Central Bank Governor outlines improved features in banking sector

The transformation of banks’ business model towards digitalisation and their profitability enhancement by rationalising their cost structure, while closely monitoring the underlying risks of this transformation, are the main banking sector challenges according to the Governor of the Central Bank of Cyprus Constantinos Herodotou.

Herodotou was speaking on Thursday at the Annual General Meeting of the Association of Cyprus International Financial Firms (ACIFF), taking place online due to the pandemic, where he presented the current situation of the Cyprus and European banking sectors, as well as the challenges that lie ahead, while also sharing information on the trends and developments in the banking industry.

In relation the banking sector in Cyprus, Herodotou said that, almost a decade after the peak of the financial crisis, a significant balance sheet derisking and an improvement in the banks’ loss absorption capacity can be observed. In addition, he mentioned that during the same period a noteworthy clean-up from non-performing loans has taken place, although the NPL ratio in the Cyprus banking sector remains high (15.2% as of October 2021), while at the same time Cyprus is amongst the most liquid banking sectors in the EU, with a Liquidity Coverage Ratio of 313% in December 2021.

As regards challenges, according to Herodotou profitability prospects of banking both in Cyprus and across the EU remain challenging, while banking overcapacity, credit risk, climate-related and environmental risks, as well as IT and cybersecurity risk constitute the main areas of concern for regulators.

In his reference to what the banking landscape in the near future is expected to look like, Herodotou argued that digitalisation in banks could be the solution to a number of issues, such as costs containment and keeping up with the new profile of customers that are more technology-savvy and have less time to spend for bank visits.

In this direction, he noted an initiative the CBC undertook to create a digital customer onboarding platform for banks in Cyprus.  According to Herodotou, a large number of banks have confirmed they will join in and use this scalable form of technology, while the tender for the technology provision is expected to be published in the very near future.

"For digitalisation to really deliver on efficiency", said Herodotou, "the digital strategy needs to be part of a wider reshaping of the business model and a streamlining of internal organisation. Of course, as supervisors, we need to make sure that financial stability and prudential soundness are preserved, while at the same time allowing for technological innovation."

Concluding, Herodotou stressed that the transformation of banks’ business model towards digitalisation may give them the opportunity in the long term to enhance their profitability by rationalising their cost structure and providing more efficient, tailor-made services to their customers. Nevertheless, he added, the underlying risks of this transformation should not be ignored and banks need to adapt to the demands of the new era.