Moody’s Investors Service said that Cyprus’ economy will continue to expand at a fast pace which in turn is likely to help borrowers’ repayment capacity and support the value of assets and new lending, helping banks improve their performance and reduce their non-performing loans stock.
“We have maintained our positive outlook for the Cypriot banking system,” said Melina Skouridou, a Moody’s assistant vice president and analyst who authored a related report. “In our view, Cyprus’ economy will expand robustly, helping to improve the banks’ weak asset quality, as well as boosting their profits and capital”.
The report, ‘Banking System Outlook: Cyprus – economic recovery to reduce high stock of problem loans, driving our positive outlook’ is available on the rating company’s website.
The Cypriot economy, which last year expanded 3.9 per cent compared to 3 per cent the year before, is expected to grow 3.5 per cent this year and 2.8 per cent in 2019, Moody’s which assigned Cyprus a Ba3 rating, which is three notches into the speculative area, said. Tourism, the recovering real estate market and the “resilient domestic consumption” will be the drivers for growth, which is expected to further help reduce the unemployment rate that in January fell for the first time in six years into the single digit area.
Still, “high private-sector indebtedness will limit growth opportunities for banks,” which are struggling with a €20bn mountain of non-performing loans, accounting more than two fifths of their loan portfolio, Moody’s added.
“Banks will continue to make progress on restructuring troubled loans and selling real-estate collateral, leading to further improvement in their still weak loan quality,” Moody’s continued, adding that it expects the combined delinquent portfolio of Bank of Cyprus, Cyprus Cooperative Bank and Hellenic Bank to drop to below 38 per cent by the end of the year from around 45 per cent in September.
In addition, “the domestic Cypriot banks are expected to report modest profits in 2018, owing to lower provisioning costs,” of up to €100m this year after an expected loss of up to €700m last year, the company said. This would allow a modest growth of the lenders’ capital buffers over the outlook horizon.
“But their capital remains vulnerable because of the high stock of non-performing loans that are not covered by cash provisions,” Moody’s added.