Cyprus banks go into lending frenzy

— Advances up 21%, deposits surge 21% to CYP 20 bln

 

Cypriots have gone on a massive borrowing spree encouraged by easy and flexible loan products from the commercial banks with the majority snapping up property, which in the process has fuelled prices ever higher.

The revelation by the island’s two largest banks, Bank of Cyprus and Marfin Popular Bank that during the first quarter of the year, their loan portfolios galloped at 23% and 28% respectively has been confirmed by figures released by the Central Bank of Cyprus, which shows that total advances by all banks in Cyprus surged 21.3% YoY to CYP 12.51 bln, or a whopping CYP 2.2 bln compared to CYP 10.31 bln a year ago in March 2006.

The biggest advance in loans has been channeled into building and construction loans, up 31% YoY to CYP 2.36 bln by contractors and by 28.5% with respect to private loans to CYP 6.3 bln from CYP 4.95 bln a year ago in March. The third largest component of loans, domestic and foreign trade was stable at CYP 1.5 bln.

The Cooperative Credit Societies, meanwhile, increased their combined loans by half a billion to CYP 4 bln by March compared to CYP 3.59 bln in March 2006, but the pace of advance in the first three months of 2007 amounted to CYP 52 mln, confirming that they are losing market share to the banks.

 

— Lending frenzy

 

The lending frenzy in March must have been a record considering that in March 2007 alone, total lending surged by CYP 594 mln compared to February 2007, while in the first three months of the year, total lending is up CYP 830 mln.

Compare that to the total Jan-Mar 2006 increase of CYP 342 mln and one realizes the dimension of the lending craze now dominating the country.

The fact that most of the new loans are taken to buy property means that while property prices continue to head higher, at least the trade deficit and the rate of inflation have not been adversely affected. Inflation by March 2007 was up 1.8% YoY, while total imports were up only 3.3% in the Jan-March 2007 period with the trade deficit 8% higher, but mostly because of an 11% drop in exports.

 

— Property bubble?

 

Residential house prices in Cyprus rose by 1.1% over the previous month in April, according to the BuySell Home Price Index, as the index reached 122.44 and brought the average home price in Cyprus to CYP 95,394 (EUR 196,680).

Compared with the same month of 2006, prices rose by 9.6% in April, slightly lower than the 9.9% increase recorded in March.

“With so much lending geared to the property sector, one would expect a much higher price increase in housing, but it seems that developers are busy off-loading property, reducing their inventory levels,” said a worried analyst, remembering the “crazy” days in 1999/2000 when easy money directed by the banks to the stock market, led to the creation of a bubble, after which equity prices crashed when the Central Bank tightened the flow of money and forced banks to halt such lending.

Will the Central Bank take action and start imposing penalties on bank for exceeding lending targets? That is the million pound question since not many people know the views of the newly appointed Governor of the Central Bank of Cyprus, Athanasios Orphanides.

He does have the right credentials, considering that he worked at the Fed and has seen the ups and downs of the property market in the US, its long term impact on the economy and banks in particular. Orphanides is also aware of the sub-prime lending problems haunting the US property market and the economy in general, a problem that can easily be repeated in Cyprus.

Alternatively the Central Bank may attempt a soft landing of the economy, by ordering the banks to cut down on lending, or at least enforce the minimum criteria, which since last year stipulates that housing loans should not exceed 70% of the value of the property.

 

— Money pouring in

 

Banks may have been justified somehow for their aggressive push to give money out, judging from the record inflow of money and the sharp increase in customer deposits during the first quarter of the year.

The Central Bank figures show that total customer deposits surged 21% YoY to CYP 19.8 bln by March 2007 from CYP 16.4 bln in March 2006, with resident deposits up 18% to CYP 11.3 bln and non-resident deposits up 26% to CYP 8.5 bln.

The pace of the advance during the first three months of the year was phenomenal, increasing by CYP 519 mln, outstripping by a wide margin the CYP 345 mln increase in the first three months of 2006.

The Cooperative Credit Societies also recorded a satisfactory increase in deposits to CYP 5.5 bln by March 2007 according to the Central Bank of Cyprus figures compared to CYP 4.7 bln a year ago in March.

Bank of Cyprus and Marfin Popular Bank recorded 20% and 21% respective increases in their Cyprus deposits, matching the 21% average increase by all banks.