DEPOSITS rose by €8.6 billion from January 2007 to January 2008, reflecting an annual growth rate of near 20 per cent, sending commercial banks into a scramble for a share of new deposits entering the country. As a result, consumers are seeing a rise in deposit interest rates across the banking sector in an effort to attract cash and commerce, mainly from abroad.
According to statistics released by the Central Bank, total deposits by the end of January 2008 reached €52.3 billion, compared to €43.7 billion the year before. The biggest share of deposits came from domestic residents (any legal entity or natural person resident in Cyprus), responsible for €32.3 billion. Deposits from other euro area residents accounted for €1.5 billion, while residents of the rest of the world brought €18.5 billion into the bank vaults of Cyprus.
While domestic residents made up the bulk of deposits, the highest annual growth rate came from “rest of the world” residents, who increased deposits by 26 per cent compared to domestic residents (17 per cent) and other euro area residents (7 per cent). The majority of this boost in cash flow comes from Russia.
On the domestic front, the majority of deposits came from households, counting for €22.4 billion. Non-financial corporations deposited €6.4 billion while insurance corporations and pension funds represented €2.7 billion of domestic deposits.
The increasing flow of deposits from residents outside the euro area is proving an attractive source of loan capital for the island’s commercial banks, a much cheaper and more stable option than interbank borrowing. The battle for a share of the cash flowing into the country, mainly from Russia, has led to the offer of highly competitive interest rates among the island’s numerous banks. With newly established banks like Eurobank and Piraeus Bank wanting a piece of the pie, the competition can only get healthier.
According to the latest Central Bank figures, loans are growing faster than deposits. By January 2008, loans reached €42.2 billion, showing a 33.5 per cent increase from the year before, almost double the annual growth of deposits (19.6 per cent).
Commercial banks are offering interest rates up to 90 points more than the European Central Bank base rate of 4 per cent, with rising rates set according to the duration of the deposit. However, the highest interest rates are reserved for deposits of over €100,000 and for over a year.
According to the Stockwatch website, Marfin Popular Bank offers an annual depository interest rate of 4.8 per cent for deposits exceeding €100,000 and 4.6 per cent for deposits up to €100,000. Bank of Cyprus offers a six-month interest rate of 4.50 per cent which will be paid in April. New arrivals, Eurobank and Piraeus Bank are forced to go one step further to cut a path into the market, offering interest rates between 4.8 and 4.9 per cent.
Economist Dr Stelios Platis highlighted two important reasons for the battle of the deposits, resulting in rising interest rates.
“Through deposits, you get liquidity for lending purposes, without going to the Euribor (Euro interbank offered rate), which is volatile and expensive as a result of current international market conditions,” he said.
“Secondly, there is a strategic reason for going after deposits. The idea is when people have their money with you, they will also receive other banking services from you. In this way, you lock them as your clients. This applies especially to overseas markets, and in particular, the Russian market, which is a strategic objective for all three major banks. The Bank of Cyprus has a bank in Russia. Marfin Laiki Bank is moving into Russia while Hellenic Bank has a website in Russian.”
The economist noted that the new players in the banking sector would have a hard time taking business from the three major banks.
“The three big banks are well positioned to take advantage of this market. Eurobank and Piraeus Bank have not captured much of the market. But they are here for a particular reason, they see a growing market and want in on it, that’s the name of the game,” he noted.
In terms of the increased cash flow at a time when the credit market is experiencing a squeeze around the world, Platis said: “It seems oil and gas prices have poured millions of roubles into Russian companies’ accounts, which they’re moving into Cyprus.”
The Central Bank stats also revealed that housing loans were on the up. “This is an indication that the housing market is still resisting pressures from global economic conditions which is indicative of support factors of the Cyprus economy. It remains to be seen what the ultimate effect will be on the Cyprus property market.”
Platis predicted that growth in real estate prices would slow down this year, going below the average price increase of 10 per cent. Last year saw a rise of 19 per cent in house prices. The economist said the most pessimistic scenario would be a 3-4 per cent price increase for this year, a figure lower than current inflation which is touching the 5 per cent mark.
Former Finance Minister Michalis Sarris told the Cyprus Mail at the weekend that Cyprus was an attractive place for people to bring in their money. He warned, however, that the banks had to be responsible with the extra liquidity so as not to put further inflationary pressures on the economy.
“People are finding Cyprus an attractive place to put their money… When you are an attractive place and you are attracting all this money you need to manage it correctly so it doesn’t translate into inflationary pressure,” he said.
