InsiderBusinessMoody's says tax relief for problem loans is credit positive for banks

Moody’s says tax relief for problem loans is credit positive for banks

A decision by parliament to extend the government’s waiver of the 20% capital- gains tax to all properties sold when proceeds are used to repay problem loans and to properties sold or relinquished to credit-acquiring companies to settle existing debt is a credit positive for Cyprus banks, Moody’s said on Friday.

Until now, this tax break was applicable only to properties sold in debt-for-asset swaps with banks. The benefit’s extension to other sales categories is credit positive for Cypriot credit acquiring companies because it will increase the recoverable amount of problem loans and banks should garner better prices offered for nonperforming loan exposures (NPEs), it said.

The government introduced the waiver of the capital gains tax in 2015 to facilitate debt-for-asset swaps as a means to reduce the large stock of NPEs in the Cypriot banking sector. Almost all these exposures are backed by real estate collateral and around one-third of these troubled loans are terminated loans, which are mostly dated exposures to non-viable businesses or loans to individuals without sufficient means to repay. For these terminated exposures, the only way for banks to recover and reduce their losses is by selling the real estate collateral. According to the Central Bank of Cyprus, NPEs were €19 billion in March 2018, accounting for around 100% of GDP, down from €28 billion in March 2015.

The Bank of Cyprus, the island’s largest bank, used debt-for-asset swaps to achieve about one-third of its 45% reduction in its stock of NPEs since 2015. Since 2015, Bank of Cyprus onboarded around 2,000 properties worth €1.6 billion. These properties include commercial real estate, hotels, a golf facility and vacant plots.

Although Hellenic Bank, the island’s third-largest domestic bank, has used debt-for-asset swaps less, having onboarded a much smaller pool of assets of around €100 million, Moody’s expect it will use this method increasingly following the July amendments to the legal framework, which significantly shortens the time necessary to foreclose on real estate collateral and limits a borrower’s ability to delay an asset’s foreclosure and auction. These amendments aim to incentivize borrowers to either seek solutions for their nonperforming loans or for non-viable borrowers to give up the real estate collateral benefiting from the tax break.

While currently only B2Kapital Cyprus (B2K), the wholly owned subsidiary of Norway’s B2Holding, a leading pan-European debt specialist, has a licence to operate as a credit-acquiring company, Moody’s expect additional companies will enter this nascent market, enhancing debt collection and providing domestic banks with additional means to reduce their high stock of NPEs.

Until now, the only NPE sale in the market was carried out by Hellenic Banl, which in January agreed to sell to B2K a €145 million portfolio of nonperforming non-retail secured and unsecured loans. The transaction, although small, was the first of its kind in Cyprus and paved the way for additional NPE sales.

Top Stories