By: Stelios C. Constantinou Banking Responsible Partner of PwC Cyprus
Four years after the 2013 financial crisis, Cyprus has completed the economic adjustment programme ahead of the initial time frame without requiring the entire funds that were originally foreseen. The country has come out of the recession, has returned to the international markets and rating agencies have been upgrading the economy, the rating of which is now just one notch below investment grade. Fiscal indicators are improving, government bonds’ yields have been reduced and positive growth rates are expected to continue.
The banking sector has been steadily recovering along with the Cyprus economy with results exceeding expectations. The recapitalisation of the sector, lifting of capital controls, return to international capital markets, positive results from ECB stress tests, the increase in deposits and the elimination of all emergency liquidity funding underline the progress achieved over the last four years.
However challenges do remain. The biggest challenge faced by banks, regulators and the government is the very high level of Non-Performing Loans which currently stands around 50% of loans. Recent actions aimed at addressing the issue include the enactment of laws aimed at modernising the insolvency and foreclosure framework in order to make enforcement of collaterals much more efficient, establishing the fist NPL servicing platform in Cyprus as well as recruiting professionals specialising in NPL management to enhance existing practices and strengthen the banks’ arrears management units.
The new insolvency and foreclosure framework now gives the banks the capability to enforce collaterals and as a result we are already seeing more restructurings and transactions taking place. Nevertheless, a balanced approach needs to be implemented as a major scale of collateral repossession might create an imbalance in the property market. That being said, the legal framework in place now allows for securitisations which could lead to transactions in the near future and enable banks to increase deleveraging. These developments together with the more efficient management of NPLs and in combination with the fact that the economy is returning to growth, give a perspective that NPLs will steadily reduce over the next years.
Technology is another major disruptor affecting the industry and digital transformation is necessary in order for the banks to remain competitive. Banks must use their customer base and data and turn it to their competitive advantage through technology and new innovative digital solutions, and in this way address the needs of their new generation customers. In addition, cyber security issues force them to continue to invest in expensive infrastructure to protect themselves against cyber risks and data theft.
One key feature of the current environment is that of increasing regulation. This represents a major challenge for the baking system, especially in Cyprus, where the disproportionate impact of regulatory demands on our relatively small banks continues to consume capital and resources with projects such as IFRS9, AnaCredit, MIFID2, Basel4, MREL and others.
Finally, Banks continue to be faced with the traditional threats of the macro – economic environment such as the sustainability of the current economic recovery, the high level of debt for individuals and corporates and the low interest rate environment, all of which adversely impact their profitability. Banks need to transform their business, reduce their cost base and become more efficient in the way they operate. Also their traditional business models must evolve with increased focus on new non-funded income generating products that increase profitability without consuming capital.
Even though the Cyprus financial crisis has greatly affected the economy and especially the banking sector a lot has been achieved over the past four years. The sector should now focus on creating stronger more profitable banks through further consolidation, as this will enable banks to build capital and liquidity buffers and create those conditions of sustainable growth that will enable them to manage more effectively the demanding regulatory environment but also put them in a stronger position to face new challenges that lie ahead.
Director - Marketing & Communications, PwC Cyprus