By Michalis Michael
Standard & Poor’s has confirmed last night the Bank of Cyprus’ long-term and short-term credit ratings at B + and B, respectively, while keeping the bank’s outlook stable. Its decision, according to the US firm, reflects the belief that while the Bank of Cyprus recently completed several actions to raise its capital, including the issuance of Tier 1 capital and the disposal of assets, “its capitalization remains weak compared to the risks the bank is undertaking”.
This can be seen, according to S&P, in the very high Non-performing Loans (MEX) stocks, which accounted for 35% of gross loans on March 31, 2019, and the bank’s inclination to retail and SMEs, which have historically proven to be more difficult to handle. The Bank of Cyprus’ top position in the domestic market and its abundant liquidity support its valuation, the house underlines.
Concerning the Bank of Cyprus’ stable outlook, the international ratings agency says they reflect its expectation that the bank will continue to reduce the risks in its balance sheet, while maintaining its capitalization at current levels over the next 12-18 months. Reporting that the RAC ratio was 5.6% as of December 31, 2018, Standard & Poor’s estimates that this figure will rise to 6.0% -6.5% by December 2020, due to legislation passed in March 2019 to convert deferred tax assets (AFS) to deferred tax credits (GNPs), the sale of the bank’s stake in CNP Cyprus Insurance Holdings in June 2019 and the Helix transaction.
These positive factors will be partially offset, according to the agency, by the weakening of the bank’s funds, due to potential losses that will occur over the next two years. Specifically, the international firm believes that net interest income will remain under pressure due to the environment of extremely low interest rates and because the need for foreclosures will remain high. We predict that Bank of Cyprus will project 2.5% to 3.0% of its gross loans, cumulatively in 2019 and 2020, which is in line with our expectation, the rating agency states.
Bank of Cyprus ratings upgrading factors
Regarding the possibility of upgrading the Bank of Cyprus in the future, S&P stresses that it could upgrade its rating if the bank slows down MEX faster than expected, so that their rate drops significantly below 20% and at the same time gradually improve its profitability and prospects of operating profitability.
“A significant reduction in MEX could, in our view, occur through further extraordinary market transactions”, it is underlined. In addition, the US firm stresses that it could also improve the bank’s ratings if the financial risk mitigation, coupled with the efforts to reduce the MEX, leads the RAC to rise and remain above 7%.
The firm also expects the Bank of Cyprus to expand its loan portfolio and gradually reduce its shareholder interest rate to 22% by 28% by the end of 2020. However, S&P says it could downgrade Bank of Cyprus’s ratings, if the bank suffered additional significant credit losses that would affect its capitalization and push the RAC rate below 5% or if the asset quality had “unexpectedly deteriorated”. “We could also take a negative action if the bank fails to boost its operating profitability and efficiency and if we believe it will remain substantially loss-making in the long run”, S&P credit rating agency stresses./ibna