Credit rating agency Fitch Ratings reported on Wednesday that it has revised Hellenic Bank’s outlook to positive from negative, while also affirming the bank’s Long-Term Issuer Default Rating (IDR) at ‘B’ and Viability Rating (VR) at ‘b’.
“The Positive Outlook reflects our expectation that asset quality will improve as Hellenic Bank is working to reach an agreement by early 2022 to dispose of €0.7 billion gross non-performing exposure,” Fitch said in reference to the bank’s project Starlight.
The agency notes that if the agreement to offload the NPEs is concluded, capital encumbrance will be decreased by unreserved problematic assets, which includes the previously mentioned NPEs, as well as foreclosed property assets.
Fitch explained that Cyprus’ robust economic recovery will fend off any potential harm to the value of material assets, noting, however, that certain risks remain due to the bank not having yet reached a formal agreement with a prospective buyer.
Moreover, the agency stated that it has withdrawn Hellenic Bank’s Support Rating of ‘5’ and Support Rating Floor of ‘No Floor’, “as they are no longer relevant to the agency’s coverage following the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”.
“In line with the updated criteria, Fitch has assigned HB a Government Support Rating (GSR) of ‘No Support’ (ns),” the agency added.
Furthermore, the agency attributed the bank’s ratings to its current level of asset quality, in the context of international standards, as well as the high capital encumbrance by unreserved problem assets.
Regarding the bank’s constrained profitability, Fitch attributes this to a dependence on net interest income and a high cost base, as well as high loan impairment charges.
The agency highlights that Hellenic Bank is the second-largest bank in Cyprus, where it enjoys a high share of the market, adding, however, that the local economy’s small size inhibits its growth potential and is a cause for above-average risk concentration.
The agency also stated that “funding is a rating strength as Hellenic Bank’s deposit base is stable and well in excess of loans”.
In terms of the bank’s NPE and problem asset ratios, Fitch said that while these remain high by international standards, they have greatly improved from past figures.
“Hellenic Bank’s NPE ratio of 14.5 per cent and problem asset ratio of 16.8 per cent at end-September 2021 (both excluding NPEs guaranteed by the Asset Protection Scheme) are significantly lower than their historical peaks but remain high by international comparison,” the agency said.
Finally, the agency said that they are expecting that the bank’s NPE ratio will drop to mid-single digits after the conclusion of project Starlight.
“We then expect asset quality to improve slowly through write-offs and recoveries, but to remain vulnerable to shocks to the Cypriot economy,” the agency added.