articles | 17 December 2022

BoC asset quality and deposit base praised after rating upgrade

Limassol-based rating agency Capital Intelligence this week announced that it has upgraded the Long-Term Foreign Currency Rating (LT FCR) of the Bank of Cyprus (BoC) to ‘BB’, from ‘BB-‘.

In addition, the agency said that the Bank of Cyprus’ Bank Standalone Rating (BSR) and Core Financial Strength (CFS) have also been raised to ‘bb’ and ‘bb’, respectively, from ‘bb-‘ and ‘bb-‘.

At the same time, CI Ratings has affirmed the Bank’s Short-Term Foreign Currency Rating (ST FCR) of ‘B’ and Extraordinary Support Level (ESL) of Uncertain, while the Outlook for the LT FCR and BSR remain Stable.

According to the report, the agency said that in terms of the bank’s operating environment, economic performance remained resilient in the first half of 2022, despite exogenous headwinds, and is expected to recover further with investment and net exports rising in the second half of the year, partially offsetting the impact of the war in Ukraine and high inflation. Moreover, robust financial performance improved the operating environment for banks in relation to risks to asset quality, lending opportunities and profitability, reflected in the operational environment risk index (OPERA) adjustment.

The agency said that it believes that the bank’s funding and liquidity continue to be strong points for the organisation, which enjoys a well-diversified retail customer deposit base and has very little reliance on borrowing from official bodies or the interbank market (wholesale funding). What is more, according to the agency, another point of strength is the significant improvement in asset quality, with a significant reduction in non-performing loans over the past three years due to sales of NPL packages, mainly to PIMCO.

The agency noted that with the completion of the Helix 3 project in November 2022, the NPE ratio fell to a single-digit number, improving the bank’s profitability due to less need for provisions. However, the agency said that the bank remains exposed to the volatile tourism and real estate sectors, which are a key source of remaining NPLs, as well as stage 2 loans.

Further to the above, the bank’s ratings are also based on the fact that it is the largest credit institution in Cyprus, with a leading market share in lending and a share of more than a third of deposits, while the largest volume of transaction charges, recurring income from insurance companies have also bolstered the income from fees and commissions. Capital Intelligence added that the voluntary exit scheme may have resulted in a small loss in the third quarter of the year, but will reduce staff costs from 2023 onwards and have a positive impact on operating profitability.

Finally, the agency also said that the Bank of Cyprus is expected to benefit from the ECB interest rate hike leading to an improved net interest margin.

Source: Cyprus Mail

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