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

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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