The credit outlook for rated Cypriot banks is stable, reflecting the ongoing restructuring of their domestic operations, their improving financial fundamentals and their continuing geographical diversification through their expansion overseas, Moody’s Investors Service said in its new Banking System Outlook for Cyprus.
However, this outlook is balanced by the banks’ raised credit risk profiles, arising from the rapid credit growth recorded over the past couple of years.
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Having suffered heavily from their weak credit quality following the collapse of the Cyprus Stock Exchange that led to a couple of loss-making years, the banks have undergone notable senior management changes that spearheaded major efforts to restructure their domestic operations, to tackle their asset quality problems and to restore their financial performance. To a large extent, the banks have succeeded in turning around their domestic operations, by reducing the level of non-performing loans, increasing their earnings generating capacity and lowering the level of credit costs, leading to an overall improvement in their financial fundamentals. At the same time, the banks have been expanding their overseas operations, leading to higher revenue and risk diversification.
The banks’ improving financial performance has attracted new shareholders, with the banks experiencing significant ownership changes that are generally forcing them to adopt more focused strategies that would lead to shareholder value creation, to become more transparent and to enhance their corporate governance structures.
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Moody’s cautioned that, although the Cypriot banks have been reporting improved credit quality indicators, rapid credit expansion in this relatively mature banking system could lead to future asset quality problems. The strong growth in lending to the housing and construction sector needs to be monitored carefully in light of rising real estate prices in recent years.
In this respect, Moody’s views positively the proactive stance of the Central Bank of