Loan sales would assist, if properly deployed, the Cypriot banks to reduce their large stock of non-performing loans, and mainly the loans associated with the real estate sector, Cyprus Investment Funds Association (CIFA) President Angelos Gregoriades has said.
Cyprus` banking sector came at the brink of collapse in 2013, prompting the government to conclude a €10 billion bailout with the EU and the IMF, that featured a controversial haircut of banking deposits over €100,000 to recapatilise the island`s largest lender. However at the backdrop of a four-year recession, the Cypriot economy is hampered by rising NPLs that obstruct economic activity. NPLs according to the Central Bank of Cyprus, reached €29 billion corresponding to 50% of total loans in November 2014, whereas the real estate loan portfolio amounts to €7.21 billion 78% with of which are non-performing.
Loan securitization is included in the island`s economic adjustment programme and will be discussed between the Cypriot authorities and the Troika (EU, EC and the IMF) currently in Cyprus for the sixth programme review. The CBC has prepared the legal framework facilitating loan sales and awaits the lenders` comments.
Speaking to CNA, Gregoriades recalled that loan sales assisted other countries such as Ireland and Spain to cope with the rising stock of NPLs.
But he pointed out that the legal framework should impose limitations or criteria to the participants in the loan sales market. He noted that these organisations should be licensed by the Central Bank, in the case of a banking organisation, or by the Cyprus Securities and Exchange Commission, in the case of a private equity fund, but in both cases these organisations should be based in Cyprus.
Gregoriades noted that the involvement of hedge funds, that follow a more aggressive policy and aim at more short-term profits, in loan purchases in Cyprus is considered a remote possibility.
“We could boost growth through specific procedures,” he said, adding that many mature projects in Cyprus remain dormant due to the lack of funding.
“I believe that the funds that would show interest in Cyprus will promote and complete these projects, providing added value, and this would create jobs. Under the current circumstances I believe it is difficult or perhaps impossible to achieve large-scale real estate sales in the short-term,” he said.
Moreover, Gregoriades said the involvement of equity funds and their expertise in areas such as corporate restructuring and project monitoring would assist the Cypriot economy.
“Empirical data in countries such as Africa show that the involvement of equity funds brought more profitability, more jobs, because the fund works in a more correct and more efficient way which puts the economy on a more sound basis,” he points out.
Price a crucial factor in loan sales
Loan sales constitute an immediate solution, as the banks balance sheets are freed from NPLs, but Gregoriades says that the price is a particularly important issue to be evaluated by every banking institution before proceeding with such a sale.
If a bank sells a loan below its net value, that is exceeding provisions, that would have a direct impact on its capital. At the same time, however, the sale generates liquidity, as the bank will collect cash while freeing up capital, he explained.
The fund that would buy a loan and the project pledged as collateral, will work on the project more efficiently, anticipating that it would sell it at a higher value (from the purchasing price), generating profit.
Funds should be operate and licensed in Cyprus
Gregoriades pointed out that these funds should have their base in Cyprus, something which would boost the local fund management industry that shows growth prospects.
He noted that the legal framework should also include a clause, that in the case that the organisation that purchased a loan suspends its operation and resells the loan, the organisation to acquire it should also be licensed in Cyprus.
“Such provisions would address the concerns that were voiced in the parliament and by the political parties,” he said. Political parties expressed concerns that these loans could be acquired by Turkish organisations, something that would affect the course of the settlement of the Cyprus problem. Cyprus has been divided since 1974 when Turkey invaded and occupied 37 per cent of its territory.
Georgiades also fended off concerns that these funds would buy primary residences and engage in massive foreclosures driving out people from their homes.
“Owner-occupied loans is a matter that primarily concerns the banks which should provide the borrowers with restructuring solutions,” he said, pointing out that the foreclosure law that has been recently approved by the parliament provides that loan purchasers should implement the same procedures as the banks.
“Apart from the fact that there is no resale market for these loans, the administrative cost would be disproportionately high,” he said.
Loan sales boom in Europe
As the banks in the European Union are engaging in a deep deleveraging, loan sales reached €91 billion in 2014, with the majority of loan purchases carried out by US funds. Experts believe that loan transactions will reach €100 billion in the current year. Irish Times citing a report by CBRE Capital Advisers reported that loan sales in Ireland reached €49 billion in 2014.
According to Cushman and Wakefield, the UK recorded Commercial Real Estate loans sales amounting to €30 billion, while CRE loan sales in Spain reached €17 billion, while Italy, which has the highest NPLs stock in Europe, is expected to enter the loan sale market.
ENDS, CYPRUS NEWS AGENCY