S&P: Cost-reduction will be key for Cypriot banks
S&P: Cost-reduction will be key for Cypriot banks
22/11/2023 8:56

The Cypriot bank’s ability to reduce operating costs while investing in digital transformation, will be key to offsetting inflationary pressure and still-high credit provisions, rating agency Standard and Poor’s said on Tuesday.

In a country-by-country global banks report, S&Ps said that despite significant progress, Cyprus banks' stock of nonperforming exposures (NPEs) "remain among the highest in Europe," estimating that this trend will continue in 2024-2025 amid the weak operating environment.

“At 9.5% of gross loans as of end-2022, …Cypriot banks' NPEs remain among the highest in Europe,” the agency said, noting that it expects “the sale of legacy problem assets will slow in 2024, and ongoing monetary tightening and slowing economic growth should lead to greater NPE inflows.”

It pointed out however that this “should be manageable as credit standards are stricter and bank provisions have strengthened.”

According to the agency, "profitability prospects, although improving, remain weaker than European peers”.

It added that rising interest rates have bolstered net interest income, with banks’ return on equity peaking at above 13% at end June from 4.7% in 2022, estimating that RoE will fall to about 10% in 2025, as the cost of funding will adjust.

“Banks' ability to reduce operating costs, while investing in digital transformation, will be key to offsetting inflationary pressure and still-high credit provisions,” S&Ps said.

Noting that while banks' funding risks are easing, “nonresident deposits remain a source of volatility.”

ON the economy, S&Ps noted that Cyprus' economic growth should outpace the EU average, as despite material exposure to Russia and the winding-down of the Cyprus Investment Program (the citizenship-by-investment scheme), growth should settle at just below 3% over 2023-2026.

Moreover, it noted that credit losses will remain elevated, hampering banks' profitability, namely at about 95 basis points in 2023-2024, “owing to persistently high inflation, higher interest rates, and the worsening operating environment.”

However, S&Ps added that government's mortgage-to-rent scheme could address some household NPEs. “Although part of targeted NPEs are already outside the banking sector, this could cushion some deterioration,” it said.

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