Introduction

The Central Bank of Cyprus has published the “Household and Non-Financial Corporations Indebtedness Report”, which includes a concise analysis of the level of indebtedness and the financial position of the main borrowers of the Cypriot banking system; domestic households and non-financial corporations (NFCs). The report presents the information about recent economic developments and outlook, as well as an analysis of household, NFC and aggregate domestic private sector.

Recent developments

Despite the negative effect of the deleveraging of the private sector and the banking sector’s efforts to clean up their balance sheets, signs of recovery are evident compared to the beginning of 2015. Total non-performing exposures in the Cypriot banking system were €25.5bn in April 2016, according to the latest Central Bank of Cyprus data. Compared with the beginning of 2015, this represents a 7% reduction in total NPE’s. In order to improve the persistent problem of high NPEs, certain policy actions for financial institutions on facility restructuring have been implemented, such as an arrears-management framework (AMF) and Code of Conduct[1] .The AMF requires efficient structures, processes and tools from the banks to support arrears management and execute fair, adequate and sustainable debt restructuring. The observed increase in loan restructuring, has already reduced the level of NPEs. The modest economic growth of Cyprus since 2015, also helps the banking sector’s restructuring efforts and will reduce the number of new defaults. In addition, significant increase in the net loan demand, from both households and NFCs, is noted.

Household sector

According to data provided by the CBC, domestic households continue to be highly indebted. Total bank loans to domestic households fell annually by 0,9% in December 2015, compared to the same period last year. NPEs as a percentage of total outstanding loans to private individuals reached 56,4% at the end of 2015, which represents a marginal reduction, compared to the previous year. In addition, coverage ratio increased marginally to 19,5% in June 2015, compared to 19,2% in March of the same year. The household debt as a percentage of GDP remained at around 127,7%, which indicates that, while domestic households remain over-indebted, signs of stabilisation are evident.

The household sector’s net financial assets as a percentage of GDP decreased marginally during 2015, from 108,0% in Q2 2015 to 107,9% in Q3 2015. Moreover, this ratio is not only continuing to fall, but also remains significantly below the euro area average of 141,1% during June of 2015. Cypriot households’ financial assets continue to consist of mainly cash and bank deposits. Deposits of Cypriot households showed an annual growth of 0,5% in December 2015 compared to the previous year.

Non-financial corporations sector

The average annual growth of total bank loans to domestic NFCs reached 1,0% in December 2015. Coverage ratio for non-financial corporations increased to 42,1% at the end of September 2015. Moreover, NFC debt as a percentage of GDP stood at 230,4% in Q3 2015, compared to 229,5% at the end of June 2015. An upward trend, of restructured loans as a percentage of total loans to NFCs, has started since December 2014. It increased from 28,5% to 33,2% in December 2015. NPLs itself are expected to follow a downwards trend in the future, given the financial sector’s commitment to intensify restructuring efforts. Overall, the non-financial corporations sector continues to be significantly over-indebted.

The NFC sector’s net financial liabilities as a percentage of GDP increased to 227,4% at the end of September 2015, up from 225,9% at end-June 2015. At the end of December 2015, equity and investment funds represented the main amount of the non-financial sector’s financial assets. The share showed a slight decrease compared with the previous quarter of 2015.

Aggregate domestic private sector

Bank credit to the domestic private sector fell to 249,9% of GDP at the end of September 2015, compared to 251,1% at the end of June 2015. Loans to private individuals amounted to 38,7% of total outstanding loans to the domestic private sector in 2015. Restructured loans as a percentage of total loans to the domestic private sector, was 24,6% in December 2015. This is slightly increased, in comparison with a previous year 22,6%, reflecting the considerable effort invested by financial institutions and the CBC towards reducing NPEs. According to the CBC, the ratio of restructured loans to total loans is expected to follow this increasing trend. At the same time, the ratio of loan loss provisions to total NPLs increased to 37,3% at the end of 2015, compared to 33,4% at the beginning of the same year.

Property prices

Residential property is an important non-financial asset for Cypriot households and property prices continued their downward trend. Residential prices for both houses and flats fell by 0.3% and 1.8% respectively, with the biggest drop recorded in Limassol (3% for houses) and Nicosia (3% for apartments). Values of retail properties fell by an average of 2.4%, and those of offices and warehouses by 0.9% and 2.2% respectively. Compared to Q4 2014, prices dropped by 0.7% for apartments, 1.1% for houses, 1.6% for retail, 1.2% for office and1.9% for warehouses. However, according to the “Household and Non-Financial Corporations Indebtedness Report”, prices may be bottoming out, given signs of renewed domestic and foreign demand, supported by the reduction in landing rates.

[1] Guide on the Central Bank of Cyprus’ Code of Conduct on the Handling of Borrowers in Financial Difficulties

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