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CYPRUS: Moody's says expanding job market will help reduce toxic debt

08 November, 2018

Ratings agency Moody’s believes Cyprus' improving labour conditions is credit positive for banks because the growth in household income facilitates the restructuring and gradual repayment of stockpiled nonperforming household loans.


According to Eurostat data, Cyprus' unemployment rate decreased the most in the EU, down 2.8 percentage points from a year ago to 7.4% as of September 2018.

Although the jobless rate is still higher than before the global financial crisis and above the euro area average of 6.7%, the rate in Cyprus declined to its lowest level since April 2011, and salary growth has accelerated.

Most job creation has taken place in trade, travel and accommodation, although there has also been some job creation in the construction sector, which has been through a boom and bust cycle and is now recovering.

“We expect a further decline in unemployment and improvement in labour conditions over the next year and forecast strong GDP growth in Cyprus of 4.0% for 2018 and 3.7% in 2019,” said a Moody’s analysis.

“Having made significant progress in addressing their stock of corporate NPEs, the domestic banks, and particularly Bank of Cyprus, have shifted their attention to smaller and more granular problematic retail and small and mid-size enterprise exposures,” it added.

But despite an NPEs declined by €11.6 bln (59% of 2017 GDP) since their peak in 2014, to around 36% of gross loans for the largest domestic banks according to Moody’s, “the total stock of troubled debt held by Cypriot banks remains high at around 50% of the country’s GDP”.

It said the reduction in NPEs was achieved organically by restructurings, write offs, debt for asset swaps and accelerated with BOC's sale of an NPE portfolio of around €2.7 bln and the liquidation of Cyprus Cooperative Bank, which removed an additional €6 bln of problem loans from the banking system.

Although Moody’s has its reservations over the government’s Estia rescue scheme for mortgage defaulters, it said there would be an impact on reducing bad loans.

“Besides improving household income, the government-subsidised scheme Estia, although at the risk of creating moral hazard, will facilitate the repayment of nonperforming mortgage loans.”

The scheme is slated to get underway in January 2019 and aims to tackle NPEs backed by primary residence, which account for the bulk of retail NPEs.

According to the terms of the scheme, for mortgages that were nonperforming as of September 2017 and relate to primary residences up to €350,000, the government will contribute one-third of the mortgage repayment and the loan amount will be written down to the current market value of the property, which is already reflected in banks' balance sheets.

Bank of Cyprus expects that around 17% of its NPEs will fall under the Estia plan, although this estimate may change since the terms of the scheme have not been finalized yet, said Moody’s.

Mortgage NPEs falling under the Estia plan will become performing after a 12-month period of regular monthly loan repayments.