DBRS sees debt moun­tain as high, but man­age­able

Financial Mirror (Cyprus) - - FRONT PAGE -

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. “

af­fect

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