Bank of Cyprus outlook revised to positive by Fitch Ratings

American credit rating agency Fitch Ratings announced on Wednesday that it has revised the Bank of Cyprus’ outlook to positive from negative, while at the same time affirming the bank’s Long-Term Issuer Default Rating (IDR) at ‘B-‘ and Viability Rating (VR) at ‘b-‘.

The agency attributes the outlook revision to the bank’s recent agreement to offload €600 million in non-performing exposures (NPEs) and €121 million in foreclosed real estate assets.

The agreement, titled Helix 3, will upgrade the Bank of Cyprus’ asset quality while decreasing capital encumbrance caused by unreserved problematic assets, including the aforementioned non-performing exposures and seized property assets.

“The Positive Outlook also reflects significant progress in organically reducing problem assets since end-2019, despite an adverse operating environment in Cyprus, and our expectation that this trend will continue in the near future,” Fitch Ratings said.

“Fitch has withdrawn BoC’s Support Rating of ‘5’ and Support Rating Floor of ‘No Floor’ as they are no longer relevant to the agency’s coverage following the publication of its updated Bank Rating Criteria on 12 November 2021,” the agency added, explaining that “in line with the updated criteria, Fitch has assigned BoC a Government Support Rating (GSR) of No Support”.

Fitch noted that the Bank of Cyprus’ low profitability, as well as the high capital encumbrance caused by the bank’s current asset quality, despite the improvement brought upon by the NPE sale, are reflected in the rating.

“The ratings also reflect BoC’s strong franchise and market position as the largest bank in Cyprus, which however is a small market, and an acceptable funding profile,” Fitch said, explaining that the bank’s current level of asset quality has been rated at ‘ccc+’, while capitalisation and leverage have been rated at ‘b-’.

Despite the ‘ccc+’ asset quality rating, which the agency described as having been ‘weak for a prolonged period of time’, Fitch says that this has been steadily improving through the organic and inorganic reduction of NPEs by the bank’s management.

“The NPE ratio peaked at 63 per cent at end-2014 before decreasing to 8.6 per cent at end-September 2021, pro-forma for Helix 3, although this remains high,” the agency said, adding that it views the completion of the sale as “highly probable”.

Fitch also said that it expects the Bank of Cyprus’ asset quality to continue its improvement, with this being driven by two key factors.

These include the bank’s ability to offload legacy problematic assets, as well as a stronger economic environment in Cyprus.

Finally, the agency said that it does not “expect significant inflows of new NPEs from the loans previously under moratorium, as performance to date has been positive and better than anticipated”.