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FINANCE: Cyprus banking system is shrinking

14 September, 2019

Relatively small Astrobank’s agreement in principle to acquire the National Bank of Greece (Cyprus), signals that the country’s banking system is weathering a consolidation process, say experts.


Following the collapse of  Laiki Bank in 2013 and the demise of the Co-op last year with its sale to Hellenic Bank, the Cyprus banking system has shrunk significantly.

In a matter of five years, two of the country’s largest banks are no longer on the map, with their healthy portfolios being absorbed by Bank of Cyprus and Hellenic who now dominate.

Astrobank’s takeover of UBS Bank in January and now of  NBG Cyprus has somewhat shifted the balances, but still leaving the big two Bank of Cyprus and Hellenic way out in front.

The deal with NBG Cyprus follows Astrobank’s recent takeover of Universal Savings Bank (USB) which had assets of €687 mln, €325 mln worth of loans and some €603 mln in deposits.

The bank belongs to the Senhaoui family from Lebanon which had initially acquired Piraeus Bank, renaming it Astrobank while announcing that they would be acquiring other banking institutions on the island as part of their growth strategy.

A finance professor sees the consolidation process triggered by banks’ exposure to NPLs, as they were unable to comply with the strict regulatory framework imposed by the European Central Bank and consequently, at a local level, by the Central Bank of Cyprus.

Frederick University assistant professor in finance Nicos Kousis told the Financial Mirror that while Cyprus had a large number of banks to begin with, compared to the size of its economy, banking institutions were not profitable enough to be able to survive within the tighter operational framework.

“So, the consolidation process is taking place whether banks want to or not. Despite packaging and selling off loans, a number of banks still are unable to conform to the strict operational framework imposed by monetary institutions.

Kousis said that the banks could have benefitted if they had voluntarily proceeded with a consolidation process in previous years.

“However, like everything dictated by the Cypriot mentality, the process was pushed to the side for as long as possible. In the end, the market took the decision and imposed the consolidation of Cyprus’ banking system,” said Kousis.

He argued it might be to the system’s benefit that the shrinkage was pushed further down the line, as there are issues that a consolidated system could have been faced with.

“High interest rates on deposits of the past could have brought about negative results as banks would have to give out a large number of loans to be in a position to cover deposits.”

Kousis expects banks to try to achieve economies of scale by encouraging their clients to avoid coming to their branches and conduct their business through online applications while downsizing their network and personnel.

As a result, bank customers have seen service points drastically reduced by more than half. Before the economy crashed, in 2012, a year before the closure of Laiki Bank, bank branches numbered a huge 850.

After the 2013 bailout and demise of second-largest bank Laiki, and its absorption by Bank of Cyprus, the number of branches in Cyprus was reduced to 682.

The next wave of shrinkages came in 2016 with the number of branches falling by 140 to 544 and in 2017 that number shrank to 460.

Last year, the demise of the Co-op and its good assists portfolio acquired by Hellenic Bank, the number of customer branches islandwide fell to 386.

Sofronis Clerides, chair of the Department of Economics at the University of Cyprus said the consolidation process was on the cards for some time and will be beneficiary for the banking system.

However, he appeared worried over the shape the new consolidated system has taken with two large banks dominating the sector.

“Unfortunately, the market is dominated by two large banks, leaving no room for the rest of the banks to present themselves as an alternative for consumers and businesses. It would be healthier if Cyprus had 3-4 large banks.”

Clerides noted that just as the consolidation was imposed by the market, which banks are to survive or to be absorbed by other banks will also be decided by the market.

A different view

While her fellow economists find that the consolidation of Cyprus’ banking system is a step in the right direction in rationalizing the country’s banks, independent MP Anna Theologou said the country’s banking system has got it wrong.

“Instead of striving to build an antagonistic banking system by creating many smaller banks, we are moving towards a system with less than a handful of banks. I cannot accept the argument ‘too big to fail’,” said Theologou.

She said that having many smaller banks is what the European Banking Union is requesting.

Acknowledging that banks’ exposure to non-performing debt is what led to the consolidation of banks, Theologou said that they could survive by packaging and selling off their NPLs, instead of waiting for a bigger bank to come in and take over.

“Banks aim to build economies of scale, looking to make money through digitalizing their business. That could also be a way for smaller banks to increase their profits and survive,” said Theologou.

The MP said that the practice followed by Cyprus banks is to sell off loans and keep the money in their coffers, rather than investing it back into the economy.

“A bank’s profitability is based on its ability to give out loans, however, they cannot give out loans due to high private debt, which is partially created by high interest rates given by banks, ignoring the instructions of the ECB to keep interest rates on lending low.

Instead, Cyprus banks went ahead and did what they thought best, giving out loans with high interest rates,” argued Theologou.

She argued not being able to give out loans would only spell more problems for the future as money will not be circulating in the economy.

“I foresee that there will come a time when banks will be forced to give out loans on a mass scale, begging people to take out loans as they did in the past.”