- Cyprus Property News Magazine - http://www.news.cyprus-property-buyers.com -

Cyprus banking idiosyncrasies laid bare

bank depositTHE Central Bank of Cyprus released the draft due diligence report on the island’s banking system produced by PIMCO on Friday, which determined that the banks will need approximately €8.9 billion for their recapitalisation.

The PIMCO report reveals what the company politely refers to as “idiosyncratic features” that differentiate Cyprus from other international banking systems:

Asset-based lending practices

“A key feature of the Cyprus banking system has been the practice of pursuing asset-based lending, meaning a high reliance on collateral in the underwriting of loans, often with less attention paid to a borrower’s ability to meet debt service payments on the loan.”

Extended foreclosure and legal resolution times

“The general timeline to receive a court judgment once a loan has been moved to recoveries can be three to four years. Following this, the borrower can appeal the process which can take another 18 months to two years. In total, the amount of time to reach a forced sale of property through auction historically has ranged between 10 to 12 years.”

Collateral used for many loans

“A single property can serve as collateral on multiple loans, or – even more complicated – multiple properties can serve as collateral on multiple loans.”

“Lenders are willing to extend additional loans to a borrower group on the pledging of additional collateral, rather than based strictly on an assessment of the borrower’s ability to service the new loan.”

Methodology for provisions and doubtful debts

“Provisioning methodology is a key differentiator between Cyprus banks and other European banks. In particular, the provisioning methodology used by a number of Participating Institutions does not capture expected loss in the financial statements to the same degree as alternative methodologies.”

Loan restructuring

“Modifications often extend loans beyond the contractual maturity, may be based on relationships and may not reflect the borrower’s current ability to repay. In other cases, modifications rely on third-party personal guarantees or simply result in extensions despite strong evidence suggesting the borrower’s inability to service the debt.”

High levels of unpaid interest

“Because loan-to-value ratios at origination have generally not been aggressive and because in some cases banks have assumed future property price appreciation up until the point of problem loan resolution, this has enabled banks to assume, in many cases, that some significant portion of unpaid but accrued interest eventually will be realized in the proceeds of a loan resolution.”

Dependence on international banking operations

“The Cyprus banking system has become an important centre of international banking operations over the last decade, and transaction revenues related to international banking have been and are likely to remain critical components of non-interest income for the large Cyprus banks. As is the case in many other centres of international banking, the bulk of these operations relate to transfer and settlement services for client transactions.”

Non-payment culture in the Co-operatives sector

“An essential difference between the co-operatives and the banks in Cyprus has been the relative reluctance of cooperative managements to pursue aggressive collection and work-out strategies on problem loans. This relative reluctance has been due in large part to management’s belief in the social function of the co-operatives, that is, the aim of the co-operatives is not to maximize profits but to serve their members.”

Further reading

Independent Due Diligence of the Banking System of Cyprus – March 2013