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Fitch Ratings: Cypriot Banks' Asset Quality to Remain Stable in 2023

According to Fitch Ratings, the stable quality of Cypriot banks' assets in the second half of 2023 will be supported by positive prospects for the Cypriot economy and improved control over Non-Performing Loans (NPLs) inflows. The American rating agency also noted that the credit profiles of Greek and Cypriot banks have improved over the past year due to reduced risk and restructuring efforts.

Fitch has previously provided positive evaluations for all Greek and Cypriot banks in the last twelve months, reflecting stronger profitability and optimism regarding the resilience of the Greek and Cypriot economies in 2023.

The agency emphasized that further positive evaluations will depend on a structural increase in profitability leading to stronger capitalization, as well as continued improvement in asset quality.

Fitch reported a significant decrease in the volume of Non-Performing Loans (NPLs) of Cypriot and Greek banks since 2020. The agency expects a further reduction in the total number of NPLs, facilitated by recent NPL portfolio disposals by Hellenic Bank, Alpha Bank, and Piraeus Bank. Stronger profitability may also enable banks to write off more NPLs or increase NPL coverage.

Despite increasing pressure on borrowers from high inflation and interest rates, the report stated that the asset quality of banks remains resilient. Fitch expects NPLs in Greece to increase in the second half of 2023 as the economy slows down. However, the upper limit on interest rates for performing domestic retail housing loans, which has been in effect since May 2023, will temporarily alleviate the pressure on borrowers.

Fitch also highlighted that higher interest rates and cost-reducing initiatives will strengthen operational profitability relative to asset risk for Greek and Cypriot banks in 2023 and 2024. The liquidity of the banks has not been affected by market turmoil in the first quarter of 2023, and it is not expected to be impacted by the expiration of favorable financing facilities provided by the ECB. The banks have ample cash reserves and investments in bonds.

The Central Bank of Cyprus governor, Constantinos Herodotou, has previously emphasized the resilience of the Cypriot banking sector, highlighting satisfactory levels of liquidity and capital adequacy. The liquidity coverage ratio stood at 310% as of December 2022, nearly double the EU average, while the common equity tier 1 capital ratio reached 17.7%.

Jose Manuel Campa, the president of the European Banking Authority (EBA), also acknowledged the above-average liquidity and capitalization of the Cypriot banking system. Campa noted that Cypriot banks' efforts to reduce NPLs are progressing well and highlighted European banks' adaptation to the prevailing economic cycle and their continued support for the economy.



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