Moody's Investors Service has changed its outlook on the Cypriot banking system to positive from stable, reflecting the rating agency's view that the country's economic recovery will restore banks to profitability and improve their weak asset quality. The outlook expresses Moody's expectation of how bank creditworthiness will evolve in Cyprus over the next 12-18 months.
"After five years of losses, we expect banks in Cyprus to be profitable in 2016 and foresee a modest 0.3% - 0.5% return on assets," says Melina Skouridou, an Assistant Vice President at Moody's and author of the report. "Cyprus' accelerating economic recovery, driven by a revival of tourism, the strengthening business services sector and increased consumer spending, will support momentum in banks' loan restructurings and generate some new business for the banks", adds Ms. Skouridou.
Moody's forecasts asset quality to improve for domestic Cypriot banks as a result of these strengthening operating conditions, with the ratio of problem to gross loans continuing to decline to 43%-45% by year-end 2016, still high but below their peak of 55% in September 2015.
Finally Moody's expects funding conditions for Cypriot banks to improve. Domestic deposits will continue to grow, reflecting the improved economic conditions.