Moody’s rating agency warned on Monday that the slow pace of loan restructurings in the Cypriot banking system may create a need for additional provisions which would erode the banks’ capital.
On the backdrop of a financial crisis, which prompted the government to require financial assistance from the EU and the IMF in 2013 and after an excessive reform of the banking sector, Cypriot banks are saddled with a huge stock of non-performing loans. The banks have used the tool of loan restructurings in a bid to reduce their high stock of NPLs that corresponds to 45% of total loans.
In its “Credit Outlook” issued twice weekly, Moody’s noted that banks’ restructured loan balance declined to its lowest level since December 2014.
The agency acknowledged that the lower balance reflects the larger amount of restructured loans that became performing and exited the restructured loan pool versus newly restructured loans entering the pool.
But it underlined that “given that banks in Cyprus have large stocks of non-performing loans, the slow pace of loans being restructured is credit negative because it will prolong the time it takes for banks to rehabilitate their loan books, strengthen balance sheets, and may create a need for additional provision.”
Restructured loans were 25.7% of total loans as of July 2017, the lowest proportion since December 2015 and materially below the 27.5% peak in July 2016, the agency said.
According to Moody’s, the slow pace in the restructuring effort comes despite the Cypriot economy had seasonally adjusted year-over-year GDP growth of 3.5% in second-quarter 2017, a 10.3% unemployment rate as of September 2017, which was the lowest rate since February 2012, and a gradually recovering property market, all of which support banks’ recovery efforts.
“Nevertheless, the banking system is falling behind the restructuring targets that banks set, increasing the risk that they will need to take significant additional provisions that dent their capital,” the agency added.
Moody’s furthermore said, the banks’ restructured loan amounts, and consequently the pace in asset quality improvement, differ substantially, with the Cyprus Cooperative Bank (CCB) lagging behind its peers.
The nationalised CCB reduced its non-performing loans by only 6% since they peaked in December 2015, versus 21% for Hellenic Bank Public Company Ltd, and 40% for Bank of Cyprus, the Agency added.
“CCB’s restructuring process is more cumbersome than that of its peers because of its retail focus and a large number of (small) accounts,” Moody’s said, adding that the bank will continue to trail its peers until the joint venture with Spain’s Altamira becomes operational.
The agency also highlighted the CCB’s “borrowers’ non-payment culture and the current political rhetoric against foreclosure of primary residences will make its loan rehabilitation task more challenging.”
According to Moody’s Hellenic Bank likely will benefit sooner from its established joint venture with Czech Republic-based APS Holding.
“Although these partnerships will hasten procedures with a more efficient organisational structure that will assist the bank’s restructuring efforts, Cypriot banks’ asset quality will remain weak for years given their large volumes of problem loans,” the agency concluded.