Moody’s upbeat on banks, expects NPL-ratio to drop to 42%

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By Stelios Orphanides

Moody’s Investors Service maintains its positive outlook on the Cypriot banking system citing an expected improvement in the banks’ funding and a drop of non-performing loans ratio to 42 per cent by the end of the year.

“We expect improving loan quality to translate into modest profits for the Cypriot banks in 2017, for the second consecutive year,” Melina Skouridou, an assistant vice president at the rating company was cited as saying in an emailed statement. “We also expect further improvements in funding conditions for banks as depositor confidence strengthens and money that left the banking system during the financial downturn in 2013 returns”.

The creditworthiness of Cypriot banks, which reported a 49 per cent ratio of non-performing loans in September, will also improve over the next 12 to 18 months, Moody’s said citing a report headlined “Banking System Outlook – Cyprus; Stronger Funding and Gradual Improvements in Asset Quality Drive Our Positive Outlook” available to subscribers on Moody’s website.

In December, weeks before Bank of Cyprus fully repaid emergency central bank funding, Moody’s upgraded the local and foreign currency deposit rating of Bank of Cyprus and Hellenic Bank by one notch to Caa2 and Caa1 respectively and maintained the positive outlook for both banks citing the expected improvement of asset quality and economic recovery.

“The slow rehabilitation process results from long workout periods for restructured loans before they are reclassified as performing and the large amount of distressed debt banks are tackling,” the rating company said.

The rating company said it expects that the economy to expand 2.7 per cent this year before growth slows down to 2.5 per cent in 2018, on a boost from tourism, consumption and a strong performance of the business services sector, Moody’s said.

Moody’s added that it expects that few bad loans combined with stable requirements for provisions for loan impairments will allow pre-provision income to increase which in turn will strengthen the Cypriot banks’ capital, which stills remains vulnerable to higher losses from non-performing loans compare to what the lenders are currently anticipating.

“Cypriot banks’ tangible common equity (TCE) will likely rise to around 15.4 per cent of risk-weighted assets by the end of the outlook horizon from 14.3 per cent as of September 2016,” Moody’s said.

“Combined non-performing loans, considered the Cypriot economy’s main challenge, stood at 131 per cent of equity and balance sheet provisions of Bank of Cyprus, Hellenic Bank and the Cooperative Central Bank Ltd at the end of June 2016,” the rating company said.

Moody’s added that depositor confidence has not fully recovered even as it “significantly” did so last year and “any unexpected weakening in the banks’ solvency could rekindle outflows”.

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