Standard and Poor’s on Thursday upgraded Bank of Cyprus’ long-term credit rating to B+ from B citing the sale of non-performing exposures (NPEs) amounting to €2.7 billion and the pricing of an €220 million Additional Tier 1 Capital amounting to €220 million.
The agency affirmed its short-term credit rating to B and raised its long-term resolution counterparty rating to BB from B+, affirming the short-term resolution counterparty credit rating at B.
“The upgrade reflects our belief that the agreed sale of NPEs and the pricing of an additional Tier 1 (AT1) instrument represent meaningful steps for BoC in reducing the inherent tail risks associated with holding a large stock of unproductive exposures. The sale and expected new issuance also contribute to strengthening the bank`s financial profile, namely its asset quality and capitalization,” the agency said in statement.
The agency expects the bank’s NPE ratio to decline to around 38% after the transaction on a pro forma basis (from 43% at end-June 2018), adding that the decline is more pronounced in domestic-only operations (to 37% from 47%), as consolidated ratios include BoC’s disposal of its U.K. business.
Moreover S&Ps said the NPE sale also includes €1.8 billion of corporate exposures and thus contributes to easing BoC’s concentration risks, both single-name and by segment, while maintaining the bank’s “sufficient cash coverage levels post-transaction (49% on a pro forma basis).”
S&Ps revised its forecast over the bank’s NPE ratio which will continue to decline over the next couple of years, reaching about 23%-26% by end-2020, in line with our expectation for the Cypriot banking system, compared with the previous forecast over a reduction to 30% by end-2020.
The agency said that recently introduced government reforms, such as the “Estia” scheme and the strengthening of the foreclosure law, should help the bank to reduce NPEs in the remaining retail and small and midsize enterprise (SME) segments, which have proven to be more difficult to work out so far.
Furthermore, the agency anticipates that the bank`s risk-adjusted capital (RAC) ratio will benefit from the €220 million successful pricing of an AT1 instrument by 80 basis points, helping “the bank to absorb the impact on its capitalization of the NPE sale.”
“We believe that risks from the implementation of BoC`s turnaround business plan are reducing,” the agency said, adding “the agreements on the NPE sale and on the private placement of the AT1 instrument are important milestones that reinforce investor confidence and support our good opinion on the effectiveness of the bank`s management team and on its ability to deliver against its targets.”
The agency also said “the extension of the CEO mandate until end-2020 should contribute to a continuation of the implementation of the business plan, in particular the ongoing de- risking of the bank’s balance sheet. “