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Burdened Cypriot banks poised for more large bad-loan portfolio sales

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Burdened Cypriot banks poised for more large bad-loan portfolio sales

Cyprus' banks are poised to bring further bad-debt portfolios to market following Bank of Cyprus Holdings PLC's record-breaking €2.8 billion sale of business loans in August.

The Mediterranean nation has one of the highest overall nonperforming loan ratios in Europe, a legacy of the global financial crisis and Cyprus' economic crisis of 2012-2013, triggered by Cypriot banks' overexposure to highly leveraged real estate developers and a weak repayment culture among borrowers.

It had the highest level of toxic construction loans of any EU country at the end of 2017, with 76.3% classed as nonperforming, according to data from the European Banking Authority.

The country has been under pressure from EU regulators to speed up bad loan reductions, and some progress has been made. Central bank figures show that total nonperforming exposures declined to €20.24 billion from €20.91 billion over the first four months of 2018.

Meanwhile the Cypriot finance ministry unveiled a three-year plan in May that targets a reduction of 40% of NPLs year-over-year in 2018.

While it is doubtful that the country will see another transaction of the magnitude of Project Helix, the €2.8 billion portfolio sold by Bank of Cyprus to Apollo Global Management LLC, other banks could come to market soon with "significant" portfolios, Jonas Floriani, a director at Axia Ventures Group, told S&P Global Market Intelligence.

"The door is now open," he said.

In particular, the merger of Hellenic Bank PCL with state-owned Cyprus Cooperative Bank Ltd., which is currently in play, could lead to fresh loan portfolio sales, Floriani said.

But large deals will be neither quick nor easy to achieve, he added.

Miriam Fernandez, associate at S&P Global Ratings, said she expected Cypriot banks to continue gradually de-risking their balance sheets, benefiting from a more supportive economic environment and from some measures announced by the government to facilitate their recovery strategies.

Among these is the so-called Estia plan for vulnerable borrowers in the retail mortgage market, which was approved by the government in July and will help banks collect repayments from non-paying borrowers with incomes of less than €50,000.

But any meaningful reduction of credit risk in Cyprus would depend on a "significant improvement" in retail borrowers' payment culture, and a decrease in the number of restructured loans that go on to re-default, she said.

Despite some progress on flushing out NPLs and an improving economy, it is still too early for Cypriot banks to look forward to meaningful growth in new lending, according to Fernandez.

"We currently expect that banks' gross lending in the Cypriot system will continue declining by about 5% in the remainder of 2018 and 2019, mainly due to ongoing deleverage in the private sector, which is not yet over," she said.

S&P Global Ratings is seeing pockets of new lending growth in some segments, namely in some corporate sectors related to tourism, trade and transport, but this is not sufficient to offset the organic reduction in both retail and small and medium-sized enterprise segments, she said.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.