Bank of Cyprus set for turn­around post-cap in­crease, but stresses re­main

Financial Mirror (Cyprus) - - FRONT PAGE -

Moody’s placed the Bank of Cyprus ‘Ca’ de­posit rat­ings on re­view for an up­grade on Septem­ber 2, fol­low­ing the suc­cess­ful EUR 1 bln cap­i­tal in­crease that strength­ened cap­i­tal buf­fers, bol­ster­ing the bank’s loss-ab­sorb­ing ca­pac­ity and are a pos­i­tive step to­wards the bank’s re­gen­er­a­tion, Moody’s said in a re­port on Fri­day.

It added that the “al­ready high level” of non per­form­ing loans could even rise beyond the cur­rent 58% of the bank’s loan­book.

“But the ex­tent to which th­ese de­vel­op­ments will lead to a sus­tained im­prove­ment in the bank’s fi­nan­cial per­for­mance re­mains un­clear, given the acute as­set qual­ity pres­sures the bank faces and its low pro­vi­sion­ing against losses from prob­lem­atic ex­po­sures,” ex­plained Melina Sk­ouri­dou, Moody’s lead an­a­lyst for Bank of Cyprus.

The rat­ing agency’s re­view, ex­pected to be con­cluded in the fourth quar­ter of the year, is fo­cus­ing on the ad­e­quacy of the bank’s cap­i­tal lev­els against the ris­ing pool of prob­lem loans and the ad­di­tional loan-loss pro­vi­sions; the sta­bil­ity of cus­tomer de­posits and its abil­ity to grad­u­ally re­pay the EUR 9.6 bln of Eurosys­tem bor­row­ings.

“The cap­i­tal in­crease strength­ens the bank’s abil­ity to ab­sorb credit losses from its large pool of trou­bled as­sets. The cash in­jec­tion takes the bank’s Core Eq­uity Tier 1 ra­tio to 15.1%, from 11.3% as of June 2014, well above the reg­u­la­tory min­i­mum. The move also im­proves the bank’s fund­ing and liq­uid­ity pro­file by en­abling a 10% re­pay­ment of EUR 9.6 bln of out­stand­ing euro-sys­tem fund­ing that weighs on the bank’s bal­ance sheet,” ex­plained Sk­ouri­dou.

The an­a­lyst added that “this is a vi­tal first step in restor­ing frag­ile de­pos­i­tor con­fi­dence, which could help stem fur­ther ero­sion of its de­posit base. In ad­di­tion, fol­low­ing the cap­i­tal in­crease, the bank’s own­er­ship struc­ture is more con­cen­trated with the par­tic­i­pa­tion of high-pro­file in­vestors, such as the Euro­pean Bank for Re­con­struc­tion and De­vel­op­ment (EBRD), which will likely im­prove de­ci­sion­mak­ing and cor­po­rate gov­er­nance.”

Sk­ouri­dou added that the bank acute chal­lenges.

still faces

“The Cypriot econ­omy con­tin­ues to con­tract, un­em­ploy­ment is high and prop­erty prices are fall­ing. As a re­sult, we ex­pect the share of non-per­form­ing loans (NPLs) in the bank’s loan port­fo­lio to con­tinue to rise from al­ready high lev­els (58% of to­tal loans as of June). We con­sider the loan-loss pro­vi­sions (cov­er­ing only 33% of NPLs) in­ad­e­quate to cover fu­ture losses from trou­bled ex­po­sures,” she said.

“Although real-es­tate col­lat­eral pro­vides some ex­tra cov­er­age, prop­erty prices are still de­clin­ing and more pro­vi­sions will have to be set aside, caus­ing losses that will erode cap­i­tal. More­over, the bank’s abil­ity to col­lect the value of col­lat­eral de­pends on amend­ments to laws gov­ern­ing the fore­clo­sure process in Cyprus. Th­ese amend­ments are in progress and their con­clu­sion is as yet un­known.”

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