21 Nov Interview with Panicos Nicolaou, CEO of Bank of Cyprus
BF: After the strong recovery of the Cypriot economy in 2022, economic activity is expected to slow to 2.3% and 2.7% in 2023 and 2024, respectively, amid persistent inflationary pressures and rising interest rates. As head of the largest banking and financial services group in Cyprus, please start byproviding us with your assessment of the Cypriot economy today. How has Cyprus managed to navigate the multiple challenges posed by the pandemic, the war in Ukraine, sanctions against Russia, inflation and rising energy prices?
Panicos Nicolaou: Cyprus has a very small, flexible and resilient economy, which explains why we have managed to deal with the fiscal shocks of the last decade – the shocks of 2013, 2020 and 2022. We are one of the few countries that rebounded from Covid within a year in terms of GDP, even though we had been earmarked as a tourist destination in the southeast of Europe and were expected to be hard hit as everything was closed.
However, despite that we are one of the few national economies that rebounded within a year in terms of GDP growth. We consistently outperformed the EU average, even in 2022 after the outbreak of war in Ukraine when we recorded an impressive GDP growth of 5.6%. This performance goes against the common misperception that Cyprus is linked to Russia and it was also better than our estimated performance pre-war.
Naturally, our growth is expected to slow in 2023 and 2024, but it will still be significantly higher than the EU average. The operating environment in our country is more resilient than the rest of Europe. As a small nation, however, we get affected more easily and rebound also more easily, so it is very important to manage our affairs in a proactive and effective manner.
BF: The pharmaceutical industry comprises one of the most important export sectors of the nationaleconomy. In your view, what are the best performing, dynamic and most promising sectors in Cyprus at present and in the future?
Panicos Nicolaou: Technology, shipping, transportation and energy are sectors that have a lot of prospects for the country. Our energy industry is particularly promising, especially with the green transition underway.
Besides, we are surrounded by countries with natural gas, meaning Cyprus could potentially become an energy hub in the Mediterranean, if not a natural gas producer itself.
The ICT and technology sector in general is a fast-growing area and as we possess the fastest 5G network in Europe, offer performant and competitive infrastructure for ICT companies. In the past two years a lot of tech companies have relocated to Limassol.
In regard to our shipping industry, Cyprus is the third largest country in Europe for ship management, with many of these companies based out of Limassol.
BF: Dating back almost 125 years, Bank of Cyprus has a rich historical presence and holds a significant position in the market with up to 80% of Cypriots having accounts with you. Bank of Cyprus is also the single largest company in the country by market capitalization, what would you say are the key distinguishing factors of the brand and what sets it apart competitively?
Panicos Nicolaou: Bank of Cyprus is not just a bank, but a leader in financial services with a universal offering creating strong and lasting client relationships. We offer traditional retail and commercial banking, investment banking, brokerage, but also general and life insurance and payment solutions.
We have a diversified business model and offer the whole package. We invest and believe a lot in technology, meaning we provide an advanced digital offering to our clients.
Bank of Cyprus is also closely linked to the history and cultural heritage of Cyprus. We support many foundations. For example, we sponsor the Bank of Cyprus Oncology Center, where we have invested over €70 million since 1996. We created ‘Support CY’ – a CSR support network with almost 200 members – contributing to society in the areas of health, education and the environment.
We have a cultural foundation; we also created a non-profit organization as an incubator accelerator for start-ups since 2015. We are an integral part of society both in banking and beyond banking with a universal offering.
BF: In 2022, Bank of Cyprus reported a strong performance on the back of the tough global financial conditions that we spoke of earlier, reporting a really impressive 139% year-on-year increase in its preliminary after tax 2022 profit of €71 million, What have been the key drivers behind this excellent business performance in the current global economic downturn?
Panicos Nicolaou: We generated better results this year, with more than 20% in return on tangible equity from the first quarter and have guided the market with an expected return on tangible equity of more than 17% for the whole year. Some of the key drivers of our performance are:
- Strong Macro: We operate in an economy that is growing faster than the Eurozone and is an attractive business hub for the region
- Market Leader: We are a market leader in a consolidated market
- We have a diversified and sustainable business model with a holistic offering integrating bank, insurance and payment services with a focus on efficiency and reducing our cost to income ratio
- We are very liquid and highly geared to higher interest rates
- We significantly improved asset quality with an NPE (non-performing exposures) ratio of below 4% (It was 63% in 2014)
- We have a strong capital base and strong deposit franchise
- As a result of all these factors, we were the first bank in Cyprus and in Greece to have paid dividends -in 12 years – out of our full-year profits of 2022.
BF: How is the bank working to mitigate the impact of high inflation and the energy crisis, while keeping the NPL (non-performing loan) ratio down?
Panicos Nicolaou: Inflation in Cyprus peaked in July 2022 so we are in a slightly different cycle to the rest of Europe. This June, inflation decelerated to 2.7%, so it was manageable. Tourism is rebounding from Covid while unemployment remains relatively low at 6.5%. However, inflation comes with higher rates, which means less disposable income for people.
Interestingly, deposits in the system remain relatively stable. It seems that consumers have not started to touch their buffers to spend or to pay off loans, so we don’t have any material NPE inflows or growing arrears.
We will continue monitoring the market and customer behavior being ready to offer solutions to those with financial difficulties.
BF: Ten years has passed since the 2013 economic crash in Cyprus and the banking sector has done an extraordinary job in boosting transparency, compliance, regulations and so on. To what extent have the banks been affected by the withdrawal from Russia and the exposure to Russian capital?
Panicos Nicolaou: The Russian exposure in Cypriot banks is more a perception than a reality. At Bank of Cyprus, we don’t have any banking operations in Russia. We used to, but exited in 2015.
