Moody’s sees Greek risk to Cyprus banks

A deterioration of the economy in Greece and a potential Greek exit (Grexit) from the eurozone, could have a negative impact on Cyprus banks, despite the fact that the island’s lenders have little or no exposure to the Greek market, according to Moody’s.

The rating agency said on Thursday that Cyprus companies that do business in Greece could burden the efforts by Cypriot banks to improve their asset quality.

The rating agency also said that Cypriot banks would benefit from a new code for handling borrowers in financial difficulty, that was published by the Central Bank of Cyprus last week, noting however that their “asset quality metrics will remain weak for several years to come”.

“The code, which is required as part of the country’s support programme from the European Commission, European Central Bank and International Monetary Fund, will benefit Cypriot banks because it raises awareness regarding borrowers’ financial obligations and speeds up loan workouts of borrowers with financial difficulties”.

The rating agency’s analysis added that the code also sets clear timeframes for each step of the restructuring process, which will likely speed up the process and reduce the number of uncooperative borrowers.

“Cypriot borrowers to date have been largely unwilling to engage their banks to restructure their loans owing to a widespread belief that they can get away with not repaying their loans because of the legal framework’s past weaknesses,” Moody’s said. “The published code can also be used by the newly established financial ombudsman and newly licensed insolvency practitioners to raise awareness and help borrowers understand banks’ rights”.

According to the rating agency, “although the code’s application will likely help the banks rehabilitate their loan books, given the large volume of non-performing loans (NPLs) that Cypriot banks are facing, asset quality metrics will remain weak for several years to come”.

The ratio of NPLs to gross loans remained stubbornly high at 46% of the national loanbook as of March, and was even higher for principal domestic banks. Bank of Cyprus reported an NPL ratio of 51.3%, while Hellenic Bank’s ratio was 54.6%.

Separately, Bloomberg quoted the head of the Single Supervisory Mechanism Daniele Nouy as telling the European Parliament that the subsidiaries of Greek banks in Cyprus “are liquid and solvent on a stand-alone basis.”