Over the last ten years, both the Cypriot economy and the local banking sector have come a long way towards strengthening their resilience.
This success story has occurred in a period of consecutive financial and geopolitical crises, from the extreme financial crisis in 2013, to the covid-19 pandemic in 2020 and the war in Ukraine in 2022.
The Cypriot economy has shown important resilience recording a yearly (2023) 2% GDP growth, 2% inflation rate, 6.1% unemployment rate and 86% public debt. Additionally, and equally importantly, after 12 years the sovereign credit rating has returned to the investment grade level.
During the same period, Cypriot banks have amended their business model, they have successfully managed the resolution of legacy assets and they have adjusted the scope of their activities to the new reality. The banks are well capitalized (CET1 20%), well above the minimum requirements set in the EU Capital Requirements Directive, hold excess liquidity (LCR 340%), almost three times higher than the minimum Liquidity Coverage Ratio, with a loan-to deposit ratio of 48% and non-performing loans ratio of 8%. At the same time, following years of losses due to unprecedented bad loan provisions, Cypriot banks have become profitable in the last couple of years.
Nevertheless, there is still a last hurdle that banks need to overcome, which consists of the final settlement of the non-performing loans (NPLs) issue. The local systemic banks have achieved significant progress in dealing with NPLs and have managed to reduce these exposures (currently at 1.8%) to just below the EU average. This has been mainly achieved through loan restructurings, sale of loan portfolios to Credit Acquiring Companies and writeoffs. There is still some work to be done by the remaining local banks and for this reason the government has adopted specific measures, mainly through legal amendments, to enable them to effectively cleanse their loan portfolios from legacy assets.
Since the year 2020 there have been consecutive suspensions of foreclosures of primary residences with a market value of up to €350.000, either through voluntary suspensions by the banks or through legislative amendments.
In December 2023, the Parliament voted a legislative package which amends the foreclosure framework as follows:
Courts Law: Amendments which establish a special jurisdiction within the Regional Civil Courts for cases relating to disputes (including unfair terms’ disputes) of borrowers with credit institutions. This new special jurisdiction will cater to borrowers having disputes for loan facilities secured by primary residence with a market value of up to €350,000.
Financial Ombudsman Law: Extensions to the perimeter of borrowers who can apply to the Financial Ombudsman’s Office for the appointment of a
Mediator to deal with differences with credit institutions as follows: n borrowers with an initial loan facility of €350.000 secured by primary residence with a market value up to €350.000 or property used for business purposes with a market value up to €750.000, borrowers whose facilities have been previously terminated by credit institutions up to the time of enactment of the Law.
During the mediation process, no foreclosure procedure can commence and existing foreclosure procedures are automatically stayed until the mediation concludes. The outcome of the mediation, unless chosen otherwise, is not binding on the credit institutions.
Foreclosures Law: Amendments giving the right to the selected borrower (classified as “cooperative borrower” – based on the Central Bank of Cyprus relevant Code of Conduct – with a loan secured by his primary residence up to a market value of €350.000) to submit a complaint to the Financial Ombudsman’s Office within a period of 21 days upon receipt of the IA Notice (last Notice in the foreclosure procedure which states the amount owed and the property foreclosure date) disputing the debt. Within a period of 45 days from the submission of the complaint, the Financial Ombudsman shall decide and indicate the amount of debt. During this period, the credit institution is obliged to suspend any property foreclosure procedures.
Thereafter, if the credit institution does not accept the Financial Ombudsman’s decision, it must suspend the foreclosure until a first instance Court decision is issued on the amount of debt.
Looking forward, the outlook for the Cypriot economy and the local banking sector looks positive and prosperous. The main challenges for the economy are to preserve and even strengthen the GDP growth of previous years, to continue implementation of the necessary reforms, to maintain financial stability and to further improve the reputation of Cyprus as a reliable investment destination. For the banking sector, the main challenges faced by Cypriot banks are the effective management of credit risk stemming from the steep increase of Euro interest rates (2/3 of local loans are priced based on
Euribor or Euro main refinancing rate), attaining further reduction of NPLs in nthe banking system to the EU average ratio (2%), the completion of digital transformation to counter competition of FinTech companies and the transition to the green economy.
Despite the challenges faced, we are optimistic that both the Cypriot economy and the Cypriot banking sector will adapt to the new business environment and continue to grow for the benefit of both businesses and households.
