MOODYS: Bank of Cyprus in stronger position to weather COVID after loan sale

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Moody’s rating agency said the sale of a bad loan portfolio by the Bank of Cyprus puts it in a better position to deal with an inflow of new NPEs arising from the pandemic-induced economic downturn.

Moody’s issued a comment on the bank after the sale on 18 January, of and additional portfolio of non-performing loans with a gross book value of €545 mln, to funds affiliated with Pacific Investment Management Company (PIMCO), a global fixed-income investment manager.

“The transaction, part of the bank’s balance sheet de-risking efforts, will further reduce its high stock of legacy non-performing exposures (NPEs) while also better positioning it to deal with an inflow of new NPEs arising from the coronavirus-induced economic downturn, a credit positive”, notes Moody’s.

It said that despite difficult market conditions, this is the second NPE sale that Bank of Cyprus has executed in the past six months, following an agreement to sell an NPE portfolio with a gross book value of €916 mln to PIMCO in August 2020.

Both transactions include primarily non-performing retail and small and midsize enterprise loans.

Moody’s said that overall, Bank of Cyprus has made significant progress in improving its asset quality, reducing its stock of legacy NPEs by 88% from the peak in March 2015 (€15.2 bln) and lowering its NPE ratio to 16% from 63% over the same period.

Nonetheless, it pointed out, that the bank’s NPE ratio remains among the highest in Europe and Bank of Cyprus’ weak asset quality is its key credit vulnerability.

The rating agency expects new problem-loan formation to accelerate as Cypriot authorities withdraw coronavirus related support measures, including a broad payment moratorium, which expired at the end of 2020.

It led to the highest level of payment deferrals in Europe, and coronavirus restrictions are prolonged because of Cyprus’ second lockdown.

Moody’s estimate an economic contraction of 6% GDP in 2020, albeit less than the 7.7% contraction in the rest of the Eurozone.

Although the Central Bank of Cyprus announced a new loan payment holiday for the first half of 2021, it is greatly streamlined, so Moody’s expects a modest number of new loan payment deferrals.