Cyprus: Re­cov­ery and loan re­struc­tur­ings drive pos­i­tive out­look

Financial Mirror (Cyprus) - - FRONT PAGE -

Moody’s has changed the out­look on the Cypriot bank­ing sys­tem to ‘pos­i­tive’ from ‘sta­ble’ as the sec­tor is set to re­turn to mod­est prof­itabil­ity and im­prove their weak as­set qual­ity.

“Af­ter five years of losses, we ex­pect banks in Cyprus to be prof­itable in 2016 and fore­see a mod­est 0.3-0.5% re­turn on as­sets,” said Melina Sk­ouri­dou, au­thor of the re­port.

“Cyprus’ ac­cel­er­at­ing eco­nomic re­cov­ery, driven by a re­vival of tourism, the strength­en­ing busi­ness ser­vices sec­tor and in­creased con­sumer spend­ing, will sup­port mo­men­tum in banks’ loan re­struc­tur­ings and gen­er­ate some new busi­ness for the banks,” she added.

The rat­ing agency fore­casts as­set qual­ity to im­prove for do­mes­tic banks as a re­sult of these strength­en­ing op­er­at­ing con­di­tions, with the ra­tio of prob­lem to gross loans con­tin­u­ing to de­cline to 43-45% by year-end 2016, still high but be­low their peak of 55% in Septem­ber 2015.

Moody’s noted that the process of bal­ance sheet re­ha­bil­i­ta­tion for the Cypriot banks will be long, given the long cure pe­ri­ods for re­struc­tured loans be­fore they are re­clas­si­fied as per­form­ing, the still size­able amounts of dis­tressed debt banks must tackle and the rel­a­tively limited vol­umes of real es­tate trans­ac­tions.

With an ag­gre­gate Com­mon Eq­uity Tier 1 ra­tio of 14.03% for the main do­mes­tic banks, cap­i­tal cush­ions are ad­e­quate un­der the rat­ing agency’s base­line sce­nario. How­ever, bank sol­vency re­mains vulnerable as a re­sult of per­sis­tent low loan loan-loss re­serves against the large stock of prob­lem loans – non-per­form­ing loans stood at 141% of eq­uity and bal­ance sheet pro­vi­sions do­mes­tic banks at the end of De­cem­ber 2015.

Moody’s also ex­pects fund­ing con­di­tions for Cypriot banks to im­prove.

Do­mes­tic de­posits will con­tinue to grow, re­flect­ing the im­proved eco­nomic con­di­tions, it said. Cred­i­tor con­fi­dence has strength­ened in re­cent quar­ters, al­low­ing the Bank of Cyprus, the only bank re­ly­ing on emer­gency liq­uid­ity as­sis­tance (ELA) fund­ing from the cen­tral bank, to re­duce its use of ELA to EUR 2 bln as of July, down EUR 9.4 bln from its peak in April 2013.

“We ex­pect Bank of Cyprus to fully re­pay ELA dur­ing 2017,” Sk­ouri­dou said. Nev­er­the­less, de­pos­i­tor con­fi­dence re­mains sen­si­tive to the banks’ sol­vency, she con­cluded.

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