Moody’s upgraded Bank of Cyprus’ and Hellenic Bank’s ratings

Moody's Investors Service on Wednesday including their long-term bank deposit ratings to Ba2, from Ba3, maintaining positive outlook citing “the resilience of the Cypriot economy that is supporting the operating conditions of the banking system.”

Furthermore, the agency upgraded Cyprus’ two largest banks’ Baseline Credit Assessments (BCAs) to b1, from b2. The outlook on both banks' long-term deposit ratings remains positive.

“The main driver for today's rating upgrade is the resilience of the Cypriot economy, that is supporting the operating conditions of the banking system,” Moody’s said in a press release adding that “this has lead Moody's to raise the Macro Profile of Cyprus to "Moderate-", from "Weak+".

According to Moody’s, Cyprus' economy has seen a stronger-than-expected resilience to Russia's invasion of Ukraine and has recovered well from the pandemic shock, indicating no permanent damage, as non-tourism related services and authorities' support measures stabilised the economy and mitigated the impact of the shock.

Moody's expects growth for Cyprus of 4.8% this year and 2% in 2023 respectively, which would be higher than the euro area average at 2.2% in 2022 and 0.9% in 2023. “Thereafter, Cyprus' growth outlook remains solid with potential GDP growth estimated by Moody's to be in the range of 2.5-3.0%,” the agency said.

It also noted that higher macro profile score also suggests lesser downside risks and severity of post-failure losses for Cypriot banks.

Moody’s noted that the positive outlooks reflect its expectation “that the two banks will strengthen their profitability, in the context of the higher interest rate environment, and will continue to improve their asset quality, despite potential new nonperforming loans (NPL) formation”, as well as “a potential higher buffer from more junior instruments, as the clarity and certainty around their future debt issuances improves.”

“The operating environment has proven more resilient and credit risks are gradually receding, which leads Moody's to expect lower post-failure losses for Cypriot banks,” the agency added.

On Bank of Cyprus, the island’s largest lender, Moody’s said that the higher BCA “reflects the reduced risks to the bank's credit profile, due to the resilience in the Cypriot economy, but also the bank's continued asset quality improvements.”

Moody’s recalls that the bank has managed to significantly improve asset quality, as a result of organic and inorganic actions, with NPEs declining to a pro-forma 5.7% of gross loans as of June 2022, from 25% at year-end 2020, while maintaining a solid Common Equity Tier 1 (CET1) ratio of 14.2%, pro-forma for the latest NPE sale and the bank's voluntary staff exit scheme.

“The bank's profitability outlook has also strengthened, supported by the higher interest rate environment and the bank's cost-cutting initiatives,” the agency added.

Moreover, the agency said the positive outlook on the long-term deposit and senior unsecured debt ratings reflects Moody's expectation that NPEs and foreclosed real estate assets will continue their downwards trajectory and profitability will strengthen further, supported by the higher interest rate environment and the bank's cost-cutting initiatives.

Moody's expects Bank of Cyprus' profitability to benefit from the increases in the European Central Bank (ECB)'s policy rate, primarily as the bank's significant cash balances with the central bank (around €9.9 billion or 38% of assets as of June 2022) reprice immediately, noting that will reprice slower and by less, given the bank's excess liquidity.

“As a result, the bank expects to reach a return on tangible equity of over 10% in 2023, two years ahead of plan,” the agency said.

On Hellenic Bank, Cyprus’ second largest lender, Moody’s said the higher BCA reflects the reduced risks to the bank's credit profile, due to the resilience in the Cypriot economy, but also the bank's continued asset quality improvements.

The agency noted that Hellenic Bank's solvency benefits from the bank's solid capital buffers, with a CET1 capital ratio of 19.6% as of June 2022, and the material reduction in its legacy problem loans, with NPEs accounting for 10.2% of gross loans, or 3.6% excluding NPEs guaranteed by the government, pro forma for the bank's recent NPE sale.

It also said that bank's profitability outlook has also strengthened, supported by the higher interest rate environment and the bank's ongoing initiatives to rationalize costs.

According to Moody’s the positive outlook on the bank’s ratings, reflect the agency’s expectation that Hellenic Bank's profitability will benefit from higher interest rates, given its large balances with the ECB of around €6.9 billion as of June 2022, equivalent to 36% of total assets, that will reprice immediately following any rises in interest rates.

More gradually, the investment of its large portfolio of bonds, an additional 24% of assets, will also increase net interest income as maturing bonds are invested in higher yielding bonds with a similar credit quality, while deposits will reprice slower and by less, given excess liquidity. Hellenic Bank estimates that net interest income will increase by more than €130 million (or around 0.7% of assets before tax) by 2023 onwards, the agency added.