According to the European Banking Authority (EBA), new non-performing loans (NPLs) in the real estate sector in Cyprus increased in the third quarter of 2023.
Moreover, Cypriot banks continue to lead the EU member states in the number of non-performing loans.
Thus, in the third quarter of 2023, the NPL ratio in Cyprus' real estate sector was 18.1% (+1%), the highest in Europe. Bulgaria came in second with 11.8% and Italy was third with 8.9%. At the same time, the eurozone average was 1.9%.
Regarding non-performing loans in the construction sector, the rate in Cyprus fell to 6.4% in the third quarter of 2023 from 7.7% in the second quarter of 2023 and 8.7% year-on-year.
In turn, the total share of non-performing loans in the Cypriot banking system during the period under review amounted to 2.6%.
As a reminder, non-performing loans include loans that are more than 90 days overdue and classified as unsatisfactory, doubtful, and uncollectible. Typically, the European Central Bank forces banks that have a lot of bad loans to hold more capital, which ultimately slows down the economy as banks have less money left to make new loans. Non-performing loans are a persistent weakness in the Cypriot banking sector, although it is predicted that things will gradually improve. "Red loans continue to pose a risk to the stability of the island's financial system and remain the main obstacle to the strengthening of the banking sector."
It is worth noting that the EBA also published a risk table summarizing the main vulnerabilities of the EU banking sector using quantitative risk indicators. Thus, at the European level, the CET1 capital ratio fell to 15.8%, while the equity ratio rose to 10.9. In Cyprus, the capital ratio was above the EU average at the end of September. The leverage ratio (a measure of an organization's debt-to-equity ratio) fell from 5.6% in the second quarter of 2023 to 5.4% in the third quarter of 2023 in the EU, while in Cyprus it was significantly higher than the European average. Bank's net interest margin (NIM) continued to increase, but the quarterly growth rate was slower than in previous quarters.