INTERNATIONAL ratings agency Moody’s said on Wednesday that the outlook for the banking system in Cyprus is “negative” due to slow growth and repercussions from the financial crisis in Greece.
“Moody’s believes that asset quality and earnings for the rated Cypriot banks will remain under pressure in the near to medium term, given the muted economic growth in Cyprus and the anticipated economic contraction in Greece stemming from the Greek government’s austerity measures,” according to the author of the report, Christos Theofilou.
Moody’s said that its rated banks in the eastern Mediterranean island of Cyprus have “direct and sizeable exposures in Greece through branches or subsidiaries, accounting for 41 percent of total loans as of June 2010.”
“The Greek exposures of Cypriot banks are affected by weak corporate earnings (due to the economic contraction) and reduced household disposable income (due to rising unemployment rates, additional tax measures and enforcement, and salary cuts).
“These factors will likely lead to substantially higher non-performing loans in Cypriot banks’ loan books,” it warned.
According to the report Cyprus’ once booming property market, which is a significant component of the banks’ loan books and which represents the majority of collateral for loans, “remains a risk area with weak demand and unclear growth prospects.”
“Bottom-line profitability for Cypriot banks will likely remain modest, slightly below 2009 levels, as it continues to be negatively affected by the weak macro-economic conditions in Cyprus and Greece, with elevated loan-loss provisions over the next 12 to 18 months,” the report added.