Tackling the challenges ahead

Panikos Nicolaou, Chairman of the Board of Directors

At a time when the global economy faces unprecedented challenges, Cyprus’ banking sector is undergoing a rapid transformation. The outbreak of COVID-19 and a very challenging 2021, as well as the war in Ukraine and the attendant sanctions on Russia, have all combined to maximize global uncertainty in every way possible, resulting in: geopolitical instability, inflationary pressures, and supply chain problems.

It is amid these conditions that the Cypriot banking system strives to adjust and transform its operational model. European banks will face several challenges in the coming years, and we will need to be prepared.

We expect that Basel III will be implemented gradually over the coming years, which will require banks to adopt a more model-based risk approach. At the same time, several overarching priorities must be addressed, including environmental risks and the incorporation of environmental, social, and governance (ESG) criteria, the necessity for more sustainable products and “greener” solutions, digital innovation, and competition from tech companies.

In the near future, the value of a bank will not be measured only by performance indicators, but also by its contribution to the preservation and protection of the environment. The financial sector can play a leading role in the coming years, helping businesses implement sustainable growth practices.

While Cyprus has made progress in recent years, legacy problems -such as Non-performing loans (NPLs)- must be handled efficiently. At the end of 2021, Non-Performing Exposures in the banking system were down from €5.1 billion to €3 billion (11.1% of the total). However, work remains to be done for this to approach the European Union’s (EU) average of 2%.

Excess liquidity costs posed another challenge to Cyprus’ banks in recent years. Indicatively, deposits surpassed €51 billion in 2021, the highest level after the financial crisis of 2013. We expect that the recently revised monetary policy of the European Central Bank (ECB) will gradually convert this into an advantage.

Operating expenses are another major challenge. According to the European Banking Authority, the cost-to-income ratio for Cypriot banks stood at approximately 75% at the end of 2021, the second highest in the bloc. The EU average stood at 62%. There is a need to rationalize expenses, in a constructive manner, as they pose the greatest threat to the drive toward sustainable profitability and financial resilience.

In this context, and with the global economy undergoing digitization, the banking system must meet customers’ modern-day needs. The use of digital applications greatly simplifies banking processes and at the same time upgrades the quality of services. In the coming years, financial institutions are expected to invest heavily in the development of innovative technologies aimed at achieving their long-term goals and strengthening their competitiveness faced with new players on the scene.
Inevitably, the local economy will face new challenges in the coming months, primarily due to inflationary pressures. The Central Bank of Cyprus expects annual inflation to reach 7% in 2022 before declining. It is a situation in which banks must ensure their financial resilience while supporting their customers. While it won’t be easy, we are accustomed to challenging conditions, and we firmly believe that we will remain the driver of support to the local economy once again.