By Stelios Orphanides
Moody’s Investors Service said that the Cypriot bank’s underperformance in the first quarter of the year in meeting loan restructuring indicators set by their supervisor is a credit negative, adding that the overall improvement in asset quality has been so far “lethargic”.
“The underperformance is credit negative for Cypriot banks because it will lengthen the time that banks need to rehabilitate loan books and strengthen balance sheets, and may create a need for additional provisions,” the rating company said in an emailed statement. The indicators banks failed to meet showed that the number of restructuring agreements was less than expected, there were fewer loans with fewer than eight days in arrears, and a lower cure ratio of loans with early arrears at the end of the quarter.
“Although banks for the past six quarters have exceeded their target in proposing sustainable solutions, they have encountered difficulties in finalising solutions,” Moody’s said. “For instance, borrowers may fail to submit timely and adequate income information, discussions may become protracted, or, in some cases, borrowers change their minds on an initially agreed restructuring offer. In terms of curing early arrears, as measured by the percentage amount of loans that were 31-90 days in arrears at the beginning of the reporting quarter but which cured by the end of the quarter, banks reported their greatest underperformance on record”.
Moody’s, which days ago said that the increase in demand for fresh lending –amid a recovering economy and falling unemployment– was a credit positive for Cypriot banks, added that the percentage of restructurings that exhibited arrears of less than eight days also fell in the first three months of the year compared to the quarter before.
On top of that, “the latest aggregate banking sector data on nonperforming facilities showed the largest monthly percentage increase in loans with amounts over 90 days past due since January 2015,” Moody’s said. “Prolonged underperformance of restructured loans and an inability of banks to capitalise on an improving economy increase the risk that banks will need to take significant additional provisions that may dent bank capital”.
While Bank of Cyprus –with a Caa1 deposit rating, a (P)Caa1 positive unsecured debt rating and a base line assessment of caa1– was the only exception in this gloomy picture, its competitors the Cyprus Cooperative Bank and Hellenic bank sought assistance from specialists to reduce their non-performing loans, Moody’s said.
Hellenic Bank entered an agreement with APS Holdings, a Czech specialist in managing non-performing loans, and their agreement entered into force in July. The Cyprus Cooperative Bank –with a Caa2 stable deposit rating and a caa2 base line assessment– announced a similar agreement with Spain’s Altamira Asset Management last month. Hellenic Bank’s respective ratings are Caa1 and caa2.
At the end of 2016, Bank of Cyprus restructured 40 per cent of its delinquent loan portfolio while in the case of Hellenic the ratio was 30 per cent and in the case of the Co-op a mere 23 per cent, the rating company said.
The Cyprus Cooperative Bank’s “restructuring process is more cumbersome than its peers because of its retail focus and its large number of accounts,” Moody’s added. “The bank will likely benefit from its joint venture with Spain’s Altamira Asset Management, under which the joint venture will manage the bank’s delinquent portfolio. Likewise, Hellenic Bank is likely to benefit from its newly established joint venture with APS Holding”.
The partnerships with Altamira and APS “will hasten procedures with a more efficient organisational structure that will assist the banks’ restructuring efforts,” Moody’s continued. “Additionally, Altamira and APS Holding have long track records and expertise in dealing with problem loans and real estate asset sales, which will increase the banks’ prospects of selling their respective real estate and problem-loan portfolios”.