Fitch Ratings has upgraded Bank of Cyprus`s Issuer Default Rating (IDR) to BB+ from BB. The rating is just one step before investment grade.
This update comes following the announcement that the bank is in the process of securitising a portfolio of €2.8 billion of gross loans, including €2.7 billion of non-performing loans (NPLs), equivalent to about a third of the bank`s total NPLs.
According to Fitch Ratings, the securitisation "will be positive for the BoC`s credit risk profile and will reduce capital encumbrance by unreserved problem assets", which include NPLs and foreclosed assets. The transaction, it notes, is subject to regulatory approvals and expected to be finalised by end-2018 or 1Q19. It expresses the view that "the execution risk on the transaction is small given the strong incentives for all involved parties to complete the deal."
The positive outlook, the credit agency says, "also reflects the progress made by the bank in organically reducing volumes of problem assets, helped by the improving operating environment in Cyprus, and our expectation that this trend will continue in the next 18-24 months."
"We expect asset quality to continue to improve, given the BoC`s track record in restructuring problem loans, the announced government scheme to support borrowers whose loans are backed by primary residences and changes to foreclosure laws that should speed up collateral repossession," the credit rating agency points out.
Our assessment of asset quality, it adds, "also takes into the good quality of the bank`s other earning assets, in particular cash and balances with central banks, €4.2 billion or 18% of total assets at end-June 2018."
"Despite the improvement, we remain vigilant to the high vulnerability of the bank`s capital to stress in the Cypriot economy and property market," it adds.
BoC`s funding profile has continued to benefit from the growth of the deposit base, which is up by 3% since-2017, the agency continues.
With the loan book shrinking, the gross loans/deposits ratio improved from 105% at end-2017, to about 83% at end-June 2018, it notes.
The bank`s liquidity buffer should be boosted by the proceeds from the transaction. "As a result, we expect that about 22% of assets will be in the form of cash and central bank placements," it says.