q1 2019 delfi partners & company | cyprus banking & npls

Delfi Partners & Company | Baking NPLs Research: Cyprus

Delfi Partners & Company | Cyprus Banking & NPLs:Key Dynamics & Expectations

Creative Thinking | State-of-the Art ResearchPractical Approach | Tangible Results

Q1 2019

RESEARCH SNAPSHOT

Key Economic Indicators

Key Economic Indicators

Source: Cyprus Statistical Service (CyStat), EuroStat, IMF, ECB, Delfi Partners & Co

The Cyprus economy has shown remarkable resilience and flexibility following the financial crisis of 2013. The financial sector’s stability, transparency and efficiency has improved remarkably through a significant re-organisation of its regulatory and legal framework.

GDP is following a positive upward trend since 2014, when the last negative GDP growth was recorded at -2.9%. GDP has been increasing gradually, reaching €20.7bn in 2018 according to IMF estimates, indicating the improved standard of living and stabilisation of the country's economy. Unemployment rate has been steadily declining, now reaching 8.6%, after hitting an all time high in 2014 of 16.1%.

Inflation, as measured by the Harmonised Index of Consumer Prices (HICP) in Cyprus reached 1.7% in Q3 2018, from 0.7% observed in 2017.

Tourism has been a major source of income and a driver of economic growth for Cyprus. Specifically, in mid 2018, arrivals of tourists have recorded an annual increase of 7.8%, while revenues from tourism have reached €1.9bn compared to €1.84bn in mid 2017, with the majority of tourists (88%) coming from European Countries.

Indicator 2014 2015 2016 2017Q3

2018

GDP Growth (%) -2.9 0.8 4.2 5.8 3.9

HCPI (%)(base 2015) -0.3 -1.5 -1.2 0.7 1.7

Unemployment (%) 16.1 14.9 13 11.1 8.6

Tourist‘s revenue Growth (%) -2.8 4.4 11.9 11.7 7.8

Overview

Delfi Partners & Company | Baking NPLs Research: Cyprus DP | 2 | Q1 2019


Despite the macro-economic turnaround, the country continues to workout its high levels of non-performing loans (NPLs) and high Government Gross Debt. Government Gross Debt as percentage of GDP increased marginally, reaching 110% in Q3 2018.

The economy shows strong signs of improvements with the current bond yield at 1.5% and upgrades to investment grade from Moody’s, Fitch and S&P to Ba3, BBB- and BBB-.

The Cypriot economy has entered a new era of recovery, with significant improvements both to public sector processes and the financial sector’s stability.

Cyprus Banking Sector

The banking sector achieved a substantial recapitalisation in less than four years, which restored confidence in both domestic and foreign investment.

Credit rating upgrades and growing deposits helped to boost confidence in the market. Cyprus credit worthiness has been improving, as Moody’s, Fitch and S&P credit ratingσ stand at Ba3, BBB- and BBB- respectively, as of the second half of 2018, which represents the first period that Cyprus re-entered an investment grade rating after the financial crisis, a significant milestone for both government finances and private investment.

Evidence of improvement in the banking sector’s financial strength is shown by the higher rates of Tier 1 capital to risk weighted assets ratio. Tier 1 Capital ratio has reached 16.6% in 2017 indicating the substantial progress of the financial system’s recovery since 2012, when the ratio stood at 6.3%.

0%2%4%6%8%

10%12%14%16%18%

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Tier 1 Capital to Risk Weighted Assets %

Source: IMF, Delfi Partners & Co.

“Cyprus’ economic recovery continues unabated, allowing for a reduction in general government debt; however, the impaired banking system still remains an important vulnerability”

S&P

DP | 3 | Q1 2019

Total outstanding amount of bank deposits remained relatively constant during the past year, reaching €47.5bn in November 2018, with a decrease of €1.7bn compared with November 2017.

Meanwhile, total transactions of deposits in November 2018 recorded a net decline of €273mn which indicates an improvement compared to January (fall of €558mn). Deposits are expected to keep rising as investors’ confidence strengthens and the overall economy improves, resulting in better business cashflows and improved labor market conditions.

Interest rate on deposits from households with an agreed maturity of up to one year is declining since 2008 with the rate currently standing at 0.54%. Interest rates on consumer credit duringthe past year recorded a minor decline to 4.9%.

The interest rate for housing loans is 2.29%. However, lending criteria and requirements for providing these loans have tightened up substantially, marking a new era of a more transparent and robust banking system.

“Stronger growth increases borrowers’ ability to repay, thus reinforcing the casefor further reduction in NPLs.”

International Institutional Investor


Source: CBC, Delfi Partners & Co.

Total outstanding amount of deposits € millions (2011-2018)


Cyprus NPL market

Cyprus banks managed to bounce back to profitability after a short period of recession, while the banking sector remains fragile due to its high percentage of non-performing loans to total gross loans and the lower lending opportunities in the market. Cyprus has one of the highest NPL ratios in the EU, with the highest being the Ukraine followed by Greece and Cyprus. The Central Bank of Cyprus (CBC) has as its top priority the reduction of non-performing loans, while other remaining challenges of the island’s banking system include further improvement in the banks' lending practices and profitability.

