According to Fitch Ratings, the creditworthiness of the two largest banks in Cyprus is improving due to significant progress in implementing plans to reduce non-performing loans (NPEs). The agency expects Bank of Cyprus (B-/Positive) and Hellenic Bank (B/Positive) to maintain this level in 2022 as they each have major sales planned. The economic recovery will help banks organically improve asset quality.
We revised our bank rating outlooks to Positive in December 2021 to reflect these expectations. But the ratings remain at ‘B’, reflecting still weak asset quality and capital heavily burdened by unreserved distressed assets. Bank of Cyprus and Hellenic Bank together represent about two-thirds of the sector’s assets.
Improving the creditworthiness of banks should help them issue debt at a better price to meet their minimum equity and eligible liability (MREL) requirements. Bank of Cyprus was the first bank in Cyprus to issue senior preferred debt when it created €300 million in 2021 to reach its interim MREL target. Hellenic Bank recently launched a €1.5bn mid-term Eurobond program but has yet to issue it.
NPLs and bank distressed assets (NPEs and forfeited real estate assets) have declined significantly since the end of 2019 and are expected to decline even further in 2022, given distribution channels and asset quality targets.A significant inflow of new NPLs subject to the moratorium is not expected, given the good yields on loans after the moratorium expires. The Bank of Cyprus aims to bring the Impaired Loan Ratio below 10% by the end of 2022 and around 5% over the medium term. Hellenic Bank recently announced plans to reduce its stake to 3% within three to five years (excluding NPEs covered by the Cyprus Asset Protection Scheme). Banks are expected to use a range of methods to achieve their goals, including debt write-downs, restructurings and swaps, but no significant new NPE sales other than those already announced are expected.
The Bank of Cyprus has reached an agreement to sell €0.6 billion of NPE and €121 million of seized real estate assets to PIMCO. The deal, dubbed “Helix 3”, which is likely to be completed in the first half of 2022, will allow the bank to meet its planned obligations to delinquent creditors. Helix 3 lowers the NPL ratio to 8.6% tentatively at the end of September 2021 from 30% at the end of 2019 and a peak of 63% at the end of 2014. However, the bank’s problem asset ratio is still high at about 18.5% tentatively at the end of September 2021. Further improvement in asset quality performance will largely depend on the bank’s ability to reduce its large stock of foreclosed real estate assets through further sales.As of the end of September 2021, the assets foreclosed were around €1.3 billion for Helix 3.
Hellenic Bank intends to negotiate a €0.7bn NPE disposal this year called “Starlight”, which is expected to be capital neutral. The bank estimates that this will reduce the NPL ratio to mid-single digits from 14.5% at the end of September 2021 (excluding NPEs covered by the Cyprus Asset Protection Scheme). The volume of assets withdrawn from circulation at Hellenic Bank is significantly lower than at Bank of Cyprus, which positively affects our assessment of asset quality.
The capital burden at both banks has eased since the end of 2019, but remains high and drags down the ratings. At the end of September 2021, Bank of Cyprus’s unreserved distressed assets amounted to 110% of Tier 1 fully committed core capital (CET1) (end 2019: around 200%). Hellenic Bank’s uncommitted distressed assets accounted for about half of CET1’s fully loaded capital at end-September 2021 (end-2019: about 80%).