Filenews 25 February 2023
Banking administrations in Cyprus are sending the message that they are not too worried that non-performing loans will increase due to the change in the interest rate environment and show that they are in control of the situation, but the Central Bank is preparing for the next day, with the aim of addressing current or future challenges, through the search for a systemic solution for NPLs (Non-Performing Loans).
Yesterday, the supervisory authority announced that it had recently commissioned reputable international advisory firms to carry out a project with the ultimate aim of maintaining and further enhancing financial stability. According to a relevant announcement, the scope of the project is the formulation of a systemic solution, which together with the existing tools can contribute to a possible further reduction of NPLs, as well as other distressed assets located in the Cypriot banking system.
Central Bank Governor Konstantinos Herodotou said in a written statement that "in cooperation with an international consortium of consultants, we are launching a new effort, which aims to formulate a systemic solution, which can be put in place for possible further management of the stock of NPLs in the domestic banking system. In addition, with such a solution at our disposal, we will be better prepared to face any future challenges. This initiative will have a positive impact on the resilience of the banking sector, further enhance financial stability and benefit the country's economy."
Most outside banks
Based on the latest data from the Central Bank, at the end of November 2022, distressed loans in the banking system were €2.68 billion, out of a total of €25.56 billion in loans. They are at their lowest historical point since 2013, a year marked by the end of the banking bubble and was the start of managing distressed loans. There were two drastic solutions mainly implemented by the management of systemic and non-systemic banks to improve balance sheets. The first solution is the exchange of real estate for debt, with the aim of writing off loans, with the result that banks have a large number of properties on their balance sheets, and the second solution is the sale of multimillion-dollar distressed loans to asset management companies.
However, despite the transfer of a large number of NPLs to asset management companies, these toxic loans remain part of the economy. It is estimated that around €20 billion will be spent on distressed loans they are outside the bank balance sheets and these include the loans managed by KEDIPES.
First in the Eurozone
The banks may have implemented radical solutions to reduce bad loans, but the Cypriot banking system is the leader in the Eurozone. The latest data announced by the European Banking Authority for the third quarter of 2022 show that non-performing loans accounted for 7.50% of banks' total loans, when the euro area average is 2.29%. The banking system with the second highest percentage of bad loans is the Greek one, with the index being at 6.82%. One of the lowest rates of non-performing loans is the banking system of Estonia, with the rate being at 0.85% in the third quarter of 2022, Lithuania with 0.91%, Latvia with 1.18% and Germany with 1.26%.
High the bar of goals
The Bank of Cyprus announced in its annual results for 2022 that the ratio of non-performing loans to loans is 4%, compared to 9,3% on 30 September 2022 and 12,4% on 31 December 2021, achieving the target of reducing the ratio of NPLs to loans below 5%.
The last move to reduce NPLs was made in November 2022, when Project Helix 3 was completed and NPLs of approximately €550m were de-identified from the balance sheet. The Bank of Cyprus has not changed its revised 2023 target, despite the fact that there are risks from interest rate increases and expects distressed loans to be below 5%.
Hellenic Bank is also optimistic and will seek to achieve medium-term NPL targets of 3%, in line with the strategic plan it announced in December 2022. With the announcement of the annual results for 2022, on March 1, it is expected to show how the year went. In the nine-month 2022 results, the bank announced that the adjusted NPL ratio is around 3.8%, the lowest level of the competition.
