Moody’s ratings agency said Wednesday it had revised its outlook for the Cypriot banking system from positive to stable to reflect the impact of widespread economic disruption caused by the coronavirus outbreak.
“We expect far-reaching civic and business shutdowns to trigger an economic downturn this year, which will reverse the trend of steadily falling problem loans and erode banks’ profitability,” Moody’s said. “However, the banks have significantly strengthened their capital and liquidity in recent years, which should enable them to absorb the deterioration in loan quality and earnings.”
Moody’s said it expected that government and central bank support measures will limit long-term economic damage to Cypriot businesses and households and “we anticipate a healthy recovery in economic activity in 2021.”
The agency said it expected the economy to contract by 6 per cent in 2020 as the coronavirus outbreak and efforts to contain its spread lead to a downturn in business activity, with the important tourism industry particularly affected.
“High private sector debt will exacerbate the stress on borrowers. Fiscal measures and central bank support will nevertheless prevent a more severe impact on the broader economy.”
It said the full impact of the crisis could not be assessed at this stage and will depend on its duration.
“We currently assume that economic activity will gradually return to normal in the second half of the year and the economy will return to healthy growth rates from 2021.”
Moody’s said it expected non-performing exposures to rise, reversing a trend of significant reductions in recent years with NPEs dropping to 29 per cent by November 2019, from 44 per cent in November 2017, as the coronavirus-induced downturn leads to new problem loans.
Small businesses, to which Cypriot banks are heavily exposed, and vulnerable sectors like tourism will be hardest hit.
A downturn in investor sentiment will also delay planned NPE sales. Policy measures to allow rescheduling and moratoria on loan repayments will provide banks with flexibility to support affected but viable households and businesses.
Capital is solid and will hold steady. Cypriot banks have strengthened their capital adequacy in recent years to solid levels.
This will support their loss absorption capacity, although their large problem loan exposure makes their capital buffers more vulnerable than EU peers.