Ms. Melina Skouridou, Assistant Vice President at Moody's, says in the report that they expect improving loan quality to translate into modest profits for the Cypriot banks in 2017, for the second consecutive year. She further notes that, they also “expect further improvements in funding conditions for banks as depositor confidence strengthens and money that left the banking system during the financial downturn in 2013 returns."

The rating agency says that these improvements will come while economy continues to recover. Moody's expects that real GDP will grow by 2.7% in 2017 and given that tourism recovers, consumer spending rises and the Cyprus’s large business services sector maintains a strong performance, they anticipate a further rise of 2.5% in 2018.

Moreover, Moody's forecasts non-performing loans (NPLs) to decline to approximately 42% of total loans by the end of 2017 (from 49% in September 2016). Moody’s supports that the slow recovery process is due to long workout periods for restructured loans before they are reclassified as performing, and the large amount of distressed debt banks are dealing with.

According to Moody’s report, “improved loan quality and stable provisioning requirements will lead to modest pre-provision income growth which will support the banks' capital levels. Cypriot banks' tangible common equity (TCE) will likely rise to around 15.4 per cent of risk-weighted assets by the end of the outlook horizon from 14.3 per cent as of September 2016”.

The report also notes, that the banks' capital is vulnerable to higher losses from NPLs than the amounts the banks currently anticipate. Combined NPLs stood at 131 per cent of equity and balance sheet provisions of Bank of Cyprus Public Company Limited (deposits Caa2 positive), Hellenic Bank Public Company Ltd (deposits: Caa1 positive) and the Cooperative Central Bank Ltd (unrated) at the end of June 2016.

Moody’s anticipates that funding conditions for banks will gradually improve and depositor’s confidence strengthening significantly in 2016 helped the gradual strengthening of the banks' balance sheets.