BOCY sale of NPLs is ‘credit positive’, says Moody’s

Moody’s has welcomed Bank of Cyprus’ deal to sell a portfolio of loans with a gross book value of EUR 2.8 bln to Apollo Global Management LLC, a global alternative investment manager, but the rating agency said risks remain.

The loans are predominantly nonperforming exposures (NPEs) in the bank’s corporate and small and midsize enterprise portfolio totalling EUR 2.7 bln and are secured with real estate collateral.

“The sale, for a consideration of EUR 1.4 bln, will significantly reduce the bank’s nonperforming exposures and increase its capital buffers upon completion, a credit positive,” said Moody’s.

This is Bank of Cyprus’ first sale of NPEs as part of its effort to accelerate the derisking of its balance sheet.

Bank of Cyprus announced its intention to finance EUR 450 mln of the portfolio’s purchase consideration through senior debt, pending regulatory approval, with the equity portion provided by funds affiliated with Apollo.

According to Bank of Cyprus, the EUR 2.7 bln reduction in gross NPEs will improve its NPE/gross loan ratio by 10%. The bank reported an NPE/gross loan ratio of 43% as of June 2018, which will increase to 48% following the sale of its UK subsidiary announced in July and the resulting fewer performing exposures.

After the completion of the NPEs

Bank of Cyprus’ NPE/gross loan ratio improve to 38%.

“The sale to Apollo is equivalent to six quarters of organic NPE reduction, with the bank reporting an additional EUR 435 mln of sale, will NPE reduction during second-quarter 2018,” said the ratings agency.

“The sale accelerates the bank’s balance sheet de-risking and reduces net NPEs to EUR 2.7 bln, a 72% decline since peak NPEs of EUR 9.9 bln in December 2014,” it added.

The EUR 1.4 bln consideration, which is equivalent to 48% of the portfolio’s gross balance sheet value, and the associated transaction costs resulted in a EUR 135 mln loss in first-half 2018 results, with Bank of Cyprus reporting a net loss of EUR 54 mln.

The EUR 135 mln loss’ immediate effect on capital is negative, reducing the bank’s Common Equity Tier 1 (CET1) ratio by 80 basis points.

Net of this effect, the bank reported a CET1 ratio of 11.9% as of June 2018. However, completion of the transaction will add 140 basis points because risk-weighted assets will decline, leading to a 60-basispoint net positive effect.

Following completion of the NPE sale and the disposal of the UK subsidiary, the bank’s pro forma CET1 ratio will increase to 14%.

The sale of NPEs adds to the bank’s existing tools to clean up its balance sheet from legacy exposures, which include debt restructurings and collections, write-offs and debt-for-asset swaps.

Bank of Cyprus is targeting an organic NPE reduction of EUR 200 mln per quarter.

“However, the bank’s NPE ratio remains among the highest of our rated banks and is a key credit challenge, with the coverage of these troubled loans at a relatively low level of around 50%,” warned Moody’s.

The credit positive analysis follows similar endorsement from S&P last week.

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