Moody’s: BOCY covered bonds hiked to B3, ELA reduced

Moody’s Investors Service has upgraded from B3 (on review for upgrade) to B1 the ratings on the mortgage covered bonds of the Bank of Cyprus, despite the high risk from the default of non-performing loans or failure of recovery.

The rating agency has also affirmed the Caa3 deposit, (P) Caa3 provisional senior unsecured debt ratings and caa3 standalone baseline credit assessment (BCA) of the bank. The Not-Prime commercial paper and short-term deposit ratings have also been affirmed. Moody’s said the affirmation of the ratings reflects the progress the bank has made with its restructuring plan through the early disposal of foreign assets, the reduction of emergency liquidity assistance and the stabilisation of its deposit base despite the abolition of deposit controls in Cyprus.

As part of its deleveraging strategy, the bank has sold its operations in Ukraine, assets in Romania as well as loans in Serbia and the UK, allowing the bank to refocus on its key domestic market. The asset sales, the early repayment of a sovereign bond and a successful capital increase have also allowed the bank to reduce its emergency liquidity assistance (ELA) to EUR 6.5 bln as of April 2015 from a peak of EUR 11.4 bln in April 2013.

Although declining, funding reliance on central banks, which accounted for 27% of assets as of April 2015 according to Moody’s estimates, remains large. Moreover, the bank faces a large stock of non-performing loans (NPLs) and low cash provisions (loan loss reserves) against losses from these exposures.

A reduction in the volume of NPLs, improvement in the cash coverage of NPLs and a material decrease in central bank funding could help in further rating rises, Moody’s said, but warned that risks remain in the deterioration in the bank’s asset-quality metrics which would significantly erode capital buffers or an increased reliance on Euro-system funding.