Fitch Ratings has upgraded Hellenic Bank Public Company Limited`s (HB) Long-Term Issuer Default Rating (IDR) to `B+` from `B` and Viability Rating (VR) to `b+` from `b`. The Outlook on the Long-Term IDR is Stable.

Moreover, Fitch Ratings has affirmed Bank of Cyprus Public Company Limited`s (BoC) Long-Term Issuer Default Rating (IDR) at `B-` and Viability Rating (VR) at `b-`. The Outlook on the Long-Term IDR is Positive.

The Hellenic Bank upgrade follows the completion of the acquisition of certain good assets and liabilities of Cyprus Cooperative Bank Ltd (CCB) and a EUR150 million capital increase. Under the final terms of the acquisition, HB took on board total assets of EUR9.3 billion comprising mainly loans (EUR4 billion net), Cypriot government bonds (EUR4.1 billion) and cash (EUR1 billion), as well as customer deposits of EUR8.8 billion.

As it is noted, the ratings of HB reflect its strengthened franchise and market position in Cyprus following the acquisition of CCB, which together with a capital increase, have led to an improved overall financial profile. In particular, the bank`s asset quality metrics have improved, albeit remaining weak by international standards, and longer-term profitability prospects are now better. The latter is helped by HB`s larger retail business and increased pricing power as well as potential for cost and revenue synergies. The ratings also reflect still high capital encumbrance by unreserved problem loans and significant execution risks related to the integration of a balance sheet that is roughly 1.5x HB`s pre-acquisition size, a Fitch press release noted.

The acquisition of CCB has strengthened HB`s retail franchise as it has enlarged its market shares in performing loans and deposits to over 20% and over 30%, respectively, and shifted the bank`s business mix towards retail customers as opposed to the more corporate and SME focused franchise that HB had pre-acquisition. "We believe that this will improve HB`s pricing power and would be positive for the bank`s profitability over the longer term. In the shorter term, HB is already benefiting from a downward repricing of the acquired deposit base," the Fitch press release said.

According to Fitch, the ratings of BoC reflect its weak asset quality, which results in very high encumbrance of capital by unreserved problem assets. Profitability is also therefore constrained. The ratings continue to reflect an improved funding profile and adequate liquidity buffers.

The Positive Outlook takes into account our expectation that the bank`s announced securitisation of a large portfolio of non-performing loans (project Helix; EUR2.65 billion) will be completed in early 2Q19 following ECB`s approval for the significant risk transfer benefit from the transaction. The Outlook also reflects our expectations that the volume of problem assets will continue to decline at a reasonable pace in the medium-term. This will be positive for BoC`s credit risk profile and key to reducing the bank`s very high capital encumbrance from unreserved problem assets.

"We expect BoC`s asset quality to continue to improve, given the bank`s track record in restructuring problem loans, the announced government scheme to support borrowers whose loans are backed by primary residences and changes to foreclosure laws that should speed up collateral repossession. From end-2014 to end-2018, BoC reduced non-performing exposures (NPEs as defined by the European banking Authority) significantly ahead of domestic peers by around 70%, including the Helix transaction," Fitch Ratings said.