What do we know about Turkish Cypriot banks? 4 Jan 2023
What do we know about Turkish Cypriot banks? 4 Jan 2023
Sapienta Cyprus Reflections
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If Cyprus is ever to be reunited, banks operating in what the 2004 EU Accession Treaty calls the areas not under the effective control of the government of the Republic of Cyprus (viz. banks in northern Cyprus/the occupied areas/the unrecognized Turkish Republic of Northern Cyprus depending on your use of terms) will become part of the eurozone system and will need to follow the EU’s many thousands of pages of rules and regulations.
Anyone interested in an assessment of the potential challenges of a united Cyprus banking system, therefore, needs to keep an eye on Turkish Cypriot banks. A few years ago a former Republic of Cyprus finance minister referred to the banking system in the north as “the Wild West”. While he was probably saying this to try and garner support for an IMF assessment, his remarks nevertheless suggested that the Republic of Cyprus government was not doing much research on the topic.
There are mounds of data
Yet it is not that hard to find out. Detailed statistics on the banking system as a whole are published monthly and quarterly, while statistics on individual banks are published once per year. If, like me, you do not read Turkish, it only requires a certain amount of persistence with Google Translate, or money spent on Turkish Cypriots who are also comfortable with numbers, to access mounds of data. Subscribers to my monthly Sapienta Country Analysis Cyprus therefore enjoy regular analysis of both the banking system as a whole in northern Cyprus, as well as its top five banks.
Since these subscribers pay to receive this analysis, I am not going to reproduce it here. But I can give a broad brush of what one can glean from the numbers, based on figures at the end of 2021. I shall also give my assessment of what I think the Republic of Cyprus and the international community should really be focusing on when it comes to Turkish Cypriot banks.
The banking system is too small to bankrupt a reunited Cyprus
The first important factor to note is that the banking system in northern Cyprus is small. While assets of the Republic of Cyprus banking system in the southern part of the island amounted to €66.9bn at the end of 2021, assets in the northern Cyprus amounted to TL79.6bn. That is just €5.3bn at end-2021 exchange rates.
Why does this matter? It means that any potential issues that arise when bringing Turkish Cypriot banks into the eurozone system will affect only part of that €5.3bn. The problem will therefore be too small to bankrupt a reunited Cyprus. Why am I confident in saying this? First, because I have crunched a lot of numbers of the largest of the banks in the north. Second, because the Republic of Cyprus government has plenty of resources. It spent €3.2bn in a single year propping up the Cyprus Cooperative Bank in 2018 and €1.5bn on Covid-19 support in 2020, and it did both without having to resort to a bailout programme.
A small Turkish Cypriot banking system also means that any issues with collateral on Greek Cypriot property are also manageable. In the run-up to the UN-facilitated negotiations in Crans Montana in 2017, Sapienta Country Analysis Cyprus subscribers received my calculations about the potential impact of a property settlement on the capital of Turkish Cypriot banks. To give you a general idea of my conclusions, the banking system is not going to be the main economic issue in a reunited Cyprus.
Banks are profitable
The second interesting feature of banks in northern Cyprus is that they are profitable. While Bank of Cyprus and Hellenic Bank have spent the years since the 2013 local financial crisis swinging in and out of profit, banks in northern Cyprus have consistently made a good return.
Why? One key reason is higher interest rates. When you are operating in a currency with high inflation and high interest rates and in an economy with little access to outside markets, you can charge high double digit interest rates for loans and pay several percentage points less for deposits. But if you are bank operating in the eurozone, with housing loan-rates barely above 2% at one stage, the spread between your deposit rates and lending rates is inevitably smaller, which in turn depresses your profits.
A second reason for profitability is that Turkish Cypriot banks have not had the same issues with high non-performing loan (NPL) ratios as banks in the south. This is probably a by-product of the Turkish banking crisis in 2001 that also affected Turkish Cypriot banks and led to a tightening up of controls. Lower NPL ratios mean fewer provisions, which in turn mean a smaller hit on profits.
One can argue that NPL ratios might rise once Turkish Cypriot banks are obliged to use stricter EU definitions for NPLs. But even if this did occur, a legacy of comfortable profits means that they will have more scope for restructuring or writing off loans than banks in the south had during their long years of slim profits.
But there are too many very small banks—
The third interesting feature, and the one where, in my opinion, the world should be paying attention, is that there are a lot of banks for such a small economy: 21 in total. In the south, with assets 12 times larger, there are only six locally authorized credit institutions and four subsidiaries, or 29 if one includes all locally authorized institutions, subsidiaries, branches and representative offices.
The top five retail banks in northern Cyprus account for 53% of all banking-sector assets. This implies that there are a large number of banks with very small assets that are not engaged in retail banking.
—that are out of reach of international AML efforts
Add to this the north’s unrecognized status, the proliferation of outlets selling and accepting crypto currencies, and what appears to have been a construction boom in 2021 despite the very harsh lockdown imposed in the north, and one can understand why concerns about money-laundering and its potential to affect the Republic of Cyprus’ already fragile reputation are rising.
I do not have any answers on how to handle this issue. But if there are any efforts towards rapprochement after the elections in the Republic of Cyprus and Turkey this year, maybe “support for banking-sector transition” which also tackles money-laundering risks, could be one part of a broader package.
To learn more about Sapienta Country Analysis Cyprus, click here.