Text: Fitch cuts Cyprus banks following sovereign downgrade

Hellenic Bank Pcl

31/01/2013 16:07

(The following statement was released by the rating agency) 
    Jan 31 - Fitch Ratings has downgraded Bank of Cyprus'    (BOC), Cyprus 
Popular Bank's    (CPB) and Hellenic Bank's    (HB) Long-term 
Issuer Default Ratings (IDRS) and Support Rating Floors (SRFS) to 'B' from 'BB-' 
and Support Ratings to '4' from '3' following the downgrade of Cyprus' sovereign 
rating (see "Fitch Downgrades Cyprus to 'B'; Outlook Negative" dated 25 January 
2013 at ). The Outlooks on the banks' Long-term IDRs are 
Negative in line with that of the sovereign. Fitch has affirmed all three banks' 
Short-term IDRs at 'B'. 
 
The three banks' Viability Ratings (VR), which are at very low levels primarily 
due to asset quality-driven capitalisation concerns (for more detail see 'Fitch 
Downgrades Cypriot Banks Following Sovereign Downgrade' dated 23 November 2012 
at ), are unaffected by the sovereign rating action. 
 
In line with Fitch's criteria, Recovery Ratings (RR) have been assigned to 
banks' senior debt issues. The RR on senior notes is 'RR4'. A full list of 
rating actions is provided at the end of this comment. 
 
SENSITIVITIES/RATING DRIVERS - IDRs, SENIOR DEBT, SUPPORT RATINGS AND SRFs 
The downgrade of BOC, CPB and HB's Long-term IDRs, which remain at their SRFs, 
and of their senior debt and Support Ratings is a consequence of the downgrade 
of Cyprus' sovereign rating. The sovereign downgrade indicates a weakening of 
the sovereign's ability to provide extraordinary support to its banks. 
 
In the near term, lingering uncertainty exists over the timing and details of an 
official financing programme for Cyprus, including in respect of banking sector 
support/recapitalisation costs. However, Fitch expects such a programme will be 
agreed before 3 June and that it will provide financing for the recapitalisation 
of the banking system. This recapitalisation cost could be up to EUR10bn, 
although Fitch anticipates that this figure may include a degree of headroom. 
Fitch will re-assess the major Cypriot banks' VRs, including in relation to the 
current level of their IDRs, after recapitalisation. 
 
Fitch currently considers sovereign and bank risks as being closely 
interconnected in Cyprus. A lack of progress in negotiations with Troika would 
put the receipt of a support programme to address Cypriot banks' 
recapitalisation needs at risk. 
 
Fitch incorporates in its assessment of support propensity for the three rated 
Cypriot banks i) their systemic importance in the domestic economy; ii) the 
limited amount of bail-inable senior debt compared to potential recapitalisation 
needs; and iii) the precedent of support for senior bank creditors in other 
Eurozone bank bail-outs during this crisis. Fitch does not rate any of the 
banks' junior liabilities. 
 
The Negative Outlooks indicate that any further downgrade of Cyprus's sovereign 
rating would be likely to lead to a further downgrade of the banks' Long-term 
IDRs, senior debt ratings and SRFs. In addition, any development that reduced 
the likelihood of international support for bank senior creditors would be 
likely to lead to a further downgrade of these ratings. 
 
Fitch revised upwards potential losses and capital needs for the three largest 
Cypriot banks by stressing further some of the variables. In addition to the 
EUR1.8bn injection into CPB by the government in July 2012, Fitch assesses that 
the three major Cypriot banks are likely to need further capital injections of 
at least EUR4.8bn under a base case scenario (which requires a Fitch Core 
Capital (FCC) ratio of 9%) and EUR6.6bn in the adverse case (which requires a 
FCC of 6%). These amounts are, however, within the EUR10bn capital backstop 
facility, leaving some buffer to support the cooperative banks. Fitch 
acknowledges that its estimates are subject to considerable uncertainty and are 
sensitive to changes in assumptions. 
 
SENSITIVITIES/RATING DRIVERS - RECOVERY RATINGS 
 
A 'RR4' has been assigned to BOC's and CPB's senior debt issues, which reflects 
average recovery prospects. RRs are sensitive to various factors, most 
importantly valuation and availability of free assets and the mix of unsecured 
and secured liabilities. 
 
The ratings actions are as follows: 
 
BOC 
Long-term IDR downgraded to 'B' from 'BB-'; Negative Outlook 
Short-term IDR affirmed at 'B' 
Viability Rating unaffected at 'c' 
Support Rating downgraded to '4' from '3' 
Support Rating Floor revised to 'B' from 'BB-' 
Senior notes downgraded to 'B'/RR4 from 'BB-' 
Commercial paper affirmed at 'B' 
 
CPB 
Long-term IDR downgraded to 'B' from 'BB-'; Negative Outlook 
Short-term IDR affirmed at 'B' 
Viability Rating unaffected at 'c' 
Support Rating downgraded to '4' from '3' 
Support Rating Floor revised to 'B' from 'BB-' 
Senior notes downgraded to 'B'/RR4 from 'BB-' 
 
HB 
Long-term IDR downgraded to 'B' from 'BB-'; Negative Outlook 
Short-term IDR affirmed at 'B' 
Viability Rating unaffected at 'cc' 
Support Rating downgraded to '4' from '3' 
Support Rating Floor revised to 'B' from 'BB-' 
 
The rating impact, if any, from the above rating actions on the banks' covered 
bonds will be detailed in a separate comment. 
 
 
Additional information is available at  
 
The ratings above were solicited by, or on behalf of, the issuer, and therefore, 
Fitch has been compensated for the provision of the ratings. 
 
Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 15 
August 2012, Recovery Ratings for Financial Institutions, dated 15 August 2012 
and 'Evaluating Corporate Governance', dated 12 December 2012 are available at 
 
 
Applicable Criteria and Related Research: 
Global Financial Institutions Rating Criteria 
Recovery Ratings for Financial Institutions 
Evaluating Corporate Governance 
 
 (New York Ratings Team) 
 ((e-mail: pam.niimi@thomsonreuters.com; Reuters Messaging: 
pam.niimi.reuters.com@reuters.net; Tel:1-646-223-6330;))