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Standard and Poor’s affirms Bank of Cyprus’ rating at B+/B, outlook stable

Bank of Cyprus

S&P Global Ratings on Thursday affirmed its B+/B long- and short-term issuer credit ratings for Bank of Cyprus Public Co. Ltd. (BOC), maintaining a stable outlook, noting that the bank will be loss making in 2020 and 2021 and will return to profit in 2022.

“The affirmation reflects our belief that BoC will be able to preserve its current capitalisation through the downturn despite increasing pressure on its already weak profitability and asset quality,” S&P said in a statement, adding that the bank has “ample” capital buffet to weather the Covid-19 crisis.

It added that the Covid-19 crisis will push the Cypriot economy into a recession, estimated at 7.5 per cent in 2020 followed by a rebound of 5.5 per cent in 2021.

“It will take time for sectors that are crucial for the Cypriot economy, such as tourism, to recover, while the small, open nature of the country’s economy might heighten downside risks from additional external shocks in Europe and CIS, which are its main counterparts for tourism,” S&P said.

The agency said it expects “BoC’s operating revenues will decline by about 15 per cent in 2020, before recovering mildly next year,” while “the cost of risk will remain at abnormally high levels – about 200-220 basis points (bps) – while gradually declining, but remaining elevated at 180-200 bps in 2021”.

“This is in line with our expectation for asset quality deterioration in the Cypriot banking sector over the next couple of years, and reflects our view of the poor payment culture embedded in the country and concentrated economy in a few vulnerable sectors, such as tourism and real estate and construction,” the agency said, adding that “overall, we expect that the bank will be loss making in 2020 and 2021, and will only return to profit in 2022.”

It however adds that “BoC’s capital buffer is ample enough to support the bank’s asset quality and capital erosion through this turmoil and remain at moderate levels, with its risk-adjusted capital (RAC) ratio standing comfortably above the 5% threshold over the outlook horizon,” adding that supportive measures from public authorities, including monetary policy decisions from the European Central Bank, should help BoC, and other European banks, to navigate the downturn.

“We expect management to maintain its improved underwriting standards while working out the bank’s legacy problematic exposures and actively monitoring new asset quality deterioration,” S&P said adding that “further pressure on the bank’s asset quality, but within manageable levels, with NPEs of around 33%-37% of gross loans by end-2021 (from 29% at end-March 2020).”

The agency added however, “we acknowledge that strategies to accelerate the bank’s balance-sheet clean-up might be more difficult to execute in the current environment.”

S&P said it could lower our ratings on BoC if it were to incur additional material credit losses that affected its capitalisation and pushed the RAC below 5%, and if asset quality worsened beyond our current expectations, or if its funding profile unexpectedly deteriorated.

“An upgrade is highly unlikely in the current context. However, we could contemplate it if economic conditions improve more than anticipated, and if the bank reduces its NPEs faster than expected,” the agency said.

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