Moody’s sees 3.3% growth rate in Q1 as ‘credit positive’

23/05/2017
Moody’s Investors Service said that the 3.3 per cent annual growth rate of the first quarter announced last Tuesday is a credit positive for Cypriot banks, as it strengthens borrowers’ capacity to repay restructured distressed debt. “Additionally, the growth will support real estate collateral values on which Cypriot banks rely heavily for most lending, and increase new lending opportunities that will support banks’ declining net interest income,” the rating company said on Monday, citing a report prepared by its Limassol-based analyst Melina Skouridou.

Moody’s, which in 2015 assigned Cyprus a sovereign credit rating of B1, four notches below investment level, said that the accelerated economic activity is expected to help improve companies’ cash flows and improve labour market conditions. The overall non-performing loans ratio in the banking system stood in January at 47 per cent according to the latest central bank figures.

In both corporate and household non-performing loans, the figure stood at 56 per cent. The unemployment rate dropped last year — when the economy expanded 2.8 per cent — to 13 per cent from 14.9 per cent in 2015, after peaking at 16.1 per cent the year before. The finance ministry said in April that the jobless rate is expected to further drop to 11.5 per cent this year with the economy expected to grow 2.9 per cent.

“Ultimately, the higher growth will enhance borrowers’ debt affordability and 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, albeit with a lag,” Moody’s said, adding that the company expects the Cypriot banks’ asset quality to further improve.

The non-performing loans of Bank of Cyprus stood at €11bn or 54.8 per cent in December. Those of Hellenic Bank were €2.3bn or 56.6 per cent at the end of the year, while that of the Cooperative Central Bank stood at 59.8 per cent or €7.4bn in September. “Cypriot banks will also benefit from stronger real estate prices, which will buttress collateral values, containing the need for additional provisions on existing non-performing loans,” Moody’s said. It added that the Bank of Cyprus will benefit the most from real estate price recovery as it has the “largest direct exposure” to real estate.

 


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