Cyprus banks in rigorous restructuring programme

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Manager Economic Research, Bank of Cyprus

Cyprus banks over the past five years have been implementing a rigorous restructuring programme, refocusing their operations, seeking to improve asset quality and normalise their balance sheets. What we may confidently say today is that whilst there is still some distance to go, a lot has been achieved through perseverance, good planning and diligence. There are different problems for different entities of course, but on the whole, the banking system is well capitalised, fully funded on a net basis by domestic sources, and certainly more stable. Private indebtedness has been reduced almost to par with European norms when allowance is made for the level of provisions, the non-viable part of the loan book and for the non-resident component. More importantly, non-performing loans have been trending downwards since their peak in early 2015. This looks like a permanent reversal of trend which holds optimism that over the medium term we will return to significantly lower ratios and a much healthier balance sheet.

For instance, of the €21 billion remaining non-performing loans about half are so called terminated loans which is the non-performing and non-viable part. A total of €8,7 billion of the other half are restructured facilities that continue to be classified as non-performing for a minimum of 12 months in accordance with regulatory requirements. Based on previous precedence about two thirds of that amount should become performing in the next 12 months which will translate to a steep reduction in the non-performing loan ratio, in the mid-thirties likely, and will also create the conditions that can potentially support a significantly higher coverage ratio.

Profitability should return in 2018 allowing banks to increase capital buffers and boost their resilience to shocks.

Whilst these problems are getting resolved banks will be left with about half the size of the balance sheet they have had before the crisis and with mounting pressures on their profit margins. These shifting conditions which will require of them to re-engineer their operations for greater efficiencies, and more diversified income bases that would allow them to face future competitive challenges from a position of strength. Weaknesses in the future will not be easily forgiven.