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Non-performing loans stand at €21.9bn

Non-performing loans (NPLs) in the Cypriot banking system currently stand at €21.9 billion, or 44 per cent of total loans and 120 per cent of economic output according to the governor of the Central Bank.

non-performing loans in the Cypriot banking system currently stand at €21.9bnCENTRAL Bank of Cyprus governor Chrystalla Georghadji said that the amount of non-performing loans in the Cypriot banking system “currently” stands at €21.9bn or 44 per cent of total loans.

The non-performing loans ratio in the system was 44 per cent of total loans and 120 per cent of economic output, Georghadji said according to the transcript of her speech at an event in Nicosia on Monday. Net non-performing loans stand at €11.7bn and banks have terminated half of the non-performing loans.

According to the latest publicly available central bank data, the amount of non-performing loans in June was €22.4bn. The net non-performing loans is the amount of unserviced loans minus total provisions for loan impairments, which in June stood at €10.5bn.

Georghadji said that the future reduction of non-performing loans needs a coordinated strategy and additional reforms, on top of the modernised foreclosure and insolvency legislation.

While macroeconomic conditions are improving gradually, with growth consolidating this year at 3.6 per cent after last year’s 3 per cent, and the unemployment rate falling to 10.6 per cent in August and expected to fall further over the coming years, the economy is still facing risks, which include geopolitics and Brexit as they may both potentially affect tourism.

“The efficiency of the new foreclosure and insolvency legal framework has not yet been tested and possible unpredicted delays in the effective implementation of the refined foreclosure framework could result in further inefficiencies,” the governor said. “Although significant progress has been made in the operational capacity and expertise of the banks, there is still room for improvement. Banks need to remain focused and committed to their non-performing loans strategies”.

Georghadji said that the central bank does not rule out mass disposals of real estate to result in plunging immovable property prices. The recovery of real estate sector which set off late last year as reflected in stabilised and recovering property prices, “is not expected to be easy both due to internal and external factors,” she added.

The Cypriot banks which following the 2013 banking crisis, beefed up their loan recovery and restructuring capabilities, in part by resorting to joint ventures with external partners, lack the capacity to aggressively increase their provisioning levels or “capital destructive” sales of non-performing loans, she said. “On the other hand, pre-impairment profitability should remain positive in the medium and long term so that the building up of additional provisions is feasible. In this regard, banks should pay particular attention to viable business models”.

Georghadji added that a secondary market for distressed assets may not operate efficiently under the current conditions as a result of the size of the portfolios and the real estate market being illiquid.

“In addition, transactions may require high haircuts on net book value due to uncertainties over the recovery value,” she said. “However, the recent collaborations of two significant banks with foreign servicing platforms for the management of non-performing loans, the gradual recovery of the real estate sector and the continuous increase of non-performing loans provisioning can potentially support distressed assets transactions”.

Readers' comments

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  • John says:

    The comments by Richard is perhaps the best summing up of the situation! The sad thing is of course that the banks won’t take any notice of it. Like all bankers they’re greedy, unscrupulous selfish…

  • John says:

    Well said Richard. There was a coordinated web of Banks, Developers and many lawyers who worked to entice well intentioned but naive buyers into buying property, that was often of poor quality or not completed. Many of the practices must surely be judged corrupt. I had personally hoped the EU or European Court would get involved to sort out the mess but little chance of that happening. I still cant believe that lawyers didn’t have to disclose that property was being built on land not owned by the developer and with a Mortgage held by another party. This has led to non availability of Deeds and delays of ten years and more to allow them to be issued. These are not just isolated cases but common practice used in thousands of cases. Cyprus property is a total mess. The other issue is that taking local court action to seek redress, takes six years to come to court. In the meantime the Cypriots are appealing judgements against them, reached at the High Court in UK for contracts signed in UK. The Cypriots are masters at blocking action, delaying resolutions and court cases and not disclosing the full facts. In the meantime the properties built in 2004-6 are worth at most 75% of the purchase price, whilst house values in UK have mainly doubled over that period.

    I fully agree with Richard that reforms should include heavily regulated banking practice, together with significantly heavier penalties against construction, legal and brokerage entities who acted with impropriety and negligence. This has to be implemented by the Cypriot and EU legislators to bring any confidence back to the Cypriot property market and also to Cyprus as a country.

  • Kurtz says:

    Is a billion in this article a thousand million or a million, million ? If so this small island has a shortfall of 21,000 or 21,000,000 a head of population.

    Ed: A billion is a thousand million (109).

  • Deanna says:

    Well said Richard.

  • Richard says:

    “Georghadji said that the future reduction of non-performing loans needs a coordinated strategy and additional reforms, on top of the modernised foreclosure and insolvency legislation.”

    I don’t suppose it really needs saying again, but I will – for consistency.

    The reduction of non-performing loans needs a coordinated admission of gross misconduct, greed, incompetence and negligence on the part of the banks who both architected and mis-sold and under-educated customers on the pitfalls of high-risk CHF loans provided against over-valued property on the island.

    Additional future reforms should include heavily regulated banking practice, together with significantly heavier penalties against construction, legal and brokerage entities who acted with impropriety and negligence.

    And when that’s all done – some compensation for the victims of the above (especially for those who’ve taken their own lives due to the stress of it all) should be forthcoming.

    Cyprus – this is your mess – it’s not going away.

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