Moody’s welcomes BoC exit scheme, says profitability to recover faster

The Bank of Cyprus’ voluntary retirement plan, which recently received approval for the departure of 550 people at a cost of approximately €99 million, was described as credit positive in a report released this week by rating agency Moody’s.

“While the completion of the scheme will immediately reduce capital and weigh on this year’s profitability, it will also reduce the bank’s workforce by 16 per cent this year, on a March 2022 basis, and thus deliver significant annual savings,” the agency said in its report.

According to Moody’s, the €99 million voluntary retirement plan is expected to be reflected in the bank’s third quarter financial results, while making note of the bank’s underlying profitability of €27 million in the first quarter of 2022.

“However, the plan will deliver significant annual savings of around €37 million going forward, corresponding to 19 per cent of the bank’s personnel costs, which represented more than 50 per cent of the bank’s total operating costs in the first quarter of 2022″, the agency explained.

“Bank of Cyprus’ cost rationalisation efforts have intensified as the focus shifts to sustainable profitability, following the reduction of balance sheet risk and the reduction of old non-performing loans to 6.5 per cent of gross loans at the end of March of 2022 from their peak of 60 per cent in 2015,” Moody’s added.

Furthermore, the agency also commented on the impact of the 100 basis points before tax on Bank of Cyprus’ capital, saying this is manageable, given the bank’s improved capital reserves adjusted for the recent sale of loans.

It also added that the direct cost of the retirement scheme will be mitigated by the adoption of the accounting standard IFRS17, which aims to standardise insurance accounting globally, and will come into force on January 1, 2023. This will have a positive impact on capital by 50 basis points.

At the same time, the agency said with more than 90 per cent of transactions being carried out digitally by the end of April 2022, the Bank of Cyprus has steadily reduced the number of its branches, closing 25 per cent of its store this year and 40 per cent of the network over the past three years.

Moreover, it noted that the bank’s workforce has shrunk by 30 per cent over the past three years, primarily due to successive redundancy plans, including the most recent one.

“Sizing the bank right will reduce the structurally high cost base and improve the cost-to-income ratio,” Moody’s said.

It added that in the medium term, the bank intends to reduce the ratio down to between 50 and 55 per cent against operating expenses, on a net basis, excluding non-recurring expenses and supervisory costs. The ratio stood at 59 per cent in the first quarter of 2022.

However, Moody’s stressed that “despite the improvements, we expect Bank of Cyprus’ profitability to be weaker than its European counterparts, while having to contend with a bank employees union, which makes the working environment inflexible, with high annual fixed cost increases for all employees and cost-exacerbating inflation-linked wage adjustments”.

The agency also said that recurring profitability will be strengthened from today’s low levels by the increase in interest rates and added that for the Bank of Cyprus, the impact of rising interest rates will be strong and immediate due to the €9.3 billion deposits with the ECB. The deposits were subject to a charge of 0.5 per cent, before the ECB raised its interest rates by 50 basis points, with the majority of these deposits being immediately repriced.

Moody’s explained that a portion of the bank’s variable-rate loans will be repriced with a time lag, while higher interest rates will not have an immediate impact on deposit rates, given the excess liquidity in the system.

“Therefore, we expect the bank’s profitability to recover faster than previously expected, with the bank expecting to achieve its 2025 target for a return on equity of more than 10 per cent a year earlier,” the agency concluded.