Fitch Affirms Bank of Cyprus & Hellenic Bank's IDRs at 'RD'; Upgrades VRs After Recapitalisation

Hellenic Bank Pcl

05/03/2014 17:23

(The following statement was released by the rating agency)

BARCELONA/LONDON, March 05 (Fitch) Fitch Ratings has affirmed Bank of Cyprus 
Public Company Ltd (BoC) and Hellenic Bank Public Company Limited's (HB) 
Long-Term Issuer Default Rating (IDR) at 'RD'. Fitch has also upgraded the 
banks' Viability Ratings (VR) to 'cc' and 'ccc', respectively, from 'f'. A full 
list of rating actions is at the end of this release.

The upgrades of the VRs follow Fitch's review of the two banks' standalone 
creditworthiness after the completion of their recapitalisation and public 
details of BoC's restructuring plan, which were key milestones in restoring the 
banks' solvency. Their IDRs continue to reflect the strong capital controls in 
place, including, among others, restrictions on the free movement of capital 
within Cyprus.

In accordance with Fitch's criteria, the fact that these banks face legal 
restrictions on servicing their obligations does not preclude us from 
reassessing their VRs following their recapitalisation. However, the VRs 
continue to reflect Fitch's view that failure risk is high in light of the 
challenges the banks and the country face, notably continued asset quality and 
capital pressures as well as restoring fragile consumer confidence. 

KEY RATING DRIVERS - IDRs, SENIOR DEBT 

While capital controls were intended to be temporary, restoring confidence in 
the Cypriot banking system is taking longer than initially anticipated by Fitch. 
We note that restrictions have been eased since they were first introduced on 27 
March 2013, but still prevail for Cypriot banks, limiting cash withdrawals, 
cashing of cheques and opening of new bank accounts. While these measures have 
been taken to stabilise the deposit outflow from Cypriot banks, deposits subject 
to capital controls constitute a material part of the two banks' obligations, at 
49% for BoC and 86% for HB of their respective balance-sheets as of end-3Q13, 
and Fitch views this as commensurate with an 'RD' rating.

According to Fitch's rating definitions, 'RD' ratings indicate an issuer that in 
our view has experienced an uncured payment default of a bond, loan or other 
material obligation but has not entered into liquidation or ceased operating, as 
is the case for BoC and HB.

BOC's Long- and Short-term senior notes programmes have been affirmed and 
simultaneously withdrawn at 'C'/'RR6' and 'C', respectively, as these ratings 
are no longer considered by Fitch as relevant.

KEY RATING DRIVERS - VRs

The upgrades of VRs reflect the banks' recapitalisations, which resulted in 
Fitch eligible capital (FEC) ratios of 9.7% for BoC and pro-forma of around 16% 
for HB at end-3Q13. However, the highly speculative VRs of the two banks 
continue to reflect high asset quality and profitability risks, which if not 
contained could renew capital concerns, as well as banks' sensitivity to 
potentially further deposit outflows. Fitch views BoC's VR as more at risk than 
HB's due to its thinner loss-absorption capacity and greater funding 
vulnerabilities, as evidenced by a deposit franchise that was heavily impaired 
by the depositors' bail-ins and high central bank funding dependence. BoC also 
faces the challenge of integrating the acquired operations of Cyprus Popular 
Bank Public Company Ltd (CPB), whilst it completes a restructuring under the 
terms agreed with the authorities. All these factors support the one-notch 
difference between the two banks' VRs. 

In July 2013, BoC raised EUR4.6bn of capital, largely by the conversion of 47.5% 
of uninsured deposits (exceeding EUR100,000) into equity. Following the 
recapitalisation, BoC agreed with the authorities to undergo a restructuring 
that entails the reorganisation of the group, reduction of capacities and asset 
optimisation. 

In October 2013, HB raised EUR358m of capital (above the EUR294m shortfall 
identified by PIMCO in its adverse stress scenario), by issuing new shares and 
converting junior debt instruments into contingent convertibles (CoCos) with, in 
Fitch's view, strong conversion triggers (ie, regulatory core Tier 1 ratio below 
9%). HB has not received state aid or enforced losses onto senior creditors. 

While fragile, Fitch considers HB has a larger capital buffer than BoC to cope 
with potentially higher credit losses under Fitch's assumed recessionary period. 
We expect the Cypriot economy to contract by 7.1% in 2013, 5.1% in 2014 and 1.5% 
in 2015. In Fitch's view, to protect its viability BoC is therefore more likely 
to have to seek ways to improve capital levels to absorb continued credit 
losses. 

Fitch regards additional rapid loan quality deterioration as one of the main 
risks for Cypriot banks. Non-performing loans (NPLs) escalated further during 
2013 and alongside loan contraction, led to high NPL ratios (53% for BoC at 
end-2013 and 44% for HB at end-3Q13 under the Central Bank of Cyprus' new 
definition). Their reserve coverage ratios are low at below 40%, also 
considering their reliance on collateral values, which are at risk of further 
corrections.  

