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Moody’s downgrades three CY banks

08/11/2011 08:41
Moody’s downgraded on Tuesday three Cypriot banks due to “the reduced ability of the country to support its large banking system”.

The agency downgraded Bank of Cyprus and Hellenic Bank by one notch and Marfin Popular Bank by three notches due to the latter’s higher exposure to Greece and its possible state support.

Specifically, Moody’s downgraded Bank of Cyprus by one notch to Ba2 from Ba1, Hellenic Bank by one notch to Ba2 from Ba1 and Marfin Popular Bank Public Co Ltd by three notches to B2 from

Moody's has also placed the ratings of the three banks on review for further downgrade.

According to the report, Moody's reassessment of the sovereign capacity to support the banking system reflects a weakening in the strength of the country's balance sheet, as indicated by the two-notch downgrade of Cyprus's government bond ratings to Baa3 from Baa1 on 4 November.

“Moody's multi-notch downgrade of Marfin reflects a weakening of the banks' standalone credit strength, in addition to the above-mentioned reduction in the country's capacity to provide support”.

“Compared to its peers, Marfin's higher exposures to Greek government bonds (GGBs), at around 91% of Tier 1 capital, render it particularly vulnerable to losses under the revised deal on greater private-sector involvement (PSI) announced on 27 October”, it added.

“Moody's estimates that Marfin would require capital of more than EUR1 billion to meet the central bank's minimum Core Tier 1 capital requirement of 8% and conform with the European Banking Authority's 9% minimum Core Tier 1”, the report said.

“While the bank is exploring various options to address this gap, given the current difficult market conditions, the task of raising such a substantial amount of capital (equivalent to around 5% of Cypriot GDP) by June 2012 significantly increases the likelihood that the bank will require a large capital injection from the government”.

Based on Moody's analysis, the other two rated banks could cover the capital shortfall triggered by the currently proposed GGB impairments without any external assistance.

According to the report, “whilst the Bank of Cyprus's exposures to GGBs, at 53% of Tier 1, imply material impairment losses, its ability to replenish core capital is supported by EUR887 million worth of Convertible Enhanced Capital Securities (CECS) that can be converted into Core Tier 1 capital”.

Hellenic's exposures to GGBs at 18% of Tier 1 are considered moderate.

Moody's notes, however, that further haircuts to GGB holdings, beyond the recently accounted 50%, cannot be ruled out in the future, which would exert additional pressure on the banks.

The greater-than-expected weakening in the macroeconomic conditions in both Cyprus and Greece -- the banks' two main markets -- will pose operating challenges for the three banks over the near to medium term.

Moody's review of the ratings on the three Cypriot banks will focus on the impact of this weakening operating environment on three primary areas:

(1) The banks' ability to sustain their current funding and liquidity profiles. Cypriot banks' funding bases have shown resilience since the Greek crisis began; however, a relatively high reliance on deposits from foreign-owned corporate entities -- accounting for around one third of total deposits for the three rated banks -- exposes these banks to potential negative shifts in market confidence and the risk of deposit outflows. These negative shifts in market confidence could arise from a range of factors, such as any further adverse developments in Greece, a potential further weakening in the Cypriot government's fiscal position or concerns regarding individual banks. The review will also focus on the fragility of the banks' deposits in their Greek operations.

(2) Further deterioration in the banks' non-performing assets, triggered by the ongoing deterioration in the payment capacity of Greek households and corporates, which account for a significant part of the banks' loan books (18% of loans for Hellenic, 35% for BoC and 46% for Marfin), as well as the increasing risk of the underperformance of loans to the Cypriot private sector. Real GDP growth for Cyprus in 2012 has been revised down by Moody's to 0.2% from 1% previously. In addition to these pressures, the review will also assess the banks' capacity to absorb further potential losses stemming from their GGB exposures, as additional haircuts to GGBs, beyond the recently accounted 50%, cannot be ruled out in the future.

(3) Pressure on the banks' profitability, despite their strong domestic franchises and solid record of pre-provision profitability. In addition to Moody's expectation of losses on the banks' Greek operations, the rating agency is concerned that the profitability of the banks' Cypriot operations will also be weakened by higher provisioning and lower business volumes.