Road to Cyprus — a series of articles in the run-up to the 2017 EBRD Annual Meetings in Nicosia
A significant landmark in the rehabilitation of the Cyprus banking industry was passed in January, when Bank of Cyprus announced that it had paid off the last of the €11.4bn of emergency liquidity assistance (ELA) it had received from the central bank since March 2013.
The repayment bore witness to the success of the bank’s restructuring programme. More generally, the confirmation of its strengthened credit profile also helped Cyprus’s largest commercial bank to access the international debt capital market soon afterwards, pricing a £250m 10 year non-call five issue of tier two capital under the bank’s EMTN programme. As John Hourican, the CEO who has guided Bank of Cyprus on its recovery since 2013, said at the time of the tier two issue, “the Bank’s successful return to the debt capital markets demonstrates the confidence of international investors in the Bank.”
Investor confidence in Bank of Cyprus, as well as in the broader Cypriot banking sector, has been driven in large part by the decisive way in which the industry has tackled the problem of non-performing loans (NPLs), which at the peak of the crisis threatened to spiral out of control.
Banks have been helped to pare back their sizeable NPL exposure by a combination of a stronger economic operating environment and an improved, updated law allowing them to initiate foreclosure proceedings.
The results have been impressive. Bank of Cyprus cut its non-performing exposures (NPEs) by €2.9bn, or 21%, in 2016. With seven successive quarters of reductions behind it, this meant that Cyprus’s largest bank had reduced its NPEs from 63% in March 2015 to 54.8% by the end of 2016.
Czechs and balances
Hellenic Bank, which is Cyprus’s second largest commercial bank, has taken the process a step further, signing an agreement with the Czech company, APS Holding, to establish a separate unit — APS Recovery — which will manage the bank’s impaired loans and real estate assets.
This initiative builds on what Hellenic Bank’s chairwoman, Irena Georgiadou, describes as a “very good year” in terms of restructuring of the bank’s loan portfolio in 2016. “In 2016, we restructured more than €700m of our loans, an increase of more than 30% compared with 2015,” she says. “The important feature of these restructurings is that more than 80% of them do not seem to be at risk of a re-default.”
“But the establishment of the external platform takes this process a step further,” she adds. “Teaming up with APS helps us to expedite the restructuring of our loan portfolio by allowing us to unlock more capital that would otherwise have been tied.”
For the Cypriot banking system as a whole, Moody’s expects NPLs to continue to fall over the next 12 months, reaching around 42% of the total by the end of 2017. But as Nicosia-based bankers point out, the headline number overstates the NPL problem in the Cypriot banking system. “NPLs are a relatively inefficient indicator because loans are required to have been performing for more than a year to be reclassified,” says George Syrichas, executive board member at the Central Bank of Cyprus. “So we also monitor other indicators such as 90 days past due where the decline in impaired loans is much more pronounced.”
This, he adds, is no grounds for complacency. “We don’t hide the problem of NPLs, which we recognise is one of the most serious problems the economy faces,” he says. “While it won’t be possible to eliminate NPLs altogether, our objective is a rapid decline which will be sufficient to take Cyprus back to being investment grade.”
Floods of liquidity
Confidence in the banking industry is also being supported by the surge in deposits that have been flowing into the sector since the crisis. “Since our recapitalisation at the end of 2013 we have been flooded with liquidity,” says Georgiadou. “Today, we are one of the most liquid banks in the world.”
This, she adds, presents Hellenic Bank with something of a dilemma, given that that it has little choice but to leave this excess liquidity generating negative returns at the ECB. The numbers speak for themselves, with Hellenic Bank’s loans contracting faster than its deposits are rising. While deposits fell from almost €6.35bn in December 2014 to €6.111bn at the end of 2016, the bank’s loan to deposit ratio has been inching down, from over 50% at the end of 2015 to just below 48% at the end of last year.
Bank of Cyprus, too, has seen its loans to deposit ratio fall sharply over the last 18 months, from a peak of 148% in June 2014 to 121% at the end of 2015 and 95% by year-end 2016.
On the surface at least, the cascade of deposits flowing into the banking system ought to be generating opportunities for banks to support accelerated growth by rebuilding their loan books, albeit on a highly selective basis. This, say Nicosia-based bankers, may be easier said than done, given the shortage of viable projects requiring finance from the local banks. “New financing needs are arising in the domestic market, but not at the pace which would be needed to absorb the excess liquidity in the Cypriot banking system, which is now around €10bn,” says Nicholas Hadjiyiannis, CEO of the Co-Operative Central Bank, which is preparing for a stock exchange listing this year. “As our focus is on maintaining our heritage as a very stable retail bank, our excess liquidity is deposited at the ECB even though this currently generates no return.”This article is the fifth part of a series of six pieces on Cyprus’s economy in the run-up to the 2017 EBRD Annual Meetings in Nicosia.
Click here for part one – Cypriot economy surprises on the upside February 22, 2017
Click here for part two – Cyprus — building bridges, not walls March 7, 2017
Click here for part three – Cyprus’s game-changer: the Mighty Aphrodite March 27 2017
Click here for part four - Cyprus eyes golden future for tourism industry April 10 2017
Click here for part six – Cyprus focuses on new FDI push May 2 2017