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Nonperforming loans at €23 billion

Confidential information from the Central Bank released by StockWatch today puts the level of non-performing loans of the domestic banks at €23 billion requiring several billions more to recapitalise them.

BANKS in Cyprus have not been categorising loans as non-performing providing they were fully covered by collateral even though the loans had not been serviced for three months.

This conflicts with the International Monetary Fund (IMF) definition of nonperforming loans (NPLs) and results from a Directive issued by the Central Bank in December 2008, which states on page 6 that “Funded credit facilities and credit substitutes extended to customers, which are fully secured, should not be classified as non-performing”.

The Central Bank has reanalysed all bank and Coop loans to bring them into line with the IMF definition and the confidential data from this analysis was reported by StockWatch earlier today.

Using the IMF definition, NPLs at the end of September amounted to €23 billion; equivalent to 27% of the credit portfolios of banks and Coops (with the exception of the Limassol Savings Cooperative). These amounted to €19.5 billion or 26.5% of bank loans and €3.4 billion or 32.3% of Coop loans.

The Central Bank data also reveals a significant increase in NPLs as a result of the economic downturn. By the end of June, they had reached €20.7 billion and increased by a further €2.2 billion in just 3 months.

According to StockWatch, the Central Bank will soon issue a new directive to the banks and coops on the recognition of NPLs to bring them into line with the IMF definition.

Readers' comments

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  • @Garry – Yes. The Central Bank gave PIMCO a list of all bank loans (the banks have to supply the CB with an updated list of loans every month).

    Several companies, some from overseas, were then given the task of valuing a sample of properties used as loan collateral. And there were checks to even out any discrepancies in their valuations. This work has only just been completed and the results are being analysed by PIMCO.

  • Garry says:

    I wonder if PIMCO have spotted yet that some of the collateral is mortgaged land that has mortgaged properties built on it? One asset, 2 loans. The recovery rate on these poor loans will be worse here than in other countries because of this crazy system

  • Janner says:

    I agree andyp. It takes a long time to change corrupt practice. Especially when it is seen as a way of life and not even corruption!

    I just can’t see Cyprus being able to do it. The fact that they will not admit there is even a problem with how property is processed is an example of just how far they have to go.

    I think they will delay, resist, duck and dive their way through this and still be the same on the other side.

    My contact in Cyprus, who works for a well known developer/agent, tells me that their boss is convinced that the Chinese will save the country. They are pushing sales hard and with some success as well. They just consider the Brits to be moaning and do not even see anything wrong in how the property business operates.

    I can only assume that their business continues to profit, or at least exist, due to the same old procedures being in place.

    Will this mindset and system ever change. Probably not.

  • andyp says:

    I have to disagree AM.

    The problem we have is corruption that was seen as a way of life.

    People who do not pay tax nor fines and people who could not be bothered to collect them.

    Taking advantage of people who trusted their lawyers to protect them.

    Developers who shafted people with the coordinated collusion of lawyers, banks and government.

    Stupid bankers who agreed but did not realise that they would get left holding the baby.

    Listening to to the assurances of our Interior Minister several years ago.

    Having a constitution that gets stuck with an idiot who blames everyone else and knows nothing about anything.

    We all pray for a brighter future but Cypriots have, to be honest, not really cared. Now they do.

    Sorry but that is the truth in my humble opinion.

  • andyp says:

    Night night Costas. Have a good one.

  • M Anastasiou says:

    The Truer Picture is now emerging, and the Debts are staggering beyond any hope of a Recovery unless we have a New Government with Policies of Curbing the Banks and a Greater reduction of the Public Sector Pay & Pensions.

    The only way forward is to Join NATO with the return of Famagusta, this would secure our future and stimulate Growth through the re-development and Mass Investments to Create Jobs and Income which is our only hope of Growth & Prosperity.

    The Days of Extreme Political Ideology with Social Partners has been devastating, this idealism of Spend, Spend and Give, Give, of Public Funds has been a Nightmare.

    I pray for a Brighter Future without Unions blackmailing us all with the Full Backing of the Akelites.

    Our Financial Exposures both Internally and externally have to be Controlled with Policies directed by the Trioca as Public funds have to be safeguarded to at least pay our Debts.

  • Costas Apacket says:

    Let’s hope that this incredible NPL total increases the Debt to GDP ratio so that privatisation of SGO’s becomes necessary.

