A strong focus on going digital, implementing more innovative banking solutions and integrated products are supporting the industry and enhancing competitiveness, as well as bringing fresh opportunities to support sustainable development in a post- Covid era of stiff competition and increasing costs.
The Cyprus banking sector has taken big strides in correcting fundamental weaknesses in the financial system, cleaning up balance sheets, successfully raising private capital and maintaining strong capital positions over the last few years. Until the end of 2019, and before the coronavirus outbreak, banks were showing strong performance with decreasing non-performing debt and an increase in deposits, a total of €3 billion in fresh loans provided during the last year, as well as continuous credit rating upgrades boosting market and investor confidence in Cyprus.
Technological advancements, 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 – 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 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 of June 2020, and the bank has come a long way since the 2013 financial crisis. Since the 2014 peak, BoC has reduced its stock of non-performing exposures (NPEs) by €12.4 billion or 83% to €2.6 billion and its NPE ratio is now reduced to 22% on a pro forma basis, from 30% as of yearend 2019. The lender remains committed to further de-risking and its capital and liquidity position remains good and in excess of regulatory requirements. A considerable boost to BoC’s balance sheet came in August 2020, with the sale of almost €1 billion in NPLs to investment firm PIMCO. The sale is expected to be completed in the first half of 2021, and will reduce the bank’s NPE ratio by five percentage points, a credit positive.
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 nonperforming 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 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. APS Cyprus currently services a portfolio of NPLs and real estate assets of around €2.6 billion that consists of non-performing loan assets and real estate assets.
RCB Bank has been a solid player in the Cyprus banking landscape for 25 years and has maintained a very low level of non-performing exposures and high level of coverage. Headquartered in Limassol, RCB has sound capitalisation and good asset quality according to credit ratings agency S&P, giving the bank a strong position to weather the macroeconomic effects of the Covid-19 storm.
With the European Central Bank (ECB) calling for more consolidation in the EU banking sector, one Cyprus bank in particular has been making moves in the local market. Consolidation and strategic new investment 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, has taken 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.
Debt Management Business
A key development in Cyprus changing the banking landscape – and the real estate sector in the long term – has been the entry of debt acquiring companies (DACs) that have bought assetbacked NPLs worth €14 billion from Cyprus banks. There are currently seven licensed DACs according to the CBC.
The Norwegian B2 Holding Group signed an agreement with the Bank of Cyprus to acquire a portfolio of non-performing loans, with a face value of €400 million, consisting of consumer and small business loans without collateral. This is the group’s second deal in Cyprus, following B2 Kapital Cyprus, a subsidiary of Norway’s B2 Holding, acquiring an NPL portfolio worth €144 million from Hellenic Bank in 2018. Since obtaining its Cyprus license in 2019, APS has acquired a small NPL package worth €245 million, and is also known for taking on Hellenic Bank’s ‘bad’ loans and real estate management business.
Also on the list of licensed companies are Cac Coral, which has acquired a €400 million NPL package from the National Bank of Greece (Cyprus), while CYMC III and Gordian Holdings have acquired an NPL package sold by BoC known as Helix 1 with a gross book value of €2.8 billion – of which €2.7 billion related to non-performing loans. The list also includes the Cyprus Asset Management Company (KEDIPES), which is a subsidiary of the Co-operative Asset Management Ltd (SEDIPES), the successor entity of the former Cooperative Bank of Cyprus. NPLs of the former Coop Bank is owned by SEDIPES and managed by KEDIPES, through Altamira Asset Management Cyprus. Alpha Bank signed a long-term partnership agreement with Italy’s biggest loan recovery specialist doValue for managing the bank’s portfolio in Cyprus, which includes bad loans and real estate assets with a total value of €3.2 billion. Reportedly, doValue is to establish an NPL management company which will take on Alpha Bank’s NPLs.
With a large proportion of these NPLs relating to real estate assets, and European Banking Union directives dictating banks cannot hold on to a property they acquire through foreclosures or debt-to-asset swaps for more than three years, analysts have raised concerns banks will offload their properties either by directly selling them to the market through asset management companies, bringing property prices further down, or packaging more asset-backed loans to investment funds. Further uncertainty in this market is being caused by the pandemic, and once the foreclosure freeze is lifted in October 2020 and loan repayments reinstated in 2021, the Central Bank has warned that NPLs could increase and shrink the value of the assets – causing further losses to bank portfolios.
Balancing the Regulatory Burden
In the past five years, EU banks have been faced with an ever-increasing regulatory burden with stricter ECB guidelines and compliance requirements – forcing institutions to grapple with finding a balance where financial stability can be safeguarded without suppressing economic growth.
The global challenges sparked by the Covid pandemic have brought a welcome, but temporary, respite as regulators have decided to postpone deadlines, the enforcement of upcoming regulations, and even provided some temporary simplification of regulations to give flexibility to capital markets and the banking sector. However, the landscape remains complex in terms of banking regulatory and supervisory standards, with no comprehensive long-term initiative to permanently reduce the regulatory burden by focusing on better regulation, rather than just more regulation.
Some key changes now under discussion relate more to capital markets. Instructed by the European Commission, the High-Level Forum (HLF) published a report where it sets out a series of clear recommendations aimed at moving the EU’s capital markets union forward. This initiative was welcomed by the European banking sector as it will help remove regulatory obstacles and would allow for market-based financing and banking finance to work better together – rather than being mutually exclusive – to meet the needs of companies and investors, and to promote economic growth in the EU.
Digital Solutions through Fintech
The regulatory pressures are 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. 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.
A silver lining of the pandemic has been that the implementation of many digital strategies have been accelerated in Cyprus due to the circumstances. Almost every aspect of the economy can be faster and more efficient with the use of better tech solutions. These developments have also opened up more interesting investment opportunities and growth prospects for the Cyprus economy, not only in banking but in key sectors such as education, health and tourism, as well as the start-up ecosystem and technology sector in general.
Focus on Sustainability
The broad-based economic recovery of Cyprus continued straight through to 2019, significantly exceeding eurozone dynamics, and the country’s banks had gone from strength to strength until the pandemic hampered this strong performance with widespread economic disruption and the Cypriot economy expected to contract by around 7% in 2020, before returning to healthy growth rates in 2021.
The reforms and firm steps to strengthen its financial institutions in the past few years have not been in vain and have bolstered 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 and strong corporate initiative, coupled with the supervisory authorities’ more accommodative policy to give banks flexibility to support the economy, there is ample reason to believe that sustainable growth is possible in the banking sector in the next few years.
For more information, contact Cyprus' investment promotion agency, Invest Cyprus.
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