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Interest rates may have come down by one percentage point as of Sunday, and 2 points in the case of the Cooperatives, but business lending rates in Cyprus are still too high, the second steepest in the Eurozone after troubled Greece.
The average for corporates is 6.3050%, with differences according to categories of loans, size of loans and maturities, while rates on housing and consumer loans are on a declining trend.
The Central Bank of Cyprus decided on February 16 to reduce the maximum deposit rate, as this is determined by the formula for the calculation of additional capital requirements of banks, by one percentage point to just below 2%.
This is the second time in two years that the Central Bank intervened in the interest rate market to reduce borrowing costs, the first time being in the summer of 2013, a few months after the Eurogroup decision for a bail-in brought the banks to their knees, when former Governor Panicos Demetriades lowered deposit rates to 3.1%-3.5%.
Commercial banks lowered their base rates by one percentage point as of March 1, while the Cooperative Central Bank, the recently nationalised institution with a wide customer base and about 20% of all loans in the country, raising the ante to two points – 1% following the Central bank decision and 1% it had earlier reduced on its housing, student and agricultural loans.
“The benefit (from the rate cuts) is liquidity in the market and Cyprus is lower than the EU average, but if we look specifically at, say, Greece and Portugal, measures of risks, etc., the Cyprus rates are still higher,” explained Ioannis Tirkides, Senior Officer in charge of Economic Research, at the Bank of Cyprus Finance Division.
“The drop was marginal and Cyprus is still among the highest in housing loans as well,” he said.
However, economist not that optimistic.
“You can see from previous efforts to reduce lending rates that they only last for so long and then the banks start inching them up again,” said the Director of Sapienta Economics.
“When there is little competition for other forms of finance and one bank dominates, this is inevitable,” she said, adding that “it also begs the question why the Central Bank is manipulating market rates. In the end it serves the bank with the biggest gap between loans and deposits, potentially at the expense of the other smaller banks,” Mullen added.
Three months ago, the average overdraft rate for new business loans was 6.30% for Cyprus, only a little lower than the 6.56% charged for troubled Greece.
However, these rates are far higher than in the rest of the eurozone periphery.
In descending order, rates for equivalent loans were 5.15% in Ireland, 4.90% in Portugal and in 2.69% in Spain in the same month. The eurozone average, meanwhile, was 3.54%.
One reason why rates are so high in Cyprus is the lack of competition. When one bank owns 40% of the business there is no pressure to cut the cost of loans, argued Mullen.
But there is also lack of competition from
Mullen was non-bank sources of funding. In countries like the US, companies raise money on the stock market or from private equity, she said, adding that this kind of funding is almost absent in Cyprus.
“The last time anyone tried it ended up in an unregulated boom and bust.”
“But without other sources of business funding, lending rates will remain higher than the average for many years to come,” Mullen concluded.
Although adding liquidity to the market by allowing consumer-corporates more access to funds, especially the amounts allocated via the European Investment Bank, the lower rates will also have an impact on the profitability of the commercial banks, whose margins will be narrower, hence requiring more deposits to prop up their balance sheets.
The three main banks – Bank of Cyprus, Hellenic Bank and the Cooperative Central Bank – are each expected to lose about 40 to 80 mln euros from their profits due to lower earnings from deposits in order to support the lower rates.
They do not have access to the interbank lending market and thus cannot benefit from the European Central Bank’s marginal lending facility of 0.30% and the fixed-rate main refinancing operations of 0.05%, while the deposit facility carries a negative -0.20% rate to encourage banks to pump more money into the market.
On the other hand, Bank of Cyprus is rushing to lower its emergency liquidity assistance (ELA), at last count still owing about 7 bln euros.