Moody’s: Banks to benefit from increased loan demand

Moody’s rating agency said it expects the volume of new loans in 2017 to be the highest since 2013, suggesting that an increase while maintaining strong underwriting standards and best practices, will be credit positive for local banks.

The rating agency cited the quarterly bank lending survey issued last week by the Central Bank of Cyprus which forecast increased loan demand in the third-quarter of 2017, mainly in mortgage and business loans, driven by accelerating economic growth, an improving labour market that increased business and consumer confidence and a gradual recovery of the property market, with building permits issued in first four months of 2017 reaching the highest level since the 2013 banking crisis.

It also noted that the banks expect demand for loans by non-financial corporates and mortgage borrowers to increase in the third quarter of this year, and expect that lending standards, which tightened in 2014 and remained stable since, will not change.

“We expect the volume of new loans this year to be the highest since 2013” Moody’s said, marking that new loans excluding debt restructurings totalled EUR 1.6 bln in the first six months of 2017, an amount equal to 67% of new loan volume for all of 2016.

“The increase in new lending will support banks’ net interest income and curtail declining pre-provision profit and contracting loan books from write-offs of bad debts”, it adds, noting also that higher revenues will support banks’ capacity to further improve their balance sheet by writing off bad loans.

According to Moody’s, of the large domestic banks Hellenic Bank would benefit most from the increased demand in new lending, given its large stock of low-yielding liquid assets. Hellenic’s cash balances with banks was 37.9% of assets in March.

It said, however that the Bank of Cyprus is increasing its loans at the fastest rate. BOC’s EUR 502 mln of new lending in the first quarter of 2017 equalled 2.5% of its gross loans at year-end 2016.

By comparison, Hellenic’s new lending totalled EUR 89 mln in the first quarter, which equalled 2.1% of its gross loans as of year-end 2016.

Moody’s concluded that notwithstanding the increasing loan demand, it will take time for Cypriot banks to rehabilitate their balance sheets because of a high stock of problem loans, which were 48% of gross loans in December 2016 for Moody’s - rated Cypriot banks.