Cyprus economic growth fails to produce the expected reduction in NPLs

The strong growth boosting the Cypriot economy has failed to produced the expected reduction of the high stock non-performing loans (NPLs), hampering the island’s banking system, IMF representative in Cyprus, Vincenzo Guzzo, has said.

We have clearly a strong economic recovery but that has not produced the reduction of NPLs that someone could have expected and certainly that reflects the weak payment discipline,” Guzzo told the 5th Cyprus banking forum

Despite three years of GDP growth after the 2013 crisis, NPLs amount to 46% of total loans in the Cyprus banking system, placing the island second after Greece in the EU.

Guzzo noted that strategic default, borrowers who have the capacity to repay their loans but refrain from doing so, is associated with the lengthy inefficient procedure in enforcing legal claims and also a perceived blanket protection of primary residence.

He also referred to the World Bank’s data, according to which contract enforcement takes 1,200 days in Cyprus, while foreclosures take 10 years, which is the longest in the EU.

Weak enforcement preserves poor preserves, poor payment discipline as the dominant strategy for many borrowers, he said.

He called for an ambitious strategy to tackle both NPLs and high private debt, stressing that growth alone is not sufficient to reduce NPLs.

On his part, George Syrihas, Executive Board Member of the Central Bank of Cyprus, agreed that the pace of NPLs reduction is slow relative to the Cyprus growth rate, but cautioned that one should not press for fast NPLs reduction.

The pace we restructure NPLs is critical, he said.

We made progress. We had Euros 6 billion reduction but progress is not fast enough given the progress of the economy, he said.

But he underlined that the pace with which we restructure loans is critical. We need to do much more because the economy is growing but there is a level on how fast we reduce NPLs.

Banks to offload assets in 2018

Furthermore, all major Cyprus banks top officials stressed that asset quality is the main challenge facing the banking system.

Bank of Cyprus deputy Managing Director Christos Patsalides said NPLs are the Sword of Damocles hanging over the banking system, adding that the banks need to move fast in reducing NPLs close to the EU average.

Noting that the bank has been reducing NPLs for ten consecutive quarters, Patsalides said that as the bank continues reducing NPLs they reach smaller retail loans which are more difficult to work out.

We need to be more strict with strategic defaulters. We need to show understanding to people that cannot repay and we have done so. We do need to have more laws and an early introduction of other instruments, such as securitization. We need to facilitate the sale of loans which would expedite the reduction of NPLs,” he said.

On his part, Nicolas Hadjiyiannis, CEO of the Cyprus Cooperative Bank said that after reducing its NPLs portfolio by Euros 3 billion, the CCB has set up a joing venture with Spanish Asset Management, Altamira, which increases potential options over offloading assets.

What we have in place are servicers. They bring visibility and it appears that in 2018 there is optionality, he said, adding that sales will require recovery track record.

IoannisMatsis, CEO of Hellenic Bank said on his part that loan sales are the tool to be used following restructurings, debt to assets swaps consensual foreclosures and auctions.

The biggest tool to sell the loans is the servicer. Loans sales is the fastest way to reduce their problem, he said.

Moreover, he said, the challenges apart from NPLs, concern the excessive number of banks in Cyprus. Overbanking is madness in Cyprus, he said, noting that banking cost is ridiculously high.

GiorgosAppios, CEO of Astrobank, said that challenges arise from banking regulations with increased capital requirements hampering the bank’s ability to attract capital.

Dmitry Chudakov, head of RCB’s local operations referred to the increased regulations and the high cost of compliance.

He also highlighted the fierce competition as well as the shrinking net interest margin.

We need to look for new opportunities that bring us profitability and enable capital resources. One direction is digitisation, he said, adding that economic growth in Cyprus, and particularly the tourist sector growth and the associated tourist capacity create opportunities.

Source: Cyprus News Agency