Cyprus interest rates: how do they compare? 21 Feb 2024

Sapienta Cyprus Reflections series

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On 19 February Bank of Cyprus (BOC) reported net profits of €487m for the whole of 2023, compared with €57m in 2022. One key reason for this was widening interest-rate margins. Interest-rates margins are the difference between interest paid by banks on deposits and interest received by banks from loans to customers. BOC’s interest-rate margin more than doubled to 3.41% in 2023, from 1.65% in 2022.

These 2023 results marked the third consecutive year of profits for BOC and the largest profits by far since the 2013 Cyprus financial crisis. This is good news for shareholders, who have waited a very long time for consistent profits.

At the same time, in a country where new lending is still in overall decline, where BOC and Hellenic Bank together hold two-thirds of the lending market, and will hold 77% assuming Eurobank completes is acquisition of Hellenic, this rise in margins has naturally drawn the attention of the finance minister, Makis Keravnos, who has tried to find ways within his limited powers to encourage banks to cut lending rates.

Cyprus banks have the highest lending margins in the eurozone

So how do lending margins in Cyprus compare with the rest of the eurozone? Analysis of the latest data from the European Central Bank (ECB) show that banks in Cyprus have the highest interest-rate margins in the eurozone periphery for outstanding business loans. Margins on loans to non-financial institutions in December reached 3.55% in Cyprus, compared with 3.07% for Greece (EL in the table), 2.52% for Portugal (PT), 2.17% for Ireland (IE), 1.80% for Spain (ES) and only 1.67% for Italy (IT). In short, it means that, at the end of last year, banks in Cyprus were making over twice as much as banks in Italy for legacy loans to businesses and around 15% more than banks in Greece. It is no wonder that Eurobank is interested in expanding its presence in Cyprus.

But the same is not true of actual lending rates

I suspect that borrowers are more interested in actual interest rates than interest margins, however. So how does Cyprus compare with the eurozone periphery on actual interest rates?

I would have like to have compared like with like, and given you interest rates on all outstanding business loans, to have a proper comparison with the margins. But after roaming for two hours on the ECB website (whose navigation frequently sends me bananas), I have to admit defeat. Instead, I compared interest rates on new business loans on smaller amounts (up to €250,000).

Here we find a nice surprise. In Cyprus bank interest rates on “loans to corporations of up to EUR 0.25M with a floating rate and an IRF period of up to three months (new business)” were 4.84% in December—the lowest of not only the eurozone periphery but also lower than the eurozone average (EZ). This has not been the case for long. In fact it was only the case in the month of December. But you can see from the chart below that from around October 2022, Cyprus started to shift from being the third most expensive place to borrow for small businesses to being the second cheapest by May 2023 and then the cheapest in December 2023.

What about housing loans?

The story for housing loans rather depends on what you are looking it. When we look at “bank interest rates - loans to households for house purchase APRC (new business)”, where APRC means the “annual percentage rate of charge”, Cyprus comes off quite well.

As of December 2023 rates on these loans in Cyprus were the third lowest in the eurozone periphery, at 4.44% after Spain (3.99%) and Ireland (4.19%). In fact, as subscribers to Sapienta Country Analysis Cyprus already know, for a short period in October-November, rates for this category were lower than the eurozone average.

However, if we look at what I assume must be the main indicator for outstanding loans, namely “cost of borrowing for households for house purchase”, then the picture is not so good. Cyprus has the highest rates among the eurozone periphery, at 5.06% in December—considerably higher than the second-highest, which is Portugal with 4.47%.

What explains the difference between the cost of outstanding loans and new loans? One answer is interest-rate subsidies. In October 2023 the government announced interest-rate subsidies for certain housing loans signed between January 2022 and December 2023. This does not explain lower rates for new business loans but perhaps the support that the European Investment Bank (EIB) often gives to banks for small business loans explains lower rates on new business loans. Feel free to give your own explanations in the comments.

Have you seen the Sapienta Cyprus Reflections series?

·         Green finance: how will it affect your business? 25 Jan 2024

·         How to bring the people into a Cyprus peace process, 18 May 2023

·         Three mega trends to define the decade, 11 May 2023

·         Cypriots and sanctions: lessons for other professionals in Cyprus, 18 Apr 2023

·         Cyprus and security: it’s time to change the toolbox, 14 Feb 2023

·         What do we know about Turkish Cypriot banks? 4 Jan 2023

·         How much is Russian business worth to Cyprus? 12 Dec 2022

·         The amazing Cyprus growth machine 17 Nov 2022

You can find a full list of all posts here.