DBRS sees debt mountain as high, but manageable

DBRS analysis published this week views in a positive light both the reduction of nonperforming loans by Cypriot banks and the government’s strategy for their further reduction.

However it said the reduction in NPLs has been largely driven by the corporate sector.

It said the decline in household NPLs, which account for more than half of total NPLs, has been more limited, but DBRS expects “further progress.”

The ratings agency also expects “the fiscal impact from the enhanced NPL strategy to be manageable.”

“After an expected rise in 2018, the government debt-to-GDP ratio is projected to decline from next year.”

DBRS acknowledges that while NPLs in Cyprus have continued to decline they “remain at elevated levels.”

“The government’s proposed enhanced NPL strategy is aiming to materially reduce total NPLs generally and address household NPLs specifically.”

But authors of the commentary are under no illusion that the task ahead to slash the debt mountain “could be challenging.”

“Even with the enhanced NPL strategy, reducing NPLs to moderate levels will take time,” the agency warned.

Referring to Cypriot banks, the ratings agency said that the high level of NPLs continues to constitute their great vulnerability adding that their profitability also remains weak.

Local banks’ Common Equity Tier 1 (CET1) has dropped to 15% in 2017 from 16% in the previous year but remains above the EU average while further consolidation of banks’ balance sheets could possibly their levels of capitilisation.

“The banking system’s coverage ratio (the stock of provisions relative to NPLs) has increased from 38.8% in June 2016 to 47.3% in December 2017. This overall ratio is now in line with the EU average.”

DBRS said NPLs in the Cypriot banking system accounted for 42.5% of total loans in December 2017 and ranked the second highest in Europe after Greece, whilst it has recorded a small drop from its peak in May 2016 of 49% of total loans. The percentage of loans 90 days in arrears dropped to 32.6% from 37.5%.

Reduction of NPLs is mainly due to a drop in business NPLs, which account for 45% of total NPLs and fell between April 2015 and December 2017 by 36% mainly due to the restructurings of large companies’ loans.

It noted a slow drop in household NPLs which account for 53% of total NPLs, noting that from February 2015 until December 2017 they fell by just 16%.

DBRS said the construction sector has contributed significantly in businesses NPL reduction.

“Construction has posted a major contribution to the reduction of NPLs. The construction sector, which accounts for about 25% of corporate outstanding loans and almost one third of corporate NPLs, has seen its stock of NPLs drop by 43% from its peak. The decline of NPLs in real estate activities has also been material. “

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