Bank of Cyprus’ latest sale of non performing exposures is credit positive, Moody’s rating agency says while pointing that weak asset quality remains the key credit challenge for Bank.

Bank of Cyprus had agreed to sell a portfolio of non performing loans with a gross book value of €916 million to funds affiliated with Pacific Investment Management Company LLC (PIMCO).

According to a report at Moody’s “Credit Outlook” upon completion, the sale, which relates primarily to non performing retail and small and midsize enterprise loans will reduce the bank’s nonperforming exposure (NPE) ratio by five percentage points, a credit positive. The bank’s pro forma ratio of NPEs to gross loans will fall to 22% as of June 2020, from 30% as of year-end 2019, and includes an organic NPE reduction of €278 million and the completion of an earlier sale of €133 million of primarily retail unsecured NPEs.

“Despite its improving NPE ratio, weak asset quality remains the key credit challenge for Bank of Cyprus”, the rating agency says.

It adds that with heightened asset quality risks from the coronavirus-induced economic disruption that will lead to new asset quality pressure starting in 2021, the disposal will help maintain an NPE ratio well below the bank’s historical levels.

“We expect a widespread economic disruption caused by the coronavirus outbreak, with the Cypriot economy contracting by 7.5% in 2020, with the economy returning to healthy growth rates from 2021”, it is noted.

Moody’s also says that the bank has made progress in reducing its high stock of NPEs, with a combination of organic reductions and inorganic transactions. Bank of Cyprus` NPEs have declined to €2.6 billion in June 2020 from a peak of €15.2 billion NPEs in March 2015, but remain high at 22% of gross loans.

However, it points out that the coronavirus pandemic has prompted the bank to make concessions on the size of the sold portfolio, and on the price and structure of the transaction, to complete the sale.

“Before the coronavirus, Bank of Cyprus expected to finalise its NPE reduction structures, including outright sales of a portfolio around €2 billion, in the first half of 2020, with a positive effect on capital owing to a significant reduction in risk-weighted assets (RWAs)”, Moody’s notes.

It also mentions that the announced transaction is around half the amount, while the potential reduction in RWAs upon completion will not offset the related losses of the transaction that will be reported by June 2020.