26/11/2015 10:08
Cyprus presents an explosive mixture of a high level of problematic loans and low provisioning in the first comparative transparency exercise carried out by the European Banking Authority in 21 countries and 105 banks.
The report released by EBA brings to light the comparative level of the problems that have accumulated in the banking system with non-performing loans reaching 137% of Cyprus’ GDP, while in the rest of Europe the corresponding percentage is 7%.
According to the data, the percentage of NPLs in Cyprus reaches the extremely high level of 50% while at the same time the coverage ratio of NPLs remains low.
Indicative of the situation is the fact that the second worst rate of NPLs is recorded in Slovenia with 28% while the European average for banks under examination is 10%.
The problem is even greater when taking into account the relatively low level of provisions made by domestic banks for losses from these loans.
Cyprus has the third lowest coverage ratio of NPLs with provisions. The ratio is limited to 32% following Latvia and Sweden ratios of 28% and 30% respectively, which however, are countries with extremely low rates of non-performing loans.
The European average is 43% while the ECB is pushing for domestic banks to raise their levels of provisions close to 50%.
The EBA notes that smaller sized banks in Europe tend to have a high level of impaired loans coupled with a low coverage ratio, which in the case of Cyprus is fully confirmed.
Countries which record high rates of NPLs such as Slovenia, Ireland and Hungary have very high rates of provisions, or at least, are close to the average.
"Low coverage ratios may result in a reluctance to resolve non-performing loans through their disposal or recovery due to material differences between potential transaction prices and net book values, leading to losses," the European Banking Authority notes.
In contrast, high coverage ratios mean that a big share of the losses has already been recognised in banks’ financial statements, and this may encourage banks to dispose of their nonperforming exposures and achieve lower levels of NPE ratios, as the EBA adds.
The level of the problem becomes even more apparent when one examines the level of NPLs in relation to the country's GDP.
The report released by EBA brings to light the comparative level of the problems that have accumulated in the banking system with non-performing loans reaching 137% of Cyprus’ GDP, while in the rest of Europe the corresponding percentage is 7%.
According to the data, the percentage of NPLs in Cyprus reaches the extremely high level of 50% while at the same time the coverage ratio of NPLs remains low.
Indicative of the situation is the fact that the second worst rate of NPLs is recorded in Slovenia with 28% while the European average for banks under examination is 10%.The problem is even greater when taking into account the relatively low level of provisions made by domestic banks for losses from these loans.
Cyprus has the third lowest coverage ratio of NPLs with provisions. The ratio is limited to 32% following Latvia and Sweden ratios of 28% and 30% respectively, which however, are countries with extremely low rates of non-performing loans.
The European average is 43% while the ECB is pushing for domestic banks to raise their levels of provisions close to 50%.
The EBA notes that smaller sized banks in Europe tend to have a high level of impaired loans coupled with a low coverage ratio, which in the case of Cyprus is fully confirmed.
Countries which record high rates of NPLs such as Slovenia, Ireland and Hungary have very high rates of provisions, or at least, are close to the average.
"Low coverage ratios may result in a reluctance to resolve non-performing loans through their disposal or recovery due to material differences between potential transaction prices and net book values, leading to losses," the European Banking Authority notes.
In contrast, high coverage ratios mean that a big share of the losses has already been recognised in banks’ financial statements, and this may encourage banks to dispose of their nonperforming exposures and achieve lower levels of NPE ratios, as the EBA adds.
The level of the problem becomes even more apparent when one examines the level of NPLs in relation to the country's GDP.
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