Citing Cyprus’ Statistical Service data, Moody’s argued that the country’s annual GDP growth rate from 3.4% in 2016 to 3.9% in 2017 will have a positive impact for the banks because it supports asset values, improves the repayment capacity of a large number of defaulted households and businesses, and provides banks with increased lending opportunities, which will support their declining pre-provision profits.
The increase in economic activity, according to the rating agency, helps strengthen businesses’ cashflows and improves labour market conditions for households, while unemployment rate has also improved, dropping to 9.8% as in January 2018, from 10.3% in December 2017, and 16.7% in January 2015.
“Ultimately, the stronger GDP growth will enhance borrowers’ debt repayment capacity, facilitating loan restructurings, particularly in the small and midsize enterprise sector, which is more vulnerable to economic changes and benefits from an economic recovery”, Moody’s says in its report.
Despite the acceleration of economic growth however, reduction of non-performing exposure will be slow, as the quality of retail loans has barely improved in the past three years of economic recovery. What’s more, the majority of NPEs are household loans that have improved little in recent years, despite economic growth, this indicates that a significant reduction in banks’ high stock of nonperforming exposures (NPEs) will be slow paced.
“Notwithstanding the improving economic environment, it will take time for Cypriot banks to rehabilitate their balance sheets because of the long cure periods for restructured loans before they are reclassified as performing, and the substantial volume of distressed debt”, the report mentions.
On the other hand, Moody’s expects Cyprus’ improving economy to create new lending opportunities, which will increase banks’ income-generating assets, supporting their net interest income, which declined 12 per cent in September from year-earlier levels, and their pre-provision profit./IBNA