sectors | 18 February 2016


The broad-based economic recovery of Cyprus has continued straight through to 2019, significantly exceeding eurozone dynamics, and the country’s buoyant banking sector has gone from strength to strength cleaning up balance sheets, attracting new investment and focusing on a more efficient digital future.

The banking sector of Cyprus has seen a surge of activity in the last few years and new initiatives and reforms have set banks on a stronger course to tackle the legacy problems of the 2013 financial crisis. Strong economic growth of almost 4% and continuous credit rating upgrades have boosted market and investor confidence, banks have successfully raised private capital and maintained strong capital positions, non-performing loans have been slashed in half, while fresh investment through acquisitions has reshaped the banking sector into a more consolidated and agile industry.

The rapid rate of technological advancements, new market demands and growing funding needs of both households and businesses are driving developments in the banking industry. The sector is introducing products and services to companies, start-ups and ventures with high growth potential, and at the same time keeping a clear focus to expand lending to key sectors such as shipping, tourism, real estate and professional services – which are substantial economic drivers for Cyprus.

Taking full advantage of the tough supervision and reform programme in 2013-16, the banking sector has corrected fundamental weaknesses in the financial system and is on a solid path towards sustainability. Cyprus, along with the rest of Europe, is operating in an increasingly tougher regulatory environment with much of the burden falling squarely on the shoulders of the banks. However, the industry is embracing new fintech solutions and innovation to ensure its adaptability and competitiveness in the future.

A Sustainable Future

The last few years have underlined the stability of the Cyprus banking sector, it has shrunk and reorganised, developed its capital strength and invested in corporate governance. All core banks in Cyprus have passed successive and rigorous European Central Bank (ECB) stress tests and have strong foundations to move toward sustainable development with the number of non-performing loans (NPLs) on a steady downward trajectory.

The sector has seen interesting developments with new investment and acquisitions transforming the landscape, specialised units taking over NPL management and new international players buying up distressed asset portfolios from local banks’ balance sheets. While the volume of non-performing exposures continues to be a challenge, banks should be in a better position to post profits on a more consistent basis from 2019 having shed a large proportion of their NPLs and expanding new lending.

Reforms in the country’s legal and judicial framework have given banks more avenues to reduce the burden of problematic assets and economic imbalances, which are a legacy of the 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 is proportionately the fastest in the EU. Liquidity and solvency in the banking system have improved significantly in recent years, with deposits increasing by more than €3 billion in 2016-17, allowing the full repayment of Emergency Liquidity Assistance (ELA).

Total deposits in the Cypriot banking sector reached €47.5 billion in March 2019, while total loans stood at €38.3 billion, according to the Central Bank of Cyprus (CBC). The vigorous domestic economic environment has had a positive impact on the solvency of prospective borrowers and the reduction of risk undertaken by banks. Net loan demand is projected to increase further in 2019, which is expected to have a positive impact on domestic activity and will mainly be supported by the historically low level of lending interest rates as well as the increase in consumer confidence and investments, according to the January 2019 Bank Lending Survey of the Central Bank of Cyprus.

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 and emerging markets. The list of banks of foreign origin in Cyprus consists of over 30 institutions, which mainly carry out international banking business and have limited interaction with the domestic economy. Beyond the traditional deposit and lending services to households, corporations and SMEs, banks in Cyprus operate under the ‘universal banking model’ and offer a diverse range of products and services. Deposits from customers have traditionally been the main source of funding for banks.

Banking in Cyprus is regulated by the Central Bank of Cyprus and is fully harmonised with EU legislation and directives. 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 2014, harmonising the landscape for all big banks in Europe.

Consolidation through Acquisitions

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 Greek Eurobank and Alpha Bank. The Cyprus Cooperative Bank (CCB) was one of the top three banks, until the healthy assets of the state-owned lender were acquired by Hellenic Bank in June 2018. As part of the deal, Hellenic Bank (HB) acquired CCBs total deposits amounting to €9.7 billion and took on €10.3 billion in assets consisting of performing loans, bonds and cash, and around €500 million in non-performing loans. While assets worth approximately €8.2 billion were transferred to the state, with the so-called bad assets managed by state-owned Cyprus Asset Management Company (KEDIPES), which is managed by the Cyprus arm of Spanish company Altamira.

The acquisition has strengthened Hellenic Bank’s status as a major player in the market. Following the 2013 financial crisis, Hellenic Bank was successfully recapitalised through private funds, and also led the way in 2017 in becoming the first financial institution to join forces with an asset management company, APS Holdings, to manage its NPLs. 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 HB and is part of the group’s strategy of reorganising and transforming its business model. The bank further reduced its troubled assets in June 2018, when it sold off non-retail secured and unsecured exposures worth €145 million to B2Holding, a Norwegian firm specialising in distressed bank loans.

A new deal that will further shuffle the state of play in Europe’s NPLs management market and also have an impact on Cyprus is Japanese tech giant SoftBank’s bid to take over Spanish group Altamira through doBank – the largest independent Italian loan management servicer. The new doBank-Altamira company structure will have under its management assets and mostly non-performing loans of around €130 billion. At the same time, Altamira is one of the main bidders for the management of the NPL portfolio of Alpha Bank Cyprus and its subsidiary AGI Cypre Ermis. The portfolio amounts to a total of €3.7 billion, and Altamira is pegged as one of the favourites to take it over.

