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Bank of Cyprus' continued recovery after a bailout four years ago will depend on the bank's ability to significantly clean-up its loan book from legacy bad loans, according to Moody’s Rating Agency. 

“Nonperforming loans (NPLs) fell to 40% of the loan book in March 2017 (equal to €8 billion) from a peak of 53% in December 2014, driven by loan restructurings, debt for asset swaps and write-offs. Management has set ambitious targets to halve the ratio to 20% by 2019. We consider the target attainable only if the bank also includes NPL sales in its toolkit”, says the agency in a special report. 

Progress on restructuring has led to large volumes of performing loans. Management expects another €1.6 billion loans approximately to be reclassified as performing by 20191. Since 2014, BoC's dedicated restructuring unit has handled close to €10 billion of nonperforming and underperforming loans out of a total loan stock of €20 billion as of March 2017. Around 91% of corporate restructured loans have no arrears. 

According to Moody’s, Cyprus’ economy has enjoyed a broad-based recovery, driven by a growing tourism sector, the recovery of the construction sector and rising consumer spending as unemployment declines. 

“We expect the economy to post solid GDP growth of 2.7% in 2017, supporting borrowers' debt repayment capacity”, the agency adds. 

Debt for asset swaps give the bank control of assets put up as collateral, allowing it to set more realistic sale prices and to benefit from income generated by these assets. 

However, although assets are taken onboard at a 25%-30% discount to current prices, the bank is exposed to the risk of losses if it is unable to sell the assets at the on-boarded price. 

“Although initially reluctant to write off bad loans, this is a measure increasingly used by the bank. Management expects around one third of its targeted NPL decline to be driven by write-offs. Accounting write offs of bad loans do not constrain a bank from pursuing debt recovery. However we expect limited reversals of these write-offs in the future”. 

“Assuming new lending of around €1.5 billion per year, write-offs close to €300 million per year and that all restructured loans currently in the pipeline become performing, we estimate that BoC's ratio of nonperforming loans to gross loans would decline to around 22% by 2019. Additional NPL sales would therefore be required for the bank to achieve its 20% target”, it concludes. 

Source: Stockwatch