According to an announcement from Moody’s, the banks’ Not-Prime short-term local and foreign currency deposit and Commercial Paper ratings have been affirmed.
“Today’s rating actions are driven by the upgrade of the banks’ standalone Baseline Credit Assessments (BCA) to caa2 from caa3 reflecting the improvement in the operating environment which led to the improvement in the Macro Profile for Cyprus to ‘Weak’ from ‘Very Weak+’, as well as the banks’ improved profitability, asset quality, capitalisation and funding. Moody’s notes that the ratings of these two banks remain at low levels, reflecting, in particular, the vulnerability of theircapital buffers to the high stock of non-performing loans (NPLs),” the announcement noted.
It continued that Hellenic’s Caa1 long-term deposit ratings also incorporate one notch of uplift from the bank’s caa2 BCA. The uplift results from the application of the rating agency’s Loss Given Failure Analysis which considers the liability structure of the bank’s balance sheet, particularly the bank’s high volume of loss absorbing corporate deposits.
“The outlook on the long-term deposit ratings for both banks remains positive reflecting the rating agency’s view that the banks’ asset quality and capitalisation will continue to improve, supported by the economic recovery in Cyprus,” Moody’s announcement added.
The ‘Ratings Rationale’ provided by Moody’s can be seen in full below:
THE IMPROVEMENT IN THE MACRO PROFILE FOR CYPRUS
Moody’s has changed Cyprus’s Macro Profile to ‘Weak’ from ‘Very Weak+’ to reflect the improvements in the operating conditions mainly relating to the country’s long-term growth dynamics and its susceptibility to event risk, which are sovereign driven inputs to the country’s Macro Profile.
Moody’s changed its assessment for Cyprus’s economic strength to ‘Low+’ from ‘Low’, driven by the country’s economic recovery, after three years of severe economic contraction, and improving expectations of medium-term growth.
The rating agency’s assessment, however, continues to reflect the small size and relatively undiversified nature of the Cypriot economy, as well as the debt overhang which constrains further economic expansion. In addition, Moody’s also changed its score for the country’s susceptibility to event risk, adjusted to exclude the risk arising from the country’s large banking sector, to ‘Low’ from ‘Moderate’. The rating agency’s assessment is driven by its views that both political and liquidity risk are low for the Government of Cyprus.
SPECIFIC ANALYTICAL FACTORS FOR THE TWO BANKS
BANK OF CYPRUS
The upgrade of BoC’s BCA to caa2 and long-term deposit ratings to Caa2 reflects the improvement in the bank’s financial metrics, mainly asset quality, capitalisation and funding, as well as Moody’s expectation that the bank will be profitable in 2016 following five loss-making years. Nevertheless, given the large stock of problematic loans, Moody’s expects BoC’s asset quality metrics to remain weak for a prolonged period of time, weighing on the bank’s credit profile.
BoC’s ratio of NPLs (defined as loans 90 days past due and impaired loans) to gross loans declined to 42.6% as of September 2016 from its peak of 52.5% in September 2015, reflecting mainly successful loan restructurings and also write-offs. Although higher, the ratio of Non-Performing Exposures (NPEs; the European Banking Authority’s more broad definition of problematic debt) to gross loans also declined to 57.8% from its peak of 62.2% a year earlier. Moody’s expects BoC’s continued loan restructurings to lead to further asset quality improvement. According to the bank, an additional €1.9 billion of NPEs (16% of total) will be restored to performing status over the next 12 months, provided the borrowers maintain their current performance and meet all exit criteria. The accelerating domestic economic recovery (Cyprus’ year-on-year real GDP growth rate for the first nine months of 2016 was 2.9%, following 1.6% in 2015 according to the Cyprus Statistical Agency) is supporting the improved performance of restructured loans. The coverage ratio improved with the loan loss reserves to NPLs ratio increasing to 53% as of September 2016 from 38% in December 2014.
After five loss-making years, Moody’s expects that BoC will be profitable in 2016 supporting internal capital generation. BoC’s profitability is driven by significantly reduced credit costs. However, core profitability will remain under pressure due to limited new loan growth and weak, although improving, fee income. For the first nine months of 2016, BoC reported net profit of €62 million, mainly the result of lower credit costs, at 1.96% of gross loans (a level the rating agency expects the bank to maintain). Although the bank’s profitability also benefited from one off gains relating to the sale of Visa Europe to Visa Inc, the bank also reported higher costs owing to one-off costs related to advisory costs and the bank’s early retirement plan. As of September 2016, BoC’s Common Equity Tier 1 capital ratio was 14.6%, while the leverage ratio was 13.2%.
Moody’s expects BoC will repay its Emergency Liquidity Assistance (ELA) funding in the coming quarters. BoC’s ELA currently declined to €400 million from its peak of €11.4 billion in April 2013. The reduction in ELA was driven by strengthening depositor confidence, with the bank’s deposits growing to 70% of total assets as of September 2016 from 47% in December 2014.
The upgrade of Hellenic’s BCA to caa2 and long-term deposit ratings to Caa1 reflects the improvement in the bank’s financial metrics, mainly asset quality and capitalisation as well as Moody’s expectations that the bank will continue to be profitable in 2016 following modest profits in 2015. Nevertheless, given the large stock of problem loans, Moody’s expects Hellenic’s asset quality to remain weak for a prolonged period of time, weighing on the bank’s credit profile.
Moody’s expects Hellenic Bank to maintain momentum in terms of loan restructurings, leading to further asset quality improvement in coming quarters. The volume of distressed loans restructured during the first nine months of 2016 reached €490 million, compared to €388 million during the same period in 2015, increasing the ratio of forborne loans to 30% of gross loans. At the same time, the economic recovery continues to support the performance of restructured loans. As a result, the ratio of the bank’s NPEs to gross loans declined to 57.1% as of September 2016, from 61.2% in September 2015. Hellenic’s NPEs coverage ratio stood at 49.9% as of September 2016.
Hellenic Bank benefits from a deposit-based funding profile and strong liquidity buffers. Deposits accounted for around 86% of total assets as of September 2016. Although a largeportion of Hellenic Bank’s funding consists of confidence sensitive deposits from foreign companies, Moody’s notes the stability these deposits have displayed through challenging years. In addition, Hellenic’s high liquidity buffers allow the bank to counter potential deposit withdrawals. Liquid assets consisting of cash and balances with banks (mainly with the European Central Bank and Prime-1 rated banks) stood at 38% of assets as of September 2016; adding the bank’s debt investments to governments and predominantly investment-grade banks, the ratio increases to 47.5%.
Hellenic Bank’s core profitability will continue to be pressured by the low returns on its high liquidity buffers and sustained high operational costs. The net profit for the first nine months of 2016 was €5 million mainly thanks to one-off gains from the sale of Visa Europe to Visa Inc. The bank’s bottom line will continue to be pressured by its weaker efficiency than domestic peers’ (cost-to-income at 56.5%), the low return on its high stock of liquid assets and sustained high credit costs. For the first nine months of 2016, the bank reported annualised credit costs of 2.1%. The modest profitability will give only limited support to the bank’s capital buffers with a Common Equity Tier 1 ratio of 14.4% as of September 2016 and leverage ratio of 9.4%.
WHAT COULD MOVE RATINGS UP/DOWN
Upward pressure on the ratings of both banks could develop following improvements in their financial performance — mainly further sustained reductions in the volume of NPLs and increased cash coverage of NPLs.
The outlook could be changed to stable if the banks’ progress with restructurings stagnates or if economic growth falters, leading to a reversal in the recent improvement to the banks’ asset-quality metrics.
The principal methodology used in these ratings was Banks published in January 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.