CYPRIOT banks would benefit from a sustainable recovery in the Cyprus property market, rating agency Moody’s said as the Cyprus Property Index posted its first rise in seven years.
The index, compiled by the Central Bank of Cyprus, recorded a quarterly increase in the third quarter of 2016, for the first time since in 2010.
Although Cypriot banks continue to face significant asset quality challenges, a sustained reversal in the prices for apartments and houses would improve asset quality, a credit positive, Moody’s said in its Credit Outlook bulletin, issued on Monday.
As the agency notes, recovering property prices would support the construction industry, incentivise mortgage repayments from strategic defaulters who have the capacity but are unwilling to repay and allow banks to offload real estate taken on their balance sheet through debt-to-asset swaps.
“We expect property prices to broadly stabilise over the coming quarters, and the demand for property to increase gradually from low levels. Real estate sales totalled 7,063 in 2016, versus 21,245 in 2007,” Moody’s said, adding although the improving economy will support domestic demand, households’ large debt loads (loans to households were 116% of GDP as of December 2016) will continue to constrain demand growth.
An improved real estate market would mostly benefit Bank of Cyprus and the Cooperative Central Bank (CCB), the agency added.
Recalling that through debt-to-asset swaps, BOC acquired €1.3 billion of properties on its balance sheet, which constitute 6% of its total assets, the largest share of any Cypriot bank, the agency said that a gradually recovering property market would facilitate its sale of these assets and reduce the likelihood of the bank recording losses.
Furthermore, the CCB will also benefit because residential mortgages amount to 37% of its gross loans, with 50% of these loans classified as nonperforming exposures as per the European Banking Authority’s broad definition.
However, the agency pointed out that notwithstanding the improving real estate market, “Cypriot banks’ balance-sheet rehabilitation will be long because of the long cure periods for restructured loans before they are reclassified as performing and substantial distressed debt that has not been restructured yet.”
Additionally, it has been difficult to change Cypriot households’ poor borrowing culture, as indicated by relatively high percentage of restructured retail loans that have fallen back into arrears, the agency stressed.
*Sigh*
It will be aided most of all by the banks who mis-sold their loan products confessing to malpractice and coming up with sensible re-structured products (or sensible exit packages).
Then – they would not have to take on “debt to asset” swaps in the first place!
Banks should responsibly lend, and should never be involved in estate disposal and property managers.
Government should not have to ‘intervene’ in this. Anyone running a proper enterprise does not need ‘intervention’. That’s for crooks and incompetents (enough said).
I wonder how many more of these reports will be generated before someone high up ‘see’s the light’…?