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Moody’s: The risks and the prospects

16/07/2008 10:02
According to a Moody’s report released on Tuesday, BOC’s BFRS depends on the course of the property market and the NPLs. “However, the BFSR also reflects the increasingly competitive conditions in its primary markets that are pressuring interest margins and BOC's high credit expansion, suggesting that the credit portfolio remains relative unseasoned and untested by any economic slowdown”.

Moody's assigns a C- BFSR to BOC. “Although the acquisition of a relative large institution, such as Uniastrum Bank, that is active in a less mature and more volatile operating environment, such as Russia, could increase BOC's overall risk profile and result in potentially higher earnings volatility, such change is not material enough to warrant a ratings change. In addition, Moody's expects that profitability dilution will be modest and that the bank's Tier 1 ratio will remain above 7.5% post-acquisition”.

“Nevertheless, BOC's C- BFSR could be pressured by a number of issues going forward, including: (a) Unforeseen problems and challenges related to the acquisition and integration process of a relatively large organisation, (b) Uniastrum Bank's rapid expansion and its unseasoned loan portfolio, which may contain hidden risks, and (c) Uniastrum Bank's current weak financial performance, suggesting that a quick turnaround is necessary to prevent a dilution of BOC's overall financial performance”, the report said.

Strong position

According to Moody’s, the BFSR reflects BOC's very strong position in its domestic market as the largest financial institution on the island with sturdy market shares across several business lines, its dynamic and increasingly valuable franchise in Greece and its relatively good financial metrics - primarily its growing earning power and bottom-line profitability, its satisfactory capitalisation and liquidity, and its adequate provisioning level.

“However, the BFSR also takes into account the bank's moderate though improving asset quality, the increasing pressure exerted on net interest margins due to increased competition in its primary markets and the risks associated with its high loan book growth rates”, it added.

As a point of reference, the assigned BFSR is one notch below the C outcome of Moody's bank financial strength scorecard.


According to the report, “with assets totalling EUR30.8 billion in March 2008, BOC is the largest financial institution in Cyprus, with a growing overseas presence, primarily in Greece (with about 40% of group loans), and to a lesser extent in other markets with large Greek and Cypriot expatriate communities. In addition, the bank has recently established a presence in emerging Eastern European countries and will seek to expand further either organically or via acquisitions”.

“In its home market, BOC has a dominant position, enjoying leading and growing market shares in most financial segments, including shares of 31.6% and 28.6% of total financial system deposits and loans, respectively as of December 2007 (including the co-operative credit institutions)”, the report noted.

“BOC's ownership structure is widely spread. Currently only two shareholders have more than 5% ownership rights; Lone Pine Capital LLC, a Greenwich registered fund that has accumulated a 5.9% stake in BOC since November 2007 and the provident fund of Bank of Cyprus employees with a 5.1% stake in the bank. With the help of external consultants, the bank has been working on improving its corporate governance structure and a number of non-independent board members have been replaced in recent years, in line with amended instructions from the Cyprus Stock Exchange regulating body. That said, we note the fact that the independence of the chairpersons of the audit and remuneration committees is questionable due to sizeable loan exposures and long dated ties with the bank and its management. Furthermore, in Moody's view, the bank's increasingly geographical diversification and growing complexity calls for a board composition with sufficient industry expertise and international experience”, it added.

According to Moody’s, “the bank's growing exposure to Cyprus real estate, will be closely monitored, as the near doubling of housing prices in the last few years (based on the "Residence Valuation Index" published by the Central Bank of Cyprus) raises concerns for a likely price correction”.

“Overall we expect the upward trend in BOC's profitability to continue, underpinned by higher business volumes in the bank's domestic operations, the ongoing maturing of the branch operations in Greece and declining loan-loss provisioning requirements”, they said.

Given the bank's risk appetite, we consider its overall capital adequacy ratio of 12.7% and Tier 1 ratio of 9.7% to be satisfactory.

The significant ongoing improvement in BOC's credit quality is viewed positively. In line with other Cypriot banks, BOC experienced a significant deterioration in credit quality between years 2001 and 2004, with reported problem loans increasing sharply following the introduction of more quantitative criteria for suspending interest on overdue loans, coupled with the financial stress experienced by some economic sectors and the collapse of the Cyprus Stock Exchange.

The other ratings are for local currency deposits (A1/Prime-1), for senior debt (A2) and for subordinated debt (A3).

“The rating of any junior obligations should be notched off the fully supported deposit ratings, as there is no legal authority or past evidence of the Cypriot regulator imposing losses on subordinated creditors outside of a liquidation situation”, the firm concluded.