Two Cypriot banks, the Bank of Cyprus and the Hellenic Bank, had their credit ratings upgraded by investment service Moody’s on Monday.

Both had their long-term deposit ratings increased by one level, from Ba1 to Baa3, while Moody’s maintained a “positive outlook” for both banks.

The upgrade comes days after Moody’s upgraded the rating of Cyprus as a country by two levels from Baa2 to Ba1 and also upgraded the island’s outlook from “stable” to “positive.”

Moody’s said, “the main reason for today’s upgrade is the continued resilience of the Cypriot economy and credit conditions, which lead to a supportive environment for Cypriot banks.”

They added that the upgrade also includes the continued improvements in the solvency profiles of each bank, the further gradual improvement in the quality of assets and capital sizes, as well as a “significant strengthening” of the profitability of both banks.

“The ‘positive outlook’ reflects our expectation that the two banks will maintain solid profitability and capital sizes and continue to reduce legacy asset quality risks, offsetting any new non-performing loans arising from the environment of higher interest rates and continued high inflation,” they said.

They also noted that there are remaining risks to the banks’ assets due to the continued existence of some non-performing loans as well as high interest and inflation rates, but said that “initial indications point to a limited impact on the asset quality of Cypriot banks.”

Given the “positive outlook”, they said, it is considered unlikely that the Bank of Cyprus’ score will be downgraded.

They added that factors which would lead to further upgrades include “the maintenance of solid profitability and capital sizes, the reduction of property inventory, and the mitigation of the impact of a potentially weaker repayment capacity on the part of borrowers.”

Regarding the Hellenic Bank, they said they “could proceed with a further upgrade if the bank manages to retain its solid profitability through further strengthening of its operational efficiency, strengthening of lending sustainability, and the increase of other sources of income.”

This should be done, they said, to “compensate for its high dependence on net interest income.”

In addition, they said that given the Hellenic Bank’s potential acquisition by the Greek Eurobank, Hellenic’s rating may be impacted by an upgrade in Eurobank’s rating.

They also indicated that the outlook could potentially be downgraded from “positive” back to “stable” in the case that “the improvement in asset quality reverse, or if the operating environment weakens, or if [Moody’s] considers that solid profitability is not sustainable.”