The reduction of non-performing loans (NPLs) by Cypriot banks has picked up pace, international ratings agency DBRS has said adding that it expected to see further progress.
In a report entitled “Cyprus: Picking Up the Pace – Government’s Enhanced Strategy for the Reduction of NPLs”, it said the reduction in NPLs has been largely driven by the corporate sector.
The decline in household NPLs, which account for more than half of total NPLs, has been more limited, it notes, adding however that it expects “further progress.”
The ratings agency also expects “the fiscal impact from the enhanced NPL strategy to be manageable.”
“After an expected rise in 2018, the government debt-to-GDP ratio is projected to decline from next year,” it says.
It acknowledges that while NPLs in Cyprus have continued to decline they “remain at elevated levels.”
According to DBRS “the government’s proposed enhanced NPL strategy is aiming to materially reduce total NPLs generally and address household NPLs specifically.”
It points out that some elements of the strategy are still under discussion and its implementation “could be challenging.”
“Even with the enhanced NPL strategy, reducing NPLs to moderate levels will take time,” the ratings agency warns.
Nevertheless, DBRS “views favourably the government’s enhanced strategy for reducing NPLs and expects NPLs to continue to decline.”
Referring to Cypriot banks, the ratings agency says that the high level of NPLs continues to constitute their great vulnerability adding that their profitability also remains weak.
Local banks’ Common Equity Tier 1 (CET1) has dropped to 15% in 2017 from 16% in the previous year but remains above EU average and notes that further consolidation of banks` balance sheets could possibly affect their levels of capitalisation.
According to the agency NPLs in the Cypriot banking system accounted for 42.5% of total loans in December 2017 and ranked 2nd highest in Europe after Greece, whilst it has recorded a small drop from its peak in May 2016 of 49.0% of total loans. The percentage of loans 90 days in arrears dropped to 32.6% from 37.5%.
Reduction of NPLs is mainly due to the drop in business NPLs, which account fo 45% of total NPLs and fell between April 2015 and December 2017 by 36% mainly due to the restructurings of large companies’ loans.
It further refers to the slow drop in household NPLs which account for 53% of total NPLs, noting that from February 2015 until December 2017 they fell by 16%.
DBRS also points out that the construction sector has contributed significantly in businesses NPL reduction.
The construction sector, which accounts for about 25% of company loans and almost one third of company NPLs, has reduced its NPLs by 43%.