Filenews 26 March 2023
By Socrates Ioakim - socratis@phileleftheros.com
Financial institutions in Cyprus are looking for ways to increase the amount of deposit rates they offer, following the urgings of the Governor of the Central Bank, Konstantinos Herodotou, during a meeting he had with the top executive management of the banks last Tuesday.
Konstantinos Herodotou, in particular, recommended that internal analyses be carried out in order to see where not only the level of lending rates but also of deposit rates can be reached. Mr. Herodotou reportedly urged the top executive management to study the examples of other eurozone banking systems and the increases in deposit products given, to start the rise in Cyprus as well. At the same time, he also referred to the need for transparent charges on the services offered by banks.
The lowest in the Eurozone
According to the latest available data from the European Central Bank, the weighted average interest rate on deposits from households in Cyprus is 0.24% and is the lowest (together with Slovenia) in the euro area.
Based on the same data, the highest weighted average interest rate on deposits from households in the euro area is recorded by France (2.34%), followed by Italy (2.08%), Slovakia (2.08%), the Netherlands (2.03%), Belgium (2.01%), Finland (1.95%), Austria (1.90%), Estonia (1.84%), Luxembourg (1.80%), Germany (1.68%) and Malta (1.61%).
The lowest weighted average interest rate on deposits from households in the euro area is recorded by Cyprus and Slovenia (0.24%), Spain (0.37%), Portugal (0.43%), Greece (0.46%), Ireland (0.66%), Latvia (0.81%) and Lithuania (0.89%).
Low for business too
The returns on deposits from businesses are in the same fate, since again Cyprus records the lowest percentage, at 0.70%.
As indicated in the ECB's data, the highest returns on deposits from enterprises are recorded by France (2.29%), Austria (2.13%), Finland (2.08%), Belgium (2.02%), Slovakia (1.98%), Germany (1.96%), Luxembourg (1.93%), Ireland (1.91%), Italy (1.91%), Estonia (1.86%), the Netherlands (1.71%), Spain (1.66%) and Latvia (1.64%).
The lowest returns on deposits from companies in the euro area are recorded by Cyprus (0.70%), Greece (0.96%), Portugal (1.05%), Slovenia (1.07%), Malta (1.46%) and Lithuania (1.45%).
Interest rates in Cyprus
- The interest rate in Cyprus on deposits from households with an agreed maturity of up to one year decreased to 0,24%, compared with 0,35% in the previous month.
- The corresponding interest rate on deposits from non-financial corporations increased to 0,70%, compared with 0,61% in the previous month.
- The interest rate on consumer credit increased to 4,68%, compared with 4,21% in the previous month.
- The interest rate on loans for house purchase decreased to 3,11%, compared with 3,34% in the previous month.
- The interest rate on loans to non-financial corporations for amounts up to €1 mil. showed an increase to 4,82%, compared to 4,71% in the previous month.
- The interest rate on loans to non-financial corporations for amounts over €1 mil. recorded an increase to 5,37%, compared to 3,52% in the previous month.
Deposits and loans
Total deposits in January 2023 recorded a net decrease of €583,8m, compared to a net increase of €586,3m. in December 2022. The annual growth rate reached -0,1%, compared with 0,4% in December 2022. The outstanding amount of deposits reached €2023,51 billion in January 5.
Total loans in January 2023 recorded a net decrease of €93,2m, compared to a net increase of €92,1m. in December 2022. The annual growth rate reached -0,9%, compared with -0,2% in December 2022. The outstanding amount of total loans reached €2023,26 billion in January 0.
In January 2023, total new loans decreased to €305.7m, compared to €545.2m. last month.
"F" contacted three well-known economists, trying to outline the current situation, i.e. why deposit rates are so low, as well as the actions that need to be taken in order for households and businesses to have better returns on their savings.
How economists explain banks' reluctance to raise. Why elsewhere they offer higher deposit rates
As Marios Clerides told us, banks at this stage, due to their excess liquidity, have no real reason to increase their deposit rates. "Banks are free to park some of their liquidity with the European Central Bank and the reason that other Eurozone countries offer higher deposit rates is because there is more leeway to borrow. New borrowing this year in Cyprus I estimate will be at clearly lower levels compared to last year. But if one bank sees fit to raise its deposit rates, the others will follow, as competition will be to the benefit of their customers," he explained.
No alternative sources of investment
This issue has two complex aspects, stressed economist Yannis Telonis. "The first is purely a matter of supply and demand. When you have a plethora of deposits, there is no competition. When there is excess liquidity you cannot have high deposit rates. The second element that should concern us is why there are no alternative sources of investment in Cyprus. In real estate there is a fear of a bubble and in the Cyprus Stock Exchange, due to the past, people are reluctant to invest. There is also the imperfection of the market, as it is not easy to transfer money abroad and someone who has the ability to invest abroad, after what we saw happening with Credit Suisse, will be much more cautious", he underlined.
Going a step further, Mr. Telonis said that banks, with the existing gap between lending and deposit rates, have the ability to amortize part of the losses they had in previous years.
The Government should issue a bond with a 3% yield
Mr. Telonis also said that since "since there is no healthy competition in Cyprus, a thorough study should be carried out by the supervisory authorities. In my opinion, it is possible to increase deposit rates up to 2%. The Government could help in this direction by issuing a bond, which would be addressed exclusively to Cypriot depositors and would have a guaranteed yield of e.g. 3%. This will force some people to take their money out of the banks and consequently competition will increase", he stressed.
When 4 banks close how to compete...
For his part, economist Alexandros Apostolides pointed out that, when four banks have closed down in Cyprus in recent years, it is perfectly normal for competition to decrease. "This is something that we should be concerned about. We are also seeing a trend abroad towards a smaller number of banks. We must not forget, however, that we are one of the few countries that levy a tax on interest on deposits. For me this is actually a disincentive and, at a time when the level of deposit rates is so low, it should be abolished," he concluded.
