Beating all expectations, Cyprus banks have bounced back into profitability after a tough few years. Significant foreign investment, growing deposits and continuous credit rating upgrades have all boosted market and investor confidence.
The strong performance of the Cyprus banking sector has been hailed impressive internationally and has been achieved in parallel with the steady economic growth of the country, following staunch reforms and restructuring efforts. The successful and sooner-than-expected completion of the financial assistance programme in 2016 and successful bond issues raising over €3 billion, have put the country on a firm path of stability and growth. The European Commission expects the Cypriot economy to grow 2.7% in 2017, while the country’s Finance Ministry projects a more optimistic 3% growth. Banks in Cyprus currently maintain healthy capital adequacy ratios, and ratings agency Moody’s has also retained its positive outlook for the sector. The ratings agency also noted that the key driver for the accelerated economic recovery has been the growth of the business services sector and tourism, as well as increased consumer spending – all of which have been crucial in generating new business for banks.
Stable and Recapitalised
Today, the Cyprus banking sector stands strong thanks to successful recapitalisations and robust reforms that have significantly improved the liquidity and solvency of the system. Since the banking crisis of 2013, all core banks have passed successive and rigorous European Central Bank (ECB) stress tests and found solid foundations to move toward sustainable development.
In October 2016, the liquidity shortfall narrowed to €5.5 billion, the lowest value since February 2013, the month before the bail-in. Capital adequacy ratios have been attained and exceed minimum regulatory requirements, and the current banking sector has shrunk to two-thirds of its pre-crisis size, having shed 20% of its employees and 25% of branches. Exposure to foreign economies has also been significantly reduced.
According to the Central Bank of Cyprus, deposits saw a €3 billion increase in 2016, in spite of interest rates being at their lowest ever, with total deposits in Cyprus banks reaching €49 billion in January 2017. The insolvency and foreclosure legislation has also led to a reduction of more than €4.3 billion in loans past due more than 90 days between October 2015 and October 2016.
Net lending from Cyprus banks is expected to rise during 1Q2017, according to the January 2017 Bank Lending Survey of the Central Bank of Cyprus, which covers approximately 85% of the lending market. According to the survey, the net demand for loans also increased during the 4Q2016 due to the reduction in interest rates, the need to increase movement of stocks and capital and the need for corporate and debt restructuring.
Despite the harsh terms that were imposed on Cyprus by its international lenders, the country has taken full advantage of the tough supervision and reform programme to correct fundamental weaknesses in its financial structure. Substantial foreign and private sector investment has also boosted the banks, a fact that has certainly stimulated the rapid recovery.
Sector Structure and Regulation
Cyprus’ banking sector is comprised of two tiers: domestically-oriented banks and international banks. International banks have long been attracted to the island for its fiscal regime and to use the country as a launch pad into high-growth markets. The list of banks of foreign origin in Cyprus consists of around 30 institutions, which mainly carry out international banking business and have limited interaction with the domestic economy.
Banking in Cyprus is regulated by the Central Bank of Cyprus and is fully harmonised with EU legislation and directives, while commercial banking arrangements and practices follow the British model. However, changes introduced by the EU’s Single Supervisory Mechanism (SSM) saw the transfer of supervision of all the eurozone’s largest banks to the European Central Bank (ECB) in November 2014, harmonising the landscape for all big banks in Europe. For Cyprus, this meant that Bank of Cyprus, the Cooperative Central Bank, Hellenic Bank and RCB Bank are currently under the supervision of the ECB.
Key players in the Cyprus banking landscape are Bank of Cyprus (BoC), the Cooperative Credit Sector, Hellenic Bank and RCB Bank, with the rest of the market made up of smaller banks and foreign subsidiaries.
The country’s largest lender, BoC, has come a long way since the 2013 events, posting positive results, raising well over €1 billion in fresh capital, and fully repaying €11.4 billion of emergency liquidity assistance from the country’s central bank – a move which will help restore and normalise BoC’s funding profile. The Cypriot lender has surpassed expectations and for the second year in a row won the ‘Best Bank for Private Banking 2017’ award by international magazine Euromoney. It also recently listed on the London Stock Exchange (LSE), which is expected to increase the liquidity and visibility of BoC shares and expose the bank to a broader base of institutional and other informed investors.
The dual listing is also set to draw attention to Cyprus’ well performing economy and the opportunities offered by the Cyprus Stock Exchange. Dynamic Irish CEO John Hourican is largely credited for the fast turnaround of BoC and for attracting big-league shareholders, including billionaire venture capitalist Wilbur Ross, who pumped €400 million into the bank in 2014. However, Ross’ recent confirmation as the US Secretary of Commerce will see him resign as vice-chair of BoC, but the company WL Ross & Co will continue to be invested in the bank.
BoC also saw a welcome cash injection from the European Bank for Reconstruction and Development (EBRD), which has plans to expand support for Cyprus’ banks, SMEs, as well as infrastructure projects and the energy sector. The London-based bank, which pledged to inject up to €700 million into the Cypriot economy, has already made available €220 million of the earmarked funds and now owns 5% of Bank of Cyprus and a 5.4% stake in Hellenic Bank.
