30/03/2018 09:17
Fitch Ratings has affirmed Bank of Cyprus`s (BoC) Long-Term Issuer Default Rating (IDR) at B-and Hellenic Bank`s (HB) Long-Term IDR at B. The Outlooks on both banks` Long-Term IDRs are Stable.
Fitch has also upgraded the Long-Term rating of BoC`s Tier 2 subordinated notes to CCC/RR6 from CC/RR6 and removed it from Rating Watch Positive.
“BoC`s and HB`s ratings are driven by the banks` poor asset quality and the resulting high encumbrance of capital by problem assets” Fitch said in a report on Thursday, noting that HB`s ratings factor in the high share of high quality non-loan earning assets on its balance sheet, which support its overall asset quality and liquidity, and drive the one-notch difference relative to BoC`s ratings.
According to Fitch, despite the fact that BoC achieved an almost 40% reduction in the stock of non-performing exposures between end-2015 and end-2017 and HB`s NPEs declined by 17% over the same period, “asset quality is still very weak at both banks”.
It said that the NPE/gross loans ratios at end-2017 were stubbornly high at 47% at BoC and at 53% at HB.
It also noted that in 2Q17, both banks revised their provisioning assumptions in the context of the ECB`s supervisory review and evaluation process. Coverage of NPEs reached 48% at end-2017 at BoC and 60% at HB. “While we view the revised assumptions as more realistic, coverage levels continue to reflect the banks` high reliance on collateral” the credit rating agency pointed out.
For HB, Fitch said that its assessment of asset quality takes into account the high quality of the bank`s other earning assets, in particular a large placement with the ECB (EUR2.2 billion at end-2017 or around 30% of total assets).
Furthermore, Fitch noted that BoC targets a further 2 billion euro organic decrease of NPEs in 2018 and that the Bank is exploring non-organic options to accelerate de-risking of its balance sheet.
It also noted that HB transferred the servicing of almost all of its NPEs and real estate assets to an external company which “will boost HB`s currently fairly low pace of NPE reduction”.
In Fitch`s view “notwithstanding the banks` efforts, organic workout of their asset quality problems will be a lengthy process and will require the operating environment in Cyprus to remain supportive. We expect asset quality to remain weak in the medium term in the absence of any structural solutions” the credit rating agency said.
The banks` capitalisation is sensitive to the setbacks in the recovery of the Cypriot property market, Fitch said, but added that the banks will reduce their capital encumbrance.
It noted that both banks are primarily deposit-funded. HB`s liquidity is underpinned by its large placement at the ECB and is stronger than BoC`s Fitch said, adding that BoC`s funding and liquidity improved in 2017.
In Fitch`s view, however, both banks need to maintain relatively high liquidity buffers to mitigate the potential volatility of non-resident deposits, that represent about a quarter of total deposits at BoC and about a half at HB.