Cyprus banks secure Moody's upgrade to investment status

After 12 years, Moody's has upgraded the ratings of Cyprus' two major banks, Bank of Cyprus and Hellenic Bank, placing them in the investment category.

This upgrade, announced on Tuesday, October 3rd, includes raising their long-term deposits from Baa3 to Ba1 and their core credit ratings (BCA) and adjusted BCA from ba3 to ba2. Notably, the outlook for the ratings on long-term deposits and senior unsecured debt of both banks is now positive.

This rating boost is primarily attributed to the sustained strength of the Cypriot economy and credit conditions, creating favorable operational circumstances for Cypriot banks. This improvement prompted Moody's to elevate Cyprus' "Macroprophil" rating from "moderate-" to "moderate."

Furthermore, the assessment acknowledges the continual enhancements in the financial stability of both Cypriot banks, marked by gradual improvements in asset quality and capital metrics, as well as a notable strengthening of their core profitability.

The positive outlook reflects Moody's expectation that these two banks will maintain stable profitability and capital metrics while addressing any potential new non-performing loans (NPL) resulting from an elevated interest rate environment and persistent inflation.

Bank of Cyprus, in particular, benefits from the overall improved economic climate in Cyprus, further reducing risks to its credit profile. The upgraded long-term ratings reflect this robust macroeconomic backdrop. Additionally, there are ongoing improvements in asset quality and capital metrics.

Non-performing exposures (NPEs) have decreased to 3.6% of gross loans as of June 2023, and the bank has increased coverage to 78% of NPEs. Importantly, the Common Equity Tier 1 (CET1) capital ratio reached 16.0% in June 2023, a notable increase from 15.2% at the end of 2022, reaching its highest level in recent years.

The positive outlook on long-term deposits and unsecured debt ratings anticipates a further reduction in asset quality risks as the bank continues to decrease its inventory of seized properties, maintains stable profitability and capital metrics, and resilient asset quality metrics in the face of higher inflation and interest rates.

Hellenic Bank, too, has experienced improvements in its long-term ratings, in sync with Cyprus' improved macroeconomic profile. These enhancements are supported by the resilience of the Cypriot economy and favorable credit conditions, which have contributed to a lower risk profile for the bank.

The improved ratings also stem from ongoing improvements in asset quality and capital metrics, as well as a significant boost in core profitability. Notably, Hellenic Bank's NPEs have decreased to 3.3% of gross loans as of June 2023, and its CET1 ratio stands at an impressive 20.8%, up from 19.1% at the end of 2022.

The positive outlook for long-term deposits and unsecured debt ratings reflects Moody's confidence that the bank will maintain stable profitability and capital metrics, even in the face of a higher interest rate environment and persistent inflation, which can impact borrowers' ability to repay loans.

In conclusion, the upgrades in ratings for both Bank of Cyprus and Hellenic Bank signify the strengthening of Cyprus' economic landscape and the resilience of its banking sector.

These developments are indicative of a positive trajectory for both institutions, with the potential for further enhancements in the future, contingent on their ability to maintain financial stability and adapt to changing market conditions.

[This article was translated from its Greek original]