The Future of Banking in Cyprus

This report seeks to provide an overview of the sector as we know it today and to present a framework for collaborative and forward-looking discussion.

In brief

• A report that showcases the importance and contribution of Cypriot banks to the wider economy and society, and identifies current and upcoming challenges and opportunities
• A report that conveys messages to banks and stakeholders to embrace change and progression framed against four key pillars: a purpose-led, viable, safe & stable and progressive banking sector

We have come a long way since the time banks acted purely as credit lenders and safekeepers of peoples’ wealth. Nowadays, banks support us in most financial transactions we do, from paying for our coffee, to receiving our salary, settling suppliers, being paid by clients, managing our wealth. Banks support economic growth and prosperity in society through solutions to our needs.

The Cypriot banking sector is at an inflection point; technological advances, changing customer preferences, increasing competition from the rise of FinTechs, high cost-to-income ratio, growing importance of funding the green transition and record high inflation are some of the challenges that are already changing the landscape and shaping their future. Challenges usually hide opportunities, hence effective response and quick adaptation may unlock significant value for banks.

Transformation initiatives were already underway in the sector prior to global events, such as Covid-19 and the war in Ukraine. The pandemic, hand in hand with the Russia-Ukraine war, have resulted in an accelerated transformation pace and a new set of market developments altogether. Such developments endanger the sector’s viability and stability threatening to offset the positive outlook created     post the recent deleveraging efforts. Digitalisation, sustainable profitability and green financing, are currently at the top of the agenda for Cypriot banks.

This report by EY, supported by the Association of Cyprus Banks (ACB), showcases the importance and contribution of Cypriot banks to the wider economy and society, identifies current and upcoming challenges and opportunities, and ultimately conveys messages to banks and stakeholders to embrace change and progression framed against a set of four key pillars:

• A Purpose-led Banking Sector
• A Viable Banking Sector
• A Safe & Stable Banking Sector
• A Progressive Banking Sector

The Cypriot banking sector is a fundamental pillar of the country’s economy with one of the highest Gross Value Added (GVA) contributions in the Eurozone (EZ); 6.6% compared to the EZ average of 2.8%. Banks (ACB members) employ more than 7,400 people and usually contribute approximately 4% of the state’s annual tax revenues.

After almost a decade of deleveraging efforts, the credit to gross domestic product (GDP) ratio is approaching the Eurozone average (80% as of December 2021).

However, despite offloading large amounts of NPLs to asset managers, these toxic exposures still remain as part of the economy.

The banking sector emerged from the coronavirus pandemic relatively intact, supporting borrowers and the economy alongside impactful Government initiatives. The Russian invasion in Ukraine though, has shaken up economies and political relationships globally, causing disruptions in the production and supply chain of international trade with ripple effects on European economies.

Euro-wide sanctions against Russia have a negative effect on energy bills in Cyprus, as the island is heavily dependent on imported energy, highlighting the need for an accelerated green transition. Record breaking levels of inflation have moved markets and are anticipated to stress borrowers’ repayment ability.

The rapidly changing socioeconomic environment in Cyprus signals the need for a thorough analysis of the local banking system’s current state, to pave the way towards the future. The diverse needs and expectations of banks’ stakeholders (i.e. regulators, shareholders, employees, customers, suppliers) are often conflicting. Cypriot banks need to balance their targets, requirements and contributions amongst stakeholders’ demands, while at the same time improve core operations to run digitally and efficiently.

A framework of four pillars strives to shape the future of banking in Cyprus. These pillars aim to create a banking sector that is:

Purpose-led: Balances the expectations of different stakeholders while it targets for long-term value creation to the society by respecting the environment and societal needs, promoting equality, and instilling trust.

Viable: Ensures sustainable profitability and simultaneously delivers value to customers and shareholders to stay competitive.

Safe & Stable: Acts in the best interest of the customer, is transparent and ensures financial robustness by surpassing regulatory compliance and consumer protection standards.

Progressive: Is forward looking, adopts innovative technologies, embraces future trends and remains resilient to future challenges.