DBRS says banking sector has cut NPLs stock by nearly half

Rating agency DBRS backs efforts by the Cyprus government and banks to reduce bad loans saying liquidation of the Co-op has halved NPL stocks and limited the banking sector from 320% of GDP to 280%.

In its commentary ‘Cyprus – Acceleration in The Banking Sector’s NPL Reduction’ DBRS sees efforts, along with the economic recovery, falling unemployment and rising house prices, “as leading to a material reduction in NPLs”.

The full effect from the Cyprus Co-operative Bank transaction is yet to be reflected in the NPL statistics for the Cypriot banking system, it says, but “together, the liquidation of CCB and the banks’ sale of NPLs will have almost halved the stock of the banking sector’s NPLs close to EUR 10 bln this year.”

“This follows a decline of 28% from their peak in February 2015 to December 2017.” The liquidation of CCB, “has also helped consolidate the banking sector further.”

“The size of the banking sector in terms of assets is estimated to have been reduced to around 280% of GDP from close to 320%,” said DBRS.

The rating agency points out however that “despite the reduction of NPL stocks, NPL ratios remain high.” In part, it notes, “this reflects the reduction in bank loan portfolios as households and businesses deleverage.”

“Until now, the reduction in NPLs has been largely driven by the corporate sector, which saw its NPL ration fall below 40% in June 2018.”

The decline in household NPLs, which account for more than half of total NPLs has been “more limited,” adding that in June this year its ratio stood just above 50%.

DBRS said “high NPLs remain the main risk to financial stability and a major rating challenge of Cyprus,” but the NPL reduction is “accelerating”.

It said a new law on securitisations voted by parliament in July is “another positive step towards the reduction of NPLs in Cyprus”.

On the project ESTIA, a social scheme aimed at vulnerable households to encourage them to make loan repayments and reduce strategic defaults, it said that the government has submitted the scheme to the European Commission for approval and that implementation is expected next year.

ESTIA is estimated to have an annual cost of 0.1% of GDP over 25 years.

DBRS said the overall NPL policy strategy has a fiscal impact, which will be on the government debt ration this year. It adds that following a government bond issuance related to the sale of CCB, the government debt -to- GDP ratio is projected to rise to 104.2% in 2018.

However, “the debt ratio is expected to resume its downward trend from 2019.” DBRS expects “the overall fiscal impact of the NPL reduction strategy to be manageable.”