20 Nov Banking sector got a complete facelift after 2013
From bankruptcy to role model: Cypriot banks have managed to turn their fate around over the last decade and are now flourishing
In early 2013, Cyprus’ financial system imploded. Its banks were forced to close their doors for two weeks to prevent a run on deposits and had to call on emergency liquidity assistance from the European Central Bank, while the country was compelled to enter an international bailout program that lasted until 2016.
In the crisis’ aftermath, “Cyprus took significant steps to strengthen its supervisory framework, to enhance its anti-money laundering and financing of terrorism regulations, and it invested in training and capacity building of regulators. The government is committed to continue to take all necessary actions to protect Cyprus’ reputation as a credible business and investment center,” President Nikos Christodoulides entrusts. “Our financial services sector is now growing, driven by the introduction of new regulations, products and services.”
Ten years on from the crash, the country’s credit ratings have recovered to investment-grade level, while its banks have totally transformed. The preeminent example of this revamp is the nation’s largest financial institution and its biggest company overall by market capitalization, Bank of Cyprus. “We have completely turned the bank around from the 2013 crisis, to the point where we were the first bank in Cyprus or Greece — which went through a similar situation — to start paying dividends to our shareholders again in 2023” declares Panicos Nicolaou, CEO of the 124-year-old institution that around 80% of Cypriots hold an account with. The bank posted an after-tax profit of about $75 million last year, 139% up on 2021, and results are on track to be even better this year, with the market expecting a return on tangible equity of over 17% for 2023.
Nicolaou credits the nation’s strong macroeconomic environment as a significant contributor to this performance. “We operate in an economy that’s growing faster than the eurozone. It’s small, flexible and resilient, which explains why it has managed to deal with shocks quickly — we are one of the few countries whose gross domestic product rebounded from COVID within a year, for example,” he states. “Additionally, inflation in Cyprus peaked in July 2022 and, although inflation comes with higher interest rates and less disposable income, banking deposits in Cyprus remain relatively stable.”
Other factors include the bank’s strong liquidity, capital base and deposit franchise, as well as its current non-performing exposures ratio, which it has reduced to under 4% from a high of 63% in 2014. On top of that, it is a clear frontrunner in a consolidated market, the CEO adds: “Bank of Cyprus is not just a bank, it’s a leader in financial services with a universal offering creating strong and lasting client relationships. We offer retail, commercial and investment banking and brokerage, but also general and life insurance, plus payment solutions. It’s a sustainable, diversified business model that creates resilience and profitability.”
As well as strengthening its balance sheet and business model, the bank has spent the last decade investing heavily to position itself at the forefront of digitalization — proof of which comes from Global Finance magazine presenting it with five accolades in its World’s Best Digital Banks Awards 2023. “Digitalization is key to our strategy. It is our primary delivery channel, more than 80% of our clients use digital channels and about 95% of our transactions are digital. We continue our efforts to be innovative, working with new technologies, artificial intelligence and customization in order to match customer expectations,” he explains.
“This year, for instance, we launched QuickHub, a digital branch that allows you to do almost everything through your mobile phone. We also introduced Jinius, Cyprus’ first digital platform that brings economic stakeholders together, connecting businesses with each other and with consumers.” Another growing focus is environmental sustainability. The bank has initiated numerous green financing schemes for its customers and is striving to become carbon neutral by 2030, achieving an 8% reduction in its scope 1 and 2 emissions in 2022 alone, says Nicolaou; “Bank of Cyprus is closely linked to the history and heritage of the country; we are an integral part of society both in banking and beyond banking. As such, we want to lead Cyprus’ transition toward a sustainable future.”
Excellence in banking standards
As Marios Skandalis, chief compliance officer at Bank of Cyprus and president of the Cyprus Integrity Forum, an organization that aims to promote transparency via raising awareness in the societal, state and business worlds, is at pains to stress, “The spectacular turnaround of Bank of Cyprus is not unique, it reflects our whole banking industry.”
Prior to the crisis, all of the country’s banks were subject to poor practices, ethics and governance, and were exposed to some external jurisdictions that damaged their reputation, he admits: “In 2013, the sector had the choice to either press the Game Over button, or reset the economy and, above all, change its culture. We chose the latter option and focused on setting international best practices and standards as our benchmark rather than mere adherence to law. Where there were no best practices, Cyprus developed its own. It was a complete cultural transformation.”
The nation’s establishment of a model banking system was recognized by Moneyval (the relevant leg of the Financial Action Task Force (FATF)) in 2019, when the international body adjudged that Cyprus is fully or largely compliant with 37 out of its 40 technical points of compliance. In the other three, it was partially compliant. “The banking sector was rated excellent in all areas and, as a result, Cyprus remains on FATF’s white list, in contrast to some neighboring jurisdictions,” says Skandalis.
To illustrate the exemplary standards of Cypriot banking, he highlights the determined de-risking of balance sheets and operations away from Russia: “In 2014, the sector’s deposits exposure to Russia and Russian clients was more than 10%. Today, it is around 1%.” Like the Bank of Cyprus, the rest of the sector has also cleaned up its balance sheets by substantially reducing non-performing loans, bringing them to a sustainable single digit number. That means, as Andreas Costouris, senior media and communications advisor with the Association of Cyprus Banks trade body notes, “Banks are now able to provide new loans, focusing in some instances on specific sectors like technology, real estate, education and health services. In 2022, over $2.4 billion in new loans was provided to the market.”
Skandalis assures international investors that they “can count on the Cypriot banking sector as a valid, solid, reliable and sustainable partner for doing business in Cyprus, or via Cyprus with the rest of Europe, Asia or Africa.” And the investment community has begun to appreciate the transformation, says Constantinos Pittalis, head of investor relations at the country’s second-largest financial institution, Hellenic Bank: “The Cypriot banking system has been consolidated, recapitalized and strengthened. Ten years after the events of 2013, trust has been greatly restored.”