Cypriot banks continue to operate on the traditional “lend and collect interest” model, remaining heavily dependent on net interest income despite efforts to diversify their revenue streams, according to the European Commission’s (EC) latest post-programme surveillance report.
The EC’s 17th post-programme surveillance review revealed that Cypriot banks maintained their high profitability levels from the previous year, primarily due to net interest income.
The banking sector recorded profits of €603 million in the first half of 2024, marginally below the €608 million achieved in the same period of 2023.
Interest income rose to €1.431 billion in the first half of 2024, up from €1.074 billion in the corresponding period of 2023, benefiting from both excess liquidity placed with the ECB and slowly increasing deposit rates for customers.
Lending activity remained stable despite higher interest rates, with net new loans to households and businesses reaching €1.670 billion in the first half of 2024, compared to €1.735 billion in the same period of 2023.
Housing, consumer and other household loans increased by 4.3 per cent to €689 million, whilst corporate lending initially declined by 8.7 per cent to €981 million before rebounding in July and August to €1.355 billion, marking a 2.3 per cent year-on-year increase.
The report highlighted that Cypriot banks maintain abundant liquidity, with a liquidity coverage ratio of 332 per cent and a net stable funding ratio of 184 per cent in June 2024, both significantly above EU averages of 161 per cent and 130 per cent respectively.
Less significant institutions continue to face challenges with non-performing loans (NPLs), maintaining an NPL ratio of 21 per cent in June 2024, unchanged from December.
These smaller banks rely primarily on organic measures for NPL reduction, resulting in a more prolonged recovery process.
The Commission noted that whilst profitability is expected to decline as interest rates normalise, banks are projected to maintain stable profits.
Both households and businesses continue to demonstrate strong debt servicing capacity, mitigating concerns about loan restructuring, which peaked in the second half of 2023 during rapid interest rate increases.
