By Stelios Orphanides
Almost five years after the bail-in, President Nicos Anastasiades is scheduled to meet the leaders of the political parties on Thursday to discuss ways of reducing non-performing loans amid increasingly dramatic supervisory appeals for action, a slowdown in loan restructurings and a labour dispute storm brewing over Bank of Cyprus.
“The amount of the delinquent (loan) portfolio of banks, their profitability and their business model in general in conjunction with supervisory regulations and requirements outline the major challenges the banking sector has to deal with in the immediate future,” said Yiagnos Demetriou, head of the Central Bank of Cyprus’s supervision department.
While non-performing loans fell by the end of 2017 to €20bn, from €24bn a year before and €27bn at the end of 2014, banks need to step up their efforts. This implies political initiatives to strengthen instruments available to banks that would allow tackling strategic default, Demetriou said, according to the transcript of his speech at an event in Nicosia over the weekend.
While social considerations could justify sensitivity with respect to foreclosing and auctioning primary residences, “there are several cases not related to the primary home or cases in which the primary home serves as an excuse for not repaying a loan or it has such a high value not justifying protecting the borrower,” the central bank official said.
“Let us not forget that the balance sheet of banks has two sides. There is also the side of the depositors who have paid and may have to pay probable consequences of not addressing non-performing loans”.
Depositor confidence, Demetriou continued, is “inextricably linked” to the robustness of the banks’ balance sheets, and –in the case of Bank of Cyprus – they contain assets financed by depositors.
The legislative framework as it currently stands following the modernisation of the foreclosure and insolvency legislation, and the introduction of a law allowing banks to sell loans to third parties, all part of Cyprus’s bailout agreement, “has been rendered unimplementable to a significant degree”, he said.
“The Central Bank of Cyprus has prepared a study sent to stakeholders which highlights the weaknesses of the legislative framework and other obstacles to the swift resolution of the non-performing loans (problem), with emphasis on terminated loans”.
Demetriou said that European Union institutions identified three major obstacles; the pace and complexity of judicial procedures, the lack of a market for non-performing loans as a result of the asymmetrical information of buyers and sellers, the absence of extrajudicial procedures and the absence of tax counterincentives.
Demetriou said that the number of applications filed with the central bank by third parties for permission to buy loans had been limited so far.
The creation of a platform which would onboard delinquent mortgage loans of vulnerable households, which according to sources familiar with the matter is being discussed by party leaders, would be a tool banks could use should they deem it effective, Demetriou continued. Alternatively, they could look into setting up one or several asset management companies, he added.
The head of the central bank’s supervision department also reminded that banks, which are suffering from low interest rates reducing their earnings, need to return to profitability by applying “a sustainable business model”.
On top, the recognition of interest income from non-performing loans remains disputed, Demetriou added.
The difficulties the Bank of Cyprus, the island’s largest lender, is facing in its attempt to overhaul its remuneration system and adjust it to the current challenges, after bank workers’ union Etyk raised demands for a quasi-return to the pre-crisis practices in human resource management, is emblematic of the challenge Cypriot banks are facing in this direction.
Last week, Etyk threatened to strike unless Bank of Cyprus accepted its demands which include the payment of incremental pay rises resulting from seniority and compensation for the loss of purchasing power to inflation. In addition, the union demands that the bank should stick to the provisions of its past organisation chart and promote up to 600 workers to higher positions.
“It’s important to evaluate sources of income in an attempt to find new income to offset the impact of the low-interest rates environment and where this is not possible, then adjusting expenses is inevitable,” said Demetriou. Lenders, he continued, could take advantage of opportunities related to technological innovation in banking services as new challenges related to FinTech companies emerge.