(Updates with governor comment in fourth paragraph)
By Stelios Orphanides
Central Bank of Cyprus governor Chrystalla Georghadji said that the amount of non-performing loans in the Cypriot banking system “currently” stands at €21.9bn or 44 per cent of total loans.
The non-performing loans ratio in the system was 44 per cent of total loans and 120 per cent of economic output, Georghadji said according to the transcript of her speech at an event in Nicosia on Monday. Net non-performing loans stand at €11.7bn and banks have terminated half of the non-performing loans.
According to the latest publicly available central bank data, the amount of non-performing loans in June was €22.4bn. The net non-performing loans is the amount of unserviced loans minus total provisions for loan impairments, which in June stood at €10.5bn.
Georghadji said that the future reduction of non-performing loans needs a coordinated strategy and additional reforms, on top of the modernised foreclosure and insolvency legislation.
While macroeconomic conditions are improving gradually, with growth consolidating this year at 3.6 per cent after last year’s 3 per cent, and the unemployment rate falling to 10.6 per cent in August and expected to fall further over the coming years, the economy is still facing risks, which include geopolitics and Brexit as they may both potentially affect tourism.
“The efficiency of the new foreclosure and insolvency legal framework has not yet been tested and possible unpredicted delays in the effective implementation of the refined foreclosure framework could result in further inefficiencies,” the governor said. “Although significant progress has been made in the operational capacity and expertise of the banks, there is still room for improvement. Banks need to remain focused and committed to their non-performing loans strategies”.
Georghadji said that the central bank does not rule out mass disposals of real estate to result in plunging immovable property prices. The recovery of real estate sector which set off late last year as reflected in stabilised and recovering property prices, “is not expected to be easy both due to internal and external factors,” she added.
The Cypriot banks which following the 2013 banking crisis, beefed up their loan recovery and restructuring capabilities, in part by resorting to joint ventures with external partners, lack the capacity to aggressively increase their provisioning levels or “capital destructive” sales of non-performing loans, she said. “On the other hand, pre-impairment profitability should remain positive in the medium and long term so that the building up of additional provisions is feasible. In this regard, banks should pay particular attention to viable business models”.
Georghadji added that a secondary market for distressed assets may not operate efficiently under the current conditions as a result of the size of the portfolios and the real estate market being illiquid.
“In addition, transactions may require high haircuts on net book value due to uncertainties over the recovery value,” she said. “However, the recent collaborations of two significant banks with foreign servicing platforms for the management of non-performing loans, the gradual recovery of the real estate sector and the continuous increase of non-performing loans provisioning can potentially support distressed assets transactions”.