Cyprus’ strong GDP growth is credit positive for Cypriot banks because it will strengthen their clients’ capacity to restructure and service their high levels of distressed debt, according to Moody’s credit outlook.
Last Tuesday, the Statistical Service of the Republic of Cyprus announced that its flash estimate for the country’s annual GDP growth rate in first-quarter 2017 was 3.3%, the highest in Cyprus since 2008.
Additionally, Moody’s points out that the growth will support real estate collateral values, on which Cypriot banks rely heavily for most lending, and increase new lending opportunities that will support banks’ declining net interest income.
At the same time Moody’s estimates that the acceleration in economic activity will strengthen businesses’ cash flows and improve labour market conditions for households.
“Ultimately, the higher growth will enhance borrowers’ debt affordability and repayment capacity, facilitating loan restructurings, particularly in the small and midsize enterprise sector, which is more vulnerable to economic changes and benefits from an economic recovery, albeit with a lag”, says the report.
Moody’s also expect banks’ asset quality to continue to improve, in line with the accelerating growth trend and banks’ restructuring initiatives.
Bank of Cyprus, is expected to gain the most, given that it has the largest direct exposure to domestic real estate.
Additionally, Moody’s expect Cyprus’ improving economy to create new lending opportunities for banks and ease the decline of interest rates that banks charge on loans.
The report says that if sustained, the country’s performance will exceed the 2.7% real GDP growth forecast for 2017. It adds that notwithstanding the improving economic environment, it will take time for Cypriot banks to rehabilitate their balance sheets because of the long cure periods for restructured loans before they are reclassified as performing, and substantial volumes of distressed debt with system -wide problem loans at 49% of gross loans as of September 2016.