14/11/2005 11:40
In its latest report for the Bank of Cyprus, the international credit rating agency, Moody’s, sounded the alarm for the uncovered pension liabilities of the fund, which pensions off more than three thousand employees in Cyprus. “Although declined during FY2004, BOC’s level of uncovered pension liabilities is viewed negatively, clouding its economic capital position and its future profitability”, Moody’s reported.
According to the current agreement, about 55% of group employees participate in the main defined-benefit pension plan. “At end-2004, about 45% of the plan’s assets were invested in BOC’s securities, of which 10% was in BOC bonds and 35% in BOC shares”, Moody’s said.
“The level of investments in BOC shares remains a cause for concern as it implies a high risk appetite and investment concentration for a pension fund. In more developed markets, pension fund managers are typically not allowed to invest more than 10% of pension plan assets in securities issued by the corporate pension plan sponsor”, Moody’s continued.
However, this might be beneficial for BOC this year due to the impressive increase of 70% of its share since early 2005. According to Moody’s “higher contributions and/or an increase in the asset value of the plan that lead to a deficit of less than 10% of the bank’s equity could alleviate the pressure on the FSR”.
Thumbs up for management and expansion, but…
Moody’s views positively the changes in the bank’s management and its strategic initiatives for the strengthening of its presence in Greece and its expansion in the Balkans. However it cautions that “such expansion should be measured and commensurate with the bank’s own resource and should be within an appropriate risk-reward profile. Failure to do so may lead to an unduly heightened risk profile, which could exert negative pressure on BOC’s ratings”.
Domestic operations
The report emphasizes that the operating environment in Cyprus is difficult. “A highly mature banking system – with a credit-to-GDP ratio of about 160% - suggests that lending opportunities with an acceptable risk-reward trade-off are becoming scarcer”. The economic activity is primarily driven by the real estate and construction industry. “Although Moody’s is not in a position to asses the long-term sustainability of real estate prices in Cyprus, we caution about the possible adverse effects on banks’ credit quality if there is a price correction in the market, especially given the large proportion of their credit portfolios secured by real estate”, the rating agency reported.
Positive prospects in Greece
Due to the limited growth opportunities in Cyprus, Moody’s views positively the bank’s expansion in Greece, “Prior investments in centralized back-office operations and an in-house training center will allow the bank to expand its network without any major additional capital expenditures”, Moody’s noted, stressing that “a successful expansion of its Greek operations will put positive pressure on BOC’s ratings”.
However, “as foreign operations grow, possible timely support – in case of a need – will weaken”.
Results
In its 12-page report, Moody’s hardly spent 7 lines for the bank’s nine-month results. According to the report, “the quarterly financial results tend not to reflect the full financial year picture as Cypriot banks usually take loan-loss provisions towards the end of a financial year”. The report made no mention of the three-year agreement signed with ETYK. The agreement provides for a significant slowdown in pay rises.
According to the current agreement, about 55% of group employees participate in the main defined-benefit pension plan. “At end-2004, about 45% of the plan’s assets were invested in BOC’s securities, of which 10% was in BOC bonds and 35% in BOC shares”, Moody’s said.
“The level of investments in BOC shares remains a cause for concern as it implies a high risk appetite and investment concentration for a pension fund. In more developed markets, pension fund managers are typically not allowed to invest more than 10% of pension plan assets in securities issued by the corporate pension plan sponsor”, Moody’s continued.
However, this might be beneficial for BOC this year due to the impressive increase of 70% of its share since early 2005. According to Moody’s “higher contributions and/or an increase in the asset value of the plan that lead to a deficit of less than 10% of the bank’s equity could alleviate the pressure on the FSR”.
Thumbs up for management and expansion, but…
Moody’s views positively the changes in the bank’s management and its strategic initiatives for the strengthening of its presence in Greece and its expansion in the Balkans. However it cautions that “such expansion should be measured and commensurate with the bank’s own resource and should be within an appropriate risk-reward profile. Failure to do so may lead to an unduly heightened risk profile, which could exert negative pressure on BOC’s ratings”.
Domestic operations
The report emphasizes that the operating environment in Cyprus is difficult. “A highly mature banking system – with a credit-to-GDP ratio of about 160% - suggests that lending opportunities with an acceptable risk-reward trade-off are becoming scarcer”. The economic activity is primarily driven by the real estate and construction industry. “Although Moody’s is not in a position to asses the long-term sustainability of real estate prices in Cyprus, we caution about the possible adverse effects on banks’ credit quality if there is a price correction in the market, especially given the large proportion of their credit portfolios secured by real estate”, the rating agency reported.
Positive prospects in Greece
Due to the limited growth opportunities in Cyprus, Moody’s views positively the bank’s expansion in Greece, “Prior investments in centralized back-office operations and an in-house training center will allow the bank to expand its network without any major additional capital expenditures”, Moody’s noted, stressing that “a successful expansion of its Greek operations will put positive pressure on BOC’s ratings”.
However, “as foreign operations grow, possible timely support – in case of a need – will weaken”.
Results
In its 12-page report, Moody’s hardly spent 7 lines for the bank’s nine-month results. According to the report, “the quarterly financial results tend not to reflect the full financial year picture as Cypriot banks usually take loan-loss provisions towards the end of a financial year”. The report made no mention of the three-year agreement signed with ETYK. The agreement provides for a significant slowdown in pay rises.
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