According to the Governor of the Central Bank of Cyprus, Konstantinos Herodotus, the transformation of the business model of banks towards digitalization and increasing their profitability by rationalizing their cost structure while carefully monitoring the main risks of this transformation are the main problems of the banking sector.
Herodotus spoke on Thursday at the Annual General Meeting of the Association of Cypriot International Financial Firms (ACIFF), which is taking place online due to the pandemic, where he presented the current situation in the Cypriot and European banking sector, as well as the challenges that lie ahead, as well as sharing information on trends and developments in the banking industry.
Regarding the banking sector in Cyprus, Herodotus said that almost a decade after the peak of the financial crisis, one can see a significant decrease in balance sheet risks and an improvement in the ability of banks to deal with losses. In addition, he mentioned that over the same period there was a notable clearing of non-performing loans, although the NPL ratio in the banking sector of Cyprus remains high (15.2% as of October 2021), at the same time, Cyprus is one of the the most liquid banking sectors in the EU with a liquidity coverage ratio of 313% in December 2021.In terms of challenges, according to Herodotus, the profitability outlook for banking in both Cyprus and EU countries remains challenging, while overcapacity, credit risk, climate and environmental risks, and IT and cyber security risks pose are major areas of concern for regulators. Referring to how the banking landscape is expected to look like in the near future, Herodotus argued that digitalization in banks could be a solution to a number of challenges, such as cost containment and meeting new customer profiles that are more tech-savvy and spend less time on bank visits.
In this direction, he noted the initiative of the CBC to create a digital customer registration platform for banks in Cyprus. A large number of banks have confirmed that they will join and use this scalable form of technology, Herodotus said, and a tender to provide the technology is expected to be published in the very near future.
“For digitalization to truly drive efficiency,” Herodotou said, “digital strategy must be part of a broader business model overhaul and internal organization optimization. Of course, as supervisors, we must ensure that financial stability and prudential soundness are maintained, while at the same time allowing for technological innovation.”Herodotou concluded by emphasizing that transforming the business model of banks towards digitalization can enable them to increase their profitability in the long term by streamlining their cost structure and providing more efficient and personalized services to their customers. However, he added, the main risks of this transformation should not be ignored, and banks need to adapt to the demands of the new era.