Nicosia, 19 June 2018
Honourable Members of the Board of Directors of the Association of Cyprus Banks, dear friends,
It is my pleasure and honour to be with you today at the Annual General Meeting of the Association of Cyprus Banks, founded in 1969 as the coordinating body of its member banks. The role of the Association was subsequently upgraded and today it is the representative of the banking sector in Cyprus and an essential partner in shaping policy on banking issues, without disrupting the relationship between the supervisor and supervised entities.
The role of the Association in expressing the views of the banking sector and in coordinating its members was particularly important during the financial crisis in 2013. The Association has helped and still continues to help the CBC with recommendations in formulating policy to address the serious challenges faced by the banking sector.
Despite the improvement seen in the banking sector since 2013, there are still important issues that need to be addressed and which the Association can help resolve.
First, as we have said on many occasions, we have to tackle the very serious problem of non-performing facilities (NPFs) which, despite the significant decline in the last two years, still continue to severely affect the banking sector. The current level of NPFs constricts the performance of banks as it reduces their profitability, while consuming a significant amount of bank capital and resources (personnel and systems) that could be used for core banking activities. As a result, the contribution of the banking sector to the recovery of the economy through new lending is limited. Thus, accelerating the reduction of NPFs continues to be a primary objective, which requires the cooperation of all stakeholders. Finding ways to deal with the problem is certainly the responsibility of the members of the Association. However, the CBC will, as it has done so thus far, continue to work closely with the banks to provide guidance and any assistance.
Another major challenge for our banks is to restore profitability through a viable business model. Around 80% of Cyprus banks' income comes from net interest income. Additionally, as I have already mentioned, the high levels of NPFs are an obstacle to the profitability of banks, as there are serious doubts about the realisation of interest income, despite such income being included in their financial statements.
Furthermore, low interest rates, which are expected to continue in the medium term, and the low returns on low-risk investments (e.g. government bonds), as well as the supervisory requirements and regulations, which increase both the capital and operating costs of banks, combined with the competitive environment for new financing, are the main challenges for new lending. These challenges impact on the setting of interest rates and the measurement of risk, which in turn affect the profitability and asset quality of credit institutions.
Another significant challenge are the prudential regulations and requirements, such as the introduction in January of this year of the new International Financial Reporting Standard (IFRS9) for making provisions, the introduction of the minimum required eligible liabilities and various other requirements, which are expected to burden the banks and make the need for close cooperation between the Central Bank and the Association even more imperative.
I would like to thank the Association for the honour in inviting me to speak today. I wish it every success in its endeavours to ensure the well-being and progress of the banking sector.