Banks will need more provisions to deal with NPLs, Moody’s warns

Moody’s warned on Monday that the slow pace of loan restructurings in the Cypriot banking system may create a need for additional provisions, which would erode the banks’ capital.

On the backdrop of a financial crisis, which prompted the government to require financial assistance from the EU and the IMF in 2013 and after an excessive reform of the banking sector, Cypriot banks are saddled with a huge stock of non-performing loans, the rating agency said.

The banks have used the tool of loan restructurings in a bid to reduce their high stock of NPLs that corresponds to 45% of total loans.

Moody’s noted that banks’ restructured loan balance declined to its lowest level since December 2014 and acknowledged that the lower balance reflects the larger amount of restructured loans that became performing and exited the restructured loan pool versus newly restructured loans entering the pool.

But it said that “given that banks in Cyprus have large stocks of non performing loans, the slow pace of loans being restructured is credit negative because it will prolong the time it takes for banks to rehabilitate their loan books, strengthen balance sheets, and may create a need for additional provision.”

Restructured loans were 25.7% of total loans as of July 2017, the lowest proportion since December 2015 and materially below the 27.5% peak in July 2016, the agency said.

According to Moody’s, the slow pace in the restructuring effort comes despite the economy’s seasonally adjusted year-overyear GDP growth of 3.5% in the secondquarter, a 10.3% unemployment rate as of September, the lowest rate since February 2012, and a gradually recovering property market, all of which support banks’ recovery efforts.

“Nevertheless, the banking system is falling behind the restructuring targets that banks set, increasing the risk that they will need to take significant additional provisions that dent their capital,” the agency added.

Moody’s furthermore said, the banks’ restructured loan amounts, and consequently the pace in asset quality improvement, differ substantially, with the Cyprus Co-operative Bank (CCB) lagging behind its peers.

The nationalised CCB reduced its non performing loans by only 6% since they peaked in December 2015, versus 21% for Hellenic Bank, and 40% for Bank of Cyprus, it added.

“CCB’s restructuring process is more cumbersome than that of its peers because of its retail focus and large number of accounts,” Moody’s said, adding that the bank will continue to trail its peers until the joint venture with Spain’s Altamira becomes operational.

According to Moody’s, Hellenic Bank likely will benefit sooner from its established joint venture with Czech Republic-based APS Holding.