NPLs, low profitability, high indebtedness vulnerabilities for banks

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By Stelios Orphanides

The Central Bank of Cyprus said that three years after Cyprus’s economy returned to growth and unemployment entered a declining path, the financial sector continues to face challenges as banks struggle with a mountain of non-performing loans and losses.

“Therefore, credit institutions need to intensify their efforts towards reducing non-performing loans by applying holistic and sustainable strategies,” the Central Bank of Cyprus said on Thursday in its financial stability report on its website. “Furthermore, credit institutions should improve their profitability by expanding their revenue sources, and further reducing their operating expenses”.

While households and non-financial sector companies are still “heavily indebted,” their debt level continues to decline, the bank supervisor said. Household debt fell to 113.8 per cent of economic output in September last year from 123 per cent a year before. In the case of non-financial corporations and the government, debt fell to 137 per cent from 147.7 per cent and 103.2 per cent from 110.6 respectively.

The ratio of non-performing loans extended to households fell in November to 52.8 per cent from 54.9 per cent a year before or by €1bn, while progress in the case of corporate non-performing loans was more spectacular with the ratio falling from 54.9 per cent in November 2016 to 48.4 per cent a year later or by €2bn, the central bank said.

Overall debt stood last September at 354 per cent of gross domestic product (GDP) compared to 381.3 per cent in September 2016, the central bank added.

The Cypriot economy, which exited a prolonged recession in 2015 caused by a twin fiscal and banking crisis, expanded last year 3.9 per cent compared to 3.4 per cent in 2016. Last year, debt reduction was aided by a 0.5 per cent inflation rate after four consecutive years of deflation.

The bank supervisor said that the banks’ “low quality of the loan portfolio of credit institutions, due to their excessive exposure to non-performing loans” is a source of risk for the banking system and remains a “constant vulnerability”.

The banks’ weak profitability prospects are also seen as a vulnerability that is expected to further increase, the central bank said. On the other hand, the vulnerability caused by the excessive debt of the non-financial sector is expected to improve.

Last year, Cypriot banks generated a €723.2m net loss compared to a net loss of €213.8m, according to the Central Bank of Cyprus. In 2010 to 2017, Cypriot banks generated more than €12.4bn in losses.

In its stability programme submitted last month to the European Commission in Brussels, the finance ministry said that it plans to help banks reduce their delinquent loan portfolio by €8bn by the end of the year via the introduction of a more effective foreclosure and insolvency framework, the sale of the state-owned Cyprus Cooperative Bank and the introduction of a body that will buy mortgages and loans to small and medium size enterprises which have a primary home as collateral.

Currently, the Co-op is considering offers from two bidders, Hellenic Bank, third largest Cypriot lender, and the US-based Apollo Capital Management, to buy its assets, more than a month after the government intervened to soothe its depositors concerned about the bank’s capital levels.

The government issued in April €2.4bn in bonds and deposited €2.5bn with the Co-op amid an increase in cash withdrawals in previous months by customers who feared over the safety of their savings.

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About Author

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

  • almostbroke

    The Government dident deposit over 3 billion with the Co Op it was the taxpayer as usual !!!

  • Banker

    The world average of NPL ratio is 4 %. Around 3 years it’s decreasing dramatically in RoC. Banks have lost half of their investments. They are not able to collect any instalments… The only way it seems for the banks profitability is to sell the bad loan portfolio to asset management companies (if there is).

    • Barry White

      With the capital value of the Bank of Cyprus being reduced by over 50% in the last 12 months, it a question of who is next to leap off the cliff following the Coop.

      The second question is who will be the beneficiary of the thousands of ‘managers’ and ’employees’ that are surplus to requirements after the Coop implosion along with their golden pensions? Does BOC have any chairs left?

  • Jim

    No doubt much corporate debt has been restructured & as such, has been removed from the NPL debt total. However, this does not mean that the debt has disappeared. Much of it will reappear as NPL’s when the debtors default on the restructuring.
    I believe that is already happening, given the increase in NPL’s recently reported.

  • Frustrated

    It matters not how you want to cut it, Cypriot banks are broke.

    Anyone who deposits monies in these entities other than day to day household expenses needs their head examining.

  • Bruce

    Surely the banks should be able to collect large amounts of money from strategic debt defaulters by the Government and bankers exercising the political will and courage to do so.Put some of the big strategic debt defaulters who are also major tax evaders in prison as they did with former Central Bank Governor and Minister of Finance Christodoulou. But I guess that the fish stinks from the “head” and nothing will be done.

  • Rory Keelan

    Nothing new here. The CBC is like a doctor that is long on diagnosis but rather short on treatment advice. The (deep) hole is known – how the banks might get out is rather less so. As for “reducing non-performing loans by applying holistic and sustainable strategies,” – meaningless waffle.