Insights | 19 August 2021 | Association of Cyprus Banks

Michael Kammas , Director General of ACB

There is always enough space for any good company or bank to invest in a market with opportunities such as Cyprus. However, as the cost of regulation increases and competition from GAFAs, BigTechs and shadow banks intensifies, we should not preclude any further consolidation in the sector.

What is the current state of the Cyprus banking sector? How does it stand compared to its European counterparts? 

The banking sector in Cyprus is well capitalised and is currently focused on reducing NPL levels, tackling the pandemic’s consequences and of course providing new lending. At the same time, the banking sector is investing in new areas to address technology needs of the local market by introducing new value-adding products and services to established companies, start-ups, households and individuals. Needless to say, the core banking focus in Cyprus remains on providing lending to important sectors of the local economy, like shipping, tourism, real estate and professional services, as well as to households. Moreover, the pandemic accelerated digital use in the country and the banking sector was one of the most important catalysts in driving society to embrace digitisation.     

When the Covid-19 pandemic hit, Cyprus was quick to introduce support schemes and other measures to help the economy. We are well over a year into the pandemic now, what kind of effect is it having on the Cyprus banking sector and how are the banks coping? 

The state of the banking sector is inextricably linked to the state of the economy. Banks therefore, assumed a leading role in supporting the economy and society, both through their traditional role of financiers as well as through other measures outside their core banking services. From the beginning of the health crisis, banks focused in providing safe and uninterrupted services to their customers and supported them to deal with the medium and long-term effects of the disruption caused by the pandemic. 

At the same time, banks provided financial and material support in the form of products and services to health sector and public services crews performing frontline duties during the pandemic, such as donation of ventilators and protective equipment, and partnered with NGOs to support vulnerable groups. Furthermore, and as the pandemic health crisis continues, the banking sector supports the local economy through liquidity provision, in order to assist the growth and the restoration of normality in all aspects of life. 

How is the banking sector doing based on key indicators such as NPL exposures, fresh loans, and size of the banking sector in relation to the economy?

During the pandemic, banks continued to provide fresh loans to the economy. In 2020, a total of €2.4 billion in new loans was provided, compared to approximately €3 billion in 2019. The NPL ratio has continued to decline. At the end of the first quarter of 2021, the NPL ratio was 17.9%, compared to 27.9% at the end of 2019, according to the Central Bank of Cyprus. In absolute numbers, the volume of NPLs declined to €5.13 billion (Q1 2021) compared to €8.97 billion (end of 2019). The size of the local banking sector to GDP was 295% according to official data by the European Central Bank (for the 2019).

There is a large number of banks operating in Cyprus compared to the size of the economy, do you see this as a problem? Do you see Cyprus attracting more financial institutions or some of the bigger global names in banking to set up here for example to support the burgeoning investment funds sector?

I don’t perceive the number of banks in Cyprus as a problem, since the current banking landscape in the country is a result of market forces, as is the case in market economies. It must be noted that significant developments have taken place during the last years, mainly in the field of mergers and acquisitions, that resulted in new, bigger banking institutions. Having said that, I believe that there is always enough space for any good company or bank to invest in a market with opportunities such as Cyprus. However, as the cost of regulation increases and competition from GAFAs, BigTechs and shadow banks intensifies, we should not preclude any further consolidation in the sector.  

Other than the proposed Capital Markets Union, are there any new regulatory changes or developments coming up that will affect the banking sector?

Numerous legislative, regulatory and supervisory requirements are continuously being generated, both at the local and the EU level, and this directly affects the banking environment. AML Directives, additional capital requirements based on EU Directives as well as local legislative developments related to foreclosures and the provision of new loan parameters are the ongoing developments that are currently affecting the local banking sector. 

Cyprus has made technology, research and innovation a key focus, is this direction also benefitting the banking sector, and if so, how? For example, is it sparking new service lines or types of products for banks?

The local banks have made substantial investments in technology both related to innovative service offerings as well as updating their internal procedures. New transaction applications, online services, more efficient and safe platforms are among the most important areas in which the banks have already invested. This digital evolution of banking services and infrastructure arose as a result of the pandemic on the one hand and, on the other hand, as a result of competition from FinTechs and new transaction platforms. At the same time, it is important to mention that the banking sector, in coordination with state agencies, made the first steps for introducing e-signatures and e-identity, two key elements for a more digital economy. 

What are your expectations for Cyprus and its banking sector over the next few years?

Expectations for the banking sector are aligned with the economy’s prospects and those prosects are in turn based on various factors such as the digital transformation of the market, a more prosperous environment based on green economy and the influence of new trends that come from the younger generations. 

The needs of the younger age groups seem to be significantly different compared to those of the older ones. For example, younger people tend to appreciate more experience goods such as travelling and are more conscious, sensitive and active regarding environmental issues. Those trends are already affecting both the economies and the banking sectors across the world. 

In that context, we strongly believe that the economic and financial landscape will be more diverse and focused on specific needs, trends and developments. As a result, the banking sector will need to embrace opportunities for new forms of funding or loans to innovative projects, green oriented proposals as well as keeping up with the demand for housing, based on the emerging trends of the younger generations.

There are vulnerabilities and challenges still ahead and all of us – banks, the public sector and other private sectors – need to cooperate to address them in the best possible way. Having said the above, we suggest that we really need to keep up the pace of reforms, introduce flexibility in the labour market and increase efficiency by utilising every digital or technological solution. That will permit us to take advantage of all the opportunities, minimise the pandemic’s impact and expand the growth prospects for the benefit of current as well as future generations.

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