Extending the waiver of 20% capital- gains tax to all properties sold when proceeds are used to repay problem loans, and to properties sold or relinquished to credit-acquiring companies, will help banks claw back debt, said Moody’s.
Until now, this tax break was applicable only to properties sold in debt-for-asset swaps with banks.
“The benefit's extension to other sales categories is credit positive for Cypriot credit acquiring companies because it will increase the recoverable amount of problem loans and banks should garner better prices offered for non-performing loan exposures (NPEs),” said Moody’s in its credit outlook.
The government introduced the waiver of the capital gains tax in 2015 to facilitate debt-for-asset swaps to reduce the large stock of NPEs in the Cypriot banking sector. Bad loans are still around 43% of the total banking system.
Almost all these exposures are backed by real estate collateral and around one-third of these troubled loans are terminated loans, which are mostly dated exposures to non-viable businesses or loans to individuals without sufficient means to repay.
“For these terminated exposures, the only way for banks to recover and reduce their losses is by selling the real estate collateral,” said Moody’s.
According to the Central Bank of Cyprus, NPEs were €19 bln in March, accounting for around 100% of GDP, down from €28 bln in March 2015.
Bank of Cyprus used debt-for-asset swaps to achieve about one-third of its 45% reduction in its stock of NPEs since 2015. Since then, Bank of Cyprus onboarded around 2,000 properties worth €1.6 bln – include commercial real estate, hotels, a golf facility and vacant plots.
Although Hellenic Bank, has used debt-for-asset swaps less, having been burdened with a much smaller pool of assets of around €100 mln.
Moody’s expects it will use this method increasingly following amendments to the legal framework, which significantly shortens the time necessary to foreclose on real estate collateral and limits a borrower's ability to delay an asset's foreclosure and auction.
Amendments approved by parliament hope to incentivize borrowers to either seek solutions for their non-performing loans or for non-viable borrowers to give up the real estate collateral benefitting from the tax break.
While currently only B2Kapital Cyprus, the wholly owned subsidiary of Norway’s B2Holding ASA, a leading pan-European debt specialist, has a licence to operate as a credit-acquiring company, Moody’s expects additional companies will enter the nascent market, enhancing debt collection and providing domestic banks with additional means to reduce their high stock of NPEs.
Until now, the only NPE sale in the market was carried out by Hellenic Bank, which in January agreed to sell to B2K a €145 mln portfolio of non-performing non-retail secured and unsecured loans.
“The transaction, although small, was the first of its kind in Cyprus and paved the way for additional NPE sales.”
