The future of the banking sector is digital, green and social

The future of the banking sector is digital, green and social, said the participants at the 3rd online FMW Conference, titled "Banking System: New Challenges and Opportunities". The Conference also highlighted the contrast between trying to tame inflation by raising interest rates and supporting vulnerable groups to avoid social unrest.

Moderator at the Conference was Iosif Iosif, on behalf of FMW, who said that profitability has returned to the banks as the management of the "wounds of the past" began to bear fruit. He noted, however, that several issues still remain open, such as the difficulty of providing credit, NPLs, digital transformation, internal restructuring and modernization.

On behalf of the Minister of Finance, Director of the Financial Stability Directorate at the Ministry of Finance Avgi Lapathiotis, said that the progress in the banking system of Cyprus is remarkable. "We are satisfied with the enhanced ability of Cypriot banks to offer financing". The new loans, as the Minister added, are given after a very proper assessment of the borrower.

"I applaud the rapid transition to the new digital era and the training programs offered by banks to citizens," she added.

The Minister pointed out that the government will continue the effort, in order to form an even more remarkable framework for the banking system, through a more efficient and fairer legislative framework, which will allow out-of-court physical and electronic auctions, alongside the existence of an effective insolvency framework.

The Financial Commissioner, Pavlos Ioannou, noted that the prudent economic policy and the rational management of the public debt "allow us to be optimistic about dealing with the current crisis".

Regarding digitalization, he said that it should lead to a reduction in bank staff, with the organization of structures that will serve "homo digitalis". He added that technology is likely to be accelerated more by geopolitical crises as, due to the need to monitor sanctions, digital banking is likely to become mandatory.

Regarding the increase in interest rates, he said that it is a profitability opportunity for the banks, and an opportunity to improve the cost-to-income ratio. This ratio stood at 76% in June 2022, higher than the EU average of 63%. He added that with the increase in interest rates, it is likely that many loans will become non-performing, while recently restructured loans will not be serviced anymore due to inflation, since the real income of households decreases. In some cases, the increase in the installments could reach 14-17%, he noted. However, the situation is not expected to create immediate strategic problems, as he said because the increase in profitability creates opportunities to absorb the loss of revenue from NPLs.

Moreover, he added, although, it is not the banks' responsibility to exercise social policy, the risk of social unrest is systemic and therefore it is the banks' responsibility to address it.

For his part, Senior Director of the Banking Association Michalis Kronides said that the banking sector must become viable and profitable, in order to be able to support customers and the Cypriot economy. "Stable profitability allows banks to organically build the required capital that will enable them to support households and businesses, maintain jobs and finance economic activity," he noted.

In addition, he said that banks should expand their sources of income and reduce reliance on interest income.

He also said that the biggest challenge for banks today is to align with the requirement to maintain a Minimum Requirement for own funds and Eligible Liabilities (MREL) until 2024.

Regarding the future of the banking sector, Kronides described it as digital, green and social. He spoke of an uncertain future, due to the international scene, however, he said that the banks are adequately capitalized and there is optimism that they will continue to be a factor of stability and a driver of growth.