According to the IMF, non-performing loans to total loans have been steadily declining since the peak in 2014 (48%), with the latest figure (2018) being 32%, while the ratio is expected to fall even further in the next few years. Moreover, the ratio of non-performing loans to GDP dropped from 161% in 2014 to 54% at the end of 2018. The remarkable improvement in NPLs is mainly driven by improvements in the foreclosure legislation and processes and loan securitisation legislations that allowed bulk portfolio disposals, along with a stronger economic growth.

Source: IMF, edited by Delfi Partners & Co.

48% 45% 42%32%

161% 154%131%

107%

54%

0%

50%

100%

150%

200%

0%10%20%30%40%50%

2014 2015 2016 2017 2018

Cyprus: Non Performing Loans (%)

NPLs to Outstanding loans NPLs to GDP

“Cyprus’ strong growth momentum continues…”

European Commission

DP | 5 | Q1 2019

Source: IMF, CBC, Delfi Partners & Co.

TotalLoans

NPLs TotalLoans

NPLs TotalLoans

NPLs

2014 2016 2018Q3

General governments Other financial corporationsNon-financial corporations Households

NPLs of the three core banks in Cyprus (BoC, CBC, Hellenic Bank), have decreased to €11bn in Q3 2018 from €27bn at the YE 2014.

Cyprus banks have progressed significantly in facilitating the reduction of NPLs. Furthermore, the bulk sale of the NPL portfolio of €2.8bn by Bank of Cyprus to Apollo Fund (Helix), was one of the main reasons for the substantial reduction of NPL levels. In addition, Hellenic Bank appointed APS Holding to service its NPL and REO book, commencing operations on the 3rd of July 2017.

Meanwhile, Cyprus Cooperative Bank (CCB) made an agreement with Spain’s Altamira Asset Management, Europe's second largest NPL management company with a portfolio of €65bn, while the good assets of CCB were sold to Hellenic Bank.

Finally, the Cyprus Parliament approved a major legislative package in July 2018 in an attempt to further facilitate NPL resolution.

In addition, the burden sharing scheme “Estia” is intended to strengthen the resolution of a key sensitive segment of NPLs, i.e. first residences.

These actions resulted in a substantial strengthening of the Banks and improved stability of the Banking system, while restoring and strengthening both foreign and domestic investor confidence in the market.

Progress in implementing the structural reform agenda remains essential to continue strong economic performance in the long term.

European Commission

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Cyprus: Loans By classification (Bn - €)


Abbreviations

BoC: Bank of CyprusCBC: Central Bank of CyprusCCB: Cyprus Cooperative BankEU: European UnionECB: European Central BankGDP: Gross Domestic ProductHCPI: Harmonised Index of Consumer PricesIMF: International Monetary FundNPLs : Non Performing LoansNPEs : Non Performing Exposures REO: Real Estate OwnedSME: Small and Medium-sized enterprises SS: Short Sales

“Estia” Scheme: The ‘Estia’ Scheme is a special scheme announced by the government and has been approved by the European Commission for Competition. The Scheme will be available to those borrowers that have non performing facilities as at 30 September 2017. These non performing facilities, mortgaged on their primary residence, must continue to be non performing until the date of application submission. The Scheme provides support to vulnerable borrowers and contributes to the deleveraging of Cypriot banks’ non-performing loans, held by individuals and corporations and secured by a primary residence. Borrowers who are eligible to participate in the Scheme must come to an arrangement with the Bank to restructure their loan, and must meet certain wealth, income and other criteria.

Securitization: is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling their related cash flows to third party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt obligations (CDOs). Investors are repaid from the principal and interest cash flows collected from the underlying debt and redistributed through the capital structure of the new financing. Securities backed by mortgage receivables are called mortgage-backed securities mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities (ABS).

DP | 7 | Q1 2019

Definitions

Delfi Partners & Company is a leading regional asset management & workout practice with presence in 4 countries. We specialise in providing value-enhancing strategies for financial institutions, investors and fund managers who are seeking to optimise their portfolios, bringing substantial know-how and a unique combination of investment banking experience, real estate asset management and optimisation services for large loan, asset and REO portfolios. Our aim is to combine the rigorous economic thinking with a practical and strategic business approach to find solutions that add real value. We are committed to a measured growth strategy that will make Delfi Partners & Company a niche firm with a compelling strategy that successfully combines advisory services with transaction structuring. Our desire is to maintain the highest level of dedication to our customer base while enhancing their entrepreneurial culture.

Dr. George MountisManaging PartnerT +357 22 000060E1 [email protected] [email protected]

Costas ZeniouDirectorT +357 22 000060E1 [email protected] [email protected]

DELFI PARTNERS Ltd: Information herein has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to independently confirm its accuracy and completeness. Any projections, opinions, assumptions or estimates used are for exampleonly and do not represent the current or future performance of the market.

Delfi Partners & Company | Cyprus

Disclaimer © 2019 | Trademarks: ‘Delfi Partners & Co.’ & ‘Delfi Partners & Company’

Stefanos Pattichis, CFASenior AnalystT +357 22 000060E1 [email protected] [email protected]

Nicolaos DanielAnalystT +357 22 000060E1 [email protected] [email protected]

Dr. Elina ArgyridouSenior Analyst T +357 22 000060E1 [email protected] [email protected]


q1 2019 delfi partners & company | cyprus banking & npls

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