The increased profitability of Cypriot banks, will not affect the supervisory authorities’ views over the necessity to maintain a prudent policy with respect to banks’ dividend payments, the Central Bank of Cyprus said in its annual report for 2023, published on Wednesday.

The CBC also says that the risk of non performing loans (NPLs) remains high in the supervisory priorities of the CBC and notes that it has engaged with a consortium comprising international and well reputable companies, for the design of a systemic solution, which, with the existing available tools, will further foster banks in deleveraging their NPLs.

The report covers 2023, while reference is also made to economic developments in the first half of 2024. The forecasts for 2024, 2025 and 2026 refer to the CBC forecasts of March 2024.

Former Governor of CBC, Constantinos Herodotou, signing the introduction of the report, says that the Cypriot economy continues to demonstrate resilience despite the ongoing challenges mainly arising from unstable international geopolitical developments. The prospects are positive, indicating a strengthening of GDP growth and further easing of inflation.

GDP recorded a higher than expected annual increase in the first quarter of 2024, reaching 3.5%. According to CBC, the data reflect the waning impact of ongoing sanctions against Russia on the turnover of financial and professional services and, the limited impact of the Middle East conflict.

According to the March 2024 forecasts, economic growth in 2024 is projected to rise to 2.8%, compared with growth of 2.5% in 2023, with further expansion by 3.1% in 2025 and 3.2% in 2026.

At the same time, the labour market continues to exhibit strong resiliency. In line with the positive trend of GDP, in the first quarter of 2024, employment recorded an annual increase of 2.2% and unemployment decreased to 6%, compared with 2% and 6.8%, respectively, in the first quarter of 2023.

Unemployment is projected to go down to 5.8% of the labour force in 2024. Reflecting the anticipated GDP growth, unemployment is projected to further decrease to 5.6% in 2025 and 5.3% in 2026, approaching conditions of full employment.

Domestic headline inflation continued its downward course, registering on average, a yearly increase of 2.2% during the period January-May 2024 compared with 5.4% in the corresponding period of 2023.

HICP inflation (Harmonised Index of Consumer Prices) is expected to decelerate further compared with 2023, standing at 2% and 1.9% in 2024-2025 and 2026, respectively. Core inflation (inflation excluding energy and food prices) is also forecasted to decline further compared with 2023, standing at 2.6%, 2.3% and 2.2%, in 2024, 2025 and 2026, respectively.

Over the past years the Cyprus banking sector has proven to be resilient, despite the prolonged challenges stemming from the health crisis, the geopolitical developments which included war conflicts, as well as the strong inflationary pressures, Herodotou notes in his introduction.

In particular, similarly to the immediately preceding years, strong liquidity reserves are observed during 2023, with the liquidity coverage ratio reaching 358% in December 2023, almost double the corresponding Eurozone average. In addition, the Common Equity Tier 1 ratio (CET1) stood at 20.4% at 31 December 2023, compared to the European ratio which was 16% at the respective period.

As at December 2023, Non-Performing Loans (NPL) as a percentage of total loans, have decreased further to 7.9%. Nevertheless, CBC notes that the risk of NPLs remains high in the supervisory priorities of the CBC given the continuous uncertain external economic and geopolitical environment, in conjunction with the fact that the deleveraging achieved has not been homogeneous, with significant reductions in NPLs observed by the larger banks.

In this respect, the CBC has engaged with a consortium comprising international and well reputable companies, for the design of a systemic solution, which, with the existing available tools, will further foster banks in deleveraging their NPLs. The said project is at an advanced stage of design and analysis.

The report says that in light of the sharp increase in reference interest rates since July 2022, banks recorded increased profitability during 2023. This, it notes, "is due to the steep increase in interest income, as a result of also the banks’ high liquidity, reaching 358% as outlined above, a significant part of which results from placements with the ECB."

However, CBC notes that "the increased profitability will not alter the supervisory authorities’ views over the necessity to maintain a prudent policy with respect to banks’ dividend payments, having as a priority further strengthening their capital adequacy."

It is further emphasised that during 2023, only one Cyprus bank was approved to distribute dividends.