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Moody's cuts Cyprus bank ratings on Greece exposure

14 March, 2012

Moody’s Investor Service has downgraded the three leading Cyprus bank ratings following Tuesday’s cut to ‘junk’ of the Cyprus sovereign ratings, despite the banks’ efforts to raise fresh funds to meet strict European demands for capital adequacy.
The rating agency lowered Bank of Cyprus by two notches from Ba2 to B1 with a negative outlook, and the other two banks by one notch – Marfin Laiki Bank and Hellenic Bank from B2 to B3, both with a negative outlook.
The Bank of Cyprus rights issue ends on March 19, hoping to raise some 400 mln euros in fresh funds to cover a 1.56 bln shortfall in Core Tier 1 capital.
Laiki shareholders and potential new investors will be asked in April to contribute some 1.8 bln through a rights issue, while older convertible bonds will be returned and re-issued, possibly with warrants attached. One of the names being mentioned as a potential new investor is the Russian state-controlled VTB colossus, owner of the Russian Commercial Bank that already operates in Cyprus.
The smaller Church-controlled Hellenic Bank, that has maintained a conservative approach to investments in Greece, may also proceed with capital raising, but at a smaller scale.
Moody’s said that the downgrades reflect the combined pressures on the banks’ standalone credit profiles from their losses on Greek government bonds after the recent debt exchange. This will require an increase in the banks’ capital to bring core tier 1 ratios back up to the domestic regulatory minimum level of 8% and to cover the shortfall indicated by the 9% stress test target of the European Banking Authority.
The rating agency said it expected continued severe asset-quality pressure from the weak operating environments in Cyprus and Greece, leading to higher loan loss provisions, as well as declining profits.
Although no formal request has been made, Moody’s said that weakening funding and liquidity positions could trigger an increased reliance on central bank funding.
On Tuesday, Moody's cut the Cyprus sovereign ratings to junk (Ba1) from Baa3, saying there was a heightened risk the government would have to support its banks.
This was the second ratings agency to cut the country’s sovereign to junk, after Standard and Poor's, which has Cyprus at BB+. Fitch rates Cyprus BBB-, one notch above junk.
Fitch, on the other hand, lifted Greece out of default territory on Tuesday after the debt swap cut Athens' debt mountain by about 100 bln euros, or close to a third.
Moody’s said the level of recapitalisation required by the Cyprus banks could exceed 20% of GDP.
The finance ministry said it believed the downgrade was unjustified because conditions had not materially changed since Moody's last cut its ratings in November. It said that it would continue to work to meet fiscal targets and cooperate with the central bank to meet challenges in the banking sector.
The ministry and the central bank have recently reiterated that the fundamentals of Cyprus banks are solid.
Effetively shut out from international markets for borrowing, Cyprus turned to close ally Russia for a 2.5 bln euro bilateral loan which authorities say will cover its needs this year. With the government refusing to slash its bloated civil service and high public payroll, the funding from Russia will only service the government’s ongoing needs, and will not provide any other assistance.
The communist-led government, however, is trying to lure in mega investments by auctioning 12 licenses for offshore natural gas exploration and is talking to international investors to buy property or Cyprus government bonds.
One such investor is Canada’s Triple Five conglomerate owned by the Ghermezian Jewish Iranian family that is keen to buy up to 500 mln euros in bonds if it is awarded one or two blocks for natural gas exploration. They have even offered to step in and rescue a government joint venture for a luxury hotel complex, after the Qatari partners pulled out.