Moody’s Investors Service said that the recovery of property prices, reported by the Central Bank of Cyprus a week ago, would improve the asset quality of Cypriot banks, which is a “credit positive”.
“Recovering property prices would support the construction industry, incentivise mortgage repayments from strategic defaulters who have the capacity but are unwilling to repay and allow banks to offload real estate taken on their balance sheet through debt-to-asset swaps,” Moody’s said on Monday in an emailed statement.
The three largest Cypriot banks, Bank of Cyprus, Cooperative Central Bank, Hellenic Bank “will benefit from an improved real estate market,” Moody’s said adding that Bank of Cyprus with 33 per cent of market share in residential mortgages, accounting for 21 per cent of its gross loans, and the Co-op would “have the most to gain”.
Through loan restructurings involving debt-to-asset swaps, Cyprus’s largest lender already acquired a total of €1.3bn in real estate assets making up 6 per cent of its total assets, Moody’s said. “A gradually recovering property market would facilitate its sale of these assets and reduce the likelihood of the bank recording losses,” the rating company said.
The Cooperative Central Bank, which the government bailed out with almost €1.7bn, “will also benefit because residential mortgages amount to 37 per cent of its gross loans,” Moody’s said. Half of these loans are classified as non-performing.
The real estate market showed signs of recovery last year partly on incentives given by the government to property buyers and partly on an increase in loan restructurings involving debt-to-asset swaps. Total property transactions rose 43 per cent last year to 7,063. Residential property prices rose marginally in the third quarter of 2016 compared to the quarter before even after falling an annual 1.3 per cent, the central bank said on February 13.
Some of the incentives offered by government have meanwhile phased out. Property buyers were exempted until December from capital gains tax and could benefit from decreased transfer fees. Foreign investors, including those who buy real estate, can still benefit from two government schemes depending on the size of the investment to acquire a residence permit or Cypriot citizenship.
“We expect property prices to broadly stabilise over the coming quarters, and the demand for property to increase gradually from low levels,” Moody’s said. Still, the increase of domestic demand will suffer from the heavy household indebtedness, seen at 116 per cent of economic output in December.
Moody’s warned that Cypriot banks will have little prospect of seeing the quality of their loan portfolio improve any time soon. Non-performing loans, roughly half of total loans in the banking system, must first complete a 12-month probation period after they are restructured before they can be classified again as performing.
“Additionally, it has been difficult to change Cypriot households’ poor borrowing culture, as indicated by relatively high percentage of restructured retail loans that have fallen back into arrears,” Moody’s said.