Annus Horribilis for Cyprus banks

4 mins read

Over the last three years, Cyprus banks had struggled to deal with their past and unload non-performing loans from their balance sheets when governments were fighting the worst pandemic in a century.

It was a hard fight that produced many loan restructurings and some new NPLs, but the banks fared well overall.

Only last month, Eurobank, a major player in the Greek banking environment, rolled the dice to become the single biggest shareholder of Hellenic Bank with a 26% stake.

Hellenic is one of the two remaining systemic banks that grew bigger this year after absorbing a major chunk of defunct RCB’s loan portfolio following European sanctions against Russian interests.

The Central Bank of Cyprus did a good job in riding the Covid-19 crisis, and its governor Constantinos Herodotou steered the system with prudence that gave it renewed confidence.

Such measures include the announcement on November 30, where “the Central Bank of Cyprus, acting proactively to fulfil its primary objective of safeguarding financial stability, decided to increase the countercyclical buffer rate from 0% to 0.5% of the total risk exposure amount in the Republic of each licensed credit institution.

“In particular, the decision aims at strengthening the banking sector’s resilience at the current juncture, i.e., at a time when risks are neither particularly elevated nor subdued.

“The goal is to ensure, to the extent possible, a sustainable flow of credit to the economy in future times of potentially increased risks.”

This translates to tighter credit conditions which would benefit not only credit institutions and the economy but also debtors.

Better lending practices reduce bad loans and losses to borrowers.

Furthermore, the new rate of 0.5%, as the announcement goes, aims at creating a cushion of capital for credit institutions, which can be used in times of crises and during economic downturns to absorb potential losses and/or to support lending to the private sector.

So, the Central Bank is warning the market that potential new losses might be coming.

The Financial Mirror asked two experts to give us their views on the new ECB monetary policy.

Marios Clerides holds a PhD from LSE and served for a term as Cyprus’ top securities regulator (CySEC) with well over two decades in senior banking positions.

“2023 is likely to be a challenging year as Europe feels the full effects of increased energy costs in many basic goods, while the increases in interest rates by ECB are also bound to reduce EU consumer spending.

“This, in turn, will affect Cyprus’ tourism and growth, expected to be around 2.7%, while inflation is expected to be around 4.5% by the end of March 2023.

“Furthermore, the increased interest rates in Cyprus are likely to cause some (mainly previously restructured loans) to re-default, but it is difficult to predict the extent of this based on the available published information.

“Banks, though, will benefit from the abolition of negative interest rates on the money they hold with the ECB increasing their capacity to survive the crisis.”

Despite sustainable economic growth, banks are bound to experience new NPLs amid interest rate hikes as some borrowers will find it difficult to service their loans, which are already burdened with higher interest rates.


Banks already feel the pressure to closely monitor big exposures and take pre-emptive action to minimise potential damage from bad loans and comply with CBC’s new policy requirement.

George Mountis, with a PhD in banking and experience in real estate asset management in Greece and Cyprus, said, “interest rates in Europe have increased the last six months significantly, ending an 11-year policy of historically low-interest (negative) rates.”

“In 2023, Cyprus’ economy is expected to continue its upward trajectory.

“However, the growth rate for 2023 is expected to be significantly lower than in 2022, from 6% (provisional data) to 2-2.5% in 2023.

“In Cyprus, the credit conditions have improved in recent years, with a significant drop in the NPLs to 10% of total loans in September 2022, from a peak of 48% as of 2015.

“In cash terms, the non-performing loans amounted to €2.7 bln, whilst the NPLs to households amounted to €1.4 bln at the end of September.

Having reached the important milestone of 10%, the market experts are setting their sights on a single-digit NPL ratio (NPL ratios were reduced since these loans were sold to investors but were not removed from the system and the actual economy as loan servicers are working towards finding resolutions with these borrowers at a slower pace than anticipated in their business plans).

“According to Moody’s, despite the potential of new non-performing loans formation due to still-high levels of indebtedness and the legal framework governing foreclosures that remain vulnerable to frequent political interference, the Cypriot economy seems resilient, and it is supporting the operating conditions of the banking system.

“All in all, as the geopolitical and financial uncertainty remains, the external environment will play a key role not only at the domestic but also at the international level and will determine the vulnerability of the economic and banking sectors.

“In Cyprus, the real estate sector will also be affected within 2023 mainly due to lack of liquidity, slower credit growth due to stricter lending criteria and the impact of increased interest rates.

“We anticipate that property prices will show signs of decline, especially in the commercial properties sector (retail, offices, industrial) and land (not for residential development).

“We also anticipate a small increase in the non-performing loans (c. €2-3 bln new NPLs in the next two years, which will be < 5% of the total loans of the system), especially towards the end of 2023 where most borrowers will start feeling the pressure of inflation and increased interest rates.”

If this scenario materialises, it will be hard for banks to pay out any dividends.

Even if they make money, it wouldn’t be prudent.

Looking ahead, we expect consolidation in the banking sector with stronger players taking strategic positions.

Having new healthy foreign players in the market is a positive sign for the Cypriot economy, which will help make its banking system more diversified and resilient.

Yet the challenges ahead will test every credit institution’s strategy, management and governance.

A new government under former minister of foreign affairs Nicos Christodoulides is more likely to take over next March.

Still, we do not expect to see any major economic policy changes.

Public debt will continue to pose risks that everyone must take more seriously than they currently do.

To confront these challenges, the new government must address corruption and productivity.

Both are important issues shaping the island’s political and financial future.