Cypriot banks are recalibrating their business strategies to sustain profitability as the era of high interest rates appears to be winding down. The transition to a lower interest rate environment poses challenges, but early indicators suggest that the banking sector is adapting effectively.
The two systemic banks, Bank of Cyprus and Hellenic Bank posted a combined profit of €685 million for the first nine months of 2024 (€401 million and €284 million, respectively). These profits were largely driven by robust net interest income, improved portfolio quality, and strong liquidity positions.
Analysts predict that the banking sector’s profits for 2024 will surpass €1 billion, buoyed by net interest income, which reached €1.03 billion by the end of June 2024, up from €519.19 million in March. This strong performance follows a record €1.27 billion profit in 2023, a dramatic 644% increase from 2022, thanks to historically high interest rates.
Adjusting to Lower Interest Rates
As the European Central Bank (ECB) begins lowering interest rates, currently at 3.25%, with forecasts to drop to 1.75% by the end of 2025, Cypriot banks face declining interest revenues. To offset this, banks are focusing on diversifying income streams, controlling operational costs, and expanding lending activities.
With high liquidity levels, banks are targeting increased credit issuance to households and businesses while avoiding a rise in non-performing loans. Meanwhile, deposit costs remain low, creating room to sustain profit margins as lending rates decline.
Bank of Cyprus Strategy
Bank of Cyprus reported a gradual decline in quarterly net interest income, reflecting the early effects of the ECB’s rate reductions. The bank is expected to unveil its strategic plan for 2025–2027 in February 2025, outlining its approach to maintaining growth and profitability under the new market conditions.
Hellenic Bank’s Approach
Hellenic Bank saw a 1% decline in net interest income in Q3 2024 (€151.2 million) compared to Q2 2024 (€153.4 million). This was attributed to reduced earnings from central bank deposits and higher costs on customer deposits, offset partially by increased revenues from securities and lower borrowing costs following the repayment of outstanding bonds.
Outlook
Both banks are leveraging a healthier balance sheet, supported by declining non-performing loans due to large-scale sales to credit acquisition firms. This trend reduces capital provisions for bad debts and strengthens their financial footing.
As the ECB’s monetary policy continues to evolve, Cypriot banks are aligning their strategies to navigate the anticipated challenges of 2025 while safeguarding profitability.
