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Restructuring NPLs top priority for banks

Article - March 3, 2016

Held in high regard by the public and politicians alike for their ethical, social and community-focused approach to financial services, co-operative banks in Cyprus were hit hard by the financial crisis, as they were in other deeply stricken southern European countries like Spain and neighbouring Greece.


The impact of the crisis on Cyprus’ 150-year-old co-op banking industry led to a series of mergers that vastly reduced the number of these so-called “friendly” lenders from 93 to 18. With restructuring and a capital injection of 1.5 billion euros (£1.1 billion) in the Cooperative Central Bank (which now controls 99 percent of the shares in the 18 co-op banks) one year ago, there have been concrete measures taken to combat non-performing loans (NPLs).

The NPL rate of the Cypriot banking system as a whole stood at 46 percent in June, and according to Nicholas Hadjiyiannis, CEO of the CCB, tackling the NPL issue, which he called a “national problem”, is his number one priority. In September he announced a 12-month strategic plan to manage NPLs, as well as a target to restructure one billion euros worth of bad loans by the end of 2015, representing around 12 percent of the total value of NPLs. From January until the end of August, 6,500 loans worth €550 million had already been restructured, indicating that the CCB is on track to reach its end-of-year target.

“Dealing with NPLs is a priority for us, because it affects our balance sheet,” says Mr Hadjiyiannis. “We had to set up a structure to handle this major issue, as it was unchartered territory. We had to create a consolidated balance sheet to establish what our real NPLs were, and there was no local expertise to really tackle this. We set up a new division where we allocated significant human resources internally, which was no small task.

“And I have to say that now we are on a good path. We can see some light at the end of the tunnel and it’s not the light of an oncoming train. We have taken the initiative and pioneered within the Cyprus banking system.”

According Mr Hadjiyiannis, the co-op sector is closing the gap on the rest of the banking system: “We had only restructured 4 percent of our NPL’s by the end of 2014, and the rest of the market was at 15 percent. Now they are somewhere around 24 percent and we are at 15 percent.”

In July Troika inspectors, frequent visitors to Europe’s crisis-stricken countries over the past few years, were in the Cypriot capital of Nicosia to conduct the seventh review of the economic adjustment programme. The programme will conclude in mid-2016, with the government confident that it will not need to tap into all of the €10 billion of bailout funds available to it.

Mr Hadjiyiannis believes that the Troika’s intervention has led to improved management and standards across the Cypriot banking sector: “In terms of corporate governance, risk management, internal audit, in terms of technology, in terms of expertise, there have been big changes. There is now a lot of international expertise coming into the banking system and we have managers with international experience; we have executives that are not local; we have foreign investors; and we have foreign monitoring. There is no differentiation in how we all handle Cypriot banks compared to German banks.”

Despite the NPL challenge, CCB continues to have a very important place in community development post recovery, ensuring liquidity returns to the real economy to stimulate growth: “Our role is providing alternative banking in a simple way, primarily to households and SMEs. That is where we have lowered interest rates compared to other banks. We want to do ethical and responsible banking.”