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Moody’s upgraded Hellenic Bank citing significant improvement in asset quality

21/04/2022 08:25

Moody’s Investor Service has upgraded Hellenic Bank’s long-term deposit ratings to Ba3 from B1 assigning positive outlook, citing the “significant improvement” in the bank’s asset quality following the agreement to sell a portfolio of nonperforming exposures (NPEs) with a gross book value of €720 million to PIMCO, as well as the acquisition of performing loans from RCB Bank.

The agency also upgraded the bank’s senior unsecured, junior senior unsecured and subordinate MTN program ratings to (P)B3 from (P)Caa1, its long-term Counterparty Risk Ratings (CRRs) to Ba2 from Ba3, its long-term Counterparty Risk Assessment (CRA) to Ba2(cr) from Ba3(cr) and its Baseline Credit Assessment (BCA) and Adjusted BCA to b2 from b3.

“The upgrade of Hellenic Bank's ratings and assessments reflects the significant improvement in the bank's asset quality following its agreement to sell a portfolio of nonperforming exposures (NPEs) with a gross book value of €720 million to an entity managed and advised by Pacific Investment Management Company LLC (PIMCO),” Moody’s investor service said.

Moody's said it expects the transaction will be concluded, which will reduce Hellenic Bank's stock of NPEs to a pro-forma 11.6% of gross loans as of December 2021, from 21.3% as of September 2021, while excluding the NPEs that are guaranteed by the government, the bank's NPEs/gross loans ratio is lower, at 4.4%.

“The NPE ratio drops further to 3.4% (excluding NPEs guaranteed by the government) by also incorporating a recent acquisition of performing loans from another domestic bank and other small NPE disposals, a figure that is close to Hellenic Bank's strategic medium-term target of an NPE ratio of around 3.0%. The coverage of residual NPEs (excluding those guaranteed by the government) is relatively high at 69% as of December 2021, pro-forma for the sale,” Moody’s added.

Noting that the NPE sale transaction is capital accretive adding 15 basis points to Hellenic Bank's Common Equity Tier 1 (CET1) ratio upon completion, based on December 2020 figures, the agency added that “following the completion of the transaction, risks to capital from legacy NPEs will have significantly receded for Hellenic Bank, with the bank's residual net NPEs (excluding those guaranteed by the government) accounting for 6% of CET1 capital, based on pro-forma September 2021 data.”

The agency also said that it expects Hellenic Bank's CET1 ratio to be around 18%, following the transaction and also incorporating the impact of the full acquisition of performing loans.

“Hellenic Bank's ratings continue to also capture its strong, retail deposit-based funding and ample liquid assets,” the agency said, adding however that “the same time, the ratings capture elevated residual asset quality risks, in the context of the still fragile post-pandemic economic recovery, with lower economic growth than previously expected, following Russia's invasion of Ukraine and considerable downward risks.”

According to Moody’s, the positive outlook on Hellenic Bank's long-term deposit ratings reflects Moody's expectations that Hellenic Bank will continue to reduce total NPEs, while maintaining capital and liquidity buffers well above regulatory minimums, as well as “the possibility of further improvement in the operating environment which could lead to Moody's concluding that a lower portion of the bank's liabilities are at a risk of loss in a resolution.”

“This would be reflected in Moody's assigning a higher macro profile score for Cyprus,” the agency added.

Moody’s said that all of Hellenic Bank's ratings could be upgraded if Hellenic Bank manages to further improve its asset quality and to strengthen its profitability, while maintaining solid capital and liquidity metrics and could also be upgraded if Moody's concludes that the impact of the coronavirus pandemic and Russia's invasion of Ukraine will not leave any lasting damage on the Cypriot economy, which may in turn lead Moody's to decide that a lower portion of the bank's liabilities are at a risk of loss in a resolution.

Given the positive outlook, it is unlikely that there will be a downgrade to the bank's ratings in the next 12-18 months, the agency added.