MOODY’S considers that in order for the Bank of Cyprus (BoC) to attain its ambitious target of halving the ratio of non-performing loans (NPL’s) to 20% by 2019 it will also have to include NPL sales in its toolkit.
In a report on the Bank of Cyprus the international credit rating agency notes that “Bank of Cyprus’ continued recovery after a bailout four years ago will depend on the bank’s ability to significantly clean-up its loan book from legacy bad loans.”
“Non-performing loans (NPLs) fell to 40% of the loan book in March 2017 (equal to €8 billion) from a peak of 53% in December 2014, driven by loan restructurings, debt for asset swaps and write-offs,” it notes.
According to Moody’s “management has set ambitious targets to halve the ratio to 20% by 2019,” adding that “we consider the target attainable only if the bank also includes NPL sales in its toolkit.”
The report points out that “progress on restructuring has led to large volumes of performing loans.”
Management, it adds, “expects another €1.6 billion loans approximately to be reclassified as performing by 2019.”
“Since 2014, BoC’s dedicated restructuring unit has handled close to €10 billion of non-performing and under-performing loans out of a total loan stock of €20 billion as of March 2017,” it reads. “Around 91% of corporate restructured loans have no arrears,” it continues.
At the same time Moody’s notes that “the strengthening economy will support improved loan performance,” adding that “Cyprus’ economy which has enjoyed a broad-based recovery, driven by a growing tourism sector, the recovery of the construction sector and rising consumer spending as unemployment declines.”
“We expect the economy to post solid GDP growth of 2.7% in 2017, supporting borrowers’ debt repayment capacity,” the credit agency says.
The bank, Moody’s notes, “has made regular use of debt for asset swaps. Debt for asset swaps give the bank control of assets put up as collateral, allowing it to set more realistic sale prices and to benefit from income generated by these assets.”
However, it points out that, “although assets are taken onboard at a 25%-30% discount to current prices, the bank is exposed to the risk of losses if it is unable to sell the assets at the on-boarded price.”
At the same time it comments on the bank’s write offs which amount to €1.6 billion of bad debt since 2014.
“Management expects around one third of its targeted NPL decline to be driven by write-offs,” it says, adding that “accounting write offs of bad loans do not constrain a bank from pursuing debt recovery. However we expect limited reversals of these write-offs in the future.”
It expresses the view that “the bank will need to sell NPL portfolios if it is to meet its 20% target.”
Assuming, it notes, “new lending of around €1.5 billion per year, write-offs close to €300 million per year and that all restructured loans currently in the pipeline become performing, we estimate that BoC’s ratio of non-performing loans to gross loans would decline to around 22% by 2019. Additional NPL sales would therefore be required for the bank to achieve its 20% target,” it says.
According to Moody’s “around 77% of restructured loans currently have no arrears. The figure excludes €420 million of loans which were restructured in the first quarter of 2017 and for which it is too early to judge their performance.”
Corporate loans, it points out, “perform best, with 91% of restructured loans now performing in line with the terms of their revised contract.”
On the contrary, “retail loans are the weakest performers with 65% of restructured loans not having arrears while SMEs perform slightly better with 67% of restructured loans not having arrears.”