NPL decline gains momentum as recovery speeds up

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By Stelios Orphanides

As economic recovery consolidates, and the government revises its growth forecast to 4 per cent, the reduction in non-performing loans may pick up in pace even as the ratio of restructurings drops, an economist said.

The three major lenders, Bank of Cyprus, Cyprus Cooperative Bank and Hellenic Bank, saw their cumulative non-performing loans drop by almost €1.1bn in the third quarter of 2017, against a cumulative reduction of €857m in April to June and €613m in the first quarter, data compiled by the Cyprus Business Mail show.

Ioannis Tirkides, who heads the Bank of Cyprus economic research division in an interview said that after banks dealt with major borrowers who defaulted on their debt in recent years and are now increasingly turning towards retail customers not servicing their loans, they may find the task more challenging.

“This has to do with the changing nature of the remaining non-performing loans, more numerous, more retail and smaller amounts,” said Tirkides. “The slowdown therefore is not paradoxical with a better-performing economy, but even so, better cooperation between borrower and lender in seeing this necessary process through should yield better results”.

The latest Central Bank of Cyprus data show that the overall drop in non-performing loans from December 2014 until July this year, amounting almost €5bn, is broken down to €3.6bn in loans extended to non-financial corporations and €564.3m to other financial corporations, against a reduction of merely €767.4m in the case of households. Total non-performing loans stood at €22.4bn in July, or 45.2 per cent of total loans, and are considered a major risk for financial and macroeconomic stability.

The ability of overindebted Cypriot households to repay their loans is also negatively affected by a decline in disposable income, which fell 11 per cent to €21,947 per capital from 2008 to 2016, said Sofronis Clerides, who teaches economics at the University of Cyprus.

Household debt as a percentage of gross domestic product (GDP), stood at 121 per cent at the end of the first quarter, compared with 122.9 per cent three months earlier, according to the central bank.

The economy, which exited in 2015 a prolonged recession caused by a twin fiscal and banking crisis, expanded last year 3 per cent. In every single quarter since, it grew more than 3.5 per cent compared with the respective period of 2016, Cystat data show.

The ratio at which delinquent loans drops may even accelerate, as almost two-fifths of them underwent restructuring and are expected to be reclassified, after a minimum probation period of 12 months, as performing, Tirkides said.

All three major banks have announced their intention to outsource problematic loans to specialists. Bank of Cyprus, which spearheaded the reduction in non-performing loans after the 2013 crisis by setting up a specialised internal unit, announced on Friday its agreement with Australia’s Pepper which will manage up to €800m in non-performing loans. In July, Hellenic Bank entered a joint venture with the Prague-based APS Holdings and the Cyprus Cooperative Bank is expected to do the same in January with Spain’s Altamira.

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About Author

Stelios Orphanides is a journalist at CyprusBusinessMail.com. To contact Stelios Orphanides: [email protected]

  • Al Bo

    “better cooperation between borrower and lender” got a certain twist on ths island.

  • AnalogMind

    Excellent!