ESTIA is fast-track ticket out of NPL cri­sis

But not a Tro­jan horse for a se­cret bailout for banks, say an­a­lysts

Financial Mirror (Cyprus) - - CYPRUS - By Kyr­i­a­cos Kil­iaris

As Cyprus banks look for ways to fur­ther re­duce their NPL port­fo­lios, the ESTIA scheme for mort­gage de­fault­ers seems to be of­fer­ing them an ex­press ticket out of the toxic loans cri­sis.

The gov­ern­ment scheme aimed to help dis­tressed bor­row­ers from los­ing their home is seen by an­a­lysts and in­sti­tu­tions as es­sen­tial for the fu­ture health of the bank­ing sys­tem.

In­ter­na­tional rat­ing agen­cies, while com­mem­o­rat­ing Cyprus for its ef­forts to bring down the bank­ing sys­tem’s NPL ra­tio, have stressed that the coun­try needs to speed up pro­ce­dures of re­duc­ing its ex­po­sure.

To­tal non-per­form­ing loans (NPLs) dropped from EUR 20.9 bln in De­cem­ber 2017 to EUR 16.8 bln at the end of July and will drop fur­ther to un­der EUR 11 bln when the sale of the Cyprus Co­op­er­a­tive Bank is con­sol­i­dated.

This has led Fitch and Stan­dard and Poor’s in their lat­est re­ports to up­grade Cyprus’ cred­it­wor­thi­ness, but they have in turn em­pha­sised that the bank­ing sec­tor re­mains ex­tremely weak due to high pri­vate debt.

As­set qual­ity is low, with the still high num­ber of NPLs in their port­fo­lios bur­den­ing new lend­ing and prof­itabil­ity of banks.

Ac­cord­ing to their H1 2018 re­sults, the two big­gest banks, Bank of Cyprus and Hel­lenic Bank, still have a high NPL ra­tio with 43.2% and 51.6% re­spec­tively.

With the BoC sale of an EUR 2.7 bln pack­age of loans to the Apollo Fund and the ab­sorp­tion of the good as­sets of the Co-op by Hel­lenic, their NPLs are ex­pected to drop to 38% and 25%, re­spec­tively.

In fact, the Bank of Cyprus is ex­pected to re­duce its NPLs by around EUR 3.5-4 bln by 2020 (in­clud­ing the sale of EUR 2.7 bln to Apollo). HB’s CEO Ioan­nis Mat­sis pre­sent­ing the banks H1 re­sults re­vealed that the bank is look­ing into pack­ag­ing and sell­ing a sig­nif­i­cant part of its NPLs within the next six months, with re­ports say­ing that the bank is to sell off loans worth EUR 1 bln.

Nev­er­the­less, the NPL stock­pile is still a daunt­ing EUR 11.5 bln.

“De­spite the de­cline in the NPL bal­ance, the rates re­main high,” DBRS said in a note un­der the ti­tle “Cyprus - Ac­cel­er­at­ing NPL De­crease in the Bank­ing Sec­tor”.

It said de­spite drop­ping sig­nif­i­cantly from May 2016 when NPLs were at 46% of banks loan port­fo­lio, to 38.9% in June 2018, “Cyprus still has the sec­ond high­est NPL rate in Europe af­ter Greece”.

The rat­ing agency said the role of ESTIA is key to bringing down NPLs, es­pe­cially those by house­holds. “The de­cline in non­per­form­ing loans to house­holds, ac­count­ing for more than half of to­tal non-per­form­ing loans, was more lim­ited. The house­hold non-per­form­ing loans ra­tio was slightly above 50% in June 2018,” said the DBRS.

Not a bailout

The scheme es­sen­tially means that banks will be able to make con­sid­er­ably fewer pro­vi­sions on their bal­ance sheets, as with­out the scheme BoC would have to make pro­vi­sions of EUR 580 mln for the EUR 950 mln worth of loans to be in­cluded in ESTIA, and HB an ex­tra EUR 130 mln pro­vi­sions for NPLs worth EUR 250 mln.

