Cyprus’ banking operations remain normal, with customers continuing to seek loans amid the ongoing Middle East conflict.
This is the general picture in the banking sector, twelve days after the US and Israel’s attack on Iran and the resulting major market turmoil globally.
In discussions with banking sources, Phileleftheros concludes that, at least for now, bank managements are reassuring. They remain confident about the quality of their assets and the resilience of the Cypriot economy, seeing no signs of customer behaviour that could cause problems.
Sources from systemic banks confirmed that demand for loans remains unaffected, whether for cars, consumption, or mortgages. Daily operations continue as usual. Specifically, for mortgages, which are long-term agreements with banks and inherently consider both the present and future, customers are proceeding with their plans without delay.
This is the current picture, but there remains uncertainty about how long the geopolitical crisis will last. As of now, there is no concern, but bank sources noted that the situation may change if the crisis extends beyond three months. This would lead to questions about the economic impact, such as the potential for rising unemployment, tourism movements, and how businesses and households will cope with an environment of uncertainty and rising costs.
There are, however, factors that provide confidence to the banks for the future. After the restructuring of their balance sheets and the sale of non-performing loans, they are confident in their loan portfolios, which mainly consist of exposures that have survived even worse crises in the past, such as COVID-19, the Russia-Ukraine war, and interest rate hikes.
Furthermore, recent loans have been granted under very strict conditions. As a result, bankers feel secure about how their customers will behave in times of prolonged uncertainty. Given these conditions, the risk of non-performing loans disrupting the current state of bank balance sheets is considered limited.
However, a question remains regarding credit expansion. Before the war began, there were expectations for a steady decline in interest rates. Now, the opposite is happening: interest rates may rise if inflationary pressures return to the Eurozone, leading potential borrowers to reconsider and resulting in slower credit expansion.
Investment Plans
Bank of Cyprus presented its investment plan two days after the Middle East conflict began, and there is some positive news. The investment strategies have been made with very conservative forecasts by the bank’s board, as has been the practice in recent years. Growth will come from new loans, with an estimated 5% expansion this year and 4% annually over the next two years.
The loan portfolio in Cyprus is expected to grow by 3% annually until 2028, with the international portfolio, which constitutes 12% of the loans, expected to increase from €1.4 billion to €2 billion by 2028. The scenario assumes that ECB interest rates will remain at 2% this year, with an average increase to 2.4% by 2028, and estimates a 3% average increase in interest income during this period.
Moreover, Panikos Nikolaou, CEO of Bank of Cyprus, when asked in Athens last week about the intensity of the war in the Middle East, responded that the Cypriot economy has demonstrated exceptional flexibility and resilience in the face of various global uncertainties. He highlighted the country’s low inflation, its public debt to GDP ratio of just over 50%, and the fiscal surplus, which is very important.
As for Eurobank Ltd, the investment plan pertains to the group as a whole, and no specific details for Cyprus have been released. The group’s CEO, Fokion Karavias, stated last week that the bank has a “track record of consistent execution of its plan and exceeding targets,” and that the prospects for the next three years remain strong. The strategy includes leveraging recent acquisitions and continuously strengthening its presence in markets such as Cyprus and Bulgaria. In Cyprus, the focus will be on corporate lending.