Despite recovery, BOCY and Hellenic loan quality to remain weak in 2016
While the recovering economy is supporting loan recoveries and depositor confidence, Bank of Cyprus’ (deposits Caa3 stable, baseline credit assessment caa3) and Hellenic Bank’s (Caa2 stable; caa3) extremely weak loan quality will only gradually i mprove in 2016, Moody’s Investors Service said in a report on Tuesday.
“The economic recovery and a raft of new legislative measures to help lenders recover unpaid loans are improving Bank of Cyprus’ and Hellenic Bank’s restructuring prospects, funding conditions as well as their profitability. However, the large stocks of problem loans will take several years to work through, with the weak real-estate market hampering collateral sales,” said Moody’s analyst Melina Skouridou.
The rating agency said its report, “Bank of Cyprus, Hellenic Bank Peer Comparison: Despite Improving Restructurings and Funding, Weak Asset Quality Weighs on Credit Profiles” is an update to the markets and does not constitute a rating action.
Because of the increased economic activity and strengthening depositor confidence, customer deposits are starting to rebuild gradually.
Although steadily declining, Bank of Cyprus remains dependent on Emergency Liquidity Assistance, last estimated at EUR 4.3 bln, while Hellenic Bank faced fewer outflows during the crisis and maintains a stronger deposit-based funding profile, the Moody’s report said.
Bank of Cyprus, the dominant bank by market share, is ahead in terms of restructuring and recovering on problem loans. As a result, its profitability, which also benefits from recoveries on the discounted assets it acquired when it took over Laiki’s domestic business in 2013, is recovering at a faster pace. However, both banks’ profits will remain modest the coming years as they build up their low levels of provisions.
Accounting for around 41% of problem loans, the banks’ loan loss provisions provide a limited buffer against losses from their high stock of non-performing loans which continues to pose risks to their capital levels. The ratio of non-performing loans to gross loans, which stood at 56.9% of total lending for Hellenic Bank and 52.5% for Bank of Cyprus as of September 2015, will remain high over the foreseeable future.