New York – The positive outlook for the Cypriot banking system reflects Moody`s view that the fast-paced economic expansion will continue, supporting borrowers` repayment capacity, asset values and new lending, Moody`s Investors Service said in a report this week.
Moody`s expects nonperforming loans (NPLs) at the three core domestic banks, namely the Bank of Cyprus, the Hellenic Bank and the Cyprus Cooperative Bank, to decline to around 35%-38% of their aggregate loan book by the end of 2018, from around 45% in September 2017 and forecasts a sector-wide net profit of between €50 million and €100 million, following expected losses of €600 million to €700 million in 2017.
“We have maintained our positive outlook for the Cypriot banking system,” said Melina Skouridou, a Moody`s Assistant Vice President and analyst and author of the report “Banking System Outlook: Cyprus – Economic recovery to reduce high stock of problem loans, driving our positive outlook.”
“In our view, Cyprus`s economy will expand robustly, helping to improve the banks` weak asset quality, as well as boosting their profits and capital” she said.
Moody`s forecasts 3.5% real GDP growth in 2018 and 2.8% in 2019, driven by booming tourism, resilient domestic consumption and a recovering real-estate market. Labour market conditions will improve further, but high private-sector indebtedness will limit growth opportunities for banks, the report said.
It expects that banks will continue to make progress on restructuring troubled loans and selling real-estate collateral, leading to further improvement in their still weak loan quality.
“Moody`s expects nonperforming loans (NPLs) at the three core domestic banks to decline to around 35%-38% of their aggregate loan book by the end of 2018, from around 45% in September 2017” the report said.
“Moody`s expects the banks` capital buffers to grow modestly over the outlook horizon, but their capital remains vulnerable because of the high stock of nonperforming loans that are not covered by cash provisions” it added.
According to Moody’s, the provisioning gap is largely covered by real-estate collateral, but any downward trend in the real-estate market would weaken the banks’ ability to recover debts through real-estate sales and they would need to set aside extra provisions. “The ratio of NPLs to provisions plus capital is around 120% – one of the weakest in Moody`s rated universe”, Skouridou added.
