Moody’s Weekly Credit Outlook – Cyprus Banking Sector to benefit from the increase in deposits

On February 2nd, 2017, Moody’s Investors Service issued a Credit Outlook highlighting the increase in the deposits held by Cypriot Banks during 2016. According to the agency, this has a detrimental role in the overall improvement of the banks’ funding structure which in turn is a definite credit positive for the Cyprus economy. Quoting Moody’s: “The increase in deposits was driven by more stable domestic deposits and is credit positive because it improves banks’ funding structures. It also points to households’ increased capacity to service their high levels of debt, a significant portion of which is distressed.”

During 2016, deposits held by Cypriot Banks rose by €3bn (an approximate 6.2% increase), with the total deposits amounting to €49bn. This is the highest level reached since the 2013 financial crisis.

Further, the agency commented that: “The improvement reflects Cyprus’ solid economic growth, which we forecast at 2.7% for 2017, lower unemployment and the conclusion of its Economic Adjustment Programme in March 2016.” and  continued by saying that “These factors have partly restored depositor confidence, leading to the gradual return of mattress money -i.e., deposits withdrawn from the Cypriot banking system. Record tourism revenues in 2016 also supported increased deposit inflows and we expect them to continue to do so this year as well”.

Finally, regarding the major issue that still has to be resolved by the Cypriot Banking system, namely the restructuring of non-performing loans, the rating agency stated that “Nevertheless, Cypriot banks’ balance sheet rehabilitation process will be lengthy because of the long cure periods for restructured loans before they are reclassified as performing, and substantial distressed debt that has not been restructured yet.”

All in all, the restoration of investor’s confidence and the improved economic conditions are positively influencing the country’s economic recovery.