articles | 29 October 2015

Cypriot banks have enough capital to deal with NPLs

Finance Minister Harris Georgiades said that Cypriot banks, including the three main ones, Bank of Cyprus, Cooperative Central Bank and Hellenic, require no additional capital to deal with the current high non-performing loan ratio.

“The capital adequacy requirements of Cypriot banks were based on much higher levels of non-performing loans than what we have today,” the finance minister told state radio CyBC on Thursday. “It was forecast that they would be higher than what they are today and what is encouraging is that the rising trend (of non-performing loans) has been reversed. In recent months, the non-performing loan situation has started to ease”.

Georgiades cited data announced by the Central Bank of Cyprus on October 20, showing that the 90 days past due loans as a percentage of the €27.4 billion in total exposures in the banking system stood at 38.4% in August, while the non-performing loan ratio was 47.8%. According to supervisory regulations, a borrower has to service a restructured loan for 12 months before the loan is considered as performing. The difference in the two figures indicates the amount of loans restructured in the past 12 months.

Six months ago, the percentage of 90 days past due loans was 37.4% of the total €60.3 billion outstanding loans while the non-performing loan ratio was 46.1%.

“This easing has to become more intensive, not just to continue,” Georgiades said. “Based on this, I believe that our banks are fully capable to operate, they are overcapitalised”.

The common equity tier 1 capital ratio of Bank of Cyprus, the Cooperative Central Bank and Hellenic Bank in June was 14.9%, 13.1% and 13.5% respectively.

Georgiades said he expects Cyprus’ borrowing cost to drop if the non-performing loans situation continues to ease and added that a considerable reduction of bad loans would allow the island to see its sovereign rating upgraded to investment grade.

“Indeed, non-performing loans are a burden on the evaluation of the economy,” he said. “We had some important sovereign rating upgrades but we remain non-investment grade. Last week we had a double upgrade and that is the maximum a rating company can do”.

To increase the tools required by banks to reduce their non-performing loans, the Finance Minister said that the government is “ready to consider” every proposal towards that direction, including establishing a fund to purchase bad loans.

Fitch Ratings upgraded Cyprus’ sovereign rating two notches on Friday to B+ after Standard & Poor’s upgraded the island by two grades to BB- on September 25. The Cyprus Business Mail understands that Moody’s Investors Service is also likely upgrade Cyprus’s sovereign rating by mid-November.

As the government on Tuesday completed its third debt issue — following the March 2013 bailout — by raising €1bn with a 10-year bond at an average yield of 4.25%, which signalled the restoration of its creditworthiness, Georgiades said he was concerned that a deviation from the government’s reform course could result in ruining what Cyprus achieved in the past 30 months.

“I wouldn’t be honest if I said that I am not concerned” about failing to deliver reforms including privatisations, which are part of the island’s bailout terms, he said. “I am confident about the course of the economy and I share the confidence of global investors. We were able to overcome an unprecedented crisis easier than expected”.

Source: Cyprus Mail

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