Cyprus banking sector optimism may be justified but continuing problems with non-performing loans need urgent solutions
As Greece’s banks head down the road towards yet another re-capitalisation, the prospects for Cypriot banks appear to be improving. For Hellenic Bank and Bank of Cyprus, which are still treading a fine line in terms of provisions and non-performing loan (NPL) management, there is light at the end of the tunnel. We have seen positive interest in both banks, with Bank of Cyprus riding international investor interest on the wave of Cypriot banking stability, while Hellenic Bank just secured a new strategic investor in the EBRD.
However, the banking sector in Cyprus is still far from ideal. Cypriot banks urgently need to sort out their NPL portfolios (which are still rising) by using new loan workout methodologies employed in other countries with great success. In their attempt to deal with the huge number of NPLs which cannot be repaid, Cypriot banks need to adopt new and innovative practices which will include foreclosures, debt-for-asset swaps, debt-for-equity, write-offs, etc. As such, they must find a way to manage considerable portfolios of real estate assets seized from the lenders in exchange for debt repayments and write-offs.
They must also begin to offer competitive (by European standards) loan rates (as they did with deposit-interest rates) and reduce NPL levels and their margins while attracting new business before we can be convinced of their long-term viability and sustainability.