2020 Cyprus Country Report

Although key
indicators
are under
pressure at
the moment
due to the
pandemic, Cyprus banks had
strong performance in 2019,
are stable and well capitalised,
and the sector has shown
overall improvement during
the last years. Banks are
now focusing on providing
the widest possible support
to the economy to minimise
the pandemic impact and
to safeguard the banking
sector’s performance
in the years ahead.
Michael Kammas
Director General
Association of Cyprus
Banks (ACB)
30+
BANKS
panies, start-ups and ventures with high growth
potential. At the same time banks have been instrumental
in expanding lending to key sectors
such as shipping, tourism, real estate and professional
services – which are significant economic
drivers for Cyprus.
The reforms and increased European supervision
have already produced more agile and
future-proof banks – and with the industry embracing
digital innovation the sector is bolstering
its adaptability and competitiveness. If Cyprus
continues to display the same level of resilience it
has shown over the last five years and continues
to efficiently restructure its institutions, it will be
well-equipped to overcome the challenges and
emerge stronger as a true international financial
centre.
COVID SLOWING MOMENTUM
Supported by the healthy growth of the Cyprus
economy over the last few years, the banking
sector was showing positive results in 2019.
However, the outbreak of the global coronavirus
pandemic struck a severe blow to the momentum
achieved. With growth-driving economic sectors
heavily affected by the ramifications of Covid-19,
the Cyprus banking sector implemented extraordinary
measures during the first months of the
pandemic to minimise the impact on households
and corporations. Key measures included a loan
repayments suspension until the end of 2020 and
the postponement of foreclosures for a period
of almost six months to support the economy,
society and bank clients.
In these unpredictable times, Cyprus banks
have been working hard to evaluate the circumstances
in an effort to clarify the real picture of
the economy in real time. The situation is very
challenging but manageable, according to the
Central Bank of Cyprus, who has stated that
apart from the low-interest rates debilitating eurozone
banks’ profitability, Cypriot banks face
the additional challenge of the still high level of
non-performing loans (NPLs). Going forward, it
will be absolutely crucial for banks to keep cleaning
up their balance sheets and focus on tackling
non-performing debt to safeguard the sector’s
performance in the years ahead.
STRONG FOUNDATIONS TO
OVERCOME CHALLENGES
Although the pandemic is currently shaking
up the world economy and putting pressure on
banks, Cyprus has shown improvement in the
sector. Local banks are stable and have reorganised,
developed capital strength and invested
in corporate governance – establishing strong
foundations to move toward a more sustainable
future. According to 2019 Q4 key aggregate
financial indicators released by the Central
Bank of Cyprus (CBC) the Core Tier 1 Capital
of Cyprus banks amounted to 17% at the end of
2019, compared to 15.1% at the end of 2018. This
is the highest level of CET1 capital in the CBC’s
time series since December 2010. Deposits in
the banking sector of Cyprus were up to €47.9
billion in August 2020, an amount which equals
less than 250% of the local GDP, while total loans
stood at €31.8 billion.
In addition, progress has been made in reducing
the NPL ratio, which is now less than 30%
in comparison with more than 50% some years
ago. This was achieved through loan restructurings,
sale of loans, debt-to-asset swaps and foreclosures.
Another key part of NPL reduction
has been through specialised units taking over
NPL management and new international players
buying up distressed asset portfolios from local
banks.
All core banks in Cyprus have passed successive
and rigorous European Central Bank
(ECB) stress tests and reforms in the country’s
legal and judicial framework have given banks
more avenues to reduce the burden of problematic
assets and economic imbalances, a legacy of
the 2013 financial crisis. Significant initiatives
include a new state programme – Estia – for supporting
the most vulnerable borrowers, a major
set of laws passed in 2018 substantially strengthening
the legal framework and allowing for
the securitisation of loans and speeding up loan
recovery rates – developments that were welcomed
by credit rating agencies. However, even
before these laws, the drop in NPLs in Cyprus
was proportionately the fastest in the EU.
Challenges do remain and banks will need
to tread carefully and adopt a more proactive –
rather than reactive – approach in order to stay
on track and maintain competitiveness. With
global uncertainty due to the pandemic, fluctuations
in international markets, and external
risks such as trade wars and changes in monetary
policy, the banking sector must make provisions
to ensure it has the ability to respond to any new
potential crises.
KEY PLAYERS
Key players in the Cyprus banking landscape
are Bank of Cyprus, Hellenic Bank and RCB
Bank which are under the direct supervision of
the ECB, with the rest of the market made up of
smaller banks and foreign subsidiaries such as
AstroBank, Eurobank and Alpha Bank.
The island’s largest lender is the Bank of
Cyprus (BoC) with a market share of 41.7% as
Sector Profile
Country Report CYPRUS 2020 57