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Moody’s says new capital gains tax exemptions to aid banks

By Stelios Orphanides

Moody’s Investors Service said that the decision of the Cypriot parliament to also exempt the sale of real estate from the capital gains tax when the generated cash goes to the repayment of loans, is a credit positive for banks.

The exemption from the 20 per cent capital gains tax which the parliament also extended to property sold or relinquished to credit acquiring companies, was previously restricted to debt-to-asset swaps after its introduction three years ago.

“The benefit’s extension to other sales categories is credit positive for Cypriot credit acquiring companies because it will increase the recoverable amount of problem loans and banks should garner better prices offered for nonperforming loan exposures (NPEs),” Moody’s said in an emailed statement on Thursday. “Almost all these exposures are backed by real estate collateral and around one-third of these troubled loans are terminated loans, which are mostly dated exposures to non-viable businesses or loans to individuals without sufficient means to repay.”

“For these terminated exposures, the only way for banks to recover and reduce their losses is by selling the real estate collateral,” it said.

Non-performing loans in the Cypriot banking system stood in March at €19.9bn accounting for 43 per cent of the total and slightly exceeding last year’s economic output compared to €27.6bn three years previously. The acquisition of the healthy operations of the Cyprus Cooperative Bank by Hellenic Bank, agreed a month ago, will result in a reduction of delinquent loans by €7bn in the system. These loans will remain with the residual Co-op which in turn will be operating as a non-performing loans management body.

The rating company said that Bank of Cyprus could reduce its NPE-stock by 45 per cent via debt-to-asset swaps which resulted to the lender onboarding around 2,000 properties, such as commercial properties, hotels, a golf course and plots, worth €1.6bn, Moody’s said. In the case of Hellenic Bank, which onboarded €100m in properties, it is expected that the use of debt-to-asset swaps will increase following the modernisation of the foreclosure and insolvency framework on July 8.

“These amendments aim to incentivize borrowers to either seek solutions for their nonperforming loans or for non-viable borrowers to give up the real estate collateral benefitting from the tax break,” While currently only B2Kapital Cyprus Ltd, the wholly owned subsidiary of Norway’s B2Holding ASA, a leading pan-European debt specialist, has a licence to operate as a credit-acquiring company, we expect additional companies will enter this nascent market, enhancing debt collection and providing domestic banks with additional means to reduce their high stock of NPEs”.

In January, B2Kapital agreed to buy a €145m portfolio of non-performing, unsecured loans from Hellenic, the first of its kind, which is expected to pave the way for further transactions of this type, Moody’s said.

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