sectors | 18 February 2016

Banking

Cyprus banks have achieved a position of profitability with stronger capital bases and upgrades from internationally recognised credit rating agencies. Safeguarding the sustainability of balance sheets, strengthening operations and implementing digital solutions are all high on the agenda for institutions in the sector.

The Cyprus banking sector has seen a strong rebound following various crises over the last years with improvements in asset quality and financial performance, and industry experts expect the positive trend to continue this year. The sector is adequately capitalised, in fact the average capital adequacy of the local banking sector is significantly higher than the average in the Eurozone, with core tier 1 capital ratio reaching 20.9% in 2023. Non-performing loans (NPLs) are now below 10%, whereas a decade ago it was closer to 50%, a big feat although the figure is still higher than the European average. Other significant improvements have been the ongoing supply of new financing in the local banking sector, improved digital solutions bringing services to the market faster, and continuous upgrades from rating agencies boosting confidence. Mergers and acquisitions (M&A) have also marked the local market, highlighting the sector’s attractiveness and investment potential.

Funding the Economy

New market demands and growing funding needs of both households and businesses have been driving developments in the banking industry, and the sector is focused on introducing services to companies, 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 – significant economic drivers for Cyprus. 

The banking sector remains the primary facilitator of the credit market, with new loans reaching around €3 billion, a similar level to previous years. The gross loans to GDP ratio has reduced from 3.4 in 2015 to 1.0 in 2023, an indication of a healthier level of indebtedness of households and businesses according to bank financial statements. According to the Central Bank of Cyprus, the outstanding amount of total deposits in Cyprus banks reached almost €52 billion in January 2024, while loans reached just shy of €25 billion.

Key Players and M&A Activity

Key players in the Cyprus banking landscape in terms of total assets are Bank of Cyprus, Hellenic Bank and Eurobank, followed by Alpha Bank, AstroBank, CDB Bank and Ancoria. Traditionally, taking the lead as the island’s largest lender has been the Bank of Cyprus (BoC) with a market share of around 40% followed by Hellenic Bank, however the recent approval of Eurobank to acquire Hellenic Bank’s share capital has shuffled the market. 

According to Eurobank, this merger will create the biggest banking group in Cyprus with a balance sheet of €29 billion based on the full year 2023. So far, Greek Eurobank has acquired 55.3% in Hellenic’s share capital with the acquisition subject to regulatory approval by the Central Bank of Cyprus and Cyprus’ the superintendent of Insurance. Eurobank has already received the green light from the Cyprus Commission for the Protection of Competition. Eurobank’s target is to increase its stake in Hellenic Bank at a level substantially above the 55% and ultimately merge the two banks. It also said it aims to establish Cyprus as one of the gateways for Indian companies who want to invest in Europe.

Previous notable moves in the M&A space in Cyprus were 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, took bold steps to expand its operations. In 2019, it acquired the operations and staff of USB Bank for €40 million, followed by another agreement to acquire 100% of the National Bank of Greece’s Cyprus subsidiary. These deals were financed by AstroBank’s own resources and supported by a capital increase primarily from its existing shareholders. The bank kept up the takeover momentum in 2020, by reaching an acquisition agreement to purchase the banking business of the Arab Jordan Investment Bank (AJIB) in Cyprus. However, the deal was terminated in August 2020 citing challenges brought by the coronavirus pandemic, with the two parties continuing to support the market independently. In 2023, the bank made moves to also acquire CDB Bank, but the agreement fell through. 

Overcoming Challenges

EU banks have been faced with an ever-increasing regulatory burden in recent years, with stricter ECB guidelines and compliance requirements – forcing institutions to wrestle with finding a balance where financial stability can be safeguarded without suppressing economic growth. 

However, according to industry experts the key challenges for Cyprus banks in 2024 will be the pressures of a slowing global economy and geopolitical tensions, keeping up with the exponential pace of new technologies, and the implementation of new Environment, Social, and Governance (ESG) criteria which will come at significant expense and effort.

The reforms and increased European supervision have 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. 

Future in Fintech 

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. The last decade has seen a surge in new tech, solutions, tools and platforms coming into the market, but in its wake have also come concerns regarding transactional security and trust – aspects that are increasingly crucial in the world of financial technology (fintech) and achieving healthy competition in banking for consumer benefit. 

Banks are currently working on new and cost-effective services, while tackling various other issues and challenges operating in a rigorous regulatory, supervisory and legal framework. Crucial to succeeding in this new reality is better cooperation between the two main channels of service provision, banks and tech companies. This would bring the best solutions for the clients, high-end digital platforms and fully compliant procedures at every level of payment or transaction – through tech such as blockchain. Banks have emphasised the importance of having the same regulatory standards for competing businesses like fintechs and big platforms as they are providing the market with the same or equivalent products and services.

Stable and Sustainable 

The broad-based economic recovery of Cyprus and its banking sector over the last decade has significantly exceeded Eurozone dynamics, and the country’s banks have gone from strength to strength. The reforms and firm steps to bolster its financial institutions in the past few years have not been in vain and have reinforced the sector, and multiple assessments have proved a high level of compliance across the banking industry, with some statutory requirements even more demanding than in other EU member states. Despite the current unpredictability of the global economy, Cyprus banks remain stable, and the country continues to offer interesting investment opportunities that can be tapped into, such as 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. Although there are challenges ahead, a fresh focus on digital solutions, compliance and strong corporate initiative, there is great opportunities for sustainable growth in the Cyprus banking sector in the next few years. 

March 2024

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

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