Parliament releasing €33 mln (0.2% of GDP) to fund this year’s cost of Estia, a government-sponsored subsidy scheme to address nonperforming exposures (NPEs) backed by primary residences, is credit positive for Cyprus banks, said Moody’s.
The credit rating agency said the new scheme will help banks reduce their high burden of NPEs and facilitate the resolution of a more troublesome segment of their problem loans.
Estia seeks to encourage distressed borrowers to start servicing their primary residence mortgages, subject to certain eligibility criteria such as income, wealth and property value.
The criteria have been tightened to ensure that the scheme targets borrowers who are unable to repay their mortgages and excludes strategic defaulters.
The criteria include that loans must be secured by a primary residence with an open market value of less than €350,000; at least 20% of the borrower’s total credit obligations is past due for more than 90 days as of September 2017; annual gross income does not exceed certain thresholds, depending on the number of dependants, ranging from €20,000 for single people to €60,000 for families with at
least four dependents; and that household net wealth, excluding the primary residence and associated loan, should not exceed 80% of the primary residence's open market value, with a cap set at €250,000.
The scheme aims to reduce outstanding principal, reduce the interest rate on loans and extend repayment.
Eligible loans will be restructured to the contractual amount owed and secured by a primary residence or the open market value of the primary residence, whichever is lower.
Eligible borrowers will then pay two-thirds of the instalment on the restructured loan, with the government subsidising the remaining one-third.
For borrowers who default during the repayment period, the subsidy will cease, and the bank will initiate a foreclosure procedure.
Estia is a one-off initiative that is available to all Cypriot banks and other financial institutions, including credit-acquiring companies.
According to the authorities, gross mortgages of €3.4 bln are potentially eligible under the scheme.
As a result, all Cypriot banks will benefit from the scheme's introduction, including Bank of Cyprus and Hellenic Bank, said a Moody’s analysis.
“Bank of Cyprus will benefit most because it has gross mortgage NPEs of €900 mln identified as potentially eligible under the scheme, based on the bank's available data, out of a total €5 bln of NPEs.
If all its eligible loans are regularised, its NPE ratio would fall to 30% from 37% as of September 2018.”
It said Hellenic Bank's preliminary estimates indicate that €260 mln of its €2.5 bln of NPEs would be eligible under scheme, and its NPE ratio would fall to 28% from 31% as of September 2018 if all its eligible loans are regularised.
The remaining balance of around €2.2 bln mainly relates to mortgages of the now-resolved Cyprus Cooperative Bank that were transferred to a residual asset management company.
“The banks' asset quality metrics will take time to reflect the improvement because the restructured loans will need to be performing for a year before they can be reclassified as performing.”
Estia will help banks resolve a difficult segment of their loan book, given that foreclosing on primary residences is socially sensitive in Cyprus, said Moody’s.
The scheme will go live once the government and the participating banks finalise the governing legal agreement.
The application process is likely to begin in the coming weeks.
Moody’s noted the scheme also sets clear guidelines for banks to pursue foreclosures of primary residences above a certain value.
