Major banks in Cyprus and Greece significantly expanded their bond portfolios over the past year, increasing their holdings in both domestic and European bond markets.

According to a report from Stockwatch, this move was driven by expectations of an impending reduction in interest rates and various unpredictable economic factors.

Although the pace of expansion is expected to slow, the trend is set to continue in the current year.

The increase in exposure to bonds during 2024 was evident across all major banks.

The Bank of Cyprus, the National Bank of Greece, and Piraeus Bank expanded their bond portfolios by approximately 20 per cent.

Hellenic Bank followed with an increase of around 14 per cent, while Alpha Bank Greece recorded a rise of close to 10 per cent.

Eurobank Greece saw the most significant surge, with a 51 per cent increase, primarily due to the acquisition of Hellenic Bank.

As a result of these transactions, bond holdings now constitute a larger share of total bank assets.

For the major Greek banks, the proportion ranged between 20.5 per cent and 26.6 per cent.

Hellenic Bank’s bond holdings reached 31 per cent of its total assets, explaining its relatively smaller increase in positions over the year.

The Bank of Cyprus reported the smallest relative percentage, at 16 per cent, but has announced its intention to increase this to 18 per cent in the current year and to 20 per cent in the medium term.

Moreover, the bond portfolios of these banks have yielded satisfactory returns, with the Bank of Cyprus achieving a slightly higher return of 3.1 per cent.

As interest rates continue to decline, banks anticipate that revenue from bond holdings will form a greater proportion of their overall income, offsetting the expected drop in interest income.

Additionally, falling interest rates are expected to drive bond prices higher, allowing banks to capitalise on investment gains.

It is noteworthy that banks are investing in high-quality bonds, with the average credit rating of the two largest Cypriot banks standing at Aa2, the third-highest rating tier.

This reflects the banks’ emphasis on quality investments, aiming to avoid the mistakes of the past when excessive exposure to lower-quality bonds contributed to the 2013 banking crisis.

*This article is a translated version of content originally published on StockWatch.