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Moody’s upgrades Hellenic Bank to Caa2; outlook now stable

Moody’s Investors Service has upgraded Hellenic Bank’s long-term deposit rating to Caa2 from Caa3, and has affirmed the bank’s caa3 baseline credit assessment (BCA) and the Not-Prime short-term deposit ratings, it said.

The actions conclude the review on the bank’s deposit ratings which was initiated on 17 March 2015, the ratings agency said.

Moody’s rating actions on Hellenic Bank primarily reflect the “Very Weak” macro profile of Cyprus (B3 stable); the bank’s weak financial profile; and Moody’s Advanced Loss Given Failure (LGF) analysis, it said.

The new methodology includes a number of elements that Moody’s has developed to help accurately predict bank failures and determine how each creditor class is likely to be treated when a bank fails and enters resolution. These new elements capture insights gained from the crisis and the fundamental shift in the banking industry and its regulation.

The affirmation of Hellenic’s caa3 BCA takes into account Moody’s assessment of a Very Weak macro profile for Cyprus, driven primarily by the country’s weak funding conditions, brought about by still fragile depositor confidence.

“Credit conditions also remain very weak, with private-sector debt standing at 300 per cent of GDP, with over a third of it built up over the last four years,” Moody’s said.

The macro profile also captures the rating agency’s expectations of a mild economic recovery in 2015, and progressive GDP growth rising to around 2 per cent over the medium term, “although the outlook remains vulnerable to private-sector deleveraging and a high stock of problem loans”.

Moody’s expects that recent amendments to the legal framework will benefit Cypriot banks, by ensuring a more timely execution of collateral.

“However, benefits to these amendments will take time to feed through and are therefore not yet explicitly reflected in the macro profile,” it added.

Moody’s affirmation of Hellenic Bank’s caa3 BCA also reflects the bank’s weak financial profile, capturing the bank’s significant asset-quality challenges which offset its enhanced capital base and ample liquidity buffers, it said.

“The bank continues to face a large stock of non-performing loans (NPLs) against which cash provisions (loan loss reserves) remain low.”

The ratio of NPLs (defined as 90 days past due and impaired loans, net of interest in suspense) to gross loans stood at 51.3 per cent as of March 2015, while non-performing exposures — according to the European Banking Authority’s definition — were 53.3 per cent of gross loans.

At the same time, the ratio of loan loss reserves (excluding interest in suspense) to NPLs was a low 42 per cent as of March 2015.

“Although the arrears management and recoveries unit has been strengthened in 2014, loan restructuring progress has been slow. The recent implementation of a more timely foreclosure framework in Cyprus is a positive development for the bank, however it is too early to assess its potential benefit,” Moody’s said.

It added however that it did acknowledge the bank’s solid liquidity cushion and stronger capital.

“This high liquidity buffer mitigates the risks that arise from the high vulnerability of the bank’s funding base, and would allow the bank to withstand large deposit outflows.”

Hellenic Bank has a significant funding reliance to corporate deposits of non-resident corporations, mainly originating from Commonwealth of Independent States. As of March 2015, around half of the bank’s deposits were from corporate entities, according to Moody’s estimates.

 

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