Managing excessive liquidity a challenge for the Cyprus banking system

Utilising excessive liquidity constitutes one of the greatest challenges facing the Cyprus banking system, despite rising revenue from the normalisation of monetary policy, Savvas Pentaris, an expert on the financial sector has said.

Following years of loan deleveraging after the financial crisis that hit Cyprus in 2013, deposits in the banking system are almost double compared with loans. This situation “is not sustainable” Pentaris, Partner, Head of Financial Services Sector of EY audit firm told a press conference for the presentation of a report on the Future of Banking in Cyprus, prepared by the EΥ with the support of the Association of Cyprus Banks (ACB).

According to the report’s data, total deposits in the Cyprus banking system amount to €52 billion, while total loans are limited to €28 billion.

“The way the banks’ balance sheets are structured yields them increased profits due to the existing excessive liquidity, which keeps deposit interest rates low while holding these cash reserves with the ECB gives them positive yield,” Pentaris said, adding that this “is not sustainable.”

The EY expert also noted that the excessive liquidity should be deployed to productive assets so that banks would bring their return on equity to the necessary levels.

Pentaris also noted that the €3 billion in pure loans per annum is not enough to absorb the existing excessive liquidity in the system.

“Therefore, there is a need for the banks to find ways to channel this liquidity elsewhere either in Cyprus or abroad,” he added, noting that a solution for the banks would be to develop asset management programmes.

Michallis Kammas, Director-General of the Association of the Cyprus Banks said the return of deposits to the Cyprus banking system following the crisis “is a vote of confidence.”

“The financial results announced by the banks show that confidence is returning to the Cyprus banking system,” he added

Moreover, Alexandros Petrou, Engagement Manager of Strategy and Transactions at EY, said a change in investment culture of the average Cypriot depositors “would be helpful in turning the existing liquidity to banking investment products rather than cash parked as banking deposits.”

Furthermore, the report said that an other challenge is digital transformation, showing that Cypriot banks have invested €240 million in new technologies.

Petrou said that in the last three years internet banking users exploded to 70% whereas bank brunches declined by 30%.

Recalling that banks globally are facing competition from fintechs which operate on a more flexible model, Petrou, said it is clear that banks should focus on their digital procedures to remain competitive.

The report, the first of its kind presented for the Cypriot banking sector showcases the importance and contribution of Cypriot banks to the wider economy and society, and identifies current and upcoming challenges and opportunities.

It also conveys messages to banks and stakeholders to embrace change and progress framed against four key pillars: a purpose-led, viable, safe & stable and progressive banking sector.