Banks must prepare for a new cycle of NPLs due to Covid-19

Constantinos Herodotou, Governor of the Central Bank of Cyprus (CBC) told Cyprus commercial banks to prepare to face a new cycle of non-performing loans in 2021 due to the coronavirus pandemic.

The CBC believes that NPLs are expected to rise in 2021, as the debt repayment suspension, imposed in mid-March following the Covid-19 outbreak in Cyprus, ends in December.

“Rationalisation of bank balance sheets should continue and the rebuilding of the banking system after the pandemic should focus on tackling non-performing debt,” Herodotou told the virtual AGM of the Associations of Cyprus Banks on Wednesday.

He furthermore said that apart from low interest rates hampering the Eurozone banks’ profitability, Cypriot banks face the additional challenge of high NPLs.

On the debt moratorium, Herodotou stressed that debt repayment suspension is of a temporary nature and cannot resolve structural weaknesses, adding that a major factor in determining the situation concerning loans that have been offloaded from the banking system and the affected borrowers is the capacity to comply with their debt obligations.

“In this context, Cypriot banks should be ready to face a new cycle of NPLs, provisions and possibly losses, a phenomenon observed globally,” he said.

Furthermore, Herodotou reiterated the CBC’s base scenario over a contraction of the Cyprus GDP by 7.3% in 2020, due to the Covid-19 pandemic, noting however that “the problems caused to the economy are grave, but manageable.”