Cyprus Banks: Vulnerabilities remain despite progress, says SSM

Cypriot banks have made progress, according to a report by the Single Supervisory Mechanism (SSM), but there are still many issues. Cyprus' banks have made a lot of progress, but more must be done for them to be on par with other banks in the European Union and at their current level of development. In contrast to the banks that were involved in the 2013 banking crisis, they have made advancements over the past ten years, but it turns out that they still face issues.  According to data provided by the SSM, Cypriot banks have a very low return on equity (ROE), a high cost to income (cost to income), and a non-performing loan ratio that, in spite of significant progress made through sales, write-offs, and organic reduction, continues to be the highest among all European nations. Cyprus has one of the lowest return on equity (ROE) rates among all countries, with a rate of only 0.32%, according to SSM data for the third quarter of 2022. Only Malta, with a negative ROE of 1.36%, is lower than Cyprus. Additionally, banks from 16 other nations demonstrate superior competency in the index that measures how effectively Cypriot banks are using their capital to generate profits. Irish banks have the lowest rate (3.22%) while Slovenian banks have the highest rate (18.8%).  The cost ratio of the Cypriot banks is the worst of any bank in Europe. The cost-to-income ratio for banks in Cyprus was 84.7% in the third quarter of 2022, according to the information provided to the SSM supervisors. With 79.9%, Luxembourg banks are the second-worst performing banks, and Irish banks are the third-worst with 69.4%.

From a high of EUR 28 billion in 2014 to EUR 2.85 billion by 2022, Cyprus has decreased its NPLs. Yes, it has made a very good effort, but Cyprus continues to have the highest percentage of non-performing loans compared to its total lending. The worst performance is shown by the percentage of NPLs in Cypriot banks, which is 7.5%; Greek banks come in second place with 6.82%. Portuguese banks come in second with 3.51%, Spanish banks third with 3.31%, and Italian banks fourth with 3.15%. Latvian banks have the highest proportion of NPLs (1.18%), followed by Lithuanian banks (0.91%) and Estonian banks (0.85%).  

Along with the information above, Cyprus also has the highest cost of risk (COR). The cost of risk (COR) is at a high of 1.13% as a result of the poor performance experienced by Cypriot banks, with Spanish banks having the next worst performance at 1.03%. Greek banks, with a cost of risk ranking of 0.89%, are in third place. The best-positioned banks are those from Ireland, Estonia, Estonia, Lithuania, and Luxembourg.

'Good performance' and the boomerang

Additionally, the second worst loan-to-deposit ratio is held by Cypriot banks. But why is this phrase listed under "positives" and not under the heading "negative performance"? Considering that, despite a loan-to-deposit ratio of 52.86% for Cypriot banks, the timing of the interest rate hike favors them.  More specifically, it is due to this ratio that Cypriot banks are demonstrating a high level of liquidity, as evidenced by the liquidity deposited with central banks. Prior to a few years ago, banks in Cyprus had to pay to store money for a period of 1.5 to 2 years; however, this cost has since come full circle, and banks in Cyprus will now benefit from the ECB's decision to raise interest rates. As can be seen, even though the deposit-to-loan ratio of 52.86% is "bad," the current environment favors Cypriot banks.  Malta performs the worst in terms of loan-to-deposit ratio, with a ratio of 52.51%, while Germany performs the best, with a ratio of 121%. The next two best banks are French banks with 108.4% and Dutch banks with 114.98%.

Along with their poor performance, Cypriot banks have, as previously mentioned, made significant strides in structural areas like the capital ratio or overall capital adequacy ratio (CAD). According to the SSM's data, Cypriot banks should have a capital ratio of 20.94%, which would rank fifth among all banks in nations under the Mechanism's supervision. The highest overall capital adequacy ratio is held by Estonian banks (24.07%), followed by Latvian banks (23.98%), banks from Malta (21.92%), and Irish banks (21.15%). With a CAD ratio of 16.24%, Spanish banks have the lowest rate.

Another one of the Cypriot banks' "strong cards" is the Liquidity Coverage Ratio (LCR). Cyprus has the second-highest LCR ratio among the other countries, at 354.68%, according to data from the SSM supervisors. Banks from Malta have a 390.6% liquidity ratio, followed by banks from Latvia (304.93%), Portugal (276.88%), Lithuania (270.75%), and Slovenia (244.32%). Luxembourg banks are at the "low," followed by Dutch banks at 160.28%, Austrian banks at 163.50%, and Finnish banks at 163.68%.

Among 111 banks

In order to determine results for the third quarter of 2022, the SSM has gathered data from 111 banks. The banks' average return on equity (ROE) is 7.55%, based on the averages of the European banks it oversees. The cost of risk (COR) is 0.48%, and the average cost-to-income ratio (CIRR) is 61.43%. European banks' average CET 1 ratio is 14.74%, while banks' average CET 1 ratio is 2.29%. Among 111 banks, the average loan-to-deposit ratio is 104.8%, and the liquidity ratio is 162.03%.

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