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Cypriot banks will benefit from improved construction activity and the expected recovery in demand for new properties, according to Moody's. 

Last Thursday, the Statistical Service of Cyprus released data showing that the number of building permits issued in the country during the first four months of 2017 reached their highest level since the 2013 banking crisis. 

“We track the number of newly issued building permits as a leading indicator2 for the performance of real estate and construction loans and mortgages and to gauge the overall health of these sectors, which combined contributed 13% of GDP in 2016. Although Cypriot banks continue to face significant asset quality challenges, a sustained increase in demand for building permits would be a credit-positive indication of an improving operating environment for the construction and real estate industries. 

During the first four months of 2017, 1,861 building permits were issued, 8% more than the year-earlier period. The increase is the result of a 38% increase in building permits for the construction of new homes. The total value of permits issued in the first four months of 2017 was 36% higher than in 2016”, says in its weekly outlook. 

“We expect that recovering demand for new real estate and overall improvement in the sector will increase construction companies’ cash flows, with positive implications on banks’ asset quality in the construction and real estate sectors, which constituted approximately 18% of gross loans as of March 2017. Nonperforming exposures (NPEs) in these sectors, based on the Central Bank of Cyprus’ assessment of troubled loans using the European Banking Authority’s broad definition, declined to 56.4% in March 2017 from 73.0% in November 2014, with the recovering construction and real estate sectors accelerating asset quality improvements”, the reports adds. 

Of the large domestic banks, Bank of Cyprus Public Company Limited (Caa1/(P)Caa1 positive, caa13) is likely to benefit most from an improvement in these sectors, which accounted for 31% of gross loans as of March 2017. Furthermore, the bank has taken on its balance sheet, via its Real Estate Management Unit (REMU), €1.4 billion of property through debt for asset swaps, an amount that constitutes 6% of total assets and is the largest share of any Cypriot bank. A gradually recovering property market would facilitate REMU’s sale of these assets and reduce the likelihood of the bank recording losses. 

Notwithstanding the improving operating environment, it will take time for Cypriot banks to rehabilitate their balance sheets because of the long cure periods for restructured loans before they are reclassified as performing, and the substantial volumes of distressed debt, with system-wide NPEs at 45% of gross loans as of March 2017.

Source: Stockwatch