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Fitch revised outlook for Bank of Cyprus and Hellenic Bank from negative to positive

16/12/2021 09:01

Fitch credit rating agency has revised the outlook for Bank of Cyprus and Hellenic Bank to positive from negative, citing the expected improvements in asset quality due to the announced sales of non-performing loans (NPL).

Fitch affirmed both banks Long-term issuer default rating at “B-” for Bank of Cyprus and at “B” for Hellenic Bank, citing weak asset quality, profitability and high cost base as the common challenges facing the two banks.

For Bank of Cyprus, Cyprus’ largest lender, Fitch said the Outlook revision follows the announcement that BoC has reached an agreement to sell EUR0.6 billion non-performing exposures (NPEs, as defined by the European Banking Authority) and EUR121 million foreclosed real-estate assets.

“The sale (project Helix 3) will improve BoC`s asset quality and reduce capital encumbrance by unreserved problem assets (which include NPEs and foreclosed assets),” Fitch added, noting that the positive outlook “also reflects significant progress in organically reducing problem assets since end-2019, despite an adverse operating environment in Cyprus, and our expectation that this trend will continue in the near future.”

The agency added that Bank of Cyprus’ ratings reflect weak asset quality even after the announced NPE disposal, which results in high capital encumbrance by unreserved problem assets, as well as weak profitability, which has been constrained by high loan impairment charges (LICs).
 
Furthermore, Fitch said it expects BoC’s asset quality to continue to improve “on a better economic environment in Cyprus and the bank`s proven ability to work-out legacy problem assets organically,” adding if does not expect significant inflows of new NPEs from the loans previously under moratorium, as performance to date has been positive and better than anticipated.
 
The agency described the bank’s profitability as volatile due loan impairments, but added it expects expect profitability to improve as loan impairments will reduce and restructuring costs wane.
 
“Improving profitability will also depend on the bank`s ability to reduce costs and diversify revenue,” the agency noted.
 
Concerning Hellenic Bank, the island’s second largest bank, Fitch said the positive Outlook “reflects our expectation that asset quality will improve as HB is working to reach an agreement by early 2022 to dispose of EUR0.7 billion gross non-performing exposure,” called project “Starlight”.
 
“If completed, the NPE trade will reduce capital encumbrance by unreserved problem assets, which include NPEs and foreclosed assets,” the agency added, noting it expects a strong economic recovery in Cyprus to prevent material asset-quality deterioration following the pandemic.
 
According to Fitch, the completion of project Starlight will reduce the bank’s NPL ratio to “mid-single digits”. The agency said it expects asset quality to improve slowly through write-offs and recoveries, but to remain vulnerable to shocks to the Cypriot economy.
 
The agency noted however that the bank’s rating reflects “its weak asset quality by international standards and high capital encumbrance by unreserved problem assets” and weak profitability, due to HB`s reliance on net interest income and a fairly high cost base, and remains constrained by high loan impairment charges (LICs).
 
It also noted that the bank has comfortable buffers over regulatory requirements but noted that “we believe that capitalisation is still not commensurate with risks, due to high capital encumbrance by unreserved problem assets of about half of fully-loaded CET1 capital.”
 
Fitch also noted that the bank’s profitability remains weak “as revenue generation remains under pressure from a fairly undiversified business model” and constrained by high loan impairment charges while “costs are structurally high relative to revenue, as the bank`s small size makes economies of scale difficult to achieve.”