De­spite re­cov­ery, BOCY and Hel­lenic loan qual­ity to re­main weak in 2016

Financial Mirror (Cyprus) - - FRONT PAGE -

While the re­cov­er­ing econ­omy is sup­port­ing loan re­cov­er­ies and de­pos­i­tor con­fi­dence, Bank of Cyprus’ (de­posits Caa3 sta­ble, base­line credit as­sess­ment caa3) and Hel­lenic Bank’s (Caa2 sta­ble; caa3) ex­tremely weak loan qual­ity will only grad­u­ally i mprove in 2016, Moody’s In­vestors Ser­vice said in a re­port on Tues­day.

“The eco­nomic re­cov­ery and a raft of new leg­isla­tive mea­sures to help lenders re­cover un­paid loans are im­prov­ing Bank of Cyprus’ and Hel­lenic Bank’s re­struc­tur­ing prospects, fund­ing con­di­tions as well as their prof­itabil­ity. How­ever, the large stocks of prob­lem loans will take sev­eral years to work through, with the weak real-es­tate mar­ket ham­per­ing col­lat­eral sales,” said Moody’s an­a­lyst Melina Sk­ouri­dou.

The rat­ing agency said its re­port, “Bank of Cyprus, Hel­lenic Bank Peer Com­par­i­son: De­spite Im­prov­ing Re­struc­tur­ings and Fund­ing, Weak As­set Qual­ity Weighs on Credit Pro­files” is an up­date to the mar­kets and does not con­sti­tute a rat­ing ac­tion.

Be­cause of the in­creased eco­nomic ac­tiv­ity and strength­en­ing de­pos­i­tor con­fi­dence, cus­tomer de­posits are start­ing to re­build grad­u­ally.

Al­though steadily de­clin­ing, Bank of Cyprus re­mains de­pen­dent on Emer­gency Liq­uid­ity As­sis­tance, last es­ti­mated at EUR 4.3 bln, while Hel­lenic Bank faced fewer out­flows dur­ing the cri­sis and main­tains a stronger de­posit-based fund­ing pro­file, the Moody’s re­port said.

Bank of Cyprus, the dom­i­nant bank by mar­ket share, is ahead in terms of re­struc­tur­ing and re­cov­er­ing on prob­lem loans. As a re­sult, its prof­itabil­ity, which also ben­e­fits from re­cov­er­ies on the dis­counted as­sets it ac­quired when it took over Laiki’s do­mes­tic busi­ness in 2013, is re­cov­er­ing at a faster pace. How­ever, both banks’ prof­its will re­main mod­est the com­ing years as they build up their low lev­els of pro­vi­sions.

Ac­count­ing for around 41% of prob­lem loans, the banks’ loan loss pro­vi­sions pro­vide a lim­ited buf­fer against losses from their high stock of non-per­form­ing loans which con­tin­ues to pose risks to their cap­i­tal lev­els. The ra­tio of non-per­form­ing loans to gross loans, which stood at 56.9% of to­tal lend­ing for Hel­lenic Bank and 52.5% for Bank of Cyprus as of Septem­ber 2015, will re­main high over the fore­see­able fu­ture.

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