Are Cyprus banks repeating same fateful mistakes?
Source: Financial Mirror
The governor of the Central Bank of Cyprus (CBC) Chris Patsalides issued a startling warning last week for banks to reconsider their pricing strategy.
He warned that banks should consider social dimensions as well as economic competitiveness; if they don’t, they risk jeopardising their image and that of the banking system itself.
Only a decade ago local banking giants such as Laiki and Bank of Cyprus went on a lending spree that led to the depletion of their capital. They also bet heavily on the Greek Government Bonds at a time when the Greek economy was placed on an austerity programme by the IMF and on the EU and there was speculation that the country might have to abandon the euro.
By 2011 those bonds were trading at junk rates before the Greek government agreed a haircut with its creditors. But with mounting losses from their loan portfolios the once might Laiki and Bank of Cyprus collapsed in 2013 with investors and depositors suffering massive losses in an unprecedented decision that let to what is commonly known as haircut.
Banks now seem to operate in an oligopoly environment where the two largest credit institutions dictate the rules of the game. They place most of their deposits with the ECB and offer the lowest deposit rate in the eurozone.
According to the latest data on interest rates published by the CBC in September, lending rates on consumer loans rose to 6.67%, compared to 6.18% the previous month. Corporate loans to non-financial institutions up to a million euros rose to 5.57%, compared to 5.45% a month earlier, while mortgage loans rose to 4.59%, compared to 4.52% the previous month.
Higher interest income
And all the while when term deposit rates were taking a beating down to 1.96% compared to 2.17% the previous month. With lending rates keep on rising and deposit ones falling, banks are achieving a higher net interest income, hence their extraordinary profits they are keep making in the current financial year.
This picture clearly points out to a classic market, abuse by the big banks where competition is unable to bring down lending rates or keeping deposit rates at a level closer to inflation.
With the large public in Cyprus still unable to understand alternative ways to earn higher interest for their deposits. There’s risk such as triple A bonds or money markets local Cypriot banks enjoy a period of easy profits.
But as Governor Patsalides warned this attitude may hurt their image and that of the banking system as a whole. Slowly but surely, depositors are seeking higher interest for their money and once they find where and how to manage their deposits with similar or even lower risk they will turn their backs on the local banks.
This is already happening as high net worth individuals, particularly those who have experienced a haircut on their deposits came to understand that even a simple deposit comes with a certain risk and looked elsewhere not only to diversify, but also to achieve a higher return than the one offered by the local players.
Cypriot banks are still risky despite their high level of capitalization, compared to many of their counterparts in the eurozone due to their rating and it makes little economic sense for a high net worth individual or a professional investor to keep their deposits in Cyprus given the system’s risk-return profile.
It won’t be long before Cypriot banks will start taking the governor’s words more seriously, particularly if the ECB’s chief Christine Lagarde realises that she is actually doing more harm than good for the local economies by allowing retail banks to keep their deposits risk free with the ECB at a relatively high interest rate.
For years greed was good, but now it seems to be legal.
Michael Olympios is a regular columnist and Editorial Consultant for the Financial Mirror
The original article: Financial Mirror .
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