Cyprus banks earned €1.02 billion in 2025 even after net interest income cooled, and the European Central Bank’s June rate rise is set to lift earnings again. That success now collides with a more fragmented Parliament elected in May, where opposition parties plan to revive a windfall tax on interest profits and fresh foreclosure changes once the House resumes in September.
The irony is sharp. The same profits and capital buffers that rebuilt the sector after the 2013 crisis, and that the Central Bank insists must stay strong against geopolitical shocks, are the fuel for political demands to hand part of those earnings back to households and housing schemes.
Profits Cooled but Still High Enough to Target
Sector-wide after-tax profits fell 13.9 percent in 2025 to €1.02 billion from €1.18 billion the year before, according to aggregate banking sector profitability data from the Central Bank of Cyprus. The drop tracked lower net interest income as earlier ECB cuts worked through.
Bank of Cyprus, the largest player, still delivered strong numbers. Preliminary results showed profit after tax of €481 million for 2025, a return on tangible equity of 18.6 percent, an NPE ratio down to 1.2 percent and a CET1 ratio of 21.0 percent. Cost-to-income sat at 37 percent. New lending hit a record €3.0 billion.
- €1.02 billion, Cyprus banking sector profit 2025
- €481 million, Bank of Cyprus PAT 2025
- 18.6 percent, BOC ROTE
- 1.2 percent, BOC NPE ratio
Assets across the system rose to nearly €70 billion. Capital ratios improved. The numbers remain well above European averages on several metrics, even if the peak of the rate-cycle windfall has passed.
| Metric | 2024 | 2025 |
|---|---|---|
| Sector profit | €1.18 bn | €1.02 bn |
| BOC PAT | – | €481 mn |
| BOC ROTE | 21.4% | 18.6% |
| Sector CET1 (approx) | 24.7% | 25.8% |
Those figures still look like windfall territory to critics who note Cyprus deposit rates remain among the lowest in the eurozone while lending rates sit higher.
May Vote Left No Easy Majority
The 24 May 2026 parliamentary elections produced a more splintered House of Representatives. DISY remained largest with 27.1 percent and 17 seats. AKEL took 23.9 percent and 15 seats. Far-right ELAM doubled to 10.9 percent and eight seats. New entrants ALMA (5.8 percent, four seats) and Direct Democracy Cyprus (5.4 percent, four seats) entered. Several traditional smaller parties fell below the threshold.
Turnout held at 66.9 percent. Scope Ratings noted the result created a more complicated policymaking environment that will require broader consensus for major legislation. President Nikos Christodoulides’s supporting parties already held a minority position; the new arithmetic makes coalition arithmetic harder still.
When Parliament returns in September, that fragmentation raises the odds that opposition bills gain traction even without government backing.
AKEL’s Windfall Bill Is Already Written
AKEL has said it will push to revive its proposal for a tax on banks’ windfall profits. The party’s earlier design called for a 20 percent levy in 2025 and 2026 on net interest income exceeding 40 percent of 2022 levels. Analysts calculated that would have cost Bank of Cyprus roughly €69 million in one year, or about 14-15 percent of expected profits, and smaller sums for peers.
AKEL will request that the proposal to tax banks’ windfall profits be brought back with the reopening of Parliament.
The party framed the move after Central Bank data showed low deposit rates and comparatively high lending rates, calling it evidence of an “oligopoly” exploiting society. Supporters want proceeds directed to housing or inflation relief.
Banks have long shown an allergy to new taxes. They already pay substantial corporate tax (sector contributions ran hundreds of millions in recent years) and face higher countercyclical capital buffers. The Central Bank raised the countercyclical buffer to 1.5 percent from January 2026. Extra capital set-asides come straight out of distributable profits.
Foreclosure Rules Keep Returning Too
Alongside tax, lawmakers are expected to revisit the foreclosure framework. The legislation has been amended repeatedly, yet never fully satisfies borrowers, banks or courts. Recent changes prompted a clear warning from the Central Bank.
What we know
- CBC’s July report said amendments intended to protect borrowers could weaken payment culture and reduce recovery expectations.
- That in turn could produce stricter lending criteria and higher borrowing costs, undercutting the original goal.
- Banks say they can discuss certain process improvements but resist measures that slow collateral recovery.
What’s unconfirmed
- Exact text of any new bill that will reach the floor in the autumn session.
- Whether enough parties will coalesce around a single package.
The Central Bank of Cyprus Financial Stability Report published in late July stressed that resilience still requires strong capital and liquidity buffers. Geopolitical tensions, Middle East conflict effects on energy, the Russia-Ukraine war and cyber risks remain elevated for a small open economy.
Banks Are Already Building Non-Interest Walls
Lenders have not stood still. They have pushed into insurance, wealth management, payments and fintech partnerships precisely to reduce reliance on pure lending margins. Bank of Cyprus highlights an integrated bank-insurance-payments offering and capital-light fee income. Sector M&A has accelerated consolidation.
- Eurobank completed its majority stake purchase and merger path with Hellenic Bank.
- Alpha Bank acquired AstroBank, creating a clearer third force.
- Insurance combinations, including Alpha’s deal linking Universal Life and Altius, aim at scale in protection products.
These moves mirror the broader shift toward open finance and non-lending income seen across Europe. They also create earnings streams that are harder for a simple interest-income windfall tax to reach. The more Parliament threatens the core lending franchise, the faster that pivot is likely to run.
Rate Support Meets Capital Demands
The ECB raised key rates by 25 basis points in June, taking the deposit facility to 2.25 percent, the main refinancing rate to 2.40 percent and the marginal lending facility to 2.65 percent. The move responded to renewed inflationary pressure linked to energy prices and the Middle East conflict. Further hikes remain possible later in 2026.
Higher policy rates support net interest margins again after the 2025 squeeze. At the same time, banks must absorb the higher capital buffers and prepare for climate, cyber and geopolitical stress tests the CBC wants embedded in strategy. Retained earnings are the cleanest way to do both.
Similar margin pressure already hitting banks elsewhere has forced pivots toward fee income and efficiency. Cyprus is further along on capital strength but faces the same political temptation to treat high ROE as a free public resource.
September Session Opens the Next Round
Parliament’s return will bring the windfall-tax proposal and foreclosure amendments back onto the agenda. In a House without a stable majority, passage of either remains uncertain, yet the mere debate keeps risk premia elevated and forces banks to plan for multiple outcomes.
Households and SMEs that the tax is meant to help could face the second-round effect CBC already flagged: tighter underwriting and higher loan pricing if recovery rights look less certain or if capital is drained. Foreign institutional investors who finally returned after years of losses watch the same signals.
Banks will keep arguing that strong profits fund the buffers that protect deposits and the economy. Opposition parties will keep arguing that those profits were made possible by public patience during the clean-up and by an uneven rate pass-through. Both claims contain truth. The fractured arithmetic of the new Parliament makes a clean resolution less likely than a prolonged series of skirmishes through 2027.
The profits that proved the sector’s recovery are now the reason it sits back in the political cross-hairs.
