Moody’s Investors Service said that Bank of Cyprus’s decision to de-risk its balance sheet with a €500m increase in provisions is a credit negative even as it reflects the vulnerability of its capital to its bad loans stock.
The increase in provisions announced on Monday, will bring the bank’s core equity tier 1 (CET1) ratio to 12.3 per cent, 280 basis points above the regulatory minimum of 9.5 per cent, and the total capital ratio just 70 basis points above the regulatory minimum of 13 per cent, Moody’s said in an emailed statement on Thursday.
The lender, which issued a €250m tier 2 bond in January, and considers issuing a similar security or additional tier 1 securities to strengthen its capital buffers, Moody’s said.
“We expect an additional negative effect as a result of the implementation of International Financial Reporting Standard 9 (IFRS9), although Bank of Cyprus expects the phased-in fully loaded effect to be manageable relative to its capital plans,” the rating company said.
“The bank’s improved loan-loss reserve buffers will allow it to absorb credit losses and provide a greater ability to take write-offs, which is part of the bank’s strategy to reduce its high stock of non-performing loans,” seen at 52 per cent of its loan portfolio in the first quarter, Moody’s continued.
The rating company said that it expects that following the increase in provisions, the coverage ratio of its non-performing loans will increase to 48 per cent in the second quarter from 42 per cent in the first quarter.
“We expect reserves relative to non-performing loans to increase to 60 per cent in June 2017 from 54 per cent in March 2017, in line with the average for Moody’s-rated euro area banks,” it said. “However, the higher charges will make Bank of Cyprus loss-making in 2017, the sixth year out of the past seven that the bank has reported losses,” Moody’s said. “Given Bank of Cyprus’s size and the extent of the losses, we expect Cyprus’ entire banking system to be loss-making in 2017”.
The bank posted last year a profit of €64m.