Fitch Places Hellenic Bank on Rating Watch Positive

Hellenic Bank Pcl

29/06/2018 14:22

(The following statement was released by the rating agency)


Fitch Ratings-London/Paris-June 29: Fitch Ratings has placed Hellenic Bank 
Public Company Limited's (HB) Long-Term Issuer Default Rating (IDR) of 'B' and 
Viability Rating (VR) of 'b' on Rating Watch Positive (RWP). Fitch has also 
affirmed HB's Short-Term IDR at 'B'. Other ratings of HB are unaffected.

The rating action follows the announcement on 25 June 2018 that HB signed an 
agreement with Cyprus Cooperative Bank Ltd (CCB) to acquire certain assets and 
liabilities of CCB. HB will acquire total assets of EUR10.3 billion comprising 
mainly loans (EUR4.6 billion net), Cyprus government bonds (EUR4.1 billion) and 
cash (EUR1.6 billion), as well as customer deposits of EUR9.7 billion.

KEY RATING DRIVERS 

The RWP reflects our view that the acquisition will overall be positive for HB's 
credit profile through a significantly strengthened franchise in Cyprus, 
improved asset quality and better longer-term profitability prospects. The still 
weak quality of the combined loan book and high capital encumbrance by 
unreserved problem loans by international standards, as well as significant 
execution risks related to the integration of a balance sheet that is roughly 
1.5x HB's current size, mean that any upgrade at this stage is likely to be 
limited to one notch.

The combined entity will become the second-largest bank in Cyprus after Bank of 
Cyprus Public Company Limited (BoC, B-/Stable/b-) with estimated market shares 
in performing loans and deposits of over 20% and over 30% respectively. We 
believe that this will improve HB's pricing power and would be positive for the 
bank's profitability over the longer term. In the shorter term, HB could benefit 
from a repricing of the acquired deposit base (which is on average 80bp more 
expensive than HB's) but any repricing is likely to be gradual to manage 
potential deposit outflows. Overall the bank's business mix will shift towards 
servicing retail clients as opposed to the more corporate and SME focused 
franchise that HB has at present. 

The transaction will improve the quality of HB's loan book. The ratio of 
non-performing exposures (NPEs, EBA definition) to gross loans in the acquired 
loan book (14%) was significantly below HB's 52% at end-March 2018. The NPE 
ratio for the combined entity would be about 33%. In addition, the transaction 
will include an asset protection scheme (APS), ultimately backed by the Republic 
of Cyprus (BB+/Positive), whereby HB will be protected against 90% of losses on 
the covered loan portfolio. 

The APS is expected to include all NPEs (EUR0.5 billion net), performing 
exposures that HB views as higher-risk (about EUR1 billion) and some other 
performing loans (EUR1.1 billion). In total EUR2.6 billion or 56% of the 
acquired net loans will be within the scope of the APS. Excluding the part of 
the acquired NPEs covered by the APS, the NPE ratio for the combined entity 
would be around 25%, which is however still high compared with international 
peers. 

HB's ratings are supported by the high quality of the bank's other earning 
assets, in particular a large placement with the ECB (EUR2.2 billion at 
end-March 2018 or around 30% of total assets). In the combined entity, the share 
of cash and equivalents will reduce to below 25% of assets, while exposure to 
Cypriot government bonds will increase to 27% of assets (from 7% at HB at 
end-March 2018), although about a third of the bonds will mature before 
end-2019. We believe that the reduction of risk in the loan book offsets the 
slight weakening of the quality of HB's other earning assets. 

As part of the transaction HB will be required to raise EUR150 million of equity 
(about a third of end-March 2018 total equity). The bank has reportedly secured 
EUR100 million split equally between one of the existing shareholders and an 
external investor. The capital increase is expected to take place in 4Q18. In 
addition, HB's capital could benefit from the difference between the EUR74 
million purchase price and EUR247 million estimated net asset value of the 
acquired balance sheet. HB expects that post-transaction, its phased-in common 
equity Tier 1 (CET1) ratio will be above its medium-term target of 14% 
(end-March 2018: 13.9%). 

Despite the capital increase, capital encumbrance by unreserved NPEs and 
foreclosed real estate is likely to remain high by international standards, 
limiting upside for the ratings. We expect that excluding the portion of NPEs 
backed by the APS, unreserved NPEs and foreclosed real estate will remain above 
100% of the fully-loaded CET1 capital, and are likely to be close to about 140%, 
depending on the final net value of acquired assets (end-March 2018: about 220% 
of fully-loaded CET1 capital).

Post-acquisition, the gross loans/deposits ratio for HB will fall to below 60%, 
from about 70% at end-March 2018. The quality of the deposit base will likely 
improve as the share of domestic retail deposits will increase, and the share of 
more confidence-sensitive non-resident deposits will decrease to below 20% of 
total deposits (from around half at end-2017). We expect that liquidity will 
remain a rating strength as about 25% of assets will be in the form of cash and 
central bank placements. 

RATING SENSITIVITIES

We will likely resolve the RWP and upgrade HB's Long-Term IDR and VR upon the 
completion of the transaction, including the completion of the capital increase 
by HB (expected no earlier than 4Q18), provided that the final terms do not 
materially deviate from what has been disclosed so far. If the acquisition does 
not go through, the ratings are likely to be affirmed. 

 

Contact: 

Primary Analyst 

Konstantin Yakimovich

Senior Direct

+44 20 3530 1789

Fitch Ratings Limited

30 North Colonnade

London E14 5GN

Secondary Analyst

Julien Grandjean

Associate Director

+33 1 44 29 91 41

Committee Chairperson 

Olivia Perney Guillot

Senior Director

+33 1 44 29 91 74

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: 
peter.fitzpatrick@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Bank Rating Criteria (pub. 22 Jun 2018)

https://www.fitchratings.com/site/re/10034713

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Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10036409

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https://www.fitchratings.com/site/pr/10036409#solicitation

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https://www.fitchratings.com/regulatory

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