Cyprus & World News

Moody’s raises deposit ratings on 3 Cyprus banks

27 March, 2014

Moody’s has raised the outlook on the deposit ratings of three local banks – Bank of Cyprus, Hellenic Bank and Russian Commercial Bank RCB – following the change in outlook on the Cyprus Caa3 sovereign rating from ‘stable’ to ‘positive’ last Friday.
The rating agency has changed the Bank of Cyprus outlook to ‘positive’ from ‘negative’ and affirmed its Ca long-term deposit ratings, Hellenic Bank ‘positive’ from ‘negative’ and affirmed the Caa3 long-term deposit ratings and Russian RCB to ‘stable’ from ‘negative’ and affirmed the bank’s Caa2 long-term deposit ratings.
Moody’s said the sovereign rating action “balances the persistent risks associated with the sustainability of Cyprus public finances over the medium-term with better than expected fiscal and economic performances in 2013 and the Cypriot authorities' commitment to meeting conditions under their funding programme” with the Troika (European Commission, ECB, IMF). The local and foreign-currency deposit ceilings remain unchanged at Caa2 as deposit controls still remain in place, the rating agency said.
The Bank of Cyprus , the island’s biggest lender, exercised a EUR 3.8 bln bail-in by unsecured depositors of over 100,000 euros, as part of the Troika-imposed recap programme, and undertook the full debt burden of about EUR 9 bln of now defunct Popular Laiki Bank, whose ‘legacy’ depositors now control an 18% stake in Bank of Cyprus.
Hellenic Bank , traditionally the third-biggest lender controlled by the Church of Cyprus, raised EUR 100 mln from three strategic investors in November – New York-based Third Point LLB, the online gaming developer and local investment fund Demetra. The Church stake has since been diluted from 25% to 7%.
The Russian Commercial Bank is a 100% local subsidiary of the Russian giant VTB Group. It is regulated by the Central Bank of Cyprus, but its non-residents customers are not subject to the bail-in or other restrictions imposed in Cyprus.

The ratings for Bank of Cyprus reflect “the continued acute capital and funding challenges faced by the bank” and capture the high risk that the bank will be faced with additional capital needs stemming from future credit losses.
While Moody's expects the sale of the bank's non-core assets to support the bank's regulatory capital levels (core Tier 1 equity stood at 10.2% as of December 2013), the rating agency believes that “the weak domestic economic environment, high unemployment rates and on-going property price correction will lead to high problem loans and credit losses that will erode capital.” Non-performing loans (NPLs) already increased to 53% of gross loans according to the bank's preliminary results for 2013.
At the same time, while the bank's deposit base has showed some signs of stabilisation, Moody's believes that “the bank's funding profile remains vulnerable to fragile depositor confidence and the bank has limited excess liquidity buffers to withstand any further deposit outflows (cash and interbank balances stood at 8% of total assets as of December 2013).”
The positive outlook on the Bank of Cyprus Ca deposit ratings captures a potentially higher capacity of the government to provide external support to the bank to meet any capital and liquidity in case of need. Under Troika support, EUR 1 bln remains available for the recapitalisation of the commercial banking system (following the EUR 1.5 bln allocated to the cooperative credit institutions).
Moody's had initially expected potentially higher losses to be imposed on debt holders compared to uninsured depositors in a bail-in scenario. However, evidence over the past year indicates that the credit risk profile of unsecured senior debt holders will likely be aligned with that of other senior creditors going forward.

The affirmation of Hellenic Bank's Caa3 deposit ratings and the increase in its standalone BCA to caa3 “reflects the balance between the weak domestic operating environment and the bank's increased capital and healthy liquidity buffers,” Moody’s said, adding that it expects that the weak domestic operating environment will lead to high problem loans and credit losses.
NPLs (excluding interest in suspense) have already increased to 44% of gross loans according to the bank's preliminary results for 2013. In addition, Hellenic's current ratings reflect the high degree of interconnectedness between the bank's credit profile and sovereign risk.
However, raising Hellenic's standalone BCA acknowledges that “these risks are partly balanced by the bank's improved capital position, following Hellenic's successful capital raising exercise in November 2013, executed without any state intervention. Hellenic's Tier 1 capital ratio stood at 13.1% as of December 2013, which provides a buffer against high credit losses.
In addition, Moody's notes the bank's healthy liquidity profile, to counter any further deposit withdrawals, with the bank having no reliance on central bank funding. Cash and interbank balances stood around 30% of assets, while gross loans (excluding interest in suspense) stood at 77% of customer deposits as of December 2013.

The change in the outlook to stable, from negative, reflects the gradual easing of some elements of deposit controls, balanced against the fact that restrictive deposit controls still remain in place for the bank's domestic (or resident) customers, Moody’s said.
Given RCB's status as an international bank in Cyprus, its international customers (or non-resident customers) are not subject to any deposit restrictions; however, the bank's domestic (or resident) customers continue to be subject to restrictions.
The affirmation of RCB's Caa2 long-term deposit ratings, which remain higher than the Caa3 Cypriot government ratings, reflect its limited interaction with the Cypriot economy, and modest direct exposure to Cypriot credit risk.
“However, the bank's franchise remains affected by the economic, financial, political and legal risks in Cyprus and it is subject to the regulations of the Cypriot central bank, including deposit controls. As such, the bank's deposit and standalone BCA remain constrained by the Caa2 deposit ceiling, which captures the ongoing deposit controls in Cyprus.”
The bank's deposit ratings could be upgraded following a lifting of the deposit controls currently in place, the rating agency said.

The positive outlook on Cyprus’s credit rating by Moody’s “is an indication that we are on the right track,” said Christos Patsalides, permanent secretary of the ministry of finance.
“This is an important development even though we are in the early stages of implementing the economic adjustment programme,” He said on Sunday.
Cyprus’s rating remained nine steps below investment grade at Caa3, Moody’s said in a statement.
“The affirmation of the Caa3 rating reflects the view of the persistent risks that remain to Cyprus’s public finances and their sustainability over the medium term as a result of significant uncertainties to the prospects for the macroeconomy and banking sector,” Moody’s said.
“Cyprus is committed to continue implementing the [fiscal] programme” imposed by the Troika of international lenders which includes austerity measures, sales of public assets, measures for the stabilisation of its banking system and changes in public administration and the social security system.
Standard & Poor’s rates Cyprus B-, six levels below the junk threshold.
In almost half the instances, yields on government bonds fall when a rating action by Moody’s and S&P suggests they should climb, according to historic data compiled by Bloomberg.