11/07/2024 15:23
Moody's Ratings (Moody's) has today upgraded Bank of Cyprus Public Company Limited's (Bank of Cyprus) ratings, with the exception of the Prime-2 short-term Counterparty Risk Ratings (CRRs) and Prime-2(cr) short-term Counterparty Risk (CR) Assessment which have been affirmed. The outlook on the bank's long-term deposit and senior unsecured debt ratings has been changed to stable, from positive.
Bank of Cyprus' following ratings and assessments have been upgraded: its Baseline Credit Assessment (BCA) and Adjusted BCA to ba1 from ba2, its long- and short-term deposit ratings to Baa1/ P-2 from Baa3/ P-3, its long-term Counterparty Risk Assessment to Baa1(cr) from Baa2(cr), its long-term Counterparty Risk Ratings to Baa1 from Baa2, its long-term senior unsecured and junior senior unsecured Medium-Term Note (MTN) program ratings to (P)Ba1 from (P)Ba2, and its long-term local-currency senior unsecured debt rating to Ba1 from Ba2.
As part of the same rating action, we have upgraded Bank of Cyprus Holdings Public Ltd Company's long-term senior unsecured MTN program ratings to (P)Ba1 from (P)Ba2, its long-term subordinated MTN program ratings to (P)Ba2 from (P)Ba3, its long-term local-currency subordinated debt rating to Ba2 from Ba3 and its long-term local-currency Preferred Stock Non-cumulative rating to B1 (hyb) from B2 (hyb).
The rating action captures the ongoing improvements in Bank of Cyprus' solvency profile in conjunction with the increased protection afforded to the bank's depositors, following its recent issuance of senior unsecured debt.
Specifically, Bank of Cyprus has further strengthened its capital adequacy metrics over the last few quarters. As of March 2024, Bank of Cyprus reported a high regulatory CET1 capital ratio of 17.1%, up from 15.6% as of June 2023, at the time of its last upgrade. We expect capital to continue to increase supported by its improved internal capital generation, while risks to capital are also gradually receding as the bank continues to address its legacy asset quality issues.
Profitability has significantly strengthened because of higher interest rates, with a reported net income to tangible assets of 2.1% during the first quarter of 2024. Although profitability will drop from recent highs, as interest rates decline to a more normalised level, we expect the bank to maintain solid bottom-line profitability of over 1% of assets supported by its cost-cutting and ongoing digital transformation initiatives.
Bank of Cyprus has managed to navigate a period of higher inflation and interest rates, with no impact on its asset quality profile. We expect the bank to continue to improve its asset quality with problem loans falling to around 3% of total loans, in line with the bank's own projections.
The rating action also incorporates the bank's recent €300 million senior unsecured green bond issuance in the second quarter of 2024, that has increased the protection afforded to depositors. Incorporating this issuance and the bank's upcoming maturities and planned refinancing over the next three years, our forward looking LGF analysis now indicates an extremely low loss-given-failure for junior depositors resulting in a three-notch uplift from its Adjusted BCA, from a two-notch uplift previously. This incorporates the full depositor preference in Cyprus.
The stable outlook on the long-term deposit and senior unsecured ratings balances potential further asset quality improvements against lower normalised profitability metrics, a broadly stable operating environment, and stable funding, liquidity and capital metrics. It also incorporates the bank's upcoming maturities and planned refinancing.
Bank of Cyprus' deposit ratings could be upgraded if our assessment of the domestic operating environment improves; or residual asset quality risks reduce and the bank's overall asset quality profile improves beyond our current expectations, while the bank maintains solid funding, liquidity and capital metrics; and the bank's ongoing digital transformation initiatives significantly diversify its franchise and earnings, and strengthen its growth potential, leading to a higher than currently expected bottom-line profitability.
Bank of Cyprus' deposit ratings may be downgraded if we expect that the operating environment will weaken; we determine that recent asset quality improvements will reverse; or if we determine that profitability metrics will likely weaken beyond similarly-rated peers.