Banks in Cyprus are confronted with five big challenges as they try to balance profits and to take huge steps towards modernising their structure and services.
Two of their big challenges are directly linked to loan portfolios while another two are related to staff and clients. And all four challenges lead to the fifth one which is that of profitability and how the balance of revenue and expenditure should evolve.
Firstly, banks may face supervisory challenges in view of an apparent failure of fledgling Estia mortgage plan and its impact on balance sheets. The plan may be extended till the end of the year but there is little hope that the original target of reducing non-performing loans through Estia will be achieved.
Vulnerable borrowers have so far turned their backs on Estia with no significant change anticipated over the little time left before its expiration deadline.
What frightens bank administrations the most seems to be the response of Frankfurt’s ECB supervisors on the need for an accelerated rate towards the reduction of red loans which is the second highest among Eurozone’s member states.
Supervisory pressure is expected to intensify in the wake of efforts by banks to sell NPLs packages to investment funds. This is the second major challenge facing banks that have a large number of non-performing loans recorded on balance sheets.
Banks will be forced to sell a large portion of their portfolio to investment funds to reduce red loans. But the main obstacles is that banks cannot easily include loans associated with first homes up for sale.
On the other hand, the question is at what price they will be sold to investment funds, that is, how much the price is going to be discounted. Banks need to study how their capital base will be affected mainly by the selling price.
At the same time, pressure on the income base and possibly capital of banks comes at a time when administrations need to find a balance with the union of the island’s banks over the modernisation of the employees’ payroll framework.