First deposits increase since 2013 indicates Cypriot banks improvement: Moody's

Rating agency Moody's said on Thursday that an increase in deposits for the first time since the 2013 banking crisis indicated improved the funding structure of Cypriot banks.

It said in a report on the Cypriot banks that deposits rose by 3 billion euros last year, reaching a total of 49 billion euros, their highest level since July, 2013.

"The rise in deposits indicates improved funding conditions in a system where depositor confidence remains fragile following losses in the country's March 2013 banking crisis," a Moody's economic report on the Cypriot banks said.

"The improvement reflects Cyprus' solid economic growth, which we forecast at 2.7 percent for 2017, lower unemployment and the conclusion of its Economic Adjustment Program in March 2016," it added.

The Economic Research Center of the University of Cyprus put the projected growth of the economy at 3.0 per cent.

Moody's said the increase was driven by deposits from Cypriot and other euro area residents, particularly corporates from Greece, helping the growth of the economy.

However, Moody's warned that the banks' balance sheet rehabilitation process will be lengthy, as a result of the European Central Bank practice of striking off restructured non-performing loans after several months.

Non-performing loans stood at 24.1 billion euros in September, 2016, the last date for which complete data are available, representing 48 percent of the total loan portfolio.

A Central Bank of Cyprus (CBC) official urged banks on Thursday to join forces in setting up a common non-performing exposures management unit to tackle the high level of red loans.

"A common non-performing exposures management unit in the Cypriot banking system would lead to synergies and economies of scale resulting in multiple benefits for the lenders," a CBC official said.

Bank of Cyprus (BoC), with 11.9 billion euros in red loans has set up large arrears management units in a bid to tackle the issue of non-performing loans in a specialized way and speed up restructuring.

The Cooperative Central Bank, now owned by the state following its bailout with public funds, said it is considering the possibility of a specialized section to deal with red loans totaling 7.2 billion euros.

The smallest Cypriot lender, Hellenic Bank, with 2.4 billion euros of non-performing loans, became the first financial institution to join forces with APS Holdings, a company specializing in asset management, to tackle the red loans issue.

Cypriot banks were resolved as part of the conditions for a 10 billion-euro bailout of the Cypriot economy by the Eurogroup and the International Monetary Fund (IMF) in March, 2013.

Bank of Cyprus, the biggest lender of the eastern Mediterranean island, was forced to recapitalize by converting 47.5 percent of uninsured deposits over 100,000 euros to equity and Cyprus Popular Bank, the second largest lender, was wound down and folded into the BoC. Enditem