Bank of Cyprus rewarding customers and shareholders

States Eliza Leivadiotou in an interview

Do you think the ECB's policy of successive interest rate hikes, to bring inflation down to 2%, is paying off? Whereas inflation has slowed down, what's the cost-benefit relation in terms of higher interest rates, people's difficulty in repaying loans, and the risk of constraining consumption and investment?

First of all, the 'shock therapy' which the ECB has started implementing was necessary in order to halt and reverse rising inflation trends at the time. Clearly the negative interest-rate policy in place for several years was coming to an end anyway. The shock from the war on energy markets, and the impact on inflation, left the ECB no other choice. More recently, the challenge has been how to figure out how much, and how fast, European economies can respond to these high interest rates. And each economy is different. Cyprus responds one way, Greece another, Germany and France are different, and so on. And that's where things get complicated for the ECB. For example, inflation in Cyprus is lower than the EU average, which is quite positive for the economy. But unless the eurozone average comes down, interest rates might conceivably keep going up.

As to whether rising interest rates constrain consumption and investment, well that is precisely the ECB's objective. Of course it mainly concerns consumption, because by reducing it you also drive down inflation. The impact on investment is an unfortunate corollary. The aim is to taper off the rising trend, so that inflation drops, economies in Europe stabilise, leading to a new cycle of 'normality' with growth and with interest rates perhaps a little lower than they are currently.

But I don't expect that in the foreseeable we'll move back into negative or zero interest-rate territory as in the previous five years.

Now, regarding credit risk in terms of loan repayments, certainly the risk today is higher than it was 18 months ago. Interest rates are a burden on individuals and corporations. At Bank of Cyprus, for years we've been utilising sensitivity analysis on our loan portfolio. Meaning, whenever we looked at a loan's repayment, we always checked the borrower's ability to repay under a higher interest rate. The customer may be unable to see it, but in our sensitivity analysis scenarios we always looked at the customer's ability to repay under higher interest rates, so we were sufficiently prepared.

That said, it's a given that in relation to the lower interest-rate period, we now face tougher challenges. That's why we're on high alert, staying in touch with customers, so that we can quickly track what issues they face and, to the extent possible, propose solutions - such as with various products, or a fixed interest rate, and with all the tools currently at our disposal or the tools which will become available as the situation unfolds.

Any news on Bank of Cyprus' suggestion to the Central Bank for a borrowers loyalty scheme? Did you get approval? What can you tell us about the scheme?

We're working on the scheme, finalising its parameters in line with the relevant regulations. There is no news at the moment, we're waiting. What we want to do, is offer some form of refund to loyal customers and to those who are consistent in their loan repayments. By that I refer to home loans to individuals, for the purchase of a first home and up to a certain value. The exact parameter hasn't been finalised yet, but we aim to support several thousands of our customers at a cost of millions of euro.

Why don't you go for freezing interest rates for a year, like they did in Greece?

We'd rather go for refunds, which customers can use as they like. Also, this way each customer will know in advance the amount he/she will receive, and it won't depend on the future trajectory of interest rates. In this way, good borrowers are rewarded with cash. We're thinking about returning a certain amount to eligible customers, regardless whether the ECB decides to raise or lower interest rates. Let me also say that the overall interest rate on home loans in Greece is higher than that in Cyprus.

Do you still need to cut back on bank staff? Any chance of a new voluntary exit plan this year?

No, our staff numbers are where we think they should be for us to operate according to the Group's situation today. Of course, a bank needs to constantly renew the skills and know-how of its staff. We all need to learn, and we've set ourselves the challenge of advancing our know-how and skills. We're hiring some specialised staff in niche areas, such as tech, which is an area we'd like to considerably invest in, in terms of human resources.

The fact that Bank of Cyprus is paying out a dividend after 12 years, what does that signify for the bank?

At the end of April, and after a pause of 12 years, we managed to get the green light from the ECB for paying out a dividend to our shareholders. For us, this was a major achievement, a landmark even. We're the first bank in Cyprus or Greece to have received approval for a dividend payout. It's a sign that we've put the difficult decade of restructuring behind us, and we're moving on. The Group has restructured into a viable, diversified and well-capitalised organisation. We have 95,000 shareholders, most of whom Cypriots. We announced a dividend payout of €0.05 per share, which works out to €22.3 million. This is an important step in our strategy for profit sustainability and providing a consistent return to shareholders.

Something else that's important, and we announced this last week, are the results for the first quarter of 2023. In all, we generated after-tax profits of €95 million, corresponding to a 21.3% Return on Tangible Equity (ROTE). Our priority is to keep our investors updated about the bank's trajectory and prospects, but also about the economy in general. So we're planning an event for shareholders, to take place on 8 June in London, where we'll present both the bank's financial results as well as the bank's updated prospects.

Some people feel that while banks apply strict policies when it comes to considering new home loan applications, they're more flexible in issuing credit cards or granting consumer loans. Is that the case at Bank of Cyprus?

I'd say there's no difference. Perhaps people get this impression because, by definition, home loans are longer-term and concern larger amounts, and therefore a bank needs to make a more detailed risk analysis. At the end of the day, what matters the most is the customer's repayment ability, in other words if a customer can keep up with card payments or loan installments. The bank looks at customers, their revenue streams, and accordingly assesses someone's ability to repay. Naturally, I'd like to stress that we're constantly striving to simplify the application process for new loans, and we're already doing that with the Quick Loans consumer loans which are available on customers' smart phones, where applying takes just a few minutes. We're planning to expand this to other products very soon.

The political parties in parliament say they'll come back soon with new bills amending the legislative framework governing foreclosures. The government is meanwhile drafting a bill for a Foreclosures Court. It seems the majority of parties insist on broadening a borrower's right to challenge the outstanding loan amount in court. Are you worried?

I think that perpetuating the public debate on foreclosure laws only serves to do damage to the country in the long term. We have a repossessions framework with safeguards for those in need of protection - be that the Financial Ombudsman, or the courts, or even filing a complaint to the bank itself. Beyond that, sustaining this talk of amending the foreclosures framework certainly doesn't help in terms of maintaining confidence in the system. Any changes should be done carefully and in a coordinated fashion, following consultation, so that they can work.