Fewer loans restructured in 2022, non-performing loan ratio steady

The total number of loan restructurings in Cyprus appears to have decelerated in 2022, after their sudden and sharp increase in 2021 due to the adverse economic effects of the coronavirus pandemic, according to a report released this week by the Central Bank of Cyprus (CBC).

According to the data cited in the report, total renegotiated loans were limited to €1.3 billion in total value, compared to €2.32 billion in 2021, which was the highest level since 2015, the year during which the central bank began tracking these figures.

The vast majority of restructurings, a share of 83 per cent, came from large corporate loans in excess of €1 million, which amounted to approximately €1.1 billion, compared to €1.78 billion in 2021.

Corporate loan restructurings of amounts up to €1 million experienced a large contraction, falling to €74 million, compared to €213 million in 2021.

Mortgage restructurings amounted to €107 million, compared to €220 million in 2021, while other loan restructurings were limited to €24 million, compared to €71 million in 2021,

What is more, the restructuring of consumer loans stood at €18.6 million in 2022, compared to €34 million in 2021.

Based on the latest available data from the Central Bank of Cyprus, the total amount of restructured loans in the Cypriot banking system reached €3 billion at the end of October.

Of these loans, €1.29 billion continue to be classified as non-performing loans. Furthermore, €0.54 billion of this amount concerns household loans while €0.5 billion concerns corporate loans.

However, with the European Central Bank (ECB) continuing to increase its key interest rates, it is expected that restructuring activity will play a central role in the effort to avoid defaults in 2023, since the increase in funding costs may worsen the financial situation of both households and businesses, with negative implications for the quality of banks’ loan portfolios.

Indicatively, in the latest financial report by the central bank, CBC governor Constantinos Herodotou noted that the goal should be to find an appropriate and sustainable restructuring solution in a timely manner.

“It cannot be denied that sustainable restructuring solutions enable both businesses and households to meet their obligations,” Herodotou said.

“In this way, the banks’ balance sheets are not burdened with new defaults, while the smooth operation of businesses continues without interruption, limiting bankruptcies and, by extension, contributing to the orderly functioning of the economy”, the CBC governor concluded.

Meanwhile, the total amount of non-performing loans (NPLs) in the Cypriot banking system was virtually unchanged in November 2022, with the percentage of total NPLs against total loans remaining steady at 10.5 per cent.

According to data from the Central Bank of Cyprus (CBC), total NPLs amounted to €2.68 billion in November 2022, compared to €2.7 billion in the previous month.

In addition, total provisions against NPLs in November stood at 47.4 per cent compared to 47.3 per cent in the previous month.

Total overdue loans in which the original deadline was exceeded by more than 90 days stood at €2.03 billion, a share of 7.9 per cent of total loans, and remained almost unchanged compared to October 2022.

Moreover, total loans restructured in November stood at €3.07 billion compared to €3.09 billion in October, of which €1.28 billion continue to be classified as non-performing.

Household NPLs in November stood at €1.33 billion, compared to €1.35 billion during the previous month and accounted for 50 per cent of total NPLs, with total provisions standing at 33.6 per cent.

Furthermore, NPLs to non-financial corporations stood at €1.04 billion in November 2022, compared to €1.03 billion during the previous month, with overall provisions against business NPLs standing at 64 per cent.

It should be noted that according to a euro area bank lending survey released in January 2023, euro area banks said that they have implemented a significant further tightening of credit standards for loans or credit lines to enterprises in the fourth quarter of 2022.

In other words, the percentage of banks reporting a tightening of credit standards was substantially larger than the percentage of banks reporting an easing.

“Risks related to the economic outlook, industry or firm-specific situation and banks’ risk tolerance continued to have a tightening impact on credit standards,” the ECB said in a statement.

“Banks’ cost of funds and balance sheet situation also continued to have a tightening impact on credit standards for loans to firms, which was somewhat smaller for costs related to capital and market financing and slightly larger for the liquidity position of banks than in the previous quarter,” the ECB added, noting that in the first quarter of 2023, euro area banks expect a net tightening of a similar magnitude to the current quarter.