Cyprus is already seeing a more intense decline in travel demand and higher cancellation rates than Greece as a result of the Middle East conflict, with its banks more exposed to the consequences of a prolonged tourism downturn, according to a report by Canadian rating agency DBRS Morningstar.
Tourism and shipping play a significantly larger role in the Cypriot and Greek economies than in most other EU member states, the report notes. Tourism accounts for 6.6% of Cyprus’s gross value added and 7.3% of Greece’s, compared to a European average of 2.9%. Banks in both countries carry above-EU-average exposure to these sectors, which the agency says increases credit risk if the crisis is prolonged.
The report draws a clear distinction between the two banking systems. Greek banks are more resilient because their shipping loans are internationalised and secured. Cypriot banks are more heavily exposed to tourism and therefore more vulnerable to a sustained fall in demand. “The first signs indicate that Cyprus is already facing a more intense decline in travel demand and higher cancellation rates, reflecting the increased risk perception due to its geographical proximity to conflict areas in the Middle East,” DBRS said. A sustained reduction in tourist flows, it warned, “would transmit through SME performance, household disposable income and property prices, putting more direct pressure on asset quality for Cypriot banks.”
Both banking sectors nonetheless enter this period from a position of strength. Greek and Cypriot banks maintained above-EU-average profitability in the fourth quarter of 2025. Cypriot banks’ capitalisation was significantly stronger than the EU average, while Greek banks were broadly in line with EU levels. Asset quality has improved in both countries in recent years and compares favourably with EU peers.
On Greece, DBRS said the impact from a tourism slowdown would be “more manageable in the short term” given lower exposure, and that the country “may partially benefit from demand diversion away from conflict-affected destinations, if inflation does not accelerate significantly and Greece remains uninvolved in the conflict.”
Non-performing loan ratios in transport and storage stood at near 0% in both Greece and Cyprus in 2025, well below the EU average of 2.3%. In accommodation and food services, NPL ratios were 2.1% in Greece and 0.7% in Cyprus, both significantly below the EU average of 5%.
According to European Banking Authority data cited in the report, exposure to transport and storage accounted for 19.8% of loans to non-financial companies in Greece and 11.2% in Cyprus, against an EU average of 5.5%. Exposure to accommodation and food services stood at 11.1% in Greece and 21.2% in Cyprus, compared to an EU average of 2.6%.
DBRS concludes that while both banking sectors maintain strong profitability and capital buffers that will support them in a more challenging operating environment, the elevated exposure of Cypriot banks to tourism means they face greater downside risk if the regional crisis persists.
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