Cyprus banks have seen a 600% increase in profits in 2023, mainly from ECB interest earnings and higher lending rates. This has sparked concerns about the impact on the real economy and prompted discussions on potential government interventions to address the ethical and economic implications.
What are the factors behind the soaring profits of Cyprus banks?
- Cyprus banks profit mainly from domestic activities, with over 90% sourced locally.
- Profits soared by 600% in 2023, raising questions about support for the real economy.
- A key driver is interest earnings from depositing reserves at the ECB, rather than funding local loans.
- Cypriot banks apply higher lending rates and offer lower savings rates than the euro area averages.
- Net interest margins in Cyprus exceed those in the euro area by more than three percentage points.
- Discussions are underway about ethical and economic implications, and potential government responses.
Banking Profitability and Local Market Claims
Recent statements by Cypriot bankers have attributed the robust performance of the island’s banks to their profitable activities within the local market. For instance, the CEO of Bank of Cyprus, Panicos Nicolaou, asserted in a Bloomberg interview that over 90% of the bank’s profits are sourced domestically. Yet, this perspective doesn’t capture the full picture, especially considering the bank profits have soared by 600% to surpass €1.1 billion in 2023. The manner of profit generation by the three largest banks in Cyprus seems to barely support the real economy, raising concerns among various stakeholders.
The Drivers Behind Soaring Bank Profits
Interest Earnings from the ECB
One of the primary drivers of bank profits in Cyprus has been the practice of depositing substantial cash reserves at the European Central Bank (ECB). About 35% of Cyprus banks’ assets were used to earn interests ranging between 2% to 4% from the ECB in 2023, rather than funding real economic activities through loans to businesses and households. This strategic allocation led to a more than twofold increase in interest income for the two largest banks, contributing significantly to their profitability.
Comparison to Euro Area Averages
Additionally, the lending rates applied by Cypriot banks have been consistently higher than the average rates across the euro area. By the end of 2023, interest rates for home loans in Cyprus averaged at 5.1%, while the average rate for the eurozone stood at 3.8%. Similarly, corporate loans in Cyprus bore an average interest rate of 5.7%, outpacing the eurozone’s average of 5.1%.
Disparity in Interest Rates
The situation for savers in Cyprus is just as concerning. While Cyprus banks gain a 4% interest rate on redepositing with the ECB, they offer an average of only 2.06% to their customers for fixed term deposits. This rate is significantly lower than the euro area average of 3.21%. In 2023, such a suppression of deposit rates contributed to the banks’ increased profitability, yet it also meant real losses for savers when considering inflation rates.
Net Interest Margins
Net interest margins are another area where Cyprus banks have outperformed their euro area peers. With loan rates above and deposit rates below the eurozone averages, Cyprus banks enjoy margins exceeding three percentage points. This is substantially higher than the eurozone average of just over one percentage point, with only Greek banks coming close to Cyprus’s levels.
Capital Outflows and Shareholder Profits
There is also the critical question of profit distribution among shareholders. Notably, significant shares of the largest Cypriot banks are held by foreign equity and investment funds. As profits rise, it is crucial to scrutinize the extent to which these earnings will leave the Cypriot economy. Recently, the Bank of Cyprus announced a cash dividend distribution of €112 million from an after-tax profit of €487 million, along with a share buyback program.
Addressing Ethical and Economic Concerns
The current banking landscape in Cyprus raises several ethical and economic dilemmas, particularly concerning the suppression of deposit rates and the ethical obligations of banks to their customers. This has prompted discussions about the appropriate government and Central Bank responses, such as moral suasion to encourage more favorable deposit rates for customers or even the imposition of additional taxes on bank profits similar to measures taken in Italy and Spain.
In light of the substantial profit increases and their derivation from arguably passive income sources, there is a strong argument for banks in Cyprus to contribute more actively to the real economy and the well-being of their customers. Proposals include taxing a portion of the net interest income of banks to support higher savings rates and subsidize loan interest rates, thereby promoting more equitable financial practices and supporting the country’s broader economic health.
What are the factors behind the soaring profits of Cyprus banks?
The soaring profits of Cyprus banks in 2023 can be attributed to interest earnings from depositing reserves at the ECB, higher lending rates compared to the euro area averages, lower savings rates offered to customers, and net interest margins that exceed those of the euro area by more than three percentage points. Discussions are ongoing regarding the ethical and economic implications of these factors and potential government interventions.
How do interest earnings from the ECB contribute to Cyprus banks’ profits?
Cyprus banks have been depositing a significant portion of their cash reserves at the European Central Bank (ECB), earning interest rates between 2% to 4% in 2023. This practice has led to a substantial increase in interest income for the banks, contributing significantly to their profitability. However, this strategy has raised concerns about the banks’ lack of active funding for real economic activities through loans to businesses and households.
What is the disparity in interest rates offered by Cyprus banks compared to the euro area averages?
Cyprus banks apply higher lending rates for home loans and corporate loans compared to the euro area averages. In 2023, interest rates for home loans in Cyprus averaged at 5.1%, while the eurozone average was 3.8%. Similarly, corporate loans in Cyprus had an average interest rate of 5.7%, surpassing the eurozone’s average of 5.1%. Additionally, Cyprus banks offer lower savings rates to customers compared to the euro area, contributing to their increased profitability.
How are shareholders benefiting from the soaring profits of Cyprus banks?
Significant shares of the largest Cypriot banks are held by foreign equity and investment funds. As profits rise, there is scrutiny on how much of these earnings will leave the Cypriot economy through dividend distributions and share buyback programs. Recent announcements, such as the Bank of Cyprus’s cash dividend distribution and share buyback program, highlight the implications of shareholder profits on the broader economic landscape.
