The ECB is cutting rates and Euribor is heading lower, yet borrowing costs and deposit rates remain stubbornly high in Cyprus.
The reasons for this phenomenon are many, according to the CEO of Hellenic Bank, Makis Keravnos, who served as Finance Minister in the previous administration. He places a large part of the blame on the government for not doing enough to increase long-term liquidity in the banking market.
DEPOSITS
Keravnos told financial journalists at a presentation held at the bank that one of the key reasons holding rates up is the fact that many banks are paying high rates to attract deposits.
The principle reason for this is that Cypriot banks rely on customer deposits to fund their liquidity. In the absence of an inter-bank market and their ability to tap international bond issues for funds, the banks have kept deposit rates high to maintain their funding.
At the moment, the ratio of loans to deposits at Cyprus banks is below 100%, while in the case of Hellenic Bank, the ratio is at 70%, which indicates that for every 100 in deposits, the bank has lent only 70.
The other reason is intense competition from Greek banks based in Cyprus, which are offering very high rates.
“Since deposit rates in Greece range 7-9%, the Greek banks are paying up to 7.6%, thus forcing local banks to bid up their rates to maintain their customers, with the average deposit rate now costing banks around 6.5%,” added Andreas Papadopoulos, Head of Strategic Planning at HB.
NO GOVERNMENT AID
Keravnos dismissed as “too little” the government’s recent effort to create liquidity in the banking system by borrowing EUR 1.4 bln from the banks for 39 weeks until October and placing half of the amount back with the banks.
“(Finance Minister) Stavrakis placed the funds until October but on a 35-day notice, which means banks cannot do much with the money since the government can call up the money,” he explained.
Instead, Keravnos called on the government to enact legislation to allow for the issue of covered bonds, leasing and allowing of the trading of mortgage loans, while Papadopoulos suggested for banks to issue 3-5 year bonds, guaranteed by the state at a reasonable cost to bring long term liquidity for the banks.
Keravnos also criticised the government for issuing 5-year bonds amounting to EUR 150 mln at a 4.7% yield, which automatically is sending a message to the market that rates need to be kept high. The comparable German bund yield for 5-years was 2.415%, while the yield on 5-year Portugal bonds was 3.5% and for Greece 4.8%.
LOAN MISMATCH
Keravnos admitted that with all loans prior to January 1, 2008 (date of shift to euro) now tied to the ECB main refinancing rate, which in the case of HB make up 70% of the total loan portfolio, every time the ECB reduces rates, bank margins come under pressure, which is the reason why banks are widening their spreads.
The new loans (after Jan ’08) are based on the Euribor, which has resumed its downward path as some kind of stability has returned to credit markets, which in tandem with declining rates, is also putting pressure on bank profits.
Nevertheless, HB’s Head of Strategic Planning stressed that local credit growth figures were distorted by the inclusion of international banking units (IBUs – formerly known as “offshore banks”). For example, loan growth for residents up to November 2008 was 19.56%, but including the offshores, the figure jumped to 29.78%.
DIVIDEND/BAD DEBTS
Keravnos said that in addition to his suggestions of ways to boost liquidity, he also believes the Central Bank of Cyprus should change the ruling on suspension of interest on problematic loans.
Currently, when a borrower fails to pay the agreed installments on a loan for more than three months, the interest is suspended and the loan is treated as “doubtful”. If the time frame is extended to six months as is the norm in the rest of the EU, it would help the banks, Keravnos added.
Another idea is for the government to temporarily lower the level of profits deemed for distribution to qualify for the 10% tax levy.
“If they drop this to 30 or 40%, then this would help the liquidity of the banks.”
BANKS NEED PROFITS
Keravnos insists that banks need to be profitable, even if this statement may sound outrageous to some.
Banks need profits to maintain adequate capital ratios to sustain their existing operations and expand into other markets as they need to meet minimum criteria set by central banks, he said. If banks are not profitable, then institutional investors – including foreign – will not invest in their shares, which will force their market capitalisation lower. Low profitability will also affect a bank’s rating, which it needs to tap international markets in order to raise money. Profits are also needed to allow banks to take risk, or lend to their customers, which is the lifeline for any economy, big or small.
TRUSTWORTHY
Keravnos said that despite the negative news affecting global financial institutions, Cypriot banks continued to enjoy the trust and confidence of both local as well as foreign investors who continue to place and increase deposits with Cyprus banks.
He said the government’s decision to table legislation asking for the state guarantee of bank deposits to be increased to EUR 100,000 per client per bank was a step in the right direction, which will help reinforce confidence in Cypriot banks.
