The positive outlook for the banking system of Cyprus reflects the opinion of Moody's agency that rapid economic growth in the country will continue. This, in turn, will improve borrowers' capacity to service debt, increase the value of bank assets and stimulate new lending. This is reported by the Cyprus news agency referring to the Moody's report from 13 March (Banking System Outlook: Cyprus - Economic recovery to reduce the high amount of problem loans, driving our positive outlook).
According to Moody's forecast, the volume of non-performing loans in the three main banks of Cyprus - Bank of Cyprus, Hellenic and the Cooperative Bank of Cyprus - by the end of this year will be reduced to about 35-38% of the total debt amount against 45% in September 2017. The aggregate net profit of the banking sector will be from 50 to 100 million euros, despite the fact that 2017 year banks ended with losses of 600-700 million euros.
The agency notes that the economy of Cyprus in 2018 will grow by 3,5%, and in 2019-m - by 2,8% mainly due to the tourism boom, strengthening domestic demand and the restoration of the real estate market. Conditions on the labor market will also improve, but a high level of private debt will become a deterrent to growth in the banking sector.
It is expected that banks will continue the restructuring of arrears and the sale of collateral real estate, which will favorably affect their balances. However, if the situation on the real estate market worsens, banks will face difficulties in repaying debts by selling collateral, which will require them to reserve additional funds to cover possible losses. "The ratio of unearned debt to reserves is about 120% - this is one of the weakest indicators in the entire Moody's rating sample," the agency said in a report.