Capital ratios improve as sector profitability cools

The Central Bank of Cyprus (CBC) published updated aggregate Cyprus banking sector data for the year ending December 31, 2025, showing that the banking sector’s profitability declined in 2025.

Specifically, profitability among Cyprus banks dropped by €165 million, a decrease of 13.9 per cent year-on-year, falling to €1.02 billion from €1.18 billion in 2024.

According to the CBC, this decrease was primarily driven by a reduction in net interest income (NII) across the sector.

At the same time, the figures revealed that total assets in Cyprus’ banking sector increased by €4.35 billion, representing a rise of 6.6 per cent.

This increase pushed the total figure to €69.96 billion in December 2025, compared with €65.60 billion in December 2024.

This growth was largely attributed to an increase in loans and advances and debt securities, the CBC explained.

The CBC also reported an improvement in the Common Equity Tier 1 (CET1) ratio, which rose by 1.1 percentage points to 25.8 per cent in December 2025, up from 24.7 per cent a year earlier.

The increase in capital adequacy was primarily attributed to an increase in CET1 capital and a reduction in total risk exposure.

The Cypriot banking sector’s performance comes within a broader European context, where banks have demonstrated resilience despite ongoing structural changes and external pressures.

According to European Banking Federation (EBF) data published in mid-December of the previous year, European banks have continued to restructure, with the total number of credit institutions declining to 4,834 in 2024, representing a 1.9 per cent decrease compared with the previous year.

This long-term consolidation trend has also affected physical networks, with the number of bank branches falling by 2.5 per cent year-on-year to approximately 126,952.

At the same time, lending and deposit activity across the EU remained broadly stable, with total loans increasing by 0.12 per cent to €26.84 trillion in 2024.

Deposits from businesses and households rose by around 4.55 per cent to €17.05 trillion, with household deposits increasing by 3.90 per cent and business deposits by 3.28 per cent.

Total assets held by EU credit institutions also continued their upward trajectory, expanding for the seventh consecutive year to €45.1 trillion.

Further insight into the European banking environment was provided by the European Banking Authority (EBA), which in early December of the same year confirmed that EU and EEA banks remain strong in capital, liquidity, profitability and asset quality.

However, the authority also warned that geopolitical uncertainty, market volatility and operational risks continue to pose significant challenges.

It highlighted that rising global tensions and sovereign debt levels are contributing to higher risk premiums and more volatile funding markets, increasing the sector’s exposure to external shocks.

The report also pointed to elevated operational risks, including cyber threats, fraud and legal challenges, alongside growing concerns related to outsourcing and third-party dependencies.

Despite these risks, European banks have maintained robust capital positions supported by strong profitability, even as net interest income has come under pressure.

Liquidity levels remain well above regulatory requirements, although buffers have increasingly shifted towards sovereign assets, making banks more sensitive to market fluctuations.

Asset quality has remained broadly stable, supported by recovering real estate markets and resilient labour conditions, although certain segments such as commercial real estate and small and medium-sized enterprises continue to require close monitoring.

The European data, however, reflects conditions prior to the outbreak of the war in Iran and the subsequent regional crisis, meaning that any potential economic and financial consequences stemming from these developments are not yet captured in the figures.

Analysts have warned that a prolonged period of turbulence could trigger further market volatility and massive capital flight, as both legitimate actors and politically exposed persons seek to move wealth away from the region.