The Central Bank of Cyprus (CBC) released its latest financial stability report this week, highlighting how banks and insurance companies are shaping their investment strategies in different ways.
The report, which covered the year 2023, showed that banks lean heavily on safer investment-grade bonds while insurance companies diversify their portfolios to mitigate risks.
Specifically, the bond portfolio of credit institutions, which makes up around 20 per cent of their total assets, is heavily weighted toward investment-grade bonds (92 per cent).
These bonds carry lower credit risk and contribute to the high-quality profile of their portfolio.
Additionally, most of these bonds (88.3 per cent as of December 31, 2023) are measured at amortised cost, reducing the impact of bond price fluctuations on the sector’s profitability and equity.
It stated that ‘the banking sector’s exposure to market risk, which may affect the value of the bond portfolio, is low,’ clarifying that fluctuations in bond prices do not affect profitability.
Insurance companies, on the other hand, have shifted towards investments in collective investment schemes in recent years, with a decrease in bond investments.
This diversification helps reduce concentration risks on their balance sheets, according to the Central Bank report.
The report also adds, ‘the potential impact on financial stability due to a potential deterioration in the quality of the insurance sector’s loan portfolio is assessed as low,’ due to the small size of their loan portfolio compared to the banking sector.
When it comes to real estate holdings, the report notes that credit institutions and credit acquisition companies have properties valued 24 per cent and 18 per cent below market value, respectively, reinforcing the resilience of these sectors against property price declines.
In contrast, insurance companies, investment funds, and pension funds hold real estate assets valued at current market prices (mark-to-market), making them more exposed to property price fluctuations.
As the report pointed out, ‘declines in property prices will negatively affect their profitability and equity.’
Finally, the report emphasised that real estate exposure within the investment fund sector is relatively small, though liquidity mismatch is a key vulnerability for real estate investment trusts.
