In a report on BoC, the agency said BoC’s continued recovery after the bail-in four years ago will depend on its ability to significantly clean up its loan book from legacy bad loans.
“Non-performing loans fell to 40%, or €8 billion, of the loan book in March 2017, from a peak of 53% in December 2014, driven by loan restructurings, debt for asset swaps and write-offs,” Moody’s said in the report.
According to the agency, “management has set ambitious targets to halve the ratio to 20% by 2019,” adding that “we consider the target attainable only if the bank also includes NPL sales in its toolkit.”
The report adds that “progress on restructuring has led to large volumes of performing loans,” and that management “expects another €1.6 billion loans approximately to be reclassified as performing by 2019.”
“Since 2014, BoC’s dedicated restructuring unit has handled close to €10 billion of non-performing and under-performing loans out of a total loan stock of €20 billion as of March 2017,” the report said.
Around 91% of corporate restructured loans have no arrears.
At the same time, Moody’s notes that “the strengthening economy will support improved loan performance.”
“We expect the economy to post solid GDP growth of 2.7% in 2017, supporting borrowers’ debt repayment capacity,” the credit agency says.
The bank has made regular use of debt for asset swaps, which give it control of assets put up as collateral, allowing it to set more realistic sale prices and to benefit from income generated by these assets.
However, Moody’s said, “although assets are taken onboard at a 25% - 30% discount to current prices, the bank is exposed to the risk of losses if it is unable to sell the assets at the on-boarded price.”
Since 2014, BoC has written off €1.6 billion of bad debts.
“Management expects around one-third of its targeted NPL decline to be driven by write-offs,” it said, adding that “accounting write-offs of bad loans do not constrain a bank from pursuing debt recovery. However, we expect limited reversals of these write-offs in the future.”
According to Moody`s, around 77% of restructured loans currently have no arrears. The figure excludes €420 million of loans which were restructured in the first quarter of 2017 and for which it is too early to judge their performance.
Corporate loans perform best, with 91% of restructured loans now performing in line with the terms of their revised contract.
On the contrary, retail loans are the weakest performers with 65% of restructured loans not having arrears while SMEs perform slightly better with 67% of restructured loans not having arrears.
Source: Cyprus Mail
