In­ter­est rates fall, but still too high BBu­us­si­in­neessss llooaannss aavveer­raaggee 66..330055%%,, CCoooopp ccu­uttss mmoorree ddr­raasst­ti­icc

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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