The island’s largest lender Bank of Cyprus (BoC) has come a long way since 2013. A milestone for the bank was listing on the London Stock Exchange (LSE) in 2017 in a bid to increase the visibility of BoC shares and to expose the bank to a broader base of investors. The dual listing is also meant to draw attention to Cyprus’ well-performing economy and the opportunities offered by the Cyprus Stock Exchange. More recently, the bank sold its UK subsidiary to Cynergy Capital, a group of British retail and property entrepreneurs, in a €117 million deal in 2018. The decision to sell the UK offshoot was in line with BoC’s strategy to principally focus on supporting the growth of the Cypriot economy.

In late 2018, BoC reached an agreement to sell the Project Helix loan portfolio with a gross book value of €2.8 billion to Apollo Global, the US-based private equity firm, for €1.4 billion. The Helix portfolio consists primarily of defaulted loans to companies and small businesses secured against property in Cyprus. Apollo intends to finance the deal through a securitisation structure, which is increasingly common place for private equity firms when buying portfolios of bad debt. The deal came in the wake of European banks ramping up sales of bad loans due to ECB pressure.

In June 2019, BoC announced a new major shareholder with London-based alternative investment manager Caius Capital LLP acquiring 3.09% of voting rights. The move underlines the fund’s confidence that BoC’s shares will move upwards in the future. Caius Capital is an alternative investment manager focusing on distressed and special situations long and short investments across the capital structure. Their investment universe comprises corporate issuers, financial institutions and sovereigns predominantly within the region of Europe, the Middle East and Africa.

RCB Bank’s profitability remained healthy in 2018 with net profit after tax amounting to €76.4 million and over 15% return on equity. The bank has maintained a very low level of non-performing exposures and high level of coverage. RCB’s new five-year strategy also includes a gradual reduction of exposures to large Russian corporate borrowers and funding operations with VTB Bank, which will reduce concentration risk and result in a more balanced structure of assets and liabilities focused on operations on the domestic and broader European market. In June 2019, Moody’s Investors Service published an updated semi-annual credit opinion on RCB, noting that the bank had a long-term deposit rating at B1 level with stable outlook – the highest rating among Cypriot banks.

Consolidation and strategic new investment also came in 2017 with a group of international investors led by Lebanese banker Maurice Sehnaoui acquiring the majority stake of the Cyprus subsidiary of Greece’s largest lender Piraeus Bank. Now rebranded AstroBank, the lender, who cites growth as a top priority in its strategy, is set to grow even further with a deal signed in January 2019, to acquire the operations and staff of USB Bank for €40 million. The deal was financed by AstroBank’s own resources and supported by a capital raise primarily from its existing shareholders. The acquisition is said to increase the bank’s balance sheet by 55% and total assets to €2 billion, including gross loans of €1.2 billion – and build up its customer deposits to €1.9 billion and equity to €160 million. The deal is expected to contribute to the further consolidation of the Cyprus banking sector and highlight potential investment opportunities in Cyprus. AstroBank’s hunger for further growth and takeovers remains strong with negotiations also underway between AstroBank and the National Bank of Greece, to acquire the latter’s subsidiary in Cyprus.

Overcoming Challenges

The banking sector of Cyprus has undergone substantial reforms and restructuring since the crisis-laden years and today stands on stable ground. However, challenges 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, 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. The new Governor of the Central Bank of Cyprus (CBC) has stressed that domestic banking institutions should base their management planning on expected developments in the eurozone, and forecasts and concerns related to the markets, such as Brexit and emerging issues of global trade protectionism.

One of the biggest remaining challenges for Cyprus banks to overcome is the reduction of NPLs. Granted, there has been significant progress with NPLs now at €11 billion from a peak of €28 billion after the 2013 financial crisis – a drop which is proportionately the fastest in the EU. However, even though bank balance sheets are clearing up through debt sales, loan restructurings and debt-to-asset swaps, it does not fully eliminate the burden of private debt in the wider economy.

With stricter ECB guidelines and regulation, it is crucial to find a balance where financial stability can be safeguarded without suppressing economic growth. Another challenge for banks is to devote more resources to meet ever-increasing compliance demands, but at the same time try to reduce the adverse effects on legitimate business activities. This issue is not unique to Cyprus banks, but a global challenge for financial institutions, and part of the solution is to invest in new tech to enhance efficiency, profitability and prospects. A well-functioning banking system is a precondition for the sustainable development of every economy and embracing a digital future with more transparency will certainly help to achieve this goal.

Rebuilding a Sector

Cyprus has received much praise from its international partners for taking firm steps to strengthen its financial institutions and multiple assessments have proved a high level of compliance across the banking sector, with some statutory requirements even more demanding than in other EU member states. The overall economic growth is supporting efforts to rebuild the banking sector with expectations of well over 3% growth in real GDP for 2019, a rate significantly higher than the average forecast of 1.8% for euro-area countries.

A burgeoning investment fund industry is boosting activity in the banking sector, and Brexit is also fostering new business for Cyprus with UK-based companies seeking alternative operational and business locations within the EU. Current investment opportunities that can be tapped into are distressed assets and loan portfolios, mergers and acquisitions, private equity and venture capital projects, as well as financing of infrastructure projects, such as tourism development and oil and gas projects.

A strong focus on going digital, implementing more innovative banking solutions and integrated products will support the industry and enhance competitiveness, bringing fresh opportunities to support sustainable development in an era of stiff competition and increasing costs. The current transformation and increased European supervision have already produced a more agile and future-proof banking sector. 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 its challenges and emerge stronger as a true international financial centre.

For more information, contact Cyprus' investment promotion agency, Invest Cyprus.

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July 2019

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