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Moody’s: What are the risks for the banks?

08/01/2008 13:31
International credit rating firm, Moody’s Ratings, remains positive for the Cypriot banks. In separate analyses for each bank released on Monday, Moody’s referred to the positive course of the banks and the challenges and risks that they will face. Among the positives are their strong position in the domestic market, their increased profitability and their sufficient capitalization. The risks include the bad debts and the quality of their assets. One of the reasons for a possible downgrading is the unfavourable developments in the financial sector.

For Bank of Cyprus and Marfin Popular Bank the financial strength rating remains to C-, while for Hellenic Bank it remains to D+.

Bank of Cyprus

According to the report, 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 ample liquidity.

The challenges for BOCY are the improvement of the non-performing loans, the improvement of asset quality and the improvement of the credit portfolio for the Greek operations.

“BOC's BFSR could be upgraded in the event of further improvement in asset quality accompanied by the adoption of stricter regulatory criteria for classifying problem loans to bring them in line with international best practice”, the report said. “However, the BFSR could be downgraded in the event of a sharp increase in unprovisioned NPLs, a material increase in financial leverage, a prolonged decline in the domestic operating environment, or an economic slowdown in Greece that negatively impacted BOC's Greek operations”, it added.

Marfin Popular Bank

According to Moody’s, “the rating derives from MPB’s strong position in its domicile, Cyprus; its expanding franchise in Greece following the merger of the Group’s three banking subsidiaries; and its improving financial fundamentals”.

The BFSR could be positively affected by further improvements in asset quality in tandem with the adoption of stricter regulatory criteria for classifying problem loans, a continued upward trend in risk-adjusted profitability and a further strengthening and greater diversification of the Greek operations. On the other hand, it could be negatively affected by a sharp increase in unprovided NPLs, the material increase in financial leverage, the decline in the domestic operating environment and the economic slowdown in Greece.

Hellenic Bank

BFSR is supported by the bank's well-established franchise in its domestic market and the ongoing efforts to improve its financial fundamentals, to revive the operations in Greece and to enhance the overall competitiveness of the group. Furthermore, the BFSR takes into account the bank's increasing profitability, rising capitalisation and satisfactory liquidity position. Constraining the BFSR, however, are HB's weak, albeit improving credit portfolio quality, the continuing weak performance of the Greek operations and HB's higher reliance on the small, increasingly competitive operating environment in Cyprus compared with its peers.

Further reductions in non-performing loans or additional increases in loan loss reserves, combined with sustained higher group profitability and a significant improvement in the performance of the Greek operations could exert upward pressure on HB's BFSR. The BFSR could be downgraded if: (a) there is an increase in the ratio of problematic loans, leading to elevated provisioning requirements and hence weaker profitability; (b) the level of core equity weakens significantly; (c) the operations in Greece continue to perform poorly, hurting group profitability; and/or (d) increasing competition in its home market affects the bank's domestic franchise

Other ratings

The global local currency deposit rating for Bank of Cyprus is A2/Prime-1, for Marfin A3/Prime-1 and for Hellenic Bank Baa2/Prime-2.

The foreign currency deposit rating for BOCY remains at A2/Prime-1, for Marfin at A3/Prime-1 and for Hellenic Bank at Baa2/Prime-2.

The loans in foreign bonds for BOCY and MPB remain at A2 and A3 and the foreign currency long-term deposit rating at A3 and Baa1.