On August 1st 2016, the international rating agency Moody’s Investors Service upgraded the Cypriot Banking system to a positive rating from stable. The change in outlook expresses Moody’s expectations of how bank creditworthiness will evolve in Cyprus over the next 12-18 months and it was based on the following four pillars:
Profitability
According to Moody’s report, the banking sector in Cyprus is expected to return in modest profitability after five years of losses, backed by an accelerating economic recovery driven mainly by a reviving tourist industry, business service industry acceleration and increasing consumer spending.
Asset Quality
The foreseen favourable economic conditions are expected to increase debtor’s ability to repay loans, reducing further the Non-Performing Loans (NPL) which are still the major drug of the banking sector.
Moody’s makes also a positive note on the bank’s efforts to rehabilitate their balance sheets through restructurings and other measures, resulting in a significant drop on the NPL’s over Gross Loans ratio. The ratio which peaked at around 55% back in September 2015 is expected to decline to around 43%-45% by the end of this year.
Capital Adequacy
Although the sector’s solvency remains vulnerable as a result of persistent low provisions (NPL’s stood at 141% of equity and balance sheet provisions as at the end of last year), Moody’s considers that the aggregate Common Equity Tier 1 ratio of 14.03% for the main domestic banks is considered as adequate under the rating agency’s baseline scenario.
Deposit Base
The rating agency is expecting domestic banks deposits to continue their uptrend capitalizing the improved economic conditions.