A “Credit Positive” by Moody’s to Cyprus’s Largest Banks!
Rating agency Moody’s considers as credit positive the fact that Cyprus’ Central Bank Governor, Constantinos Herodotou, expects two of the largest banks on the island to sell a significant portion of problem (non-performing) loans.
Mr. Herodotou recently told the House Finance Committee that “Bank of Cyprus Public Company Limited and Hellenic Bank Public Company Limited are actively pursuing sales of €4 billion of problem loans.”
“The sales would significantly reduce their problem loans and improve their asset quality metrics, accelerating the derisking of both banks’ balance sheets, a credit positive for Cyprus’ two largest banks,” Moody’s said. The agency also pointed out that, a €4 billion sale out of the €10 billion of non-performing exposures (NPEs) would reduce the NPE ratio to below 20%, from 29% as at end-August 2019.
According to the Central Bank Governor, “Bank of Cyprus is pursuing a sale of €2.8 billion of problem loans, with the transaction potentially agreed as early as end of next month.” Moody’s noted that although the bank has not disclosed any amounts, it did disclose in its latest financial reports that it is in an advanced preparation stage of reviewing NPE reduction structures, which it expected to finalise in the first half of 2020 and that include outright sales of a portfolio exceeding in total €2 billion.
“According to our estimates, if the sale materialises, Bank of Cyprus’ NPEs to gross loans ratio would decline to 12.6%. Part of the remaining problem loans could potentially exit NPE status during 2020-21, according to the bank’s estimates, or resolve through ESTIA, a government subsidy scheme, leading to an NPE ratio of less than 10% in the next 12-18 months”, Moody`s says.
According to the Governor, Hellenic Bank could amount to a sale of €1.2 billion of problem loans, with no clarity around the completion of the transaction. “According to our estimates, if the transaction materialises, the NPE ratio could decline to 10.7%, excluding NPEs guaranteed by the government. Hellenic Bank’s NPE ratio would also fall to less than 10% with the help of ESTIA (the bank received applications for €130 million housing NPEs), while the bank also expects certain NPEs to return to performing status,” the statements says.
As of September 30, 2019, non performing exposures (NPEs2) comprised 31.3% of gross loans at Bank of Cyprus and 25.2% of gross loans at Hellenic Bank, 3 compared with a 2.5% average for European banks as of the same date, the statement concludes.