Fitch Upgrades Bank of Cyprus to 'B-' and Hellenic Bank to 'B'

Hellenic Bank Pcl

25/04/2016 17:01

(The following statement was released by the rating agency)

LONDON, April 25 (Fitch) Fitch Ratings has upgraded Bank of Cyprus Public 
Company Ltd's (BoC) Long-Term Issuer Default Rating (IDR) to 'B-' from 'CCC' and 
Hellenic Bank Public Company Limited's (HB) Long-Term IDR to 'B' from 'B-'. The 
Outlooks for the two banks' Long-Term IDRs are Stable. A full list of rating 
actions is at the end of this Rating Action Commentary.

These rating actions reflect Fitch's expectation that some improvement in the 
economic environment in Cyprus and the implementation of reforms to its 
insolvency framework will support domestic banks' efforts to manage and reduce 
very high non-performing loan volumes and enhance recoveries, primarily via 
forbearance. Investor confidence is also improving following the completion of 
the international bailout programme in March 2016 and customer deposits in the 
system have remained broadly stable since capital controls were fully lifted in 
April 2015.

Nevertheless, these banks' ratings remain deeply sub-investment grade, in 
particular because their capitalisation is still highly vulnerable to their very 
weak asset quality. Their internal capital generation capacity is also weak 
given that modest pre-impairment operating profits are eroded by impairment 
charges. 

KEY RATING DRIVERS 

IDRs AND VRs

BoC's and HB's Long-Term IDRs are based on their VRs, which reflect their 
respective standalone creditworthiness. The very weak asset quality and its 
capital encumbrance to unreserved problem loans are factors that have a high 
influence on both banks' VRs. 

As a result of the deep recession and restructuring of the banking sector in the 
past three years both banks are exposed to exceptionally large non-performing 
exposures (NPEs, as per the EBA's definition) representing 62% of gross loans at 
BoC and 56% at HB (excluding suspended income) at end-2015. However, we believe 
that 2015 was an turning point for these banks' asset quality as they 
experienced a decline in 2H15. At the same time, the composition of NPEs is also 
improving as a larger proportion of them are being restructured. 

The NPE reserve coverages also improved in 2015 as both banks allocated their 
pre- impairment profits to build additional provisions. However, at end-2015 
coverage for NPEs remained low by international standards.

Both banks have reinforced their loss-absorption buffers since September 2014 
through equity issuance and as of end-2015 had acceptable Fitch Core Capital 
(FCC) ratios (12.1% for BoC and 13.4% for HB). However, their capital is tied up 
with their large unreserved NPEs, which at end-2015 represented around 360% of 
FCC at BoC and around 246% of FCC at HB. 

The stability of customer deposits in Cyprus since the full removal of capital 
controls in April 2015 has supported the banks' funding profiles. At end-2015 HB 
had a low gross loans/deposit ratio (excluding suspended income) 66% of which 
underpins its good liquidity position. At the same date, BoC's gross 
loan/deposit ratio remained high at 159%. To fund the gap between loans and 
deposits BoC relies on central bank funds, largely from the Emergency Liquidity 
Assistance (ELA) facility. However, BoC has been progressively reducing this 
reliance and we expect this trend to continue in 2016 in the absence of any 
unforeseen liquidity shocks.

SUPPORT RATING AND SUPPORT RATING FLOOR 

BoC's and HB's Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No 
Floor' reflect Fitch's expectation that support from the state, while possible, 
cannot be relied upon despite the two banks' systemic importance to Cyprus, with 
deposit market shares of around 28% for BoC and 14% for HB at end-2015. This 
belief is due mainly to the limited resources at the Cypriot authorities' 
disposal, as demonstrated primarily by the receipt of an international support 
package of EUR10bn and the March 2013 imposition of losses on BoC's senior 
creditors. 

RATING SENSITIVITIES

IDRs AND  VRs

Upside rating potential is limited in the short term, but BoC's and HB's VRs, 
and hence their IDRs, could be upgraded if they accelerate the recoveries on 
their exceptionally large problem loan stocks, thus reducing the vulnerability 
of their capital to further stress in asset quality. We believe that the new 
insolvency framework and the improvement in the economic prospects for Cyprus 
could help the banks to make progress in sustainably restructuring larger loan 
volumes. In the case of BoC, the VR would also benefit from a reduction in the 
funding imbalances. We expect the bank to continue reducing its reliance on 
central bank funding progressively in the next 18 months. 

A material deterioration in asset quality that jeopardises solvency, or any 
unforeseen shocks to the stability of the banks' customer deposit bases could 
result in a downgrade of the VRs. In the latter scenario, Fitch believes that 
BoC would be more at risk of a VR downgrade than HB.

SUPPORT RATING AND SUPPORT RATING FLOOR

Fitch believes there is little upside potential for BoC's and HB's SR and SRF. 
This is due to the authorities' limited capacity to provide future support, the 
presence of a resolution scheme with bail-in tools that have already been 
implemented, but also in light of a clear intention to reduce implicit state 
support for financial institutions in the EU, following the implementation of 
the Bank Recovery and Resolution Directive and Single Resolution Mechanism.

 

The rating actions are as follows: 

Bank of Cyprus 

Long-Term IDR: upgraded to 'B-' from 'CCC'; Stable Outlook

Short-Term IDR: upgraded to 'B' from 'C'

Viability Rating: upgraded to 'b-' from 'ccc' 

Support Rating: affirmed at '5' 

Support Rating Floor: affirmed at 'No Floor'

Hellenic Bank

Long-Term IDR: upgraded to 'B' from 'B-'; Stable Outlook

Short-Term IDR: affirmed at 'B' 

Viability Rating: upgraded to 'b' from 'b-' 

Support Rating: affirmed at '5' 

Support Rating Floor: affirmed at 'No Floor'

Contact: 

Primary Analyst (Bank of Cyprus)

Josu Fabo, CFA

Director

+44 203 530 1513

Fitch Ratings Limited 

30 North Colonnade

London E14 5GN

Primary Analyst (Hellenic Bank)

Erwin van Lumich, CFA 

Managing Director

+34 93 323 8403

Fitch Ratings Espana S.A.U.

Paseo de Gracia, 85 7th Floor

08008 Barcelona

Secondary Analyst (Bank of Cyprus and Hellenic Bank)

Fernando Sanchez 

Analyst

+44 203 530 1221

Committee Chairperson 

Cristina Torrella 

Senior Director 

Financial Institutions 

+34 93 323 8405 

Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: 
elaine.bailey@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Global Bank Rating Criteria  (pub. 20 Mar 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

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