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Cyprus banks to cover exposure in property sector

It is expected that the commercial banks will be called on to cover their big lending exposures in the island’s property sector next year following latest economic bulletin the Central Bank of Cyprus.

UNDER pressure from the slowdown in the Cyprus property sector, it is expected that the commercial banks will be called on to cover their big lending exposures the sector next year. In its latest economic bulletin the Central Bank of Cyprus refers to the credit risks that the banks have undertaken over the past few years as being a result of their increased lending to property developers and real estate agents.

In September 2007, loans to companies actively involved in the property construction and management sectors amounted to 15.8% of all loans to Cypriots. This represents an increase of 22% over the year which, according to calculations carried out by StockWatch, corresponds to an increase of €4.1 billion. A year ago the banks’ exposure stood at €5.1 billion a year ago; today it exceeds €9.2 billion.

The activity in the sector has fallen by 30% since 1st January, as demonstrated by the reduction in Capital Gains Tax revenues.

The sharp drop in the sector’s activity is expected to push up bad debt provisions, as it restricts the ability of property developers and real estate agents to serve their loans.

However, the bank managements are worried about the course of the prices, particularly in housing properties. In a bulletin released on Friday, the Central Bank supports the view that property prices in Cyprus grew by 10% against 15% but avoided revealing details of how its figures are calculated.

The Central Bank of Cyprus forecasts differ from those of the property developers and estate agents, The vast majority of whom believe that the price of housing properties in seaside areas have dropped up to 20%.

Irrespective of the course of prices, the Central Bank believes that the big lending exposures are the major risk that the commercial banks face. “The credit risk is still the most important risk that the banks are exposed to“, the bulletin said. Other risks are related to the €22 billion that the banks have deposited to banks abroad, the increased cost of absorption of deposits and the expansion to uncertain markets in Eastern Europe.

As a result, the Central Bank is expected to ask certain banks to increase their supervisory capital, which “must be maintained in order to cover possible unexpected future losses to certain isolated banks“, the Central Bank concluded.

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