International credit rating agency S&P Global Ratings (S&P) on Wednesday upgraded the Bank of Cyprus and revised its outlook from stable to positive, citing the bank’s diversified business model and the reduced financial risks for the entire banking system in the country.

In the same rating action, the agency confirmed the long-term and short-term ratings of the Bank of Cyprus at ‘BB-‘ and ‘B’, respectively.

In addition, S&P upgraded the ratings of various Greek banks, including the National Bank, Piraeus Bank, Eurobank, Alpha Bank, and Aegean Baltic.

“In our view, Cypriot and Greek banks will increasingly enjoy the fruits of the long-term de-risking of their balance sheets and the restoration of income from interest rate hikes, significantly strengthening their loss-absorbing capacity and capital-building capabilities ”, the agency stated in its report.

What is more, according to the report, the agency stated that the decision to upgrade the Bank of Cyprus’ outlook to positive reflects its assessment that the financial risks for the entire banking system are receding.

“Our bank ratings reflect the bank’s leading network in the country, benefiting from a diversified business model and the significant progress made in reducing the stock of non-performing loans (NPLs) over the past decade,” the report explained.

It also pointed out that the Bank of Cyprus has simultaneously improved its capitalisation in the wake of easing financial risks and divesting risk-weighted assets, which will give it a buffer to absorb “any expected deterioration in asset quality”.

However, the agency also said that the Bank of Cyprus still lags behind some higher-rated banks in terms of profitability and efficiency.

That being said, the agency proceeded to clarify that “we expect the bank to gradually close this gap over the next 12 to 18 months”.

Regarding the assignment of the positive outlook, the agency noted that this reflects the possibility of further upgrading the rating in the next 12 months if there is additional progress in Cyprus’ business environment and in particular a significant reduction in terms of financial risks.

“We expect the Bank of Cyprus’ efficiency and profitability to improve significantly over the next 12 months compared to the recent past, aided by rising interest rates and cost savings associated with recent voluntary staff reductions, while management will remain focused on keeping the quality of the assets under control”, the agency concluded.