A decline of nonperforming exposures (NPEs) in September, which showed a €5.6 bln or 33.6% decline versus August 2018, is credit positive for the Cypriot banking system because it reduces asset quality risks and supports depositor confidence, said Moody’s.
It said the NPE improvement primarily reflects the resolution of Cyprus Cooperative Bank (CCB) and subsequent transfer of its €5.6 bln of NPEs, primarily related to household lending, to a non-bank asset management company, Cyprus Asset Management Company.
“CCB's resolution and NPE transfer reduces the risk of higher losses for the Cypriot banking system. The CCB's remaining assets and deposits were transferred to Hellenic Bank, which has supported overall depositor confidence in the system,” said a Moody’s analysis.
Cyprus' percentage of NPEs dropped to 31.8% by 30 September 2018, which remains high relative to the region but is down from 40.4% at the end of August 2018 and 43.7% at year-end 2017.
“However, the reduction in banking system NPEs does not reduce the debt burden on the economy because CCB’s NPEs will continue to be managed, albeit outside of the banking system, with the intention of being restructured, rescheduled and repaid,” said Moody’s.
The credit agency underlined that Cypriot households continue to be highly indebted: household debt was 105% of Cyprus’ gross domestic product (GDP), and nonfinancial corporate debt accounted for an additional 122% of GDP as of March 2018. The transfer does not reduce these debt levels.
“The €5.6 bln NPEs equal close to 30% of the country’s GDP and a resumption of loan repayments by households will likely still weigh on disposable income, spending and on economic growth.”
In total, NPEs across Cypriot banks dropped by €10 bln during the first nine months of 2018 to €11 bln, almost half their amount as of year-end 2017.
In addition to the recent €5.6 bln transfer, the other main driver of the recent reduction was roughly €3.2 bln of NPE sales and transfers by Bank of Cyprus, Alpha Bank and Hellenic Bank primarily related to small and midsize enterprises.
“Despite the reduction from these sales and transfers however, the pace of actual loan repayments has been very slow, despite economic recovery and growth since 2015,” Moody’s pointed out.
It expects loan repayments to be supported by the recent regulatory and legislative measures to improve the foreclosure and insolvency framework, and a government sponsored plan (Estia) targeting socially vulnerable borrowers that have defaulted on their mortgages.
“Estia in particular is expected to incentivise the resumption of repayment of around €1.4 bln of retail loans that remain in the banking system’s NPE balances.”
