NPEs of the Cypriot banking sector remain significantly high despite increased arrears management activity from banks and the introduction of new/modernised legislations on Insolvency & Foreclosures (2015) and Loan Disposals & Acquisitions (2016). As at 31 December 2016, total Cypriot NPEs stood at €24bn (implying an NPE ratio c46%); loans to the Construction Sector exhibit the highest NPE ratio (69%), followed by loans to Households (55%).
Despite the c11.4% reduction in NPEs during 2016, the NPE ratio increased by 8bps due to a c13.0% drop in gross loans stemming from banks’ continuing deleveraging efforts. The NPE decline is the result of intensified efforts to reduce these loans, including implementation of debt-to-asset and debt-to-equity swaps, write-offs, curing following restructurings and increased repayments due to improved borrower viability given the general economic growth. Specifically with regard to debt-to-asset swaps, Cypriot banks have aggressively proceeded with on-boarding of assets in lieu of debt and have now built significant stocks of repossessed assets on their balance sheets. As a result, most banks have recently set up real estate management units that have undertaken the responsibility of on-boarding, maintaining/managing and disposing of such assets.
The persistently high level of NPEs warrants the implementation of more drastic solutions such as the set-up of external servicing platforms and/or disposal of problematic loan portfolios. To this end, the first servicing platform in Cyprus has been set up in early 2017 via the establishment of a JV between Hellenic Bank and the specialist NPE management company APS Holdings. The JV has initially undertaken the management of the bank’s NPEs, with a future prospect to secure additional management contracts (from other banks on the island) and/or acquire NPE portfolios.
With regards to loan transaction activity in Cyprus, this has remained absent to date, primarily due to the following key impediments:
Thin capital buffers, combined with large bid-ask spreads
Lack of historical data preventing interested investors from making informed/fairer pricing decisions;
Untested legislation regarding Insolvency & Foreclosures and Loan Disposals & Acquisitions.
Nonetheless, the Cypriot loan transactions market is anticipated to evolve considering:
The sizeable NPE volume (2016: c€24bn);
The set-up of the first servicing platform in Cyprus, leading to specialist management and thereby anticipated increased recovery rates of certain NPEs (rendering them more attractive to potential investors);
Recent investments made in loan and collateral data collection and analytics by most banks.
Cyprus has been on an economic recovery path since 2015 which has led to a series of credit rating upgrades for the country. The significant level of Cypriot NPEs however, remain the primary obstacle to achieving a credit rating on the A/A+ scale. It is therefore evident that balancing effective management of NPEs, whilst adhering to capital requirements is currently the most challenging task for Cypriot banks which have already begun to seek more radical NPE solutions.
Partner - Head of Advisory, PwC Cyprus
Director - Marketing & Communications, PwC Cyprus