- The report highlights the importance and contribution of Cypriot banks to the wider economy and society and identifies current and upcoming challenges and opportunities.
- It communicates to banks and all stakeholders about change and progress based on four central pillars: purpose, sustainability, security & stability and progressiveness.
EY Cyprus presented its report on the Future of the Banking sector in Cyprus, (the Future< /em> of Banking in Cyprus)which was drawn up with the support of the Cyprus Banks Association (CBA). The report was developed in consultation/collaboration with local banking experts and senior managers of the sector, as well as based on primary research by STK on specific financial data of Cypriot banks.
The report highlights the important role played by the banking sector in the economy as a catalyst for growth.
Banks today not only act as lenders and custodians of citizens' wealth, but also support them in a large number of financial transactions, such as paying for their coffee, collecting their salary, paying suppliers and accepting payments, etc. a. Banks support economic development and the well-being of society by providing solutions to a wide range of needs.
The Cypriot banking sector is at a turning point. Technological developments, changing customer demands, increasing competition from the rise of Fintechs, high cost-to-income ratio, increasing importance of financing the green transition and high inflation are some of the challenges that are already changing the landscape and shaping the future of the banking sector. However, challenges are often accompanied by opportunities, so effective response and quick adaptation can create significant value for banks.
The report highlights the importance and contribution of Cypriot banks to the wider economy and society, identifies current and upcoming challenges and opportunities and concludes on the need to transform the banking sector so that it can readjust its purpose of existence, be sustainable in the long term, offer security and stability to customers and to develop technologically and digitally.
The role and importance of the banking sector
Banking sector activities contributed €1.29 billion to Gross Value Added (GVA) in 2020 (6.6% of the total), compared to 2.8% in the Eurozone. Despite the significant losses suffered after the financial crisis of 2013 as a result of loan provisions, the largest banks in the sector contributed €216 million in 2021 to national tax revenues, corresponding to 4.27% of the total tax contribution in Cyprus.< /p>
Cypriot banks are among the country's largest employers, employing approximately 7,400 people or 974 bank employees per 100,000 customers, the third highest rate in the Eurozone. Bank employees are better paid compared to the average salary in Cyprus. As of 2015, average earnings in the banking sector were about 1.8 times higher than the average salary across all industries.
Cypriot banking sector loans decreased significantly from €63 billion in 2015 to €28 billion in September 2022, mainly due to the reduction of non-performing loans (NPLs), resulting in the credit-to-Gross Domestic Product (GDP) ratio to approach the Eurozone average (80% in December 2021). However, despite the transfer of large numbers of NPLs to asset management companies, these toxic loans are still part of the economy. During the same period, deposits followed a steady upward trend, approaching twice the loan balance, leading to excess liquidity. In September 2022, the country's financial institutions held deposits of €51.77 billion, equivalent to 186% of the country's GDP.
The banking sector has emerged from the pandemic largely unscathed, supporting borrowers and the economy combined with important government initiatives. However, the Russian invasion of Ukraine has upset economic and political relations worldwide, causing disruptions in production and supply chains of international trade with cascading effects on European economies. European sanctions against Russia have a negative impact on Cyprus' energy balance, as the country is highly dependent on imported energy, thus underscoring the need for a rapid green transition. Historically high levels of inflation have disrupted markets and are expected to shake borrowers' ability to repay.
Cyprus has been hit by European sanctions on Russia through a reduction in inbound tourism and Russian investment. However, Cypriot banks have low credit and debt exposure to sanctioned Russians. Any outflow of liquidity in this period of economic turmoil is expected to be absorbed, as Cypriot banks have the highest liquidity coverage ratio in Europe at 314%.
