By Kyriacos Kiliaris
Cyprus’ major banks saw their operating profits for 2017 slashed by provisions according to their preliminary unaudited results for last year, with many pondering offloading their troubled portfolios of non-performing loans in order to rescue their balance sheets.
“Profitability should return in 2018 allowing banks to increase capital buffers and boost their resilience to shocks,” said Yiannis Tirkides, Manager Economic Research at the Bank of Cyprus.
“Whilst these problems are getting resolved banks will be left with about half the size of the balance sheet they have had before the crisis and with mounting pressures on their profit margins,” Tiurkides said.
At the end of February, Bank of Cyprus announced an operating profit of EUR 485 mln, which was subsequently wiped out by higher provisions due to the overhang of NPLs. The bank’s total provisions and impairments of EUR 942 mln resulted in a EUR 552 mln loss after tax. Final audited results, with little change expected, are due out at the end of March.
Following suit, Hellenic Bank, while announcing operating profits of EUR 36.6 mln, saw provisions of EUR 82.9 mln resulting in a EUR 49 mln loss.
Key points highlighted in the BoC 2017 results include continued progress on ‘balance sheet repair’, eleven consecutive quarters of organic reduction of ‘non-performing exposures’, NPEs lowered by EUR 2.2 bln (20%) year-on-year to EUR 8.8 bln (down by 41% since December 2014), an NPE ratio at 47%, NPE coverage at 48% rising to 51% after IFRS 9 First Time Adoption (FTA), and continued de-risking.
BoC said that it has an “adequate capital position”, with a CET1 at 12.7% and 12.2% FL, a total capital ratio at 14.2%, and, allowing for transitional arrangements, estimated capital impact of about nine basis points from IFRS 9 FTA in 2018.
The bank said it improved its funding and liquidity position last year with deposits which were up EUR 1.3 bln (+8%) yoy, deposits up EUR 535 mln in the fourth quarter of 2017 facilitating full compliance with liquidity requirements on 1 January 2018, and a loans-to-deposit ratio of 82%.
Despite the losses, sources at the Hellenic Bank consider the past year to be significant to the strategic process to strengthening the bank. Key points in the bank’s unaudited report include nine consecutive quarters of NPE reduction with the level of NPEs reduced by 14% to EUR 2.16 bln at 31 December 2017, an NPE to gross loans ratio of 53.3% compared to 58.2% at 31 December 2016, and a CET1 of 13.84%. The bank’s NPE coverage stood at 59.6% as at 31 December 2017 (31 December 2016: 54.9%).
According to Hellenic’s unaudited report the bank saw damages of EUR 29 mln in the fourth quarter, adter EUR 6 mln in the third quarter. The bank said its fourth quarter loss was mainly due to the cost of the Voluntary Early Exit Scheme which affected administrative and other costs.
Acknowledging the role that the reduction of the NPEs has in setting the lender on firmer ground, Hellenic Bank has come to an agreement with APS Debt Servicing Cyprus Ltd for the sale of an NPE portfolio worth EUR 145 mln, being the first Cypriot bank to apply the measure.
Officials at the Cyprus Cooperative Bank, which has found its self in the middle of an emergency sell off, told the Financial Mirror that the institution has yet to release its results for 2017. Despite the fact that the bank is in desperate need of strategic investors and has created a separate iconic data room, the bank claims not to have the previous year’s results at hand. Similarly, the fourth systemically important bank of the island, RCB, monitored by the European Central Bank, has also claimed that results are not to be made available until, the latest, July 2018. Both banks were also not available for further comments regarding the institution’s performance in 2017 or the general trend in the banking system of Cyprus.
Eurobank, however, announced an increase in profits to EUR 41.1 mln in 2017 compared to EUR 38.1 mln in 2016. According to the announcement, the bank has a strong capital position, with the CET1 standing at 26.6%. The bank also has “strong surplus liquidity,” with deposits reaching EUR 4.26 bln and a loan-to-deposit ratio (excluding secured loans) of 28%, while the NPE ratio, as directed by the European Banking Authority (EBA), remained low at just 5%.
Eurobank was able to make a profit as it is not exposed to NPEs which still remain a serious threat to the banking system and the economy as a whole.
Cyprus banks’ high exposure to NPEs is the main reason why S&P kept the island’s economy rating at BB+ and did not give Cyprus an investment grade last week. The rating agency said it would upgrade the rating if it saw greater mobility in addressing the various weaknesses, particularly in relation to the banking and debt sector in the private sector, provided that economic growth continues to contribute to the reduction of the public sector debt.
Earlier, Moody’s issued a comment along the same lines, saying that despite the robust economic growth of Cyprus, following the announcement of the highest growth rate since 2008 (3.9%), the reduction of NPLs is expected to be slow.
While NPLs appear to be turning into a Damocles’ sword hanging over the heads of Cyprus banks, sources at the lenders feel that the island’s banking system is on the right track towards recovery.
“Whilst there is still some distance to go, a lot has been achieved through perseverance, good planning and diligence. But on the whole, the banking system is well capitalised, fully funded on a net basis by domestic sources, and certainly more stable. More importantly, non-performing loans have been trending downwards since their peak in early 2015,” the Bank of Cyprus’ Tirkides said.
Of the EUR 21 bln remaining NPLs, Tirkides explained that about half are so-called terminated loans which is the non-performing and non-viable part.
“A total of EUR 8.7 bln of the other half are restructured facilities that continue to be classified as non-performing for a minimum of 12 months in accordance with regulatory requirements. Based on previous precedence about two thirds of that amount should become performing in the next 12 months which will translate to a steep reduction in the non-performing loan ratio, in the mid-thirties likely, and will also create the conditions that can potentially support a significantly higher coverage ratio,” Tirkides concluded.
Sources from Hellenic Bank said that “the sector has covered significant ground and has been reset on a more rational and firm basis. It narrowed its size, reorganised, invested in corporate governance and, of course, developed its capital strength. While messages from the various rating agencies are encouraging for the economy and the banking system, their reservations still persist”.
The same sources confirmed that the rating agencies perceive NPLs to be the biggest challenge facing the banking system. An issue, as they explained, which directly affects the growth of the economy and the potential contribution of the banking sector towards economic growth. HB sources said that the banking sector is obliged to find a solution to the problem.
“The packaging and selling of loans along with expropriations, loan restructuring, real estate debt swapping are some of the tools we have at our disposal in order to reduce our NPEs even more”.
The HB source finds encouraging that the banks now have a legal framework which allows banks to go ahead with expropriations. “This tool not only strengthens the banking system and its contribution to the economy, but also protects borrowers who are willing to cooperate.
“Banks are obligated to find ways to solve the NPL problem as soon as possible. The selling of the loans is the fastest of the tools we have at our disposal,” concluded the source.
