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Βanks need to inject healthy loans to avoid increased provisions

Cypriot banks need to inject fresh, healthy lending into the economy in order to support growth and so help job creation which will reduce non-performing loans and subsequently the need to increase provisions for loan impairments, a financial advisor said.

“Should economic growth weaken, this could affect borrowers’ ability to repay their loans and this could make a further increase in provisions necessary,” George Mountis managing partner at the Nicosia-based Delphi Partners which offers advisory services on real estate and transaction management, said in an interview. “Therefore banks should act pre-actively and support growth this year by injecting new, healthy lending into the economy which will also help job creation. That in turn, will also help borrowers service their loans and facilitate restructurings”.

Cyprus’s economy grew 1.6 per cent last year after contracting 2.3 per cent in 2014. The government expects the economy to expand 2 per cent this year, which will help unemployment further drop from 15.3 per cent in January which was 1 percentage unit below that a year before.

Whether Cypriot banks increase their provisions for loan impairments at some point in the future will therefore depend on “how they manage non-performing loans, which has to be done in an innovative and creative way,” Mountis said.

The new insolvency legislation which entered into force last year and restricts the liability of guarantors to the amount exceeding the value of the collateral could affect the extent of the increase in provisions, he added.

Cyprus’s three major banks, Bank of Cyprus, Cooperative Central Bank and Hellenic Bank, posted in the fourth quarter a drop in their respective non-performing loan ratios to 61.6 per cent, 59.4 per cent and 59.2 per cent. In September 2015, Bank of Cyprus’s non-performing ratio stood at 62.2 per cent, while that of the Cooperative Central Bank and Hellenic Bank stood at 59.6 per cent and 61.2 per cent. It was the first time cooperative banks and Hellenic reported a drop in their non-performing loan rations since the banking crisis of 2013.

Bank of Cyprus increased its overall provisions last year by €959m to €5.4bn while the co-ops, amidst preparations for stock-exchange listing, by €379.1m to €3.5bn. Hellenic Bank posted a total of €1.3bn in provisions for loan impairments in the fourth quarter, €119m more than the previous year.

Increased provisions continue to impact the lenders’ profit and Bank of Cyprus, largest Cypriot lender posted an after tax and provisions loss of €438m last year. The government bailed-out Cooperative Central Bank posted a net loss of €167.4m while Hellenic generated €13m in net earnings.

As banks increasingly resort to debt-to-asset swaps in order to speed up loan restructurings, they “will also have to be careful with the real property they will accumulate in the process and be careful not to cause a drop in real estate prices,” Mountis said.

According to the Cyprus branch of the Royal Institute of Chartered Surveyors, flat and house prices fell in the fourth quarter of 2015 an annual 1.8 per cent and 0.3 per cent, while those of shops, offices and warehouses fell 2.4 per cent, 0.9 per cent and 2.2 per cent, respectively. A drop in property values could affect the value of collaterals and subsequently the coverage ratio of provisions.

Mountis said that as Cypriot banks “still have to start lending again for the economy to grow, the question is whether they have the liquidity and the capital to do so,” he said.

Bank of Cyprus, the only major lender so far to post in December a drop in its bad loan ratio compared to a year before and has around €3.5bn in outstanding emergency liquidity assistance, may need to make further provisioning in order to “increase its coverage ratio above 50 per cent and align it to the European equivalent”.

In the fourth quarter, Bank of Cyprus’s coverage of provisions was 39 per cent compared to 45.9 per cent in the case of the cooperative banks and Hellenic’s 50.1 per cent.

“It appears that the bank has an appetite for credit growth to healthy retail and corporate investors but with low loan-to-value ratios,” he said.

Bank of Cyprus was unavailable for a comment.

Hellenic Bank, the only major lender that did not bail in depositors or resort to a government bailout and extended a total of €377m in new credit facilities in 2015, has “sufficient liquidity even though the bank may have to further increase its provisions at some point,” Mountis said. “While it does offer new credit, the bank has difficulties finding suitable borrowers”.

When banks resume offering new credit in order to expand their business they may see that their income suffers as a result of increased competition for good customers, Mountis continued. “This will imply a drop in lending rates in order to attract new customers and their profitability may suffer,” he said.

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