12° Nicosia,
21 May, 2024

Banks are revising lending rates

They are conducting working exercises to ensure that new allocations reflect the current circumstances and interest rate framework.

Panayiotis Rougalas

Panayiotis Rougalas

Cypriot banks are preparing new loan rates in an effort to redesign the pricing of loans. In the first half of 2023, Cypriot banks will see significant changes in the pricing of new loans, accompanied by increases in interest rates, leaving behind the extended period when lending rates were at historic lows. As a result, the banks of Cyprus are now working harder to make sure that the new rates accurately reflect the circumstances and interest rate environment we are currently living in as a result of the European Central Bank's ongoing interest rate increases in an effort to control inflation through monetary decisions.  Bank of Cyprus and Hellenic Bank have already announced that they will proceed with the increases, but have also formally stated their positions on redesigning their loan pricing.

The EUR 300 million senior preferred bonds issued in June 2021 (Senior Preferred Bond), with a fixed annual interest rate of 2.50%, will be included in the Bank of Cyprus's money market funding as of 15/03/2023. (money market funding cost). As previously communicated to customers, the Bank reserves the right to include the cost of new future money market funding (wholesale funding) in its base rate calculation methodology at any time. At the same time, the inclusion of money market funding costs affects all credit facilities linked to the Bank's base rates. The inclusion of money market funding costs in the Bank of Cyprus' base rate has no effect on credit facilities linked to EURIBOR and the ECB MRO.  Furthermore, the Bank of Cyprus has stated that it may modify the methodology in the future to link the base rates to another reference rate. If the reference rate changes, so will the relevant margin over the reference rate. It may also change the methodology for calculating base rates if it deems it necessary due to changes in the regulatory framework, market conditions, or the possible unavailability of the index used to calculate the reference rate.

The Hellenic Bank, on the other hand, has indicated that it will inevitably begin to redesign its lending pricing in the near future through the announcement of its CEO, Oliver Gatzke. It has been sending these signals since the fourth quarter of 2022, and it is expected that by the end of the first half of the year, it will also make loan pricing announcements. For example, at the bank's most recent annual meeting, which was marred by another event involving him, the CEO stated that corporate credit risk is currently not adequately reflected in the pricing of new loans in Cyprus. Interest rates, as he suggested, should reflect the macroeconomic operating environment, so an increase from all-time low rates would be inevitable.   He used the Republic of Cyprus bond and its 4% borrowing rate as an example. He had emphasized that Cyprus banks could not lend at much lower interest rates than the CB, and that the risk should be reflected accordingly. "The yield on the CB's 10-year bond is significantly higher than the average interest rate on corporate loans," he had added emphatically, implying that increases are on the way.

Little information on loan interest rates

According to the latest available data from the Central Bank of Cyprus, the interest rate on consumer loans increased in November to 3.84%, up from 3.57% in October 2022. The interest rate on home purchase loans rose to 2.95% in November, up from 2.93% in October. The interest rate on non-financial company loans up to EUR 1 million increased to 4.52% in November, up from 4.17% in October, while the interest rate on non-financial company loans above EUR 1 million increased to 4.35% in November, up from 3.43% the previous month.

Loans have also increased

The paradox is that, while loan interest rates "went up," the total amount of new loans increased at the same time. Total new loans increased to €413.1 million in November 2022, up from €240.3 million the previous month, while new consumer loans fell to €14.1 million, down from €15.1 million in October 2022. According to the same data, new home purchase loans increased to EUR 91.8 million in November 2022, up from EUR 72.7 million the previous month. New loans to non-financial companies of up to EUR 1 million increased to EUR 48.9 million in October 2022, up from EUR 42.7 million in October 2022. Finally, new loans to non-financial companies for amounts greater than EUR 1 million increased to EUR 247.5 million, compared to EUR 102.6 million in October 2022.

Reduced deposit rates

Deposit rates have not risen in response to rate hikes that have increased the installments that borrowers are required to make. Banks will be required to take action in 2023. According to the most recent CBC data, the interest rate for one-year term deposits by households fell to 0.12% in November 2022, from 0.19% the previous month. Finally, the corresponding interest rate for non-financial company deposits fell to 0.41% from 0.47% in October 2022.

[This article was first published in Kathimerini's 'Oikonomiki' paper edition and was translated from its Greek original]

Cyprus  |  banks  |  economy

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