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Moody's: Increased BOCH provisions credit negative

24/08/2017 14:24
The increase in provisions against delinquent loans by Bank of Cyprus is credit negative as it shows the bank`s capital vulnerability to reduced recoverable amounts from its high stock of non-performing loans, rating agency Moody’s said on Thursday.

Moreover, the agency noted that given the losses expected by the Bank of Cyprus, the island’s largest lender, it expects Cyprus’ entire banking system to record losses in 2017.

Last Monday, the Bank of Cyprus announced that certain modifications in its provisioning assumptions will raise its loan-loss provisions by €500 million, resulting in a €550-million loss for the first half of 2017. The move is expected to lower its June 2017 common equity Tier 1 (CET1) to 12.3% from 14.4% as of March 2017, and its total capital ratio (on a transitional basis) to 13.7% from 15.6% over the same period.

“Although this transfer of capital to loan-loss reserves aims to accelerate balance-sheet de-risking, it shows the vulnerability of the bank’s capital to a reduction in the recoverable amount that the bank expects from its stock of nonperforming loans (NPLs), a credit negative,” the agency said in bi-weekly Credit Outlook bulletin.

According to Moody’s, the decision follows a better alignment of BoC’s provisioning assumptions with the ECB in 2015, which led to an additional €600 million in provisions in the fourth quarter of 2015.

However, Moody’s pointed out that the increased provisioning will bring BoC’s CET1 ratio 280 basis points above the regulatory minimum and the total capital ratio just 70 basis points above the regulatory minimum, adding that the agency expects an additional negative effect as a result of the implementation of International Financial Reporting Standard No. 9, although BoC expects the phased-in fully loaded effect to be manageable relative to its capital plans.

The bank announced that it is considering issuing more Tier 2 debt beyond the €250 million it raised in January 2017, and/or issuing Additional Tier 1 securities to shore up its total capital buffers.

“The bank’s improved loan-loss reserve buffers will allow it to absorb credit losses and provide a greater ability to take write-offs, which is part of the bank’s strategy to reduce its high stock of NPLs,” the agency added.

The increased provisions will elevate the bank’s ratio of loan-loss reserves to non-performing exposures, the European Banking Authority’s broad definition of troubled loans to 48% in June 2017 from 42% as of March 2017, while Moody’s said it expects reserves relative to non-performing loans to increase to 60% in June 2017 from 54% in March 2017, in line with the average for Moody’s-rated euro-area banks.

“However, the higher charges will make BoC loss-making in 2017, the sixth year out of the past seven that the bank has reported losses (the bank was profitable in 2016),” the agency added, noting that “given BoC’s size and the extent of the losses, we expect Cyprus’ entire banking system to be loss-making in 2017.”