Today, we have less than 1% of our net loan book related to Russian or Belarusian ultimate beneficial owners and less than 1% of the bank’s deposits relate to individuals whose country of residence is Russia or Belarus, so it is immaterial.
Most of this has to do with people who live and work in Cyprus. It’s residual. Bank of Cyprus has significantly reduced its exposure to Russian and Belarusian residents since 2015.
BF: What are the main opportunities and challenges faced by banks and financial institutions today in Cyprus?
Panicos Nicolaou: The opportunities are quite clear: we have a universal offering, so we offer everything to our clients. We are also leveraging the Recovery and Resilience Funds from the EU for the green and the digital transition of the country. These funds will serve as an equity contribution from the government, while we provide debt, so this is an incremental opportunity for us.
In terms of threats, we have fintech companies everywhere that we compete against. We have also built our own ‘fintech’ to serve as a digital economy platform for the country, so we are not just defensive.
We extend beyond banking. We are working with new technologies, artificial intelligence (AI), customization, trying to match customer expectations that are much higher than previously. It’s an ongoing process of change and challenge for us.
BF: Bank of Cyprus has been at the forefront of the digitalization process within Cyprus’ banking industry and has just won four awards at the Digital Finance Awards. What kind of efforts are you making in that regard and how are you unleashing new opportunities?
Panicos Nicolaou: Digitalization is key to our strategy. We have 427,000 active users – huge for the size of the country. It is our primary delivery channel, more than 80% of our clients use digital channels and c.95% of our transactions are digital.
We continue our efforts to be innovative. This year we launched QuickHub, which is a digital branch that allows you to do almost everything through your mobile phone: you can open an account, order a debit or credit card, take out an insurance policy, take a picture of your check and deposit it into your account, personal loans, etc.
We also introduced Jinius which is the first digital economy platform in Cyprus that brings the stakeholders of the economy together, connects businesses with each other and with consumers and drives opportunities in lifestyle banking and beyond. It is both an infrastructure project for us, but also a potential source of revenue in the medium-term. `
BF: Are you partnering with local fintech companies or fintech entrepreneurs to spur innovation in the sector?
Panicos Nicolaou: We are not partnering in the way of formal partnerships as yet, but we exchange ideas. We are working closely with technology companies on certain projects, especially with a couple of these innovators now that we have Jinius. We are very receptive to ideas that will improve our offering and customer experience.
BF: Cyprus is a nation at risk of major disruption due to climate change and its precious biodiversity must be protected. What initiatives are you taking by partnering with entities to protect the oceans?Do you see sustainability and ESG factors forming a greater part of your investment portfolio in future?
Panicos Nicolaou: Through our ‘Beyond Banking’ approach we aim to become market leaders for sustainable banking and lead the transition of Cyprus to a sustainable future. Our main goals in this area are to become carbon neutral by 2030 and to reach net zero by 2050.
We reduced Scope 1 and Scope 2 GHG emissions by 8% in 2022 compared to 2021 and our goal is to reduce these GHG emissions by 42% by 2030. Bank of Cyprus is the first bank in the country to estimate and publish its Financed Scope 3 GHG emissions associated with c.88% of its Gross Loans and advances portfolio using the Partnership for Carbon Accounting Financials (PCAF) standard and proxies.
We have a lot of initiatives around the green energy transition, such as an electric car financing scheme and a home renovation scheme. We encourage energy upgrades and finance solar energy installations. The green energy transition is a preferred sector for us, but we can still do more.
Our partnership “Seammachia” is a project funded by the bank and includes the study and installation of a pilot system to monitor the quality of sea water in real time. The aim is to develop indices for the early detection of pollution in order for necessary corrective actions to ensure environmental protection.
BF: Globally speaking, how would you assess the progress that has been made around green finance in the country by the banks?
Panicos Nicolaou: It’s still at an early stage. Green finance forms part of the EU Recovery and Resilience Funds and the green transition that we will work with the government on.
BF: You’ve been with the bank since 2001, stepping in as CEO from 2019. What are some of your key personal aspirations? Where would you like to take Bank of Cyprus in the next few years; what are some of your big ambitions?
Panicos Nicolaou: The first goal has been delivered in the sense that we completely turned the bank around from the last crisis in 2013, as well as paying dividends to our shareholders and being the first bank in Greece or Cyprus to do this. This was the first big milestone we achieved.
The rest of the world did not have all the shocks that we experienced in the past five to 10 years. At the same time, we continued to invest heavily in technology as we are very much focused on our clients: we want to create lifelong partnerships with our customers. It is important to guide and support them during the different stages of their lives.
Our ambition is to be a leading, full-service banking and financial services group with a diversified and sustainable business model, because being diversified creates resilience and profitability and it’s a competitive advantage for us.
Diversification goes beyond banking, we don’t have to just be a bank. It creates resilience throughout the cycle. We are an integral part of this country and want to lead the transition of Cyprus towards a more sustainable future, embracing all aspects of ESG while being profitable.
BF: What is your final message to the readers of USA Today?
Panicos Nicolaou: Geopolitically, Cyprus is an interesting location. It’s perfect from a geopolitical perspective for the US as it’s an appealing and safe destination with high living standards. It’s very easy to move around. Many people who moved to Cyprus during Covid actually ended up staying here. The population is highly educated; we were #3 in terms of university graduates per capita in Europe in 2022.
All this, together with our Anglo-Saxon legal and financial system, creates conditions for Cyprus to be the business hub of the region in the Middle East and North Africa (MENA). We are also a Eurozone country and a gateway for many companies accessing the European market.