Challenges ahead for banking sector

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The banking sector faces multiple challenges ranging from the large percentage of non-performing loans (NPLs) to climate change; despite progress made, speakers told the Association of Cyprus Banks AGM.

Finance Minister Constantinos Petrides said although the pandemic isn’t over yet, the progress of the Cypriot banking sector is already remarkable and steadily moving towards sustainability.

Nevertheless, Petrides noted, “the challenges for the banking sector remain”, noting the size of Non-Performing Loans is still large both relative to the size of the economy and the relevant European index.

Petrides assured bankers the Government would continue to facilitate the management of NPLs, to significantly improve the banks’ prospects.

Cyprus Central Bank governor Constantinos Herodotou also noted the progress made by banks in most areas in recent years but emphasized they need to continue on their positive path and adapt in time to meet new challenges.

“Further adjustments are needed to remain competitive in Cyprus and Europe and effectively fulfil their main purpose of supporting the real economy by granting new loans.”

The banks, he argued, should be especially careful in managing risks arising from the pandemic by properly adapting their policies and procedures.

“Following the end of the loan repayment moratorium, the banks must focus their attention on the evolution of the quality of their loan portfolios.

“After about eight months, the picture is encouraging, but there is a significant amount of credit facilities whose repayment, due to restructuring, is yet to begin.

“There should be no complacency.”

He said banking institutions should intensify their efforts to provide sustainable restructuring and improve procedures for swift and more efficient communication with borrowers to support businesses and economic activity.

Herodotou said the banks should also intensify their deleveraging efforts.

“Banks need to timely calculate and manage the risks posed by climate change.”

The European Central Bank will conduct the first emergency simulation exercises for these risks in 2022.

“Although the situation is slightly improved, there is no room for complacency. The effects of the pandemic on the banking sector as well as on the economy as a whole are obvious and ongoing”, Chair of the Association, Panicos Nicolaou, said.

Director-General of the Cyprus Banks Association Michalis Kammas said the sector supported borrowers, the State, and the economy during the pandemic.

According to Kammas, in 2020, banks provided new loans totalling €2.4 bln and €1.3 bln in the first half of 2021.

“The new lending significantly strengthens the recovery of the Cypriot economy in a particularly difficult period.”

Head of the European Banking Federation, Wim Mijs, identified key challenges for European banks.

Capital needs, in particular, full compliance with Basel III requirements, the transition of economies and societies – at the European level – to the era of sustainable development, digital transformation and implementation of the Green Agenda, the intensifying supervisory framework, which demands close cooperation between banks and governments and strengthening digital services along with security and efficiency of transactions.