Cyprus state officials convey ‘cries of anguish’ over high lending rates at banks association AGM

Cypriot state officials on Tuesday used their attendance at the annual general meeting of the Association of Cyprus Banks to call for a reduction in lending rates and a narrowing of the gap between deposit and lending interest rates.

This year’s assembly highlighted the robust condition of the Cypriot banking sector, which finds itself in the best state since the 2013 financial crisis, boasting high capital ratios and profitability following elevated interest rates.

In her address to the assembly, House Speaker Annita Demetriou highlighted the impact of high interest rates on financing costs, coupled with rising production costs and reduced real disposable income of households, which she described as “an additional critical factor affecting the current financial situation of households and businesses.”

“Under this light, it is crucial to explore additional solutions, particularly concerning the issue of high interest rates, to assist specific groups of creditworthy borrowers, thereby preventing the creation of a new chain of non-performing loans and providing relief to businesses and households amidst widespread price increases,” Demetriou noted in her speech, as read by Disy MP Savia Orphanidou.

She pointed out, however, that “the entire banking sector in Cyprus has shown remarkable resilience to crises and challenges in recent years, as well as an impressive ability to adapt to increasingly demanding regulatory and legislative frameworks, especially within the context of obligations arising at European and international levels”.

Moreover, Demetriou referred to emerging challenges such as the green transition and digitalisation, emphasising that “it is therefore clear that challenges and risks for Cypriot banks and the Cypriot economy as a whole continue to exist”.

She added that this “not only does not allow for complacency but, on the contrary, requires careful and economically rational moves”.

In his own address, Finance Minister Makis Keravnos, via a pre-recorded message from Luxembourg, welcomed the fact that the banking sector in Cyprus is in its strongest position in a decade with robust capital ratios.

“The rise in interest rates has strengthened the profitability and capital position of banks, although the level of interest rates creates challenges for the real economy and households,” he said.

Without ignoring the fact that the rise in interest rates creates potential risks for banks, as households and businesses are now facing higher loan servicing costs, Keravnos reminded that “in this context, as a Finance Minister respecting the independence of the Central Bank of Cyprus, I have made many recommendations to banks for the re-evaluation of their interest rate policy”.

He also acknowledged that “our interventions have had some marginal results as banks have adopted some positive measures regarding the absorption of the increased cost from the rise in interest rates as well as the formation of deposit rates”.

Addressing the banking institutions, the Finance Minister emphasised that “I expect to see drastic moves in two directions”.

“First, the reduction of the spread between deposit and lending rates and, secondly, not a repetition of interest rate increases but a substantial course of de-escalation of lending rates, especially after the marginal reduction of rates by 0.25 points by the ECB,” he explained.

“I want to convey to our banks in the strongest possible terms the cries of anguish from households, our businesses, and the common political perception regarding the level of lending rates, which is one of the most serious inhibitory factors in the development of the economy and in addressing social issues such as housing,” he added.

Keravnos also referred to non-performing loans (NPLs), noting a significant reduction in their bank balance sheets but highlighting that “the fact remains that NPLs in the real economy remain at high levels, creating problems in the smooth functioning of the economy and especially businesses”.

In addition, the minister called on banks, credit acquisition companies, and credit management companies “to continue their efforts and positive approaches to achieve a sharp reduction of NPLs in the real economy”.

He said that this “will be to the mutual benefit of all, as it will give a significant boost to economic development”.

In his speech, Central Bank of Cyprus (CBC) governor Christodoulos Patsalides reiterated what he had previously emphasised in his first press conference after assuming office, concerning the reputational risk associated with addressing the public’s dissatisfaction arising from the banks’ pricing policy.

“One final aspect concerning the risks I would like to address is the reputational risk,” he said.

“The pricing and business activities of banks must incorporate an element of social sensitivity to mitigate the public’s dissatisfaction,” he added.

Furthermore, Patsalides welcomed the decisive restructuring, resilience, and stability the sector has demonstrated in recent years, stating that “the significant capital buffers and excess liquidity provide the banking sector with the guarantees to manage potential future crises, even on a large scale”.

Noting that trade wars and the potential fragmentation of the global economy could have negative impacts on an international level, Patsalides said that “therefore, the fortification of banks and the stability of the country’s financial environment, which has been significantly enhanced in recent years, must continue”.

However, Patsalides acknowledged the “increased difficulty borrowers face in repaying loans” following the rise in interest rates from mid-2022 by the ECB, while noting that the quality of the banking sector’s assets has not deteriorated.

“Regarding Non-Performing Loans (NPLs) managed by credit acquisition companies, the volume of NPLs remaining in the real economy remains substantial,” he said, emphasising that European forecasts anticipate a decline in asset quality in 2024.

In this context, the CBC governor called on all stakeholders to utilise the amendments made to the foreclosure framework and the increased powers of the Financial Commissioner.

From the banks’ side, he noted that “it is of utmost importance to promptly identify customers facing financial difficulties to find a sustainable loan repayment plan”.

“This limits the cost for both banks and borrowers while avoiding the implementation of more drastic measures,” he added.

Patsalides also alluded to additional risks beyond traditional concerns, such as climate change and technology-related risks like cybersecurity.

Meanwhile, the outgoing president of the association, Bank of Cyprus CEO Panicos Nicolaou, referred to the ECB’s decisions to reduce its key interest rates, stating that the pace of reduction of lending rates in Cyprus will be faster since most loans are at variable rates, which are more sensitive to monetary policy decisions.

“The rate of interest rate reduction in our country will be faster than in the rest of Europe, as was the case with their increase,” he said.

Moreover, Nicolaou emphasised that in an environment of intensifying geopolitical instability and uncertainty, Cypriot banks are actively supporting the development, progress, and smooth transition of the country into the new green and digital era.

He referred to supporting up-to-date borrowers affected by the inflation crisis and ECB interest rate increases, noting that restructurings and renegotiations of terms for a significant number of household and business loans amounted to €4.5 billion between 2022 and 2023, and are ongoing.

He also mentioned that Cypriot banks granted new loans of nearly €3.3 billion in 2023, while in the first four months of 2024, net new lending reached nearly €1.1 billion.

Regarding non-performing loans, Nicolaou said that the NPL ratio fell to 7.3 per cent of total loans in the first quarter of 2024, expressing hope that the new foreclosure framework “will finally be allowed to work without new suspensions”.

“The banking sector inspires confidence and stability during a period characterised by instability,” Nicolaou said.

“the Association of Cyprus Banks is a prudent, calm, and constructive partner of the state in an era where voices and sometimes populism gain ground in the political arena and ultimately lead to undesirable outcomes,” he added.

He pointed out that the association had to manage “scenarios detrimental to our country’s profile, such as the potential taxation of so-called windfall profits of banks”.

“It is not possible to promote your country as an investment destination while at the same time taxing foreign investors triply (beyond the deposit levy in place since 2012) because they happen to have invested in banks supporting the country during difficult times,” he stressed.

Finally, the association’s general manager Michalis Kammas highlighted that despite the successive crises in recent years, some of which persist to this day, Cyprus’ banking sector remains a point of reference through the stability, adaptability, flexibility, and determination it demonstrates.

He referred to a “puzzle” of challenges and crises such as the pandemic, war and conflicts, intense inflationary pressures, geopolitical upheavals with immediate economic consequences, disruption of global trade, and interest rate increases by central banks to curb inflation.

“In this environment, our banks are part of the solution to any problems, not part of them,” he said.

“Banks have taken a series of steps to support and relieve society from the interest rate increases, which were the main tool of central banks to control inflation,” he concluded.