In a year when geopolitical turbulence has reshaped Europe’s risk landscape, Cyprus’s banking sector stands at a crossroads - stronger than ever in terms of capital and liquidity, yet still grappling with a legacy of non-performing loans (NPLs). The latest Financial Stability Report from the Central Bank of Cyprus paints a nuanced picture: tangible progress combined with persistent structural weaknesses that could shape the country’s economic outlook for years to come.
A Decade of Progress
After more than a decade of structural reforms, recapitalizations, and stricter regulation, Cypriot banks have emerged from the post-2013 crisis as institutions with the strongest capital adequacy in the eurozone.
By the end of 2024, the sector’s Common Equity Tier 1 (CET1) ratio stood at 24.6%, well above both the minimum regulatory requirement and the eurozone average of 19.8%. Liquidity positions also remain robust, with the Liquidity Coverage Ratio (LCR) at 333.4% and the Net Stable Funding Ratio (NSFR) at 188.1% - far exceeding EU benchmarks.
Profitability is another bright spot: net profits for Cypriot credit institutions reached around €1.2 billion in 2024, supported by strong interest income and prudent cost management. Yet, behind these headline figures lies a stubborn challenge, the still-elevated stock of NPLs.
The Shadow of Non-Performing Loans
Despite commendable progress, Cyprus continues to stand out for the scale of its NPL problem. As of December 2024, the NPL ratio in the banking sector had dropped to 6.2% - a historic low for the country, but still significantly above the eurozone average. The gap is even wider among less significant institutions, where the NPL ratio exceeds 21%, compared to just 3.5% for the island’s largest banks.
The roots of the NPL problem run deep, linked to pre-crisis lending booms and a highly indebted private sector. Much of the deleveraging in recent years has been “passive,” driven by GDP growth rather than actual repayments or portfolio sales. This leaves banks -and the broader financial system- exposed to any slowdown in economic activity or tightening of credit conditions.
Asset quality trends are encouraging: the volume of new bad loans is limited, “Stage 2” exposures are declining, and coverage ratios remain among the highest in the EU, providing a solid buffer against future shocks. Still, structural vulnerabilities persist - more than 62% of all loans are secured by real estate, a sector sensitive to global interest rates and foreign demand.
Regulatory Vigilance
The Central Bank’s supervisory stance remains cautious. The announced increase in the countercyclical capital buffer from 1.0% to 1.5%, effective January 2026, signals a proactive approach to reinforcing defenses ahead of the next downturn. Ongoing enforcement of strict loan-to-value and debt-service-to-income ratios also helps shield balance sheets from fresh credit excesses.
However, Cyprus’s vulnerability to external shocks persists. The banking system’s strength is offset by the economy’s heavy dependence on tourism, international services, and external demand - all of which could be impacted by global instability, shifting asset prices, or geopolitical tensions.
No Room for Complacency
Having absorbed the hardest regulatory lessons of the past decade, Cyprus’s banking sector is now in its most secure position since the onset of the crisis. Yet recent European experience shows how slowly developing vulnerabilities can escalate into full-blown emergencies.
For Cyprus’s banks, the path forward is clear: defend recent gains while reducing NPLs to levels comparable with eurozone peers. That means making the reduction of non-performing loans not just a target, but the sector’s top strategic priority.