Cyprus banks are confronted with three main challenges which put at risk the country’s overall economic sector, according to a report by the Central Bank of Cyprus on macroeconomic projections for 2018 and recent macroeconomic policy decisions.
The report, which was recently sent to the House of Representatives, underlines that the high level of non-performing loans (NPLs) and poor quality of loan portfolios of credit institutions are assessed as top risks.
In fact, the NPLs are a constant vulnerability for the country’s banking sector even though the projection is that the state of play will improve. For the moment, red loans still pose significant risks to the stability of the island’s financial system and remain the biggest obstacle to further strengthening the banking sector.
The report also notes that credit institutions are expected to continue their strenuous efforts to reduce non-performing loans by implementing holistic and sustainable strategies. In addition, the report underlines that red loans outside the banking sector are still part of the real economy and burden it since the private sector remains heavily indebted.
The second constant vulnerability is the reduced profitability of banks. The Central Bank points out that profitability of credit institutions remains under pressure.
And that increasing revenue, reducing costs and enhancing operational efficiency are a major challenge for banks. The report indicates that credit institutions should broaden their revenue base and invest in technology.
The third constant vulnerability is the excessive indebtedness of the domestic non-financial private sector. According to the report, over-lending to households and non-financial corporations continues to pose risks to the country’s economy.
At the same time, the Central Bank indicates that a potential increase in interest rates or a sharp slowdown in economic growth would make the non-financial private sector extremely vulnerable.