Hellenic Bank has also seen healthy growth and has been branded one of the most liquid banks in Europe. The lender successfully recapitalised through private funds, with New York based hedge fund Third Point LLC, international online gaming developer Wargaming, and local investment house Demetra, taking 75% of the share capital, and EBRD securing a minority stake in the bank.
The Central Bank of Cyprus has called for banks to set up common non-performing exposures (NPEs) management units, and in 2017 Hellenic Bank led the way in becoming the first financial institution to join forces with asset management company APS Holdings. The agreement with the Czech debt-servicing specialist, whose clients include Merrill Lynch, Bank of America, Unicredit, Fortis Bank, Banco Populari and Deutsche Bank, is of strategic importance for Hellenic Bank and is part of the group’s strategy of reorganising and transforming its business model.
The Cooperative Central Bank (CCB) has also progressed with its restructuring plans. Since 2013, the CCB has received a recapitalising cash injection of around €1.7 billion of taxpayer money. It also completed a merger with 18 separate cooperative saving banks in a bid to modernise procedures and transfer assets and staff to the CCB – which has increased its value and improved corporate governance. The bank is now looking at completing a Cyprus Stock Exchange listing in 2017 to attract more private equity and to gradually reduce the government’s stake to 25%.
Ranked by Global Finance Magazine as the ‘2016 Safest Bank in Cyprus’, RCB Bank has gone from strength to strength. The bank has had operations in Cyprus for over 20 years, and in 2016 joined forces with the European Investment Bank (EIB) and the Cypriot government, to inject a further €40 million into the Cypriot economy and to support SMEs through competitive lending solutions. RCB also signed a €10 million loan agreement with the European Investment Fund, the first agreement of its kind to be signed in Cyprus in the context of the European Fund for Strategic Investments, a basic pillar of the Investment Plan for Europe.
The banking sector has also seen some newcomers such as Swedish Ancoria Bank, which with an initial capital of €50 million, offers a range of personal and business banking products from its two branches in Nicosia and Limassol. In addition, strategic new investment into the sector has come from the sale of the majority stake of the Cyprus subsidiary of Greece’s largest lender Piraeus Bank, to Lebanese Holding M. Sehnaoui SAL.
Sehnaoui has injected €40 million of fresh capital and described his investment in the bank, now renamed AstroBank, as a vote of confidence in the country’s economy – highlighting the attractive economic environment and investment opportunities in Cyprus.
Although Cyprus banking has weathered the storm better than anyone expected, there still remain challenges – the most severe being the burden of non-performing loans (NPLs) on the balance sheet. However, the creditworthiness of Cypriot banks, which reported a 47.8% ratio of non-performing loans in December 2016, is set to improve over the next 12 to 18 months. Moody’s Investors Service also maintains its positive outlook for 2017 thanks to expected improvements in the banks’ funding and asset quality, and projects the NPL ratio will drop to 42% by the end of the year.
Although Cyprus still has one of the highest levels of non-performing debt in Europe, it must be noted that it is not alone in this fight, with many other eurozone credit institutions also battling NPLs. Both the banks and the Cyprus government are determined to boost their efforts in tackling this issue, and have already covered much ground. In contrast to the recent past, Cypriot banks are well-stocked in capital and well above the supervisory capital adequacy requirements. Also, the creation of more restructuring units in banks and the improvement of the macroeconomic environment are expected to gradually ease the problem.
A Future of Opportunity
Cyprus has received much praise from its international lenders for taking firm steps to rebuild its financial institutions and has received a clean bill of health through rigorous independent audits, which have time and again discredited floating accusations of a weak anti-money laundering (AML) system. While all jurisdictions have room for improvement, assessments have proved Cyprus has a high level of compliance across the banking sector, with some statutory requirements even more demanding than in other EU member states. A recent report by Transparency International said that Cyprus disclosed the most complete set of AML data among 12 analysed countries, which included the US and UK.
To reduce its bank dependence, Cyprus has already turned its interest to alternative sources of finance such as debt sale on bond markets and investment funds, which could develop into a multi-billion-euro industry. Strong focus has also been placed on going digital and bringing more innovation to services and activities. Creating more bespoke banking solutions and integrated products will strengthen the industry and its competitiveness, and bring many opportunities in its wake to support sustainable development in an era of tough competition. Investment opportunities that could be tapped into are mergers and acquisitions, private equity and venture capital projects, as well as financing of infrastructure projects, such as resort development and oil and gas projects.
As for geopolitics, a looming Brexit is reshuffling European dynamics, and Cyprus’ shared history and close cooperation with the UK may see an evolution. The country’s exposure to the UK is limited, with a trade surplus of 2.6%, and rather than drawbacks the country may discover further advantages by attracting companies that wish to continue operating in an EU jurisdiction with a familiar UK legal framework.
Negotiations to reach a political solution to the long-standing ‘Cyprus Problem’ – the de facto division of the island – have also gained momentum and a settlement would bring significant opportunities to the island and its banking sector. Cyprus has already demonstrated resilience in the face of adversity and most industry professionals believe the current transformation and increased European supervision has produced a more sound and agile banking sector for the future.
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Updated: May 2017