Moody's upgrades Bank of Cyprus and Hellenic Bank

Moodys Investors Service upgraded on Thursday the long-term deposit rating of Bank of Cyprus and Hellenic Bank to B3 from Caa1 and their long-term Counterparty Risk Ratings (CRRs) to B1 from B2. At the same time, Hellenic Bank`s baseline credit assessment (BCA) and adjusted BCA were upgraded to caa1 from caa2, and its long-term Counterparty Risk Assessment (CRA) to B1(cr) from B2(cr). The outlook on both banks` long-term deposit ratings is positive.

According to Moody’s, the upgrade of Bank of Cyprus` ratings is driven by changes in the bank`s liability structure. In particular, the issuance of EUR220 million of Additional Tier 1 (AT1) securities in December 2018, enhances the buffers that are available to protect depositors and non-debt counterparty financial liabilities captured by the CRR.

The positive outlook acknowledges recent improvement in Bank of Cyprus` financial fundamentals.

Nonperforming exposures (NPEs) declined to 37% of gross loans as of September 2018, from 47% in December 2017, following the securitisation of a portfolio of NPEs in August 2018 that will likely be completed in the first quarter of 2019. The bank`s capital is also strengthening, following the bank`s issuance of AT1 securities in December 2018 and contingent on the regulator`s approval of a reduction in its risk-weighted assets, following the NPE securitisation. The bank`s Common Equity Tier 1 (CET1) ratio will strengthen to 13.2%, from 11.9% as of the end of September 2018, while its Total Capital Adequacy ratio will strengthen to 16.2%, from 13.4% as of September.

The upgrade of Hellenic Bank captures its strengthened franchise, asset quality and capital following the integration of EUR9.3 billion of predominantly performing assets and liabilities, mainly deposits, acquired in the summer from the now resolved Cyprus Cooperative Bank Ltd (CCB), and a capital increase of EUR150 million, for which the bank has already received binding commitments and which will be completed in the first quarter of 2019.

Hellenic Bank`s acquisition has strengthened its franchise and asset quality. Following the integration, it has become the second-largest bank in Cyprus, with around 31% market share of system deposits and is now the largest retail and SME bank. Hellenic Bank`s deposit mix has shifted and the bank is now predominantly retail deposit funded, which supports the sustainability of its deposit franchise. Hellenic Bank`s asset quality has also improved on a relative basis, following the acquisition of primarily performing loans from CCB, with NPEs-to-gross loans improving to 31% as of the end of September 2018, from 52% as of June 2018. NPEs drop to 25.6% of gross loans excluding €441 million of nonperforming loans that are guaranteed by the government, while the provisioning coverage improves to 66%, from 62% as of June 2018.

For both banks the positive outlook assigned reflects Moody`s expectations of further improvements in the banks` financial fundamentals, mainly asset quality over the next 12-18 months, in the context of an improved operating environment in Cyprus.