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Moody’s assigns Co-op a Caa2 deposits rating, stable outlook (Update)

Moody’s Investors Service said that it assigned the Cooperative Central Bank a Caa2 long-term local and foreign currency deposits rating, the first rating ever received by the state-owned lender, which is preparing for its Cyprus Stock Exchange listing.

Moody’s also assigned the bank, which the government bailed out with almost €1.7bn, a not-prime short-term local and foreign currency deposits rating and a caa2 baseline credit assessment and adjusted baseline credit assessment. In an emailed statement on Wednesday, it added that the long- and short-term counterparty risk assessments assigned to the bank was Caa1(cr)/Not-Prime(cr).

“The outlook on the deposits rating is stable,” Moody’s said, and justified the Cooperative Central Bank’s rating with Cyprus’s weak macroeconomic profile and “challenging environment,” the bank’s weak asset quality with non-performing loans accounting for 59.8 per cent of total loans in September, which is expected to “gradually improve overtime,” and its strengthened, but still vulnerable capital buffers.

Through the listing in the Cyprus Stock Exchange, the lender is planning to issue new shares in an attempt to attract private equity and gradually dilute the government’s stake to 25 per cent from currently 99 per cent. The government is also considering handing over shares to various social groups such as Co-op workers and customers, investors, depositors who lost money in Cyprus’s banking crisis, and others.

The problematic portfolio of the bank, which had a core equity tier 1 ratio of Moody's sign on 7 World Trade Center tower in New York16.5 per cent in September, was not adequately covered by provisions, Moody’s added. In September, the bank’s provisions for loan impairments stood at €3.3bn, or 44.7 per cent of its total non-performing loans.

 

The rating of the Cooperative Central Bank also takes into account the bank’s “stable funding structure based on domestic deposits,” as well as the challenges stemming from the merger of the 18 independent saving banks which the Cooperative Central Bank administered and served as lender of last resort until last year, Moody’s said.

In December, Moody’s upgraded the ratings of Bank of Cyprus’s and Hellenic Bank by one grade to Caa2 and Caa1 respectively, and kept them on positive outlook.

“The stable outlook on the long-term bank deposit ratings balances Moody’s expectation of still weak, though improving, asset quality metrics balanced against its capital buffers,” Moody’s said.

While the economic growth forecast for 2017 is expected to help improve the ability of borrowers to service their debt, the improvement would be gradual from the current “very weak levels, as the bank maintains the momentum in its restructuring efforts,” said Melina Skouridou, assistant vice president at Moody’s.

“Loan restructurings are supported by the economic recovery in Cyprus, which makes revised repayment terms easier for borrowers to cope with,” said Moody’s, which expects the economy to expand 2.7 per cent this year and a further 2.5 per cent in 2018, slightly below the government’s forecasts.

“Nevertheless, (the bank’s) stock of nonperforming loans will remain large for a significant period of time, representing a key credit weakness,” it said.

The rating company added that while the deposit ratings of other banks do not factor in government support, given how banks were recapitalised four years ago, in the case of the Cooperative Central Bank, the government’s track record in supporting the Co-op and the bank’s share in domestic deposits, justifies incorporating a “one notch of support uplift”.

Moody’s added that an improvement in the financial performance of the bank, a drop in its non-performing loans and an increase in the coverage ratio could trigger a rating upgrade. On the other hand, the rating could be decreased if the bank fails to make progress with restructurings also as a result of slower growth.

On Thursday, the Cooperative Central Bank reacted with a statement to the Moody’s rating, saying that it “proves the important progress achieved at the Co-op since 2014”.

“The first assessment by Moody’s is an important milestone in the corporation’s strategic planning, ensuring transparency and comparability with other Cypriot and European banks,” the bank said.

The Cooperative Central Bank is together with Bank of Cyprus, Hellenic Bank and RCB Bank supervised by the European Central Bank’s Single Supervision Mechanism.

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