According to a relevant announcement, the move reflects the successful completion of the BoC’s capital increase by €1 billion, which “significantly strengthens the bank’s capital buffers and improves its funding and liquidity profile.”
The review will focus on a forward-looking assessment of the extent to which the strengthened capital and liquidity levels will buffer the bank against continued asset-quality pressures, stemming from the still-stressed domestic operating environment.
“As of June 2014, the ratio of non-performing loans (NPLs) to gross loans – based on the new broader definition of the local regulator – stood at 58%, while the ratio of loans that were 90 days past due or impaired was 49.8%,” said the agency’s announcement. “BoC’s loan-loss reserves remain low at 33% (39% for the 90 days past due or impaired loans), with the balance covered by mostly real estate collateral.”
The review will focus on the credit implications of the final form of the legislative amendments to the foreclosure framework in Cyprus, which will influence the bank’s ability to sell collateral and,in turn, manage provisioning and capital levels and the outcome of the European Central Bank’s (ECB) comprehensive assessment in October, which will determine any further potential capital needs.
BoC’s long-term deposit ratings could be upgraded if Moody’s considers that the recent capital increase will translate into sustained improvements in the bank’s performance. These could include the maintenance of capital buffers in excess of the regulatory minimum and the stabilisation of its deposit base, which would allow it to further reduce its dependence on Euro-system funding.
BoC’s ratings could be confirmed at the current Ca level due to one of more of the following reasons: a) the changes in the legal framework regarding foreclosures fail to materialise or do not strengthen the bank’s recovery prospects, b) the bank’s asset-quality metrics deteriorate beyond current expectations and significantly erode capital buffers, bringing them close to the regulatory minimum c) the bank’s reliance on Euro-system funding increases.
Bank of Cyprus, the island’s largest lender, had been recapitalised last year with depositor money, as part of the €10 billion bailout Cyprus received from the EU/IMF, under which 47.5% of deposits over €100,000 have been converted to shares. At the end of August the bank concluded the increase through the placing and the open offer of its share capital by €1 billion.
As a result, Moody’s expects BoC’s pro-forma Common Equity Tier 1 (CET 1) ratio to increase to 15.1%, from 11.3% as of June 2014.
“The increased capital buffer will improve the bank’s ability to absorb further credit losses and may strengthen depositor confidence, which could help stabilise its deposit base,” Moody’s announcement said. “Moreover, the €1 billion cash injection will improve BoC’s liquidity profile, as it will enable the bank to reduce its sizeable Emergency Liquidity Assistance (ELA) from €8.8 billion in June 2014, and may improve its overall funding options.”
Source: Cyprus Mail