Cyprus Mail

Moody’s hints rating upgrade as mattress money comes back

Deposits in the Cypriot banking system increased by €827.7m in August in a month outstripping a €476.2m increase in loans, pushing the liquidity gap to €6.6bn, the smallest value since the 2013 bail-in, the Central Bank of Cyprus said.

Total deposits rose in August 6.4 per cent compared to the respective month of 2015 to €47.9bn, the highest since October 2013, while total loans fell 11 per cent to €54.5bn, one of the lowest figures since 2009, the central bank said in a statement on its website. The news prompted Moody’s Investors Service to hint a credit rating upgrade.

The increase in deposits came mainly from the government and rose by €442.6m to €909.4m in August, the central bank said. Following the issue of a €1bn 7-year bond in July, the government accepted offers from commercial banks to deposit €430m. In addition, the government had in August a total of €1.6bn deposited at the central bank which is not included in the above figures.

Deposits from non-financial companies rose in August by €280.8m in a month to €10.9bn, the highest since November, while those of households rose by €25.9m, enough for a new peak since September 2012, the central bank data showed. The bulk of new loans in August went to other financial corporations rising by €411m to almost €7.9bn. Loans to non-financial corporations rose by €117.6m to €23bn, while those to households dropped by €52m to €22.7bn.

The increase in deposits reflected in the fresh central bank data is “a credit positive,” Moody’s which rates Bank of Cyprus and Hellenic Bank and is also about to begin preparing reports on the Central Cooperative Bank.

“Although Cypriot banks have a high stock of problem loans that will challenge them for a prolonged period, the increase in deposits, which was driven by less confidence-sensitive domestic residents’ deposits, will improve banks’ funding structure,” the rating company said.

The deposits inflow in August, the fifth consecutive in five months, is indicating “improved funding conditions in a system where depositor confidence remains fragile following depositors’ losses in March 2013,” Moody’s said. “The improved economic sentiment, as a consequence of accelerating economic growth, declining unemployment, and the conclusion of Cyprus’ Economic Adjustment Programme in March 2016, has partly restored depositor confidence, which led to the gradual return of mattress money. Record tourism revenues this year also supported increased deposit inflows”.

The rating company, which in November upgraded Cyprus’s sovereign credit rating by two notches to B1, which is still below investment grade, said that it still expects that deposit growth will remain “modest” as growth picks up as a number of borrowers will chose to “use a portion of their income to repay debt”.

Bank of Cyprus, the largest Cypriot lender which still has a €1.5bn reliance on emergency central bank funding, has the most to gain from improved depositor confidence, given that it has the “weakest funding structure” compared to Hellenic and the coops, Moody’s said. It added that it expects Bank of Cyprus to fully repay its emergency liquidity assistance in 2017.

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