Cyprus’ banking sector: Facts & Figures
Cyprus exited the three-year economic adjustment programme provided by the International Monetary Fund (IMF), European Commission and the European Central Bank (ECB). As a result, 2016-17 has been the first major endurance test for Cyprus as well as its banks, following the programme exit.
Economic conditions continued to improve in 2016. Real GDP growth reached 2.8% in 2016, up from 1.7% in 2015, as the economy expanded for the second consecutive year after three years of economic recession, and robust growth is forecasted to continue in 2017.
Economic gains are slowly being transposed into improvements in the labour market. Unemployment, which had reached a peak of 16.1% in 2014, declined to 13.3% in 2016 and the downward trend is continuing in the first months of 2017.
During this period, the banks have contributed towards Cyprus’s successful performance after the conclusion of the economic adjustment programme, having managed, gradually, to restore credibility, to restructure operations and procedures, radically, and to overcome challenges in order to finance new viable projects and investment opportunities. At the same time, banks have had to comply with an ever-increasing number of supervisory and regulatory requirements.
The banking sector in Cyprus comprises domestic banks, international banks with Cyprus-based subsidiaries or branches and co-operative credit institutions (CCIs). Beyond the traditional deposit and lending services, banks in Cyprus operate under the universal banking model as they offer a diverse range of products and services. Deposits from customers have traditionally been the main source of funding for banks.
There are 54 authorised credit institutions in Cyprus, consisting of seven local authorised credit institutions, the Cooperative Central Bank and 18 affiliated Cooperative Credit Institutions (CCIs) that are currently in the process of merging with the Cooperative Central Bank, three subsidiaries of foreign banks from EU Member States, two subsidiaries of foreign banks from non-EU Member States, seven branches of banks from EU Member States, 14 branches of banks from non-EU Member States and two representative offices.
Within the framework of the European Banking Union, since November 2014, the CCIs and the Cooperative Central Bank, together with Bank of Cyprus, Hellenic Bank and RCB Bank, were among the European credit institutions that came under the direct supervision of the ECB, as part of the Single Supervisory Mechanism (SSM) provisions, whereas the subsidiaries of Greek banks are supervised by the SSM as their parent banks are systemic in their home country.
All banks are adhering to the SEPA direct debits’ scheme, administered by JCC Payment Systems (a national card acquirer).
Following a government bailout, the cooperative sector is majority-owned by the government. Nonetheless, a plan is under way for its eventual privatisation.
The recovery of the Cypriot financial sector continued throughout 2016. The banking sector has been restructured and recapitalised while, at the same time, the banking regulatory and supervisory regime has been significantly strengthened. The banking sector rests on a much stronger basis as far as capitalisation, liquidity and governance are concerned, and the Common Equity Tier 1 capital ratio of all banks increased to 16.1% in December 2016, up from 15.6% a year before. These developments are reflected by the most recent upgrades of banking institutions in Cyprus and of the Cypriot economy by international credit rating agencies, as well as by the gradual reduction of interest rates which is helping the economic recovery.
Aggregate bank deposits increased by 6.6% in 2016, as confidence gradually returned. Deposits registered strong growth in the second half of 2016 with the trend continuing in the first months of 2017. This increase in deposits, together with the continued deleveraging, marks an improvement in the banking sector’s liquidity position, which culminated with the complete repayment of the Eurosystem emergency liquidity assistance in January 2017.
It should be noted that the high level of non-performing loans (NPLs) remains the greatest challenge faced by the banking sector and towards this goal, great efforts are directed to restructure and clean up banks’ balance sheets.
The Association of Cyprus Banks (ACB), in cooperation with its members and the Ministry of Energy, Commerce, Industry and Tourism (MECIT) launched a mechanism in 2016 which will enable SMEs, approved for the receipt of grants (through schemes adopted by the MECIT), to increase their chances of receiving banking finance.
The financial education programme “More than Money” was launched during 2016 in primary schools across Cyprus, based on the initiative of the ACB and its member banks. The programme is implemented by the organisation Junior Achievement (Cyprus), following the approval of the Ministry of Education and Culture. This is a three-year programme (2016-2018) and is financed by the member banks of the Association. “More than Money” aims at familiarising primary school pupils with concepts related to money management, such as income, expenses and savings.