Cypriot banks in the process of becoming bad banks, economist says – cyprus business mail
As Cypriot banks are struggling to deal with their heap of bad loans largely via loan-to-land swaps, they may face additional challenges in the future, including of becoming bad banks, amid weak demand for new lending and low interest rates, an economist said.
As a result of the partial restoration of depositor confidence in the Cypriot banking system following the 2013 banking crisis and the lifting of capital controls two years later, reflected also in the repayment of emergency funding by Bank of Cyprus, Cypriot banks have about €16bn in excess liquidity, economist and former banker Marios Clerides told delegates at the Cyprus Economic Society’s panel discussion on Thursday.
As banks are unable to convert excess liquidity into healthy, fresh lending, with demand for new loans remaining subdued, it currently remains parked at a cost at the European Central Bank which set its deposit facility to 0.4 per cent below zero two years ago, Clerides said.
Clerides said that he does not expect the banks’ non-performing loans, which account for about half of their loan portfolio, will significantly drop anytime soon, following initial success in loan restructurings.
The drop in non-performing loans by €3.8bn from December 2014 until a few months ago, represents the “low hanging fruits,” as “banks went for the easy solutions first and left more difficult to handle” cases for later, Clerides said. Database building In addition, the bulk in the drop of bad loans represents corporate loans.
According to Central Bank of Cyprus data, from December 2014 until October 2016, the non-performing loans of non-financial companies dropped by €2.3bn, versus €267.7m in the case of households.
Restructuring a larger number of smaller household loans is likely to prove more difficult, reflecting the particular difficulties the government-owned Cooperative Central Bank is facing, whose exposure to mortgages and other lending to households or small business is comparably higher, Clerides who, until mid-2015, served at the helm of the bailed-out bank said.
While Cypriot banks are beginning to extend new loans to customers, in the absence of substantial demand for healthy lending, amid ongoing deleveraging and strong reliance on debt-to-asset swaps – involving mainly real property – Cypriot banks are in the process of becoming bad banks “by default”, should the trend continue, Clerides said.
With the household debt to gross domestic product ratio seen in 2015 at 123 per cent, “non-performing loans are a problem of over-indebtedness and not a temporary income issue,” he said. Data recovery top 10 Therefore, economic recovery alone is unlikely to cure the problem and other therapies including haircuts on loans may be required, he proposed.
The analysis of data on non-performing loans shows that there is evidence of strategic default practices, i.e. Database hosting of borrowers who are in position to service their loans but opt not to do so, he said.
The strong performance of the Cypriot tourism industry over the past years, especially in 2016, when the number of visitors rose 20 per cent to almost 3.2m, setting an all-time record, confirms this assumption, he continued.
Non-performing loans of hotels and restaurants stood in December 2014 at €1.3bn or 63 per cent of their total borrowing, and by October 2016, they fell to €1.1bn or 53 per cent.