Moody’s up­grades BOCY de­posit rat­ings to Caa3; sta­ble out­look

Financial Mirror (Cyprus) - - FRONT PAGE -

Moody’s In­vestors Ser­vice on Mon­day up­graded Bank of Cyprus’s long-term de­posit rat­ings to Caa3 from the Ca it is­sued just six weeks ago with sta­ble out­look “to re­flect the bank’s strength­ened cap­i­tal buf­fers as well as the re­duc­tion, to some ex­tent, of its re­liance on cen­tral bank fund­ing.”

The rat­ing agency also up­graded the provisional se­nior un­se­cured pro­gramme rat­ing to (P)Caa3 from (P)Ca — and ad­justed up­wards its stand­alone base­line credit as­sess­ment (BCA) to caa3 from ca.

De­spite the up­grade, the bank’s rat­ings con­tinue to be po­si­tioned at the lower end of Moody’s rat­ing scale, “re­flect­ing the im­mense chal­lenges the bank still faces, mainly in terms of ad­dress­ing very high vol­umes of non­per­form­ing loans,” the rat­ing agency said.

Fol­low­ing a suc­cess­ful cap­i­tal in­crease in Au­gust, Bank of Cyprus’s fully loaded Common Eq­uity Tier 1 (CET1) ra­tio in­creased to 15.1% from 11.3% as of June, en­hanc­ing the bank’s ca­pac­ity to ab­sorb as­set qual­ity pres­sures and en­abling it to pass the Euro­pean Cen­tral Bank’s com­pre­hen­sive as­sess­ment (stress tests).

The up­grade also takes into ac­count the par­tial re­duc­tion in Euro-sys­tem fund­ing (pri­mar­ily Emer­gency Liq­uid­ity As­sis­tance) to a still high 29% of the bank’s as­sets as of Septem­ber, ac­cord­ing to the rat­ing agency’s es­ti­mates, from 37% as of March this year.

How­ever, Moody’s said that the bank still faces sig­nif­i­cant chal­lenges, un­der­pin­ning the con­tin­ued po­si­tion­ing of its rat­ings near the lower end of its rat­ing scale. Non-per­form­ing loans stood at 58% as of June, while 90+ days due and im­paired loans (a more glob­ally com­pa­ra­ble ra­tio) were at 49.8%. The rat­ing agency said it ex­pects some fur­ther in­crease in the NPL ra­tios, given the con­tin­ued con­trac­tion in eco­nomic ac­tiv­ity and that NPLs will peak to­wards the end of 2015 be­fore start­ing to fall. Im­por­tantly, while the rat­ing agency ex­pects that re­cent amend­ments to the leg­isla­tive frame­work will im­prove the bank’s re­cov­ery prospects as they al­low for the ex­e­cu­tion of col­lat­eral within a rea­son­able time­frame (18 months), po­ten­tial losses on real es­tate col­lat­eral (which cov­ers the short­fall be­tween the bank’s cash pro­vi­sions and the full scope of NPLs) are dif­fi­cult to quan­tify, given the limited trans­ac­tions in the do­mes­tic real-es­tate mar­ket and the lack of per­for­mance his­tory un­der the new frame­work. As a re­sult, the rat­ing agency con­sid­ers the 33% cash pro­vi­sions against losses from NPLs (39% against im­paired and 90 days past due) as low.

Up­ward pres­sure could de­velop on the rat­ings fol­low­ing fur­ther im­prove­ments in fi­nan­cial per­for­mance, a re­duc­tion in NPLs and a ma­te­rial de­crease in cen­tral bank fund­ing, com­bined with the elim­i­na­tion of ex­ist­ing cap­i­tal con­trols.

On Oc­to­ber 5, Moody’s an­nounced that it had placed the Bank of Cyprus ‘Ca’ de­posit rat­ings on re­view for an up­grade, fol­low­ing the suc­cess­ful EUR 1 bln cap­i­tal in­crease that strength­ened cap­i­tal buf­fers, bol­ster­ing the bank’s loss­ab­sorb­ing ca­pac­ity and a pos­i­tive step to­wards the bank’s re­gen­er­a­tion. 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,” Melina Sk­ouri­dou, Moody’s lead an­a­lyst for Bank of Cyprus had ex­plained at the time.

The an­a­lyst added that the re­pay­ment of euro-stem fund­ing “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 high­pro­file in­vestors, such as the Euro­pean Bank for Re­con­struc­tion and De­vel­op­ment (EBRD), which will likely im­prove decision-mak­ing and cor­po­rate gov­er­nance.” Sk­ouri­dou added that the bank still faces acute chal­lenges. “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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