Fitch rating agency reaffirmed Cypriot banks’ negative outlook noting the general environment poses threats to their balance sheets.
In a report on the Cyprus banks, the agency notes that while they are offloading their toxic non-performing exposure, banks are still sensitive to possible obstacles to the economic recovery and investor sentiment.
Fitch said the small Cypriot economy and the private sector have a lot of leverage (private debt was 210% of GDP end of 2020), making the economy more vulnerable to external shocks. The weak financial position of banks limits business opportunities and new viable lending options in a small and highly leveraged economy.
However, as Fitch notes, the country’s economy “has shown flexibility for a speedy recovery in previous crises, as reflected in an average growth of 4.6% in the five years before the pandemic.”
“We expect the recovery of the economy will support the further reduction of risk in Cyprus’ balance sheet and will offer stability in the operating environment over time. Nevertheless, the lack of structural solutions throughout the sector in Cyprus limits the speed with which banks can reduce risk in a weaker-than-expected economic recovery scenario,” it said.
It said Cyprus’ ESTIA scheme, the homeowner rescue scheme backed by the Ministry of Finance to help loan repayments, had “disappointing” participation.
It noted the most promising solution for the issue of home-backed non-performing loans is the one under discussion for the conversion of the remainder of the Cooperative Bank into a bad loan buyer, a fact that could help accelerate the liquidation of quality assets.
Cypriot banks have successfully reduced the non-performing loan ratio from historically high levels over the last five years (63% at the Bank of Cyprus in 2014 and 60% in Hellenic Bank in September 2015), taking advantage of strong economic development dynamics. [Financial Mirror]