Bank of Cyprus and Hellenic Bank upgraded by Fitch

Fitch Ratings has delivered significant upgrades to the two largest Cypriot banks, Bank of Cyprus and Hellenic Bank, signaling a positive turn in Cyprus's economic landscape and a bright outlook for both financial institutions.

Hellenic Bank's Long-Term Issuer Default Rating (IDR) has surged from 'BB-' to 'BB+', accompanied by an upgrade in its Viability Rating (VR) from 'bb-' to 'bb+'. The outlook for Hellenic Bank's Long-Term IDR has now stabilized.

These upgrades stem from several positive factors contributing to a more favorable evaluation of the Cypriot business environment and the ongoing enhancement of Hellenic Bank's credit profile. Cyprus anticipates benefits from sustained domestic economic growth, stronger fundamentals within the banking sector, and a reduction in private sector indebtedness, even though it remains slightly above the average.

The upgrade also takes into account Hellenic Bank's reinforced capitalization, a decreased inventory of legacy problem assets, structurally improved profitability, and a robust deposit franchise, leading to a substantial base of low-cost deposits.

The primary drivers behind this upgrade include Hellenic Bank's strong competitive position as the second-largest bank in Cyprus, its dependable deposit-based funding, and solid liquidity. Moreover, the bank's profitability prospects have improved in a higher interest rate environment, its regulatory capital ratios exceed the average, and its asset quality metrics are well-managed.

Simultaneously, Fitch Ratings has elevated the Bank of Cyprus by elevating its Long-Term Issuer Default Rating (IDR) from 'B+' to 'BB', and a Viability Rating (VR) boost from 'b+' to 'bb'. The outlook for the Bank of Cyprus' Long-Term IDR has turned Positive.

The upgrade for the Bank of Cyprus mirrors a more positive assessment of the Cypriot operating environment.

This upgrade also reflects Bank of Cyprus's reinforced capitalization, a reduced stock of legacy problem assets, structurally improved profitability, and a robust deposit franchise, resulting in a sizable base of low-cost deposits.

The Positive Outlook demonstrates Fitch's anticipation that the Bank of Cyprus will continue to fortify its capitalization, bolstered by enhanced profitability, and gradually reduce its stock of legacy problem assets, ultimately leading to a further reduction in capital encumbrance due to net problem assets.

Key factors driving this upgrade include Bank of Cyprus's powerful competitive position as the largest domestic bank in Cyprus's compact market and its ongoing progress in deleveraging legacy problem assets. These factors also reflect structurally improved profitability prospects in a higher interest rate environment and a decreased capital encumbrance stemming from net problem assets.