CI gives positive outlook to Hellenic Bank on improved outlook, cut in NPLs

Capital Intelligence, the Limassol-based international rating agency, said it has assigned a positive outlook to Hellenic Bank’s (HB) Financial Strength Rating (FSR), reflecting the positive trend in loss reserve coverage, as well as the improved outlook for the Cyprus economy, with sustained economic growth and an improving property market expected to contribute to a reduction in the bank’s NPLs.

“The FSR, affirmed at ‘B+’, is primarily supported by very strong liquidity and sound capital adequacy,” CI said in an announcement.

“Both strengths mitigate the bank’s very weak asset quality and profitability and provide a buffer against downside risks, as well as the means for generating renewed growth of business volumes in line with the bank’s ‘fix and build’ strategy,” the agency added.

CI noted, however, that the FSR remains constrained by what remains a very high NPL ratio, a systemic feature, while downward pressure on the net interest margin and the high cost to income ratio are also constraining factors. Asset quality metrics remain very weak, reflecting the systemic debt overhang, despite the greater than expected improvement in the economy.

“Following a moderate decrease of NPLs in 2016, the pace of reduction picked up in H1 17 due to higher collections, write-offs and debt for asset swaps, bringing the NPL ratio down further despite a lower volume of gross loans,” the agency said.

CI highlighted that “given the small net loans portfolio, loss of interest income because of high NPLs and the large amount of negative yielding placements with the ECB, the bank’s income generation is expected to remain weak until there is substantially higher loan volume growth and interest rates rise.”

The bank announced on Monday a voluntary retirement scheme (VRS) aiming to reduce staff by a further 200 retirements, in a bid to reduce its operating cost.

“Although the VRS will benefit the recurring cost to income ratio in 2018, operating profitability is likely to remain under pressure and net recurring profits are likely to be elusive until provisioning costs can be reduced substantially,” CI added.