The high level of loan payment holiday in Cyprus may shield the banks in 2020 but suggests that asset quality deterioration is “still very likely next year,” rating agency Moody’s has said.
In its bi-weekly Credit Outlook issued today, Moody’s said that according to data published by the Central Bank of Cyprus as of June 5 around one-third of Cyprus banks’ gross loans had payment deferrals, adding to banks’ credit risks.
“Although the payment deferrals reduce the probability of acute asset quality stress this year, the high percentage of deferrals suggest that asset quality deterioration is still very likely next year,” the rating agency said, adding that the deferrals will reduce the extent of any deterioration, but their ultimate effect will depend on the depth and duration of the economic downturn.
The agency said it expects that Cyprus’ economy to contract by 7.5% this year before recovering in 2021, when we expect it to grow by 6.0%, adding that while Cyprus’ construction, retail and restaurant sectors have reopened, the tourism sector will take significantly longer to recover.
Furthermore, Moody’s said that policy response measures by the authorities will alleviate the immediate strain on creditworthy borrowers’ cash flow and increase the likelihood of the recovery and longer-term viability of their loans.
Noting that total loans with deferrals amounted to €11.4 billion as of June 5, Moody’s said it estimates that banking system loans with deferred payments amount to around a third of gross banking system loans, while loan deferrals make up almost half of the banking system’s performing loans, compared with 16% in Greece, another country with high NPL rate.
“The high level of loan deferrals reflects the strains on Cyprus’ economy, but also the broad and protracted payment deferral framework,” Moody’s added.
According to Moody’s, loan deferrals for tourism-related loans (represented by accommodation and food service activities) account for 81% of the sectors gross loans and 89% of performing loans, while other confidence-sensitive sectors such as real estate and the troubled construction sector also have high percentages of deferred loans.
“Combined, the three sectors account for more than 60% of loan deferrals for non-financial companies,” the agency added.
“Although the payment holiday will provide banks with flexibility to support and reschedule loans for viable borrowers in 2020 to better match revised cash flow expectations, we expect some borrowers to eventually default,” Moody’s said.
Recalling that payment holiday’s does not automatically result in the loan being classified as nonperforming as long as the bank continues to expect the borrower to pay, the agency said that “banks’ asset quality will therefore largely be shielded until 2021, but forward-looking loan-loss provisions will affect their profitability this year.”