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Fitch: Marginal profits for HB

06/10/2009 11:30
According to Fitch Ratings, Hellenic Bank will keep its marginal profitability in 2009. In its report dated October 2, 2009, the firm affirmed Hellenic Bank's (HB) ratings at Long-term Issuer Default (IDR) 'BBB', Short-term IDR 'F3', Individual 'C/D', Support '2' and Support Rating Floor 'BBB'.

At the same time, the Rating Watch Negative (RWN) assigned to HB's Individual Rating on 6 May 2009 has been removed.

According to the report, “the bank's Long-term IDR is at its Support Rating Floor, reflecting the high probability that support from the Cypriot financial authorities would be forthcoming, if ever required”.

“The removal of the RWN on the Individual Rating indicates that Fitch's short-term concerns regarding HB's structural position in its home markets of Cyprus and Greece have eased after the group returned to profitability in Q209, and Fitch's expectation that HB will remain marginally profitable in 2009”, it said.

“HB reported a loss in Q109 mainly as a result of sharply increasing funding costs and significantly higher loan impairment charges, notably in Greece (which accounted for 21% of the group's loan book at end-H109). Funding costs eased in Q209, leading to a partial restoration of the group's net interest margin (NIM)”, it noted.

However, Fitch notes that significant downside risks for HB's Individual Rating remain. While the normalisation of funding costs in Q209 and Q309 is a positive trend, the sharply deteriorating asset quality, notably in Greece, remains a concern.

“Although management is actively restructuring HB's Greek operations, which are currently loss-making, the highly competitive Greek market and recessionary pressures are likely to deepen asset quality and hence profitability problems and management will, in Fitch's opinion, be challenged to turn around HB's Greek branches in the medium-term”, the report added.

Consequently, HB's Individual Rating would come under pressure should HB fail to achieve profitability improvements in Greece in the medium-term or should asset quality both in Greece and Cyprus deteriorate faster than currently anticipated. A failure to restore an adequate NIM would also put downward pressure on HB's Individual Rating.

According to Fitch, “the quality of HB's EUR5bn gross loan book (as of end-H109) is in Fitch's view below peer-group-average. While the group's overall non-performing loans ratio deteriorated to 7.25% at end-H109 (from 6.73% at end-2008), asset quality in the group's Greek operations is weaker and deteriorated markedly in H109. Loan loss coverage for the group is, however, adequate and acts as a mitigating factor for further anticipated asset quality deterioration”.

Due to Cypriot banking regulations, HB is required to invest 70% of its foreign currency-denominated deposits in highly rated and liquid government or bank bonds, leading to adequate liquidity within the bank.

“Liquidity is further supported by a government deposit which is likely to be converted into a special government bond at end-2009 once the respective legislation has been passed. HB is, in Fitch's view, adequately capitalised but capital ratios will have to remain at current levels to mitigate the impact of further credit losses, notably in Greece”, the report noted.

According to the firm, “HB was the third-largest bank in Cyprus by total assets at end-H109, employing 2,051 staff (451 in Greece) in 98 branches (27 in Greece). Its largest shareholder, with 14% of the bank's equity, is the Archbishopric of Cyprus. HB has expanded into Greece and, more recently, into Russia’.