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High private debt constrains cash-rich banks

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With Cyprus banks holding record liquidity the system has come under fire from various stakeholders in the economy for keeping a tight lid on loans to new businesses and for mortgages.

But some economists refute arguments that bankers are deliberately not injecting money back into the economy.

Analysts say that banks are doing their best to execute their role of fuelling the economy with new loans, however, there aren’t enough viable big projects to invest in, while private debt is still very high.

According to the latest Central Bank data, as of December, deposits in the country’s banks exceed loans by €15.1 bln, remaining at the highest levels since at least 2008, when the Central Bank start keeping such figures.

According to the EU’s Single Supervisory Mechanism (SSM), Cyprus has the second-highest liquidity coverage ratio in the euro area.

The liquidity coverage ratio of the Cypriot banking system in the third quarter of 2019 stood at 331.02%, exceeding by far the Eurozone average of 145.16%, while more than double the 100% target set by the European Commission Directive known as Basel III.

The debt-to-deposit rate of Cyprus banks has changed dramatically since 2013 when loans were by €17 bln higher than deposits.

Earlier this week, land developers argued that liquidity-rich Cyprus banks are making life difficult for young couples who want to buy a first home by denying them a loan.

As developers are relying more on Cypriot buyers, young couples are finding it difficult to secure financing to purchase a house or a flat.

The Land Developers Association raised the issue of banks not providing mortgages for first-time homebuyers during a meeting with Central Bank officials.

Antonis Frangoudes, secretary of the Association told the Financial Mirror: “At a time when rents are high, young couples are considering the alternative which is acquiring their own house, taking advantage of low-interest rates.”

But the Central Bank was told that young couples are hitting a brick wall of difficulties, as most of them are rejected after screening procedures.

“Although banks are advertising their mortgage products and looking for new borrowers, reports from developers suggest the opposite,” argued Frangoudes.

He said that young couples usually seek financing between €200,000 to €300,000 while 20% of the property value is paid in advance.

Earlier this month, producers of Hollywood films also complained that they are not being financed by Cyprus banks despite having the approval of the government incentive scheme offering them a 35% rebate.

Large projects for electricity production using Renewable Energy Sources are also having a hard time convincing banks to finance them.

However, analysts believe there is not much banks can do, as there are not enough creditworthy projects out there, at a time private debt is still one of the highest in the Eurozone.

Dr Nicos Kousis, assistant Professor of Finance at Frederick University, said that projects out there are either not creditworthy or promising but of high risk, which the banks, still carrying the weight of their Non-Performing Exposure, prefer to avoid.

“In such times, it is only natural that banks will need collateral from borrowers to back promising projects but with high risk. What banks are doing, for the time being, is trying to focus on the cost side of their businesses,” said Kousis.

He explained that the banking system is trapped, on the one hand, banks want to redirect their excess liquidity back into the market, but, on the other, they cannot do so because of the scarcity of ‘safe’ projects.

“Excess liquidity is costing, especially in an environment with negative interest rates.”

Kousis noted that banks will have to find alternative ways of hedging the risk of financing promising projects for them to fulfil their role as financial institutions.

Banks are naturally more cautious

CIIM Professor of Economics George Theocharides told the Financial Mirror that due to stricter criteria imposed by European monetary bodies, following the demise of two of the island’s big lenders and the bailout, there is no room for error.

“The Cyprus economy is already drowning in private debt which is the main obstacle for banks to give out new loans, financing new projects and businesses. We can’t have the banks repeating the errors of the past,” argued Theocharides.

He said banks are currently looking abroad for investment opportunities, so they can offload their excess liquidity.

The CIIM professor said that authorities and stakeholders should be working on a long-term goal, looking to promote and make use of alternative forms of funding such as investment funds.

Costas Mavrides, economist and MEP, said that banks know best when it comes to who and how they will lend their money, noting they are acting within the framework set by the European Banking Union.

“The regulatory framework imposed on banks by the European monetary authorities foresee stricter screening of projects and individuals asking for financing, with the emphasis being on the borrower’s ability to repay the loan.”

Mavrides argued that if the above regulatory framework was in place 20 years ago, banks would not have ventured into risky projects which left them with a mountain of NPLs.

He argued that all authorities can do, until private debt drops to levels which will allow banks more freedom of movement, is to find temporary solutions to inject cash into the economy, “as they did with the Citizenship for Investment Scheme”.

Bank of Cyprus and Hellenic Bank have adopted negative interest rate policies to offset the costs incurred by the European Central Bank’s (ECB) deposit retention charges.

For the moment negative interest rates on large deposits do not seem to change the structure of the banking system, as smaller banks are set to follow the two big banks.

Bank of Cyprus is to impose negative interest rates of 0.5%, as of March, on large deposits excluding educational and charitable institutions.

Hellenic Bank will also impose negative interest rates of 0.6% on large deposits over €100,000 from March.

Hellenic CEO Ioannis Matsis has confirmed that his bank is on the lookout for investment opportunities abroad.