Central Bank Governor urges banks to take advantage of economic environment before it changes

Cyprus’ Central Bank Governor Constantinos Herodotou urged banks to take advantage of the beneficial economic environment before it changes due to the downside risks, speaking to the 7th Cyprus Banking Forum in Nicosia.

Herodotou referred to the challenges for the banks including real estate concentration, high indebtedness which in combination with the small size of the country, translates to limited lending opportunities for the banks. This, as he said, leads to limited income sources for our banks which translates to high cost to income ratios.

He added however that the cyclical environment was quite beneficial despite the negative interest rates, that could have positive effects, especially for the reduction of NPLs.

I will urge our banks to take advantage as soon as possible, because of the remaining downside risks that will change the environment quickly and suddenly, because this is the speed with which markets and investors moves, he said.

He also stressed that the business model of the banks needed to be adjusted, something that was a eurozone necessity and that ECB studies indicate that banks that do manage to diversify their income sources are the banks that are performing better within the eurozone.

Herodotou also pointed out that consolidation of the banks should only be made on a healthy basis.

We shouldn’t seek consolidation and then just try to fund it by excessive loan giving and reduction in the risk management of these loans, he said, adding that his position has always been that the regulator should not decide on consolidation -the market forces should do that- but provide transparency and an even played field to make it easier from the players to decide which moves to do.

In their presentation to the forum CEO of the two Cyprus’ biggest banks referred to the limited growth prospects of the Cypriot economy in the coming years and suggested ways to accelerate it.

Hellenic Bank’s CEO Yiannis Matsis said that Cyprus was facing the challenge not to maintain but to accelerate growth above the 1% potential according to the estimates.

Matsis said that economy could grow through increasing productivity, increasing labour force participation and broaden economic basis. He more specifically pointed out that the small population density of Cyprus provided limited growth prospects for the economy.

He suggested increasing Cyprus’ population and achieving bigger growth, following a model of opening borders to controlled immigration, subsidizing air connectivity and increasing mobility of multinational enterprises with various tax incentives.

He also suggested the access to capital and equity with tax incentives and an environment free from government intervention and investment in infrastructure.

Concerning human capital, he stressed the need to address labour market rigidities, strengthen education and training, and improve technology use, digitalization incentives for key sectors of the economy and digital skills.

He also said there’s need for smaller government, public administration, local government reform and privatisation as an opportunity to attract foreign direct investment.

Banks of Cyprus’ CEO Christakis Patsalides said that growth means high level worker productivity and referred to ways to increase it by improving the efficiency and by technology. He also pointed out that population growth in Cyprus was expected to slow-down over time.

As he said real growth of gross value added would have to rely more on productivity and employment gains in the future. He also referred to significant potential to increase high productivity, by improving the efficiency and by technology.

He added that Cyprus had a low competitiveness score on the WEF Competitiveness index for 2019 and scored particularly low in specific areas as market size, infrastructures and the financial system.

Patsalides said that business need to play a full part as investors in upgrading capital and technology and needed to invest and research and development.

As he also said companies needed to think how to do business and introduce necessary changes and Government needed to act on many fronts to create an environment more productive to growth.

Change is required. Productivity and competitiveness are central for long term growth. We should give them our full and urgent attention, Patsalides concluded.

Source: Cyprus News Agency