Capital Intelligence Ratings (CI Ratings or CI) has upgraded the Long-Term Foreign Currency Rating (LT FCR) of Bank of Cyprus (BoC) to ‘BB’, from ‘BB-’. BoC’s Bank Standalone Rating (BSR) and Core Financial Strength (CFS) have also been raised to ‘bb’ and ‘bb’, respectively, from ‘bb-’ and ‘bb-’, citing “the substantial improvements in asset quality and the resulting positive impact on the Bank’s capital and overall credit loss absorption capacity.”
At the same time, the Limassol-based agency has affirmed the Bank’s Short-Term Foreign Currency Rating (ST FCR) of ‘B’ and Extraordinary Support Level (ESL) of Uncertain. The Outlook for the LT FCR and BSR remains Stable.
CI noted that improved operated environment improved as economic performance remained resilient in 9M 22 despite external adversities and is expected to recover further, with the increase in investments and net exports in the second half of this year partially offsetting the impact of the war in Ukraine and higher inflation.
The sound economic performance has improved the operating environment for banks in terms of asset quality risks, lending opportunities, and profitability, hence the upward adjustment of our OPERA assessment, the agency added.
According to CI, funding and liquidity continue to be the principal credit strengths supporting the CFS. “The Bank enjoys a well-diversified and stable retail customer deposit base and has very little reliance on wholesale funding. Liquidity metrics continue to be strong,” it said.
Another credit strength CI added, and the key contributor to the change in the CFS, is the substantially improved asset quality.
Recalling that NPLs have reduced markedly over the last three years due to sales, mostly to Pacific Investment Management Company LLC (PIMCO), CI said that sale to Helix 3 was completed in November 2022, bringing the NPL ratio down to mid-single digits at end Q3 22.
“This had the effect of reducing the residual impact of unprovided NPLs on the Bank’s capital, and to improve net profitability due to lower provisioning requirements,” CI said, adding that these factors, in turn, have improved BoC’s overall credit loss absorption capacity despite the still moderate NPL coverage ratio.
The agency noted, however, that the bank remains exposed to the volatile tourism and real estate sectors which are also a major source of outstanding NPLs, as well as stage 2 loans – both of which remain high. As a result, asset concentration risk is still considered a credit challenge.
Furthermore, CI said the Bank’s status as the largest bank in Cyprus with a leading market share in lending and over a third of customer deposits supports the ratings.
The agency pointed out that the bank’s net profitability improved moderately in H1 22, albeit from a very low base, having returned to positive territory in 2021.
Recalling that the small loss in Q3 22 reflected the one-off costs associated with the voluntary staff exit plan, which will reduce personnel expenses from 2023 onwards thus expected to have a positive impact on operating profitability, CI pointed out that net and operating profitability are still considered low and the cost-to-income ratio is high.
According to CI, although the rising interest rate environment in the EU is likely to benefit BoC in full year 2022 and into 2023 in terms of improved net interest margin, further significant cost savings may however be limited as bank employee salaries remain relatively high and staff are strongly unionised.
“The high inflation may also pressurise operating costs. We thus consider it uncertain whether the anticipated income improvement from higher interest rates and the already achieved cost savings can fully offset the impact of inflation and subdued loan growth. Operating and net profitability thus remain a credit challenge for the Bank,” the agency added.
Source: Cyprus News Agency