DBRS: Cyprus has lowest deposit rate hike among European banks

The Cypriot banking system has the lowest rate of transmission of increased interest rates to deposit rates, which is a reflection of local banks’ significant excess liquidity, according to rating agency DBRS Morningstar.

It said in an analysis report that since the end of 2021, the 12-month Euribor rate, which is considered the key interest rate in the European market, has increased from -0.5% to approximately 3.75%, representing a cumulative increase of 425 basis points.

This has been beneficial for the profitability of European banks as the increased interest rates have been “passed on” to lending rates.

“However, by the end of April, the corresponding increase in deposit rates was limited in EU banks,” the agency stated.

Based on the agency’s calculations, by the end of April, the corresponding increase in deposit rates was only 13% of the average increase rate of the 12-month Euribor since the end of 2021.

According to DBRS, Cyprus has the lowest rate of increase in deposit rates among the selected countries it used for its analysis, with only 2%, while the highest rate is recorded in France with 23%.

However, the agency pointed out that there are various factors explaining the different transmission rates of interest rate increases to depositors, with an important factor being the type of deposits and the financial structure of each banking system.

“As a result, banking systems with a large proportion of stable retail deposits and deposits held as liquidity and working capital tend to have less pressure to pass on the interest rate increase to deposit costs,” the agency said.

For example, the Cypriot banking system has a percentage of over 70% in household deposits and over 15% in corporate deposits, while government deposits and deposits from other financial institutions have much lower percentages.

Moreover, it should be noted that the Cypriot banking system is characterised by high liquidity, ranking among the highest in the EU.

Earlier this month, the Central Bank of Cyprus said that the liquidity coverage ratio (LCR) reached 310% at the end of 2022, a rate almost that is double the EU average. Additionally, according to data from the European Banking Authority, the Cypriot banking system recorded the second-highest deposit-to-total-assets ratio at 41% at the end of 2022.