Fitch: Bank of Cyprus, Hel­lenic up­graded to ‘CCC’ and ‘B-’/Sta­ble

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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