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Banks show mixed success in tackling NPLs, excel in deleveraging

By Stelios Orphanides

Cypriot banks have had mixed success since the beginning of 2015 in their battle against delinquent portfolio and were more successful in deleveraging than reducing their non-performing loans, a compilation of data shows.

Since December 2014, when the current regulatory directive on the classification of non-performing loans entered into force, until March this year, Cypriot banks reduced their overall non-performing loans by €1.6bn compared to a €4.1bn drop in outstanding exposures to €25.7bn and €53.1bn respectively, central bank data show.

Over the same period of time in which banks intensified their restructuring efforts, the amount of restructured loans rose by over €1bn to €13.9bn in March, while their overall 90 days-past-due loans fell by €2.3bn to €19.8bn, and for the very first time below the €20bn mark.

“Some banks have now started to restructure,” academic economist Michael Michael said in a telephone interview on Thursday. “Banks had a limited administrative capacity to tackle the problem which has two sides; it also depends on the willingness and ability of borrowers to service their loans”.

The above drop in non-performing loans in the banking system was entirely booked by Bank of Cyprus, the island’s largest lender, which pioneered the restructuring crusade by setting up a specialised recovery and restructuring unit in 2013, the year in which the lender was recapitalised with uninsured deposits. By March 2016, the Bank of Cyprus had reduced its non-performing loan ratio by 2 percentage points to 61 per cent of total loans or by over €1.6bn to €13.3bn.

The Cooperative Central Bank, the lender which the taxpayer bailed out with almost €1.7bn in 2014 and 2015, and Hellenic Bank have started showing some tentative progress over the past quarters.
In March 2016, Hellenic managed to reduce its non-performing loans to €2.5bn, This is below its December 2014 figure for the first time. Still, as a result of the deleveraging process, the bank’s non-performing loan ratio was still at 58.1 per cent in March which is 1.1 percentage points higher compared to the December 2014 figure.

The Cooperative Central Bank, on the other hand, is still struggling with a higher amount of non-performing loans (€7.4bn in March 2016 compared to €7.3bn in December 2014) and a higher non-performing loan ratio (59.3 per cent in March 2013, compared to 55.8 per cent in December 2014). Still, the bank saw its non-performing loans drop by €175m in the first quarter of the year and its non-performing loan ratio drop by 0.1 percentage point.

All references to data of individual banks are according to financial reports on their websites. Combined, the loan portfolio of Bank of Cyprus, the Cooperative Central Bank and Hellenic Bank made up 73 per cent of outstanding loans in the banking system in March. Their cumulative non-performing loans represented almost 91 per cent of the total in the system.

Non-performing loans in the Cypriot banking system make up more than 48 per cent of total loans and are considered a major risk for Cyprus’s economic recovery, more than three years after the island experienced an unprecedented banking crisis and a few months after completing its adjustment programme. The cash-for-reforms programme also provided for the modernisation of legislation on foreclosures and insolvencies in an attempt to help compliance of borrowers. First foreclosures are scheduled for later this month.

“Some banks are now learning to restructure,” Michael who teaches at the University of Cyprus said.

Sofronis Clerides, who teaches economics at the same university, added that “while it is a positive sign to see non-performing loans drop, it would be better to see this happen at a faster pace”.

Still, Clerides added, “there’s no point in monitoring developments in a month by month basis, as it will take time”.

The increased pace of loan restructurings, a process closely monitored by the regulator who also set restructuring targets for each bank, will take time before it is reflected in the balance sheets of banks, as a borrower has to service its restructured loan for a continuous 12 months before it is classified as performing.

Bank of Cyprus is well ahead of other banks, as it has comparably fewer loans to restructure. In March, its 90 days-past-due loans were just over 47 per cent of its loan portfolio while those of the cooperative banks were just below 50 per cent.

Hellenic Bank may have some more way to go as the percentage of its impaired and 90 days-past-due loans was 53.7 per cent, Melina Skouridou, an analyst at Moody’s Investors Service in Limassol, said.

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