The 6.2 per cent increase in the deposits held by Cypriots banks last year to €49bn in December, the highest level since July 2013, represents improved funding conditions and is a credit positive for Cyprus, Moody’s Investors Service said.
“It also points to households’ increased capacity to service their high levels of debt, a significant portion of which is distressed,” the rating company said in an emailed statement on Thursday. The issue of a €250m subordinated tier 2 capital bond by Bank of Cyprus four weeks ago, at a 9.25 per cent rate, reflects also an improvement in creditor confidence.
Still, “depositor confidence remains fragile following losses in the country’s March 2013 banking crisis” and a probable weakening of the financial strength of Cypriot banks, “although not our expectation,” could again spark a deposit outflow, Moody’s said.
“The improvement reflects Cyprus’ solid economic growth, which we forecast at 2.7 per cent for 2017, lower unemployment and the conclusion of its economic adjustment programme in March 2016,” Moody’s continued. “These factors have partly restored depositor confidence, leading to the gradual return of mattress money -i.e., deposits withdrawn from the Cypriot banking system. Record tourism revenues in 2016 also supported increased deposit inflows and we expect them to continue to do so this year as well”.
While households will therefore have better capacity to service their loans -seen at €27.3bn and include €12.3bn in non-performing loans with less than half restructured-, the reduction of bad loans in the banking system will be a “lengthy” process partly “because of the long cure periods for restructured loans before they are reclassified as performing,” Moody’s said. “Substantial distressed debt that has not been restructured yet”.
In addition, a weak property market negatively affecting revenue generation from the sale of real property and the “poor borrowing culture” of Cypriot households shown in a large ratio of restructured loans showing arrears, are also factors which will prolong the recovery of the banks’ balance sheets, the rating company said.