The expected increase in demand for new loans excludes loan restructurings and comes as economic growth picks up, conditions on the labour market improve and the real estate market recovers, Moody’s said in an emailed statement. Already in the first six months of the year, total new lending stood at €1.6bn, which is two thirds of the total new lending extended in 2016.
“An increase, while maintaining strong underwriting standards and best practices, will be credit positive for Cypriot banks because it will support revenue generation, help stabilise declining pre-provision profits and bolster weak balance sheets,” Moody’s said. “The increase in new lending will support banks’ net interest income and curtail declining pre-provision profit and contracting loan books from write-offs of bad debts. Higher revenues will support banks’ capacity to further improve their balance sheet by writing off bad loans. Banks expect demand for loans by non-financial corporates and mortgage borrowers to increase in the third quarter of this year, and expect that lending standards, which tightened in 2014 and remained stable since, will not change”.
The Cypriot economy, which expanded 3.3% in the first quarter, is expected to grow 2.9% this year, marginally higher than 2016, helping reduce the unemployment rate to 10.8% in June, the lowest since March 2012.
“Of the large domestic banks, Hellenic Bank would benefit most from the increased demand in new lending given its large stock of low-yielding liquid assets,” Moody’s said. “Hellenic Bank’s cash and balances with banks was 37.9% of assets in March 2017, which is a drag on profitability. However, Bank of Cyprus is increasing its loans at the fastest rate”.
Bank of Cyprus extended €502m in fresh lending in the first quarter of the year which accounted for 2.5% of its gross loans at the end of last year against €89m or 2.1% in the case of Hellenic Bank, the rating company said.
“Notwithstanding the increasing loan demand, it will take time for Cypriot banks to rehabilitate their balance sheets because of a high stock of problem loans: for Moody’s-rated Cypriot banks, problem loans were 48% of gross loans in December 2016,” Moody’s said.
Source: Cyprus Mail