DBRS views positively the ongoing reduction in Cypriot banks’ non-performing loans, which after reaching a peak at the beginning of 2015, the NPL stock has been declining.
This decline has mostly been driven by the non-financial corporations (NFCs) sector, the rating agency said, explaining that largely helped by loan restructurings of large firms, NPLs for NFCs fell by 29% between February 2015 and August 2017, while NPLs for households declined by 12%. Overall, total NPLs have fallen by 23% from their February 2015 peak.
Nevertheless, the NPL ratio remains high, as total loans continue to decline, reflecting the ongoing deleveraging of the economy, DBRS said in its Illustrative Insights newsletter.
NPLs for the banking system were 43.8% of total outstanding loans in August 2017, compared with 49% in May 2016. The 90 days past due loans ratio was 33.8%, down from 37.5% during the same period. At the same time, the coverage ratio increased to 47.3% in July 2017 from 38.6% in July 2016 and is now in line with the European average, although this has hit Cypriot banks’ profitability.
The housing market is gradually recovering. The housing market recovery is key to banking sector performance, as a sizable portion of banks’ non-performing exposures stem from property developers. After suffering a significant correction between 2009 and 2016, property prices are now rising. The transaction-based property index has been rising since Q4 2016, with year-over-year growth reaching 3.6% in Q2 2017.
The valuation-based index has also started to recover, posting an annual rise of 1.2% in Q2 2017 after stabilising in Q1 2017. Property sales are also increasing, driven by higher demand from both residents and non-residents and supported by low interest rates.
At the same time, important efforts to speed the resolution of legacy NPLs remain ongoing and DBRS expects further progress.
A comprehensive framework of measures is in place, including the sale of loans legislation.
Moreover, rating agency added in its newsletter that the third-largest Cypriot bank, Hellenic Bank, recently signed an agreement with an independent company for the management of NPLs, while the second-largest bank, Cyprus Cooperative Bank, has approved the creation of an NPL platform on loan servicing with a Spanish asset management company.
“The establishment of NPL platforms is bringing international expertise to the Cypriot banking sector, and could help develop the secondary market for NPLs. These efforts, together with the recovery of the Cypriot economy, declining unemployment and the housing market recovery bode well for the reduction in NPLs,” DBRS said.