Four pillars for the future
Although transformation initiatives in the banking sector had already begun, the pandemic, combined with the Russia-Ukraine war, led to a new set of market developments and thus accelerated the pace of transformation. In this environment, the report argues that, in order to meet current and upcoming challenges and opportunities, Cypriot banks must embrace change and progress based on a framework of four central pillars. More specifically, the banking sector must act with the aim of the following:
Realignment of itspurpose, putting the customer at the center, while balancing the expectations of all stakeholders and aiming to create long-term value for society while respecting the environment and society's needs, promoting equality and strengthening trust.
The banking sector that is guided by a clear purpose of existence is one that places the purpose of the organization, an essential and timeless reason for existence, at the core of everything it does, but also of the way it operates. This includes placing the green transition and ESG at the core of its strategy, improving and restoring trust with the public, acting with integrity and humanely towards customers, and building a corporate culture that encourages the development of capabilities .
Sustainability, ensuring sustainable profitability while remaining future-oriented through technology investments while, at the same time, delivering value to customers and shareholders to remain competitive.
Banks need to ensure sustainable profitability and the necessary return on equity (ROE), seek to diversify their income by seeking more fee-based services to reduce their reliance on net interest income (NII) and reshape their cost base them through network reorganization, staff rationalization and digitization.
Security and stability, acting in the best interest of the customer, transparently and ensuring its financial soundness by meeting the requirements regulatory compliance and consumer protection standards and reassuring shareholders of the return on their investment.
Cypriot banks' capital adequacy ratios are higher than the European average, however, banks should further reduce their non-performing loan (NPL) ratios to approach the European average, even in an adverse macroeconomic environment. At the same time, they need to step up their efforts to ensure that they are future-proof with EU ESG regulations, while strengthening cyber security.
Digitally Progressive Banking
strong>, forward-looking, adopting innovative technologies, embracing future trends and remaining competitive against new entrants disrupting the market, but also resilient to future challenges.
This requires a systematic commitment to the pursuit of digital transformation for reduce costs and improve customer experience, prepare for the threat posed by Fintech and search for the necessary talent, while investing in upskilling and strengthening existing staff.
For each of these four pillars, the report highlights the relevant challenges and opportunities facing banks and outlines the steps necessary to address them:
Guided by their realigned purpose >, cultivating public trust through a more customer-centric operating model, with greater flexibility and responsiveness to customer needs, and by fostering a healthy culture with which employees and employers will align, to deliver the highest possible value to society and the wider economy.
Sustainable, pursuing revenue diversification and targeted cost optimization, upgrading their digital capabilities and advancing their technology, or even partnering with fintechs to to remain relevant in a technology-savvy world.
Safe and sound, acting proactively to identify and prevent the emergence of new NDEs, acting proactively to create the necessary ESG structures and staff across their organizations, developing the necessary skills and investing in appropriate infrastructures that will ensure the privacy and security of customer data.
Digitally progressive, offering more support services or integrating the existing capabilities of Fintechs through partnerships, generating synergies, training, reskilling and reallocating human resources, combined with recruiting new talent to meet the demands of the banking of the future.
Commenting on the report, Savvas Pentaris, Partner and Head of Financial Services at EY Cyprus, said: “The Cypriot banking sector is facing unprecedented challenges in the midst of drastic transformations. To continue to play its key role in supporting the national economy and lead successfully into the new era, it will need to identify current and future trends, challenges and opportunities and balance the often conflicting needs and expectations of stakeholders . Our report presents a framework for conducting a future-focused collective discussion aimed at conveying to bank executives and stakeholders the need to adapt to the ever-changing future, characterized by transformation and progress through the four key pillars : adherence to a realigned purpose of existence, sustainability, security & stability and digital progressiveness”.
On behalf of the Cyprus Banks Association, Mihalis Kammas, General Manager of the Cyprus Banks Association said: “We are particularly happy about the research presented today, because it is a very special study in relation to the banking sector of our country. It is the result of many months of intensive and thorough work and clearly records the importance of the banking sector, the challenges of banks and the economy, the changes and trends that are created but also the dynamics as they are shaped mainly through the twofold Green and Digital Transition .”
To see the full report, visit this link.