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S&P affirms its B/B credit rating of Bank of Cyprus

July 28, 2018 at 2:33pm
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S&P Global Ratings said Friday that it affirmed its B/B long- and short-term issuer credit ratings of Bank of Cyprus Public Co. Ltd. (BoC). The outlook is positive.

“We expect that robust economic recovery, recovering property prices, ongoing reforms in the legal and judicial frameworks, and the liquidation of Cyprus Co-operative Bank (CCB) will help reduce the significant economic imbalances accumulated by the Cypriot banking system throughout the crisis,” said S&P. It also expects Cyprus’ exceptionally high stock of problematic assets to almost halve by end-2018 compared with one year earlier.

This decline, according to the rating agency will be mostly driven by factors such as the sale of the CCB’s state-owned good assets to Hellenic Bank and the creation of a government-owned run-off entity that will hold the bad assets  from the CCB and will be managed privately and independently.

Also, from further amendments to the legal and judicial framework in order to make it more effective, efficient, and transparent and a specific burden-sharing scheme between banks and the state (the so-called “Estia” scheme) to differentiate vulnerable borrowers from strategic defaulters.

It also calculates that Cypriot banks should be able to reduce NPEs by an additional €2.5 billion, reaching an NPE ratio of about 25% by end-2020 from more than 50% as of end-2017.

Moreover, the rating agency, sees potential for faster NPE reduction through opportunistic market sales, given pressure from the European regulator to do so, and investors` increasing appetite for these types of assets.

The rating agency anticipates that over the next two-to-three years, Cypriot banks will need to accumulate additional credit losses of about 4.0%-5.0% of loans (as of end-March 2018, pro forma of the CCB transaction) to recognize losses embedded in their NPEs. This is in addition to losses of about 1% of loans recognized with the first-time adoption of International Financial Reporting Standard 9.

“Such a high level of provisions, along with restructuring costs to reduce the scale of the branch and employee network, and still very low interest rates and muted volume growth, will continue to weigh on banks’  bottom-line results over the next two-to-three years. We believe that economic risks could eventually ease further for Cypriot banks, although we see this as a medium-term trend,” it adds.

As a result of the ongoing improvement in banks’ asset quality and decreased economic risks, S&P now assess Cyprus’  Banking Industry Country Risk Assessment (BICRA) in group 8 (it was previously in group 9). We have revised upward to b- from b+ our anchor for banks operating primarily in Cyprus.

“ Notwithstanding the improvement we envisage on the Cypriot banking sector, we affirmed the B/B ratings on BoC. This is because BoC is lagging behind its peers in improving its business and financial profile, despite the high 44% decline in the NPE stock from its peak at December 2014,”  says S&P.

It also expects the bank to continue working to reduce its high stock of NPEs, benefiting from a more supportive economic environment. However, it anticipates that the decline will only be gradual, with NPEs only falling to about 30% by 2020.