Central Bank of Cyprus Governor, Constantinos Herodotou called on the Cypriot banks to follow prudent provisioning policies amid a deteriorating macroeconomic environment due to the war in Ukraine.

Addressing the 10th Banking Forum and Fintech Expo Herodotou said in the aftermath of the two consecutive crises, the first-round adverse effects have been limited for the banking sector.

“Nevertheless, with the level of uncertainty still tilted to the upside, the full extent of the consequences has not yet materialised especially in the area of credit risk,” he said according to a press release issued by the CBC.

According to Herodotou, at the same time, the banking sector faces the challenges of the adverse macroeconomic developments, which may deteriorate asset quality, leading to an upward pressure on impairments and provisions. “Prudent provisioning policies and the provision of fast and viable restructurings to customers is the appropriate way to address effectively the consequences of the adverse economic environment,” he added.

Moreover, Herodotou said that if we were though to draw a lesson from both crises, this would be the significance that technology plays for the banking sector, not only for the conduct of the normal banking operations but also for the sustainability of its profitability.

He also noted that although proven resilient to the crisis, the legacy structural weaknesses of the sector remain, while competition from challenger banks has been increasing.

“Therefore, the banks need to move more decisively in the road to digital transformation. This is presumably the only way if they are to address their structural weaknesses while retaining their competitive advantage against new players in the market. Investing in technology can become the catalyst in their effort to strengthen efficiency and build sustainable profitability,” he added.