Fitch: Bank of Cyprus, Hellenic upgraded to ‘CCC’ and ‘B-’/Stable
Fitch Ratings has upgraded Bank of Cyprus’s (BoC) Long-term Issuer Default Rating (IDR) to ‘CCC’ from ‘CC’ and Hellenic Bank’s (HB) Long-term IDR to ‘B-’, with a Stable Outlook, from ‘CCC’. At the same time, Fitch has upgraded BoC’s Viability Rating (VR) to ‘ccc’ from ‘cc’ and HB’s VR to ‘b-’ from ‘ccc’. HB’s Short-term IDR has also been upgraded to ‘B’ from ‘C’.
These upgrades mainly reflect improved capital buffers following the completion of equity issuances and evidence of better deposit dynamics amid the gradual relaxation of capital controls, which were fully lifted by the authorities in early April 2015, the rating agency said.
It added that BoC’s rating actions also highlight progress made in asset de-leveraging, enabling a reduction of its reliance on central bank funding. However, these banks’ ratings remain deeply sub-investment grade to reflect material failure risk, mainly because of weak loan quality performance and, in the case of BoC, still-high funding imbalances.
At end-2014, group problem loans, taking into account impaired and unimpaired 90 days past due loans, were close to a very high 53% for BoC and 54% for HB of gross loans (excluding suspended interest). Reserves held for these loans, at 41% for BoC and 42% for HB, remained in Fitch’s opinion low in a scenario of collateral stress.
BoC’s and HB’s Support Rating (SR) of ‘5’ and Support Rating Floor (SRF) of ‘ No Floor’ reflect Fitch’s expectation that support from the state, while possible, cannot be relied upon despite the two banks’ systemic importance to Cyprus, with deposit market shares of around 25% for BoC and 14% for HB.
The announcement follows an earlier statement by Fitch last week that with public sector debt reaching 110% of GDP this year and later easing off to about 90% by 2022, Cyprus won’t need to cash in on the full EUR 10 bln bailout agreed to in 2013.
“The general government debt to GDP ratio is expected to peak at just over 110% in 2015 and 2016 and will ease to around 90.7% by 2022. The strong budget performance implies the buffers in the programme have grown close to EUR 3 bln (17% of GDP). The underlying trend for public finances has been positive,” the rating agency said, adding that the fiscal deficit in 2014 was 0.2% of GDP (8.8% of GDP including the one-off capital injections to the co-operative sector) compared with Fitch’s forecast of 3.3% in October.
“The over-performance reflects a combination of higher tax revenues and lower than expected expenditure across most items. Fitch expects the fiscal deficits to average 0.8% from 2015 to 2018”.
However it said that the risks to EU-IMF adjustment programme implementation remain elevated and that there is a significant risk that privatisation plans will not be fully implemented, leading to further delays to programme reviews.
Fitch also noted that non-performing loans (NPLs) in the banking sector reached an “exceptionally high” 50%.
The removal of the remaining capital controls in April has led to the Country Ceiling being raised by three notches to ‘BB-’.
“The passing of the insolvency law through parliament on 18 April should trigger the activation of the foreclosure law and pave the way for further official funding. The law should strengthen the foreclosure framework and address the high banking NPL problem,” the rating agency said.