Panayiotis Rougalas
Half of the loans in Cyprus are "vulnerable" to euribor and the European Central Bank's (ECB) key rates. In 2024 and 2025, we may not expect further increases, but rather possible decreases, according to the Central Bank of Cyprus' Financial Stability Report for 2022.
The report states that the loan portfolio of credit institutions is mainly characterized by long-term lending to the private sector. At the end of 2022, lending to households and non-financial corporations accounted for 44% and 50% of the loan portfolio to the private sector, respectively.
The majority of these loans (83% of the combined amount) have variable interest rates, with 50% of the loan amount linked to the ECB's base rates and the euribor rate. This portion of the portfolio is directly affected by changes in borrowing costs, due to recent increases in key ECB rates in the second half of 2022 and the first quarter of 2023.
On the other hand, only one-third (33% to be exact) of the total loan portfolio is linked to the key rates of credit institutions and the survey shows that it does not seem to have been significantly affected by the increases in ECB rates. In particular, the part of the loan portfolio linked to the ECB base rates and the euribor rate appears to have increased in loan yields by up to +1.8% (about 71% of the 2.5% increase in the ECB base rate).
In contrast, lending rates on the portfolio linked to the key rates of credit institutions appear to have increased by +0.4% (about 17% of the 2.5% increase in the key rate of the ECB). According to the report, the high cost of borrowing, which is higher than the loans linked to euribor or the ECB base rate, combined with the inflationary pressures of goods and services, may have limited the ability of borrowers to repay, especially those with high indebtedness.
As a result, concerns arise regarding the future servicing of the credit institutions' loan portfolio. A potential increase in non-performing loans (NPLs) will have a direct impact on the profitability of credit institutions due to increased provisions, and may affect their asset quality, capital adequacy and ability to offer new lending to the economy.
No deterioration
As noted in the report, the quality of the credit institutions' loan portfolio did not deteriorate in 2022, but rather continued to improve. The improvement in the banking sector's assets at the central level, reflected both in the NPL ratio and in the reduction in the amount of loans classified in Stage 2 according to the International Financial Reporting Standard 9 (IFRS 9). In particular, at 31 December 2022, the total NPL ratio stood at 9.5%, an improvement over the end of 2021 (11%), despite the increase in NPLs in some sectors of economic activity, as credit institutions continued the process of deleveraging their balance sheets through the sale of NPL portfolios and the write-off of loans.
Despite the significant improvement achieved in the level of NPLs, it is worth noting that the domestic banking sector still has the second highest NPL ratio among EU countries, and is significantly higher than the European average of 1.8%.
It is noted that the improvement in the NPL ratio was mainly driven by large credit institutions. Smaller credit institutions continue to lag significantly behind in reducing their NPLs, with the relevant NPL ratio standing at around 25% at 31 December 2022. "Therefore, these credit institutions should accelerate efforts to clean up their balance sheets," the report said.
77% of service providers
As of December 31, 2022, loans with a book value of €8.1 billion were on the balance sheets of the credit acquisition companies (CACs), with 77.7% being NPLs. It seems that the central bank changed the way of reporting/recording their loans, since it now records the book value, instead of the contractual balance as was done in the previous reports.
Despite the fact that the large part of the loan book of the CACs is restructured to facilitate its servicing by the borrowers as well as by the lower lending rates, the high percentage of NPLs shows the central bank how risky the quality of the assets of these companies is, and therefore the supervision for their financial stability is low. These companies have become an important part of the Cypriot financial sector, as, through the purchase of loans from credit institutions, they play a catalytic role in the ongoing effort of credit institutions to deleverage their balance sheet and improve the quality of their loan portfolio.
[This article was translated from its Greek original]
