S&P affirms Bank of Cyprus at B+/B with a positive outlook

International rating agency S&P Global Ratings this week announced that it has affirmed its ‘B+/B’ long- and short-term issuer credit ratings for the Bank of Cyprus, maintaining a positive outlook.

The agency said that this reflects “the possibility of an upgrade if economic risks appear manageable and we have more certainty that the recent improvement of the bank’s risk profile is sustainable in the medium term”.

In addition, the agency said that it views “positively that the Bank of Cyprus (BoC) has gradually strengthened its capitalisation and materially advanced in the clean-up of its legacy problem assets”.

However, the agency explained that although the bank’s direct exposure is limited, it has also factored in Cyprus’ closer economic links to Russia, when compared to other EU countries.

It added that a deteriorating macroeconomic environment and protracted inflation make the potential spillover effects on credit quality uncertain.

The agency said that the Bank of Cyprus achieved a 95 per cent cumulative reduction of its stock of non-performing exposures (NPEs) from its 2014 peak through a mixture of market sales and organic efforts.

“NPEs represented 6.5 per cent of gross loans at March 31, 2022, pro-forma for Helix 3, compared with 30 per cent at year-end 2019,” the agency said.

“As a result, the Bank of Cyprus enters a more challenging period in a stronger position than in the recent past,” it added.

S&P said that the Bank of Cyprus, as is the case with its peers, won ́t be immune to the indirect effects of protracted inflation and high energy prices, with some asset quality deterioration being deemed a future possibility.

The country’s ties with Russia were mentioned again in the report, with the agency saying that “Cyprus’ tourism and business links with Russia are stronger than those of other EU members, and therefore the economic stress currently being experienced by Russia could somewhat affect the island’s tourism sector recovery”.

The report made note of the bank’s adequate capitalisation, which should provide a buffer to accommodate growth.

Following seven years of balance sheet derisking and a reduction of high-risk-weighted problem assets, the bank’s capitalisation has gone from strength to strength.

What is more, the agency noted that the bank’s ample liquidity mitigates the potential risk of Russia-linked deposit outflows, with €10.2 billion in liquid assets on March 31 2022, covering 58 per cent of customer deposits, primarily in the form of cash and reserves at the central bank.

“This, coupled with retail funding fully financing the loan book (loan-to-deposit ratio of 58 per cent at March 31, 2022), provides enough of a buffer to absorb potential customer deposit outflows related to Russian citizens or businesses, even if this is not our base case,” the agency said, adding that the “Bank of Cyprus’ Russia-linked deposits are limited at about 6 per cent of customer deposits, which we consider manageable.”

Furthermore, the agency said that the bank’s efficiency should further reduce the gap with its peers over the next 12-18 months.

“Ongoing efforts to reduce costs through voluntary staff exit schemes and digital transformation should somewhat offset inflationary pressures, resulting in the Bank of Cyprus’ feeble efficiency gradually improving,” the agency said.

S&P also said that it expects the bank’s cost-to-income ratio to be reduced to 63 per cent by the end of 2023, compared with approximately 70 per cent, as calculated by S&P Global Ratings on March 31, 2022.

Finally, the agency said that the Bank of Cyprus could benefit more than its peers from monetary policy tightening, citing the fact that approximately 95 per cent of its loan book is referenced to floating rates.