    Then maybe going forwards Cyprus will become more competitive by improving it’s offering to consumers at a price they can afford, hopefully starting with EAC and electricity prices.

    Just think, gas fired power stations run on Gas from Cyprus’s own fields and supplied by a lean efficient privatised industry without interference by politicians!

    I know, I know, I can only dream!

  • Adrian says:

    Thank you Nigel for clearing that up for me. It just confirms what a precarious state this whole property market is in with all the powers that organize the day to day business of this island running it like it is there own little business with no regard to the protocol required.

    I personally am lucky that my developer is a long established (1961) family business with an excellent track record, but I do feel for the people whose lives have been ruined by these corrupt individuals and the more that outsiders such as the Troika get involved and do not take any information that they get from officials at face value the sooner things will improve. Do they know the triads don’t mess about!!

  • steve says:

    In my case Alpha Bank hold 3 mortgages on our site of 7 properties. The site is only 65 percent completed but Alpha Bank released all of the mortgages to the builder who is now (surprise, surprise) in liquidation and has skipped the island. The properties are in effect worthless and all 3 mortgages are non-performing. Negotiations with the bank and the receiver have broken down so we are going to take a stance on this and take our chance in court, SOMEBODY HAS TO. In this instance the word due diligence by Alpha Bank is out of the window. I wonder how many times this has been repeated with Alpha Bank across the island.

    Am I mistaken or wasn’t there an auction recently where the bank put up several properties for sale on a site that was similar to ours and not one single purchaser turned up. People are not interested in Cyprus any more which is such a shame because the island is paradise. Get your act together and people will come flooding back.

  • Gavin Jones says:

    With the Orphanides Supermarket chain now going into receivership, I wonder if PIMCO’s audit of the Bank of Cyprus and Popular Bank had classed these loans as ‘non-performing’ or ‘sound’?

    I rather suspect that the €200 million exposure of the two banks will have to be added to the ballooning figure of their recapitalization requirements.

  • Martyn says:

    Well, well, well! So quite a few of us were right. Poor risk management, weird and wonderful methods of determining what is and what isn’t a NPL, sloppy provisioning parameters, referred in correspondence to the Troika as ‘cultural nuances’ – wonder what they are a smokescreen for? – , poor > non-existing Central Bank controls mean estimates of a Total bail-out of €20bn+ remain very probably accurate.

    So, the 2nd biggest banking bailout in history, I was in Indonesia in 1998 and witnessed first hand the dire impacts of their massive bailout – truly awful!

    So, the last 2 digits of 2013 are likely to prove particularly significant for the island State.

  • andyp says:

    @Adrian. I tried to get my lawyer charged by the Police for fraud a few years ago. They did investigate but I was told by them that it was a civil and not criminal matter so I guess the answer to your question is no.

    As for the scale of the debt no doubt the Pimco figure presented to the troika must make the true Cyprus bailout figure close to, if not over, the GDP ratio which defines a loan as unsustainable hence the secrecy and delay.

  • @Adrian – A fully secured loan doesn’t mean that the bank retains title to the property.

    It means that the value of the collateral used to secure the loan is sufficient to cover it.

    Eg. If the loan is €20,000 and the value of the collateral used to secure it is €25,000 – the loan is fully secured.

    However, if the loan is €25,000 and the value of the collateral used to secure it is €20,000 – the loan is NOT fully secured.

    Mortgaged property can be sold without the knowledge of the bank – this is not illegal (the same is true in the UK and other countries).

    The problem in Cyprus is that developers and ‘crooked’ lawyers fail to advise those buying property that it is mortgaged to the bank.

  • Adrian says:

    Am I correct in assuming that what the bank refers to as a secured loan means that they retain the Title of land or property as security for the loan. What happens if the land or property was sold on without the knowledge of the bank, does that still count as a secured loan?, and will the developers and lawyers who facilitated such a sale be charged with “fraud” of some sort.

    The Troika must have discovered hopefully that not only the loans are non performing but include the bankers, lawyers and developers are non performing helped by this government.

  • Denton Makrell says:

    @Nigel. For clarification, I believe that the difference (23bn less 16.6bn) shown up by the newly imposed definition amounts to €6.3bn, virtually all of which relates to immovable property according to Stockwatch. This figure is pretty close to the earlier Stockwatch estimate in 2009 of €5.9bn and the subsequent assumption that it would have risen to over €6bn by now.

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