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Moody’s downgrades Co-op baseline credit assessment to ‘ca’

Moody’s Investors Service on Tuesday downgraded the baseline credit assessment of the state-owned Cyprus Cooperative Bank to ‘ca’ from ‘caa2,’ citing a shortfall in provisions rendering a capital increase necessary.

It also placed the bank’s ‘Caa2’ long-term, local and foreign currency deposit ratings on review “with direction uncertain,” Moody’s said in an emailed statement. It did the same also with the bank’s long-term ‘Caa1(cr)’ counterparty risk assessment (CRA) and affirmed its ‘Not-Prime’ short-term deposit ratings and ‘NP(cr)’ short-term CRA.

The outcome of the bank’s decision to seek an investor to either acquire it as a fully licenced lender or buy its assets or part of them will determine the review, Moody’s said.

“The extent of any capital raised, or the credit profile of the acquirer of the bank’s assets and liabilities will be key drivers of the direction of the resulting rating action,” it said adding that the bank, owned to over 99 per cent by the government, has a predominantly retail focus in loans and deposits.

“Moody’s says that the two-notch downgrade of the bank’s baseline credit assessment to ‘ca’ from ‘caa2’ reflects the rating agency’s view that the bank has a provision shortfall which will have to be filled either through a capital increase, with funds coming from private investors or the government, or through the sale of all or part of the bank’s assets and liabilities,” Moody’s said. “Although Cyprus Cooperative Bank currently satisfies all of its regulatory requirements, the bank’s capital shortfall stems from weak solvency and limited progress to date in tackling its asset quality issues”.

The bank, which struggles with a 59 per cent non-performing loan ratio, “down slightly from its peak of 60 per cent,” has a provision coverage, ie the amount of provisions compared to total non-performing loans, of 45 per cent, Moody’s said.

“Accordingly, (the) Cyprus Cooperative Bank’s capital buffer, with a ratio of tangible common equity to risk weighted assets at 11.3 per cent as of September 2017, is vulnerable owing to its high provision gap,” the rating company added.

Moody’s said that in the event of the bank significantly increasing its capital or reducing its delinquent loans, it would upgrade the baseline credit rating. On the other hand, it would downgrade it if it was placed into liquidation.

“The deposit ratings could be downgraded if the bank is unsuccessful in its efforts to find an investor or the credit risk profile of an acquirer of the bank’s assets and liabilities is weaker than the bank’s current deposit ratings,” Moody’s continued. “The deposit ratings could be confirmed or upgraded if there is a capital infusion or improvement in the bank’s coverage of non-performing exposures, or if the bank is acquired by an entity with a credit risk profile in line with or stronger than that of (the) Cyprus Cooperative Bank”.

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