05.10.2022
Ratings agency Moody’s on Wednesday announced that it had upgraded the long-term ratings of Bank of Cyprus and Hellenic Bank, including their long-term bank deposit ratings to Ba2 from Ba3, as well as their basic credit ratings (BCA) to b1 from b2. The agency also said that the outlook for long-term deposit ratings of both banks remains positive.
“The main driver behind today’s upgrade is the resilience of the Cypriot economy, which is supporting banking system conditions,” the agency said, noting that this has resulted in an upgrade of Cyprus’ macro profile to “moderate ,” from “weak.” In addition, the higher macroeconomic profile also implies lower downside risks and the severity of post-failure losses for Cypriot banks.
“The positive outlook reflects Moody’s expectation that the two banks will strengthen their profitability in the context of higher interest rates and continue to improve their asset quality despite the potential formation of new NPLs,” the agency explained.
“The positive outlook on the banks’ long-term deposit ratings also reflects a potentially higher buffer from newer instruments as clarity and certainty about their future debt issuance improves,” he added.
Moody’s took into account the fact that the Cypriot economy showed stronger than expected resilience to the Russian invasion of Ukraine (negative Caa3) and recovered well from the shock caused by the pandemic, indicating that there is no irreversible damage, as non-tourism services , and government support measures stabilized the economy and cushioned the effects of the shock.
In addition, the agency said it expects growth in Cyprus this year at 4.8% and 2% in 2023. These figures will be higher than the euro area average of 2.2% in 2022 and 0.9% in 2023.
Subsequently, Moody’s stated that the growth outlook for Cyprus remains stable, with potential GDP growth estimated in the range of 2.5-3.0%.
“Moody’s notes that lending conditions have improved in recent years, with the share of systemic non-performing loans (NPE) falling significantly to 11.2% of total domestic loans and advances in June 2022 from a peak of 49.8% in May 2016″ . with the agency said.
“However, the rating agency notes that problems remain due to still high levels of debt and a foreclosure legal framework that remains vulnerable to frequent political interference,” he added.
Regarding the Bank of Cyprus, Moody’s explained that the positive outlook on long-term deposit and senior unsecured debt ratings reflects its expectation that foreclosed bad loans and real estate assets will continue their downward trajectory. In addition, profitability is expected to improve further thanks to higher interest rates and the bank’s cost-cutting initiatives.
“Moody’s expects the profitability of the Bank of Cyprus to benefit from an increase in the European Central Bank (ECB) discount rate, primarily due to the bank’s significant cash balances at the central bank (about 9.9 billion euros or 38% of assets as of 2018) . June 2022) to be revalued immediately,” the agency said in a statement, noting that at the same time, deposits will be revalued more slowly and less, given the bank’s excess liquidity.
As a result of the above, the bank expects to achieve a return on equity of over 10% in 2023, two years ahead of schedule.
“The positive outlook on the long-term deposit rating also reflects a potential higher buffer zone from more junior instruments as clarity and certainty about the bank’s potential future debt issues improves,” the agency said.
For Hellenic Bank, the agency explained that the positive outlook on long-term deposit and senior unsecured debt ratings reflects Moody’s expectation that NPEs will continue their downward trajectory, with profitability strengthened by higher interest rates.
“Moody’s expects Hellenic Bank’s profitability to benefit from higher interest rates, given its large ECB balances of around €6.9 billion as of June 2022, equivalent to 36 percent of total assets to be revalued immediately. after any increase in interest rates,” the agency said in a statement.
“ More gradually , investing in his large bond portfolio, an additional 24% of assets, will also increase net interest income as maturing bonds are invested in higher yielding bonds of similar credit quality,” he added.
At the same time, Moody’s notes that deposits will be revalued more slowly and to a lesser extent, given the excess liquidity.
“Hellenic Bank estimates net interest income will increase by more than € 130m (or about 0.7% of pre-tax assets) by 2023,” Moody’s said.
“The positive outlook on the long-term deposit rating also reflects a potential higher provision for more junior instruments, depending on the bank’s potential future debt issues,” it concluded.
