02.08.2022
S&P Global Ratings has affirmed the long-term and short-term issuer credit ratings of Bank of Cyprus, Cyprus’ largest lender, at ‘B+/B’, maintaining a positive outlook, reflecting ‘upside potential if economic risks are manageable and we have more confidence that the bank’s recent improvement in risk profile will be sustainable over the medium term.”
S&P stated that it “positively believes that Bank of Cyprus Public Co. Ltd. (BoC) is gradually strengthening its capitalization and has made significant progress in cleaning up its legacy distressed assets.”
However, the agency noted that “while the direct impact of the Bank of Canada is limited, we believe that Cyprus has closer economic ties with Russia than other EU countries, which, combined with the deteriorating macroeconomic situation and lingering inflation, makes potential credit spillovers. the quality is uncertain.”
S&P highlighted that the Bank of Canada managed to collectively reduce its stock of non-performing loans (NPE) by 95% from its peak in 2014 thanks to a combination of market selling and organic efforts.
“As of March 31, 2022, NPE accounted for 6.5% of gross loans (pro forma for Helix 3) compared to 30% at the end of 2019. As a result, the BoC enters a more difficult period in a stronger position than in the recent past . S &P added .
While noting that the Bank of Cyprus, like its peers, will not be immune from the indirect effects of prolonged inflation and high energy prices, S&P said “there may be some deterioration in asset quality eventually.”
“Cyprus’ tourism and business ties with Russia are stronger than those of other EU members, and therefore the economic stress that Russia is currently experiencing may have some effect on the recovery of the island’s tourism sector,” the agency added.
The agency also noted that adequate capitalization should provide a buffer for growth, as after seven years of de-risking the balance sheet and reducing high-risk distressed assets, the BoC’s capitalization has gradually strengthened.
In addition, the agency noted that the bank’s sufficient liquidity reduces the potential risk of an outflow of Russia-related deposits, with liquid assets of €10.2bn as of March 31, 2022 covering 58% of client deposits, primarily in cash and reserves. to the central bank.
“This, combined with retail financing fully covering the loan portfolio (loan-to-deposit ratio of 58% as of March 31, 2022), provides a sufficient buffer to cover potential outflows of client deposits related to Russian individuals or businesses, even if this is not our base case,” the agency said, noting that “BoC Russia-related deposits are capped at approximately 6% of client deposits, which we consider manageable.”
In addition, S&P said that the effectiveness of the BoC should close the gap with peers over the next 12-18 months.
“Continued efforts to reduce costs through voluntary layoff schemes and digital transformation should somewhat offset inflationary pressures, leading to a gradual increase in BoC’s weak performance,” the agency said, noting that it expects the bank’s cost-to-revenue ratio to reach 63% in year . at the end of 2023 compared to about 70% calculated by S&P Global Ratings as of March 31, 2022 .
In this regard, S&P said that the Bank of Canada could benefit more from tightening monetary policy than peers, since about 95% of its loan portfolio is associated with floating rates.
