Moody’s Investors Service is maintaining its positive outlook on Cyprus’ banking system, reflecting the rating agency’s expectation of further funding and loan quality improvements. The outlook expresses Moody’s expectation of how bank creditworthiness will evolve in Cyprus over the next 12-18 months.
“We expect improving loan quality to translate into modest profits for the Cypriot banks in 2017, for the second consecutive year,” says Melina Skouridou, Assistant Vice President at Moody’s. “We also expect further improvements in funding conditions for banks as depositor confidence strengthens and money that left the banking system during the financial downturn in 2013 returns.”
The rating agency expects these improvements amid continued economic recovery; as noted in November 2016, Moody’s forecasts real GDP growth of 2.7% in 2017 and 2.5% in 2018 as tourism revives, consumer spending rises and the country’s large business services sector maintains a strong performance.
Moody’s forecasts non-performing loans (NPLs) to decline to around 42% of total loans by year-end from 49% in September 2016. The slow rehabilitation process results from long workout periods for restructured loans before they are reclassified as performing and the large amount of distressed debt banks are tackling.
Improved loan quality and stable provisioning requirements will lead to modest pre-provision income growth which will support the banks’ capital levels. Cypriot banks’ tangible common equity (TCE) will likely rise to around 15.4% of risk-weighted assets by the end of the outlook horizon from 14.3% as of September 2016. Moody’s notes, however, that the banks’ capital is vulnerable to higher losses from NPLs than the amounts the banks currently anticipate. Combined NPLs stood at 131% of equity and balance sheet provisions of Bank of Cyprus Public Company Limited (deposits Caa2 positive), Hellenic Bank Public Company Ltd (deposits: Caa1 positive) and the Cooperative Central Bank Ltd (unrated) at the end of June 2016.
Furthermore, the rating agency expects that funding conditions for banks will improve further. Depositor confidence strengthened significantly over 2016 reflecting the gradual strengthening of banks’ balance sheets. Nevertheless, depositor confidence is not fully restored and any unexpected weakening in the banks’ solvency could rekindle outflows.