This has led many crit­ics to look upon the ESTIA scheme as an ‘un­der­cover bailout’ for the banks, as banks would need to ur­gently find cap­i­tal to cover the above pro­vi­sions.

Dr Ge­orge Theocharides, Direc­tor of CIIM’s MSc Fi­nan­cial Ser­vices pro­gramme, feels the Estia scheme does in­deed ben­e­fit the banks, as it gives them a tool to quickly re­duce their NPL port­fo­lios, “but would not go as far as to call it a bailout, as this also ben­e­fits bor­row­ers and the so­ci­ety”.

He said that such a scheme should have been brought ear­lier to the ta­ble, as this could have helped to avoid de­vel­op­ments such as the clo­sure of the Co-op.

Theocharides said that if the scheme had not been brought to the ta­ble, “we could have been talk­ing about a hair­cut on de­posits of Co-op cus­tomers, es­pe­cially if the Co-op had not been closed and its as­sets split with the state tak­ing on the bad loans and HB the good as­sets”.

He ex­plained that with the Co-op’s clo­sure, a sig­nif­i­cant slice of NPLs have been re­moved from the bank­ing sys­tem but are still a bur­den on so­ci­ety, as they are un­der­taken by the state “at a sig­nif­i­cant cost, but one which is un­der­weighted by the ben­e­fits”.

Echo­ing the same ar­gu­ments, Demetris Ge­or­giades, Pres­i­dent of the Fis­cal Coun­cil, said that “In the case of the Estia scheme, the bor­rower and the lender are two sides of the same coin. If one side is strength­ened by be­ing sub­sidised, then the other side is to ben­e­fit”.

He added that the scheme comes at the cost to the tax­payer but there will be an in­di­rect but equiv­a­lent ben­e­fit for the so­ci­ety such as “the sta­bil­i­sa­tion of the coun­try’s bank­ing sys­tem”.

Yian­nis Tirkides, Eco­nomic Re­search Man­ager at the Bank of Cyprus, said that “the well- be­ing of the econ­omy de­pends on the ef­fi­ciency and the ef­fec­tive­ness with which banks chan­nel funds to their best uses”.

He ar­gues that un­less funds move from savers to in­vestors through the banks, Cyprus can­not grow its cap­i­tal stock, it can­not in­crease pro­duc­tiv­ity and in the end, the econ­omy stag­nates and de­clines.

Pr­ereq­ui­sites for NPL drop

On whether the bank­ing sys­tem will be able to achieve the ul­ti­mate goal of re­duc­ing the NPLs ra­tio to below 5%, as in­di­cated by the Euro­pean mon­e­tary au­thor­i­ties, an­a­lysts like Tirkides be­lieve this is con­nected to whether Cyprus’ econ­omy will con­tinue to grow at the cur­rent high rate.

Theocharides said that the coun­try’s medium-term out­look should re­main favourable, the macroe­co­nomic con­di­tions in the coun­try con­tinue to im­prove, un­em­ploy­ment must con­tinue to de­cline, in­vest­ment has to in­crease, tourism must re­main strong, while pri­vate debt con­tin­ues to fall, and the coun­try con­tin­ues to pro­duce a sur­plus.

He stressed that there are a num­ber of risks ahead such as the pres­sures ex­er­cised on Cyprus au­thor­i­ties by Brus­sels, that may en­dan­ger the ‘Cit­i­zen­ship for In­vest­ment’ scheme which is “of great im­por­tance for the Cypriot econ­omy”.

He said that there are ex­ter­nal risks such as Brexit and the slow­down of the world econ­omy due to the trade wars be­tween China and the USA.

But the gov­ern­ment needs to find ways to en­sure that the state-backed NPL man­age­ment body will be run in a sound man­ner with­out any in­ter­fer­ences, said Theocharides.

“If the NPL man­age­ment body and the ESTIA are run wisely, then the state and the so­ci­ety are to see ben­e­fits and prof­its.”

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