Fitch Ratings has on Friday removed Hellenic Bank from Rating Watch Negative, and affirmed the bank’s Long-Term Issuer Default Rating (IDR) at ‘B’ (risk with a limited margin of safety) and Viability Rating (VR) at ‘b,’ (which denotes concerns about ongoing viability).
But the Outlook on the Long-Term IDR is Negative, the ratings agency said in a statement.
“Our updated view that Hellenic Bank’s ratings are not immediately at risk from the impact of the economic downturn from the pandemic, as its current financial position provides the bank with some rating headroom to absorb the likely reduction in profitability, higher credit risks and higher capital encumbrance from unreserved non-performing exposure (NPE) due to the coronavirus crisis.”
While Fitch acknowledges that Hellenic Bank has significantly reduced its exposure to non-performing loans, the agency is concerned that the fallout from the pandemic crisis will lead to a another surge of NPLs.
“The Negative Outlook reflects our view that risks remain skewed to the downside in the medium term, especially if the recession proves deeper or the recovery weaker than our forecasts. In this case, HB’s ratings would come under pressure from higher inflows of new impaired loans generating larger credit losses, weaker revenue generation, ultimately resulting in greater-than-expected capital erosion,” the statement warns.
Fitch does note the bank’s strengths. “Our ratings also reflect Hellenic Bank’s strong franchise and market position as the second-largest bank in Cyprus, a small country and improved overall financial profile following the smooth integration of Cyprus Cooperative Bank LTD (CCB).”
Fitch forecasts that its assessment of profitability assumes that earnings will recover as the economy emerges from the crisis, “albeit remaining weighed down by the large stock of problem assets.”
“The Outlook could be revised to Stable if the bank’s operating environment stabilises and the bank successfully manages the challenges arising from the economic downturn and reversing downside risks to its asset quality and profitability and maintaining capital levels,” Fitch concludes.