The gradual lifting of capital controls since March 2013 led to steady deposit 
outflows, particularly at BoC. Fitch views HB in a better position than BoC to 
face any funding and liquidity pressures that may arise if deposits continue to 
decline once controls are further eased and/or depositors' confidence concerns 
remain. This is reflected in HB's net loans/deposits ratio of 68% at end-3Q13 
compared to 145% at BoC as of end-2013.  

Central bank funding underpins BoC's funding and liquidity, notably after the 
partial acquisition of CPB, and is needed to cover large retail funding 
imbalances. The recapitalisation allowed BoC to exit resolution and to be 
reinstated as an eligible counterparty by the ECB, which should help reduce 
funding costs as access to the Emergency Liquidity Assistance is substituted by 
lower-cost ECB funding.    

In 9M13, the two banks were loss-making due to high impairments from the sales 
of Greek operations and a rapid deterioration of Cypriot loan books. Fitch 
believes that a return to profits is increasingly challenging in the foreseeable 
future given Cyprus's recession and will require the successful completion of 
restructuring plans and/or cost-cutting measures. 

RATING SENSITIVITIES -IDRs AND SENIOR DEBT

The two banks' IDRs are sensitive to the relaxation of capital controls, in 
particular regarding the free flow of capital within the country. According to 
details provided in the second IMF review, the Cypriot and international 
authorities agreed on a roadmap for the relaxation of capital controls, which 
envisages four phases linking relaxation steps to defined milestones on the 
restructuring of the banking sector. Each of these steps will take into account 
depositors' confidence and banks' liquidity position.

Fitch will reassess the banks' IDRs upon the completion of phase three, which 
involves the free flow of capital within the country, namely by lifting 
restrictions on cash withdrawals, cashing of cheques, and opening of new bank 
accounts. The accomplishment of this phase is based on further progress in BoC's 
restructuring and the completion of the merger of the credit cooperative sector.

RATING SENSITIVITIES -VRs

Fitch views little upside potential for the two banks' VRs in the foreseeable 
future as they remain highly vulnerable to Cypriot economic developments and 
investor/depositor confidence issues. Their overall financial strength is 
sensitive to Cyprus's recessionary environment, especially if this is more 
protracted and deeper than currently assumed. It will also depend on their 
ability to return to profits and absorb further loan losses without jeopardising 
capital, a material reduction in central bank funding at BoC and on restoring 
depositors' confidence.

Fitch views BoC, and to a lesser extent HB, at risk of a VR downgrade. This 
would mainly come from a deterioration of the capital base as asset quality 
pressures continue, and/or if funding and liquidity deteriorates further, for 
example, because of the lifting of capital controls. 

KEY RATING DRIVERS - SRs AND SRFs

BoC's and HB's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No 
Floor' reflects Fitch's belief that while the two banks are of systemic 
importance in Cyprus with national deposit market shares of 28% and 11%, 
respectively; support for them cannot be relied upon in light of the scarce 
resources at the authorities' disposal, the large IMF/EU bail-out package as 
well as the imposition of losses on senior creditors in the case of BoC. 

RATING SENSITIVITIES - SRs AND SRFs

Fitch views little upside potential, if any, for Cypriot banks' SRs and SRFs 
given the limited ability of the Cypriot authorities to provide support, the 
recent implementation of its resolution mechanism, but also more generally 
considering the intent to reduce implicit state support for financial 
institutions in the EU, as demonstrated by a series of legislative, regulatory 
and policy initiatives. In September 2013, Fitch commented on its approach to 
incorporating support in ratings of banks worldwide in light of evolving support 
dynamics (see "The Evolving Dynamics of Support for Banks" and "Bank Support: 
Likely Rating Paths" available at www.fitchratings.com)

The rating actions are as follows:

Bank of Cyprus 

Long-term IDR: affirmed at 'RD'

Short-term IDR: affirmed at 'RD' 

VR: upgraded to 'cc' from 'f' 

Support Rating affirmed at '5' 

SRF: affirmed at 'No Floor' 

Senior notes programme: affirmed at 'C/RR6'; withdrawn

Commercial paper programme: affirmed at 'C'; withdrawn 

Hellenic Bank

Long-term IDR: affirmed at 'RD'

Short-term IDR: affirmed at 'RD' 

VR: upgraded to 'ccc' from 'f' 

Support Rating affirmed at '5' 

SRF: affirmed at 'No Floor' 

Contacts:

Primary Analyst

Cristina Torrella

Senior Director 

+34 93 323 8405

Fitch Ratings Espana, S.A.U.

Paseo de Gracia, 85, 7th Floor

08008 Barcelona

Secondary Analyst 

Josep Colomer

Director

+34 93 323 8416

Committee Chairperson

James Watson

Managing Director

+7 495 956 9901

Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: 
hannah.huntly@fitchratings.com.

Additional information is available at www.fitchratings.com. 

Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 
January 2014 and 'Recovery Ratings for Financial Institutions', dated 24 
September 2013 are available at www.fitchratings.com.

Applicable Criteria and Related Research: 

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Recovery Ratings for Financial Institutions 

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=717538

Additional Disclosure 

Solicitation Status 

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822616

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: 
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING 
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S 
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND 
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF 
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE 
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF 
CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE 
SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS 
SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED 
ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH 
WEBSITE