InsiderEconomyNew lockdown in Cyprus to accelerate non-performing loans, says Moody's

New lockdown in Cyprus to accelerate non-performing loans, says Moody’s

The new lockdown measures enforced in Cyprus will lead to increased challenges on bank asset quality as well as accelerated non-performing loans (NPLs) as negative impact outweighs benefit, Moody’s rating agency has said.

Alarmed by increased daily Covid-19 infections and rising hospitalisations, Cyprus imposed a three-week lockdown until the end of January 31 which limits financial activity.

“The support measures are positive for banks, but are outweighed by the larger credit-negative economic effects of the second lockdown,” the agency said in its bi-weekly Credit Outlook released on Thursday.

“The lockdown measures will squeeze business revenue and cash flow for companies after a tough 2020, and will challenge banks` asset quality,” it added.

The bulletin also noted that the support measures will soften the negative effect on banks` asset quality, but the harsh and prolonged coronavirus restrictions mean they will only delay the realisation of bank credit losses, rather than eliminating them altogether.

“Banks may reschedule loans for viable borrowers to better match revised cash flow expectations, but we expect some borrowers will not be considered eligible for rescheduling or will eventually default,” the agency said.

Moody’s also noted that the new lockdown measures come as a majority of bank borrowers are likely to resume loan repayment obligations, adding that these new measures “will likely reduce banks` loan origination and fee income, pressuring banks` profitability, which is already weighed down by the low interest rate environment and elevated loan-loss provisioning expenses.”

The new more streamlined moratorium, is offered only to borrowers who didn’t exploit last-years moratorium, which amounted to approximately half of performing loans in the Cyprus banking system, the agency said.

“Because Cyprus’ broad payment moratorium expired at the end of 2020 and given our expectations of a modest number of new loan payment deferrals, we expect problem-loan formation to accelerate, particularly in the second half of the year,” Moody’s said, pointing out that weak asset quality is the key credit challenge for Cyprus` largest banks.

That is Bank of Cyprus and Hellenic Bank despite a significant drop in their non-performing exposure (NPE) ratios in recent years.

However, the agency said that “nevertheless, we expect both banks’ ongoing organic legacy NPE recovery efforts to buffer any significant increase in overall NPEs.”

On the government’s latest support measures, valued at approximately €400 million, including one-off grants to companies and self-employed persons to cover operating expenditures such as rent and loan instalments, the agency said.

“The implementation of any financial support depends on passage of the fiscal budget for 2021 that was initially rejected in December, which we expect later this month.”

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