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COVID19: Lockdown II will test Cyprus banks

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Although the government has announced financial support to buffer the effects of a second lockdown, there is a larger credit-negative economic effect for Cyprus banks as the pandemic endures.

The lockdown measures will squeeze business revenue and cash flow for companies after a tough 2020, and will challenge banks’ asset quality, said a Moody’s analysis.

“The support measures will soften the negative effect on banks’ asset quality, but the harsh and prolonged coronavirus restrictions mean they will only delay the realisation of bank credit losses, rather than eliminating them altogether,” it added.

Banks may reschedule loans for viable borrowers to better match revised cash flow expectations, but Moody’s expect some borrowers will not be considered eligible for rescheduling or will eventually default.

Lockdown measures include closures of nonessential businesses, limiting staff physically present to 15% of total staff at other businesses, and restrictions on movement.

The lockdown comes as a majority of bank borrowers are likely to resume loan repayment obligations.

“The latest lockdown measures will likely reduce banks’ loan origination and fee income, pressuring banks’ profitability, which is already weighed down by the low interest rate environment and elevated loan-loss provisioning expenses.”

Cyprus’ broad payment moratorium expired at the end of 2020.

“Given our expectations of a modest number of new loan payment deferrals, we expect problem-loan formation to accelerate, particularly in the second half of the year,” said Moody’s.

Credit challenge

It said weak asset quality is the key credit challenge for Cyprus’ largest banks, Bank of Cyprus and Hellenic Bank despite a significant drop in their nonperforming exposure (NPE) ratios in recent years.

“Nevertheless, we expect both banks’ ongoing organic legacy NPE recovery efforts to buffer any significant increase in overall NPEs.”

Bank of Cyprus’ NPEs were 21% of gross loans as of 30 September 2020, pro forma for the latest €916 mln potential sale of NPEs, versus 30% at year-end 2019.

Hellenic Bank’s NPEs/gross loans were 24.5% as of September 2020, or 17.6% excluding NPEs guaranteed by the government.

The latest financial support measures, which the Finance Ministry estimates at close to €400 mln (2% of GDP), include one-off grants for affected businesses and the self-employed to pay rents, loan instalments or other operating expenses; additional measures to support tenants; tax breaks for property owners; and a six-month extension of the Interest Rate Grant Plan for new business loans and mortgages.

The government is planning to resubmit to parliament a loan guarantee scheme of up to €1 bln, initially presented in the first half of 2020.

The implementation of any financial support depends on the state budget for 2021 that was initially rejected in December but should pass this month.

“The Central Bank of Cyprus announced a greatly streamlined loan payment moratorium for the first half of the year, following the much broader moratorium in place since March 2020.”

The original loan holiday, which expired at year-end, was available to borrowers who had performing obligations before March 2020.

“The broad and protracted payment deferral framework led to loan deferrals for almost half of the banking system’s performing loans last year.”

The new framework is much more specific and applies only to companies that did not defer loan payments for more than nine months and for a specific subset of affected borrowers.

“Because the majority of troubled borrowers already took advantage of the 2020 moratorium, they will not be eligible for the new moratorium this year, and we expect the number of loans with new payments deferrals to be limited with the majority of deferred loans resuming loan repayment obligation,” said Moody’s.