Fitch af­firms BOCY cov­ered bonds at ‘CCC’

Financial Mirror (Cyprus) - - FRONT PAGE -

Fitch rat­ing agency af­firmed at ‘CCC’ the rat­ing of the Bank of Cyprus out­stand­ing res­i­den­tial mort­gage cov­ered bonds of EUR 1 bln.

The rat­ing ac­tion fol­lows the up­grade of the bank’s longterm is­suer de­fault rat­ing (IDR) to ‘CC’ from ‘RD’ (Re­stricted De­fault) last Fri­day, af­ter the lift­ing of lo­cal cap­i­tal con­trols. As a re­sult, Fitch said it no longer makes an ex­cep­tion to its cov­ered bonds rat­ing cri­te­ria and uses the LT IDR, in­stead of the vi­a­bil­ity rat­ing VR, as a start­ing point for its credit risk anal­y­sis.

Fitch has not as­signed an out­look to the cov­ered bonds in line with its rat­ing def­i­ni­tion, un­der which out­looks are ap­plied se­lec­tively to rat­ings in the ‘CCC’, ‘CC’ and ‘C’ cat­e­gories.

“All else be­ing equal, the cov­ered bonds ‘CCC’ rat­ing would be sen­si­tive to move­ments of BOC’s IDR. The cov­ered bonds’ rat­ing would also be vul­ner­a­ble to a de­te­ri­o­ra­tion of the per­for­mance of the res­i­den­tial mort­gage port­fo­lio of more se­vere mag­ni­tude than cur­rently fore­seen,” Fitch added. On Fri­day, Fitch up­graded the rat­ings of the Bank of Cyprus and Hel­lenic Bank, but warned that the is­land’s big­gest lender still faces a high risk of cap­i­tal ero­sion be­cause of weak­en­ing as­set qual­ity and prof­itabil­ity.

It also af­firmed BOCY’s vi­a­bil­ity rat­ing (VR) at HB’s VR one notch higher at ‘ccc’.

“Al­though re­stric­tions re­main on cross-bor­der out­ward cap­i­tal flows, these banks are now sub­stan­tively able to ser­vice all their obli­ga­tions,” Fitch pointed out, adding how­ever, that the re­main­ing cap­i­tal con­trols, es­pe­cially

‘cc’, and out­ward “is un­likely to be fully im­ple­mented be­fore the end of 2014.”

Fitch be­lieves that BOCY’s and HB’s VRs are in­flu­enced by the re­ces­sion in Cyprus, which continues to put at risk the two banks’ very weak as­set qual­ity, as well as weak prof­itabil­ity and vul­ner­a­ble cap­i­tal­i­sa­tion.

The agency con­sid­ers as­set qual­ity as one of the main con­cerns for Cypriot banks. In 1Q14 both banks’ non­per­form­ing loans (NPLs) con­tin­ued to in­crease, al­beit at a lower rate than past quar­ters, reach­ing 55% at BOCY and 49% at HB of gross loans and Fitch ex­pects loan qual­ity to weaken fur­ther in the near fu­ture, al­though more mod­er­ately.

“The two banks’ most im­por­tant chal­lenge will be to im­prove NPL re­cov­er­ies, for which banks have in­ter­nally strength­ened their re­cov­ery units. NPL cov­er­age re­mained low in Fitch’s view in a stress sce­nario at 35% for BOCY and 43% for HB at end-1Q14,” it added.

The agency notes that in the ab­sence of fur­ther liq­uid­ity shocks, Bank of Cyprus’ de­pen­dency on cen­tral bank fund­ing will de­cline fur­ther, but will re­main large in the fore­see­able fu­ture, in­di­cat­ing ma­te­rial fund­ing con­straints.

With re­gard to the two banks’ vi­a­bil­ity rat­ing, Fitch noted that while limited in the short-term, the VRs could be up­graded if pres­sure from un­re­served NPLs ease and/or cap­i­tal ma­te­ri­ally im­proves and fur­ther prof­itabil­ity im­prove­ments are ev­i­denced.

In Fitch’s view, BOCY re­mains more down­grade than HB.

The up­grade is a “pos­i­tive and im­por­tant de­vel­op­ment” in




a VR the course of sta­bil­is­ing the econ­omy, Fi­nance Min­is­ter Har­ris Ge­orgides said, adding that de­ci­sive steps must be taken to ease the prob­lem of NPLs in the bank­ing sys­tem.

He added that all these moves should con­tinue be­cause the ul­ti­mate aim is to fully re­store the in­ter­na­tional con­fi­dence to the Cypriot econ­omy.

In­vited to com­ment on Fitch’s ob­ser­va­tion that NPLs is the main chal­lenge fac­ing the Cypriot banks, Ge­or­giades said this “is a se­ri­ous side ef­fect, or a residue of the un­sus­tain­able credit ex­pan­sion and the ex­ces­sive in­debt­ed­ness of the pre­vi­ous years, which has left an over­sized prob­lem to­day.”

He said this up­grade would “un­doubt­edly” as­sist Bank of Cyprus’ ef­forts to raise fresh cap­i­tal. No one would trust nei­ther an econ­omy, nor in­vest in a bank that would be down­graded or would not en­joy con­fi­dence, the min­is­ter added.

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