Cypriot banks stick to tight lending criteria — loan demand suppressed

Lending criteria for both businesses and households in Cyprus remained tight during the second quarter of 2023, reflecting the cautious approach adopted by Cypriot banks, according to a report released this week by the Central Bank of Cyprus (CBC).

At the same time, there was a reduction in loan demand, largely attributed to elevated interest rates and reduced consumer confidence.

According to the Banking Lending Survey, conducted by the Central Bank of Cyprus for Q2 2023, loan demand decreased across all categories, primarily due to high interest rates and reduced demand for financing fixed investments and purchasing durable goods.

Specifically, during Q2 2023, the criteria for loan issuance to businesses and all other loan categories for households remained unchanged from the strict levels observed during the previous quarter.

In light of existing economic and financial conditions, banks seem keen to take a cautious approach when granting new loans, aiming to keep non-performing loans at a minimum.

Meanwhile, they pursue sustainable loan renegotiations when necessary, with a dual approach aimed at risk mitigation and ensuring the quality of their loan portfolios.

In Q2 2023, the overall terms and conditions for granting new loans or credit limits to businesses became stricter, primarily due to the increase in banks’ margin (the difference against the reference interest rate) for higher-risk loans.

Conversely, banks’ margins for standard loans decreased on a net basis, but there were varying opinions among banks.

Moreover, increased competition from other financial institutions restrained the tightening of overall terms and conditions for granting new business loans, while other factors had a net neutral impact across the board.

On the demand side, during the second quarter of 2023, net loan demand in Cyprus from businesses and households, both for housing loans and, to a greater extent, for consumer and other loans, continued to decrease.

The reduction in net business loan demand in Q2 2023 was influenced by higher interest rates and decreased demand for financing fixed investments, although to a lesser extent than the previous quarter.

Conversely, the demand for working capital and current account financing continued to increase, potentially due to high energy prices and the high cost of raw materials/products.

Regarding households, net demand for housing loans in the same quarter decreased, although to a lesser extent than in the past five quarters.

The reduction in housing loan demand in this period was attributed by banks to high interest rates and worsening consumer confidence.

Similarly, the decrease in consumer and other loan demand was influenced, according to the survey, by reduced consumer confidence, general interest rates, and reduced spending on durable consumer goods.

For the third quarter of 2023, banks expect the criteria for granting business loans to remain unchanged compared to the previous quarter.

Conversely, stricter criteria for granting loans are anticipated for all household loan categories, indicating a potential continuation of the tightening of new lending.

At the same time, the Banking Lending Survey predicts further reductions in net loan demand in Cyprus in Q3 2023, both from businesses and households across all loan categories.

Finally, the Central Bank of Cyprus clarified that the results of the survey reflect the perceptions and expectations of participating banks and do not necessarily represent the views, expectations, or estimates of the Central Bank of Cyprus.