Moody’s welcomes toxic bank loans slashed 43%

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A Moody’s analysis said nonperforming exposures held by Cyprus banks declining 43% despite the pandemic is credit positive for the economy.

The Central Bank of Cyprus said Cypriot banks’ nonperforming exposures (NPEs) declined by €3.9 bln, or 43%, to €5.1 bln in 2020.

“The decline is credit positive for Cypriot banks because it reduces risks stemming from legacy problem loan exposures when the pandemic will create new problem loans,” said Moody’s.

The decline reflects NPE sale agreements by two Cypriot banks totalling €1.8 bln, writing off legacy NPEs of around €0.6 bln by Hellenic Bank and organic NPE reduction efforts.

The sale deals include Bank of Cyprus selling two NPE portfolios with a combined gross book value of €1.5 bln to funds affiliated with Pacific Investment Management Company LLC, and National Bank of Greece’s agreement to sell NPEs with a gross book value of around €325 mln to Bain Capital Credit.

Cypriot banks’ NPEs fell to 17.7% of gross loans in 2020 from 27.9% in 2019; however, loan-loss reserve coverage of NPEs decreased to 46% from 53%, primarily reflecting the write-offs of NPEs fully provided for.

Of the outstanding NPEs, around 54% related to retail NPEs, 35% to small and midsized corporates and 6% to large non-financial corporates.

“While we expect significant new problem loan inflows, these are likely to be offset by efforts by the large Cypriot banks to further reduce legacy problem loans, both through additional sales and organically.

“Loan defaults will accelerate following the withdrawal of coronavirus-related support measures, including a broad loan repayment moratorium that expired at the end of 2020 and which led to the highest level of payment deferrals in Europe.

“Although a large portion of loans with payment deferrals have resumed payments, a combination of high private-sector debt, higher unemployment and a drop in corporate revenue and household incomes will weigh on borrowers’ repayment capacity.”

To reduce NPEs, tackle pandemic-induced problem loans, Finance Minister Constantinos Petrides plans to transform the Cyprus Asset Management Company into a “bad” bank.

The CAMC is a non-bank established to acquire problematic assets of the defunct Cyprus Co-op Bank.

The bad bank will essentially buy the toxic loans and other risky assets of Cypriot financial institutions.

However, further details of the plans have yet to be released.

“Less positively, any changes to the legal framework for foreclosures will hamper banks’ efforts to reduce their problem loans,” said Moody’s.

It said proposals discussed in Cyprus’ parliament risk weakening and lengthening the foreclosure process and reducing recovery, requiring additional provisions for banks.

“If passed, they will also make potential new problem loan sales less attractive to investors.”