31.01.2022
According to credit agency Moody’s, Cyprus’ high total debt continues to limit the growth potential of local banks and increase economic vulnerabilities, which negatively affects the creditworthiness of banks.
On January 25, local media reported that Cypriot banks sold or transferred €19.2 billion worth of loans, mostly non-performing loans (NPEs), to asset management companies, and that borrowers subsequently repaid less than 10%, or €1.8 billion, through cash repayment or debt-for-asset swaps, with the remaining €17.4 billion still outstanding at the end of 2021.
The reports came after the head of the Central Bank of Cyprus, Konstantinos Herodotou, released the figures in the Cypriot Parliament.
Even though they are not part of the banking system and are not part of banks’ balance sheets, NFPs remain part of the economy’s overall debt burden. Very high private sector debt, it says, makes the economy vulnerable to shocks and limits attractive lending opportunities for banks, holding back their credit growth. He adds that significant private sector debt is also a potential drag on private consumption once defaulted borrowers start servicing or repaying the current large stock of NPS.
According to central bank data on bank credit risk, the ratio of domestic private sector loans to GDP was 92% as of September 2021, one of the highest rates in European countries, but down from 192% at the end of 2017.The improvement mainly reflects the sale and transfer of NDUs outside the banking system to asset management companies. Herodotus’ comments suggest that €17.4bn in loans to asset management companies remain outstanding, indicating a limited reduction in overall debt over the past three years.
Adjusted for outstanding loans held by wealth management companies, the ratio to total private sector loans increases to 174% as of September 2021, suggesting a limited reduction in total debt and limited deleveraging by households and companies over this period.
Asset management companies began acquiring loans in Cyprus in 2018, when almost €6.4 billion of non-government funds of the now liquidated Cyprus Cooperative Bank Ltd (30% of systemic non-government assets at the end of 2017) were transferred to the state-owned asset management company. KEDIPES and thus excluded from the banking system.
Hellenic Bank Public Company Ltd (B1 positive, b32) acquired the remaining €9.3 billion of the bank’s assets (previously holding €6.9 billion) and related liabilities from the government, including €3.6 billion of outstanding loans (under compared to 2 billion euros previously).
Other major transactions included three large outright sales of inactive assets to private investors in 2019 and 2021. Bank of Cyprus Public Company Limited (Ba3 positive, b2) for a total book value of EUR 4.7 billion (or 22% of systemic inactive assets as at the end of 2017).The first two transactions were generally capital neutral due to adequate bank provisioning. The latest deal, which was announced on November 15, was incremental.
As a result, despite challenging market conditions, the quality of loans from Cypriot banks is improving as banks reduce their legacy NPLs by selling or transferring them to asset management companies. Banks’ next challenge will be to bolster their still-low margins. High levels of total debt, combined with a small, saturated market that limits upside potential, means profitability is likely to take longer to recover than peers in Greece and other European countries, for example.
