Moody’s ups BOC deposit ratings to Caa1; maintains positive outlook

Moody’s Investors’ Service on Friday upgraded Bank of Cyprus Public Company Limited’s (BoC’s) long-term local and foreign currency deposit ratings to Caa1 from Caa2 and its Provisional Senior Unsecured EMTN ratings to (P)Caa1; and Subordinated and Junior Subordinated to (P)Caa2. The bank’s Not Prime short term ratings have been affirmed. The rating action is driven by the upgrade of BoC’s Baseline Credit Assessment (BCA) to caa1 from caa2. The outlook on the long-term deposit ratings remains positive.

The rating agency said that the upgrade ratings reflects the improvement in the bank’s financial fundamentals – mainly profitability, asset quality, capitalisation and its funding position.

Moody’s expects BoC to remain modestly profitable in 2017, following its return to profitable performance in 2016 after five years of losses. The rating agency also expects further improvement in the bank’s asset quality metrics as ongoing loan work-outs and collateral sales are supported by the strong economic recovery.

The positive outlook reflects Moody’s expectations of changes over the next 12 to 18 months in the bank’s liability structure, mainly the issuance of debt.

Moody’s said it expects BoC’s continued loan restructurings to lead to further asset quality improvement. The bank’s ratio of NPLs (defined as loans 90 days past due and impaired loans) to gross loans continued to decline to 40.0% as of March 2017 from its peak of 53.2% in December 2014. Although higher, the ratio of Non-Performing Exposures (the European Banking Authority’s more broad definition of problematic debt) to gross loans also declined to 51.8% from 62.9% in December 2014. The coverage ratio also improved with the loan loss reserves to NPLs ratio increasing to 53.6% as of March 2017 from 38.2% in December 2014.

Moody’s expects the bank to remain modestly profitable in 2017 supporting its capital levels. Although pre-provision profit will continue to be consumed by sustained high credit costs, increased new lending will likely support net interest income at current levels. The bank’s Common Equity Tier 1 capital ratio was 14.4% as of March while the leverage ratio was 13.2%, a level the rating agency expects the bank to maintain.

BoC’s funding profile has also i mproved following strengthening depositor confidence which allowed the bank to grow its deposits and eliminate ELA funding in January. The bank also issued EUR 250 mln of Tier 2 securities in January, marking its return to the debt markets. Deposits grew to 85% of liabilities as of March, while the net loans to deposit ratio declined to 95% from 141% as of December 2014.

The positive outlook reflects Moody’s expectations of changes in the bank’s liability structure. An increased cushion to depositors against potential losses, such as through an issuance of EUR 500 mln of senior debt, would result in one notch uplift in the bank’s deposit ratings following the application of Moody’s Loss Given Failure.

Moody’s concluded that upward pressure could develop on the ratings following further i mprovements in BoC’s financial performance, mainly a further reduction in the volume of NPLs and/or improvement in the coverage ratio. A change in the bank’s liabilities’ waterfall through the issuance of senior or additional subordinated debt may also positively affect its deposit ratings.