Fitch lifts Cyprus bank ratings

Fitch Ratings, the rating agency states that all the three major Cyprus banks have significantly enhanced their profitability and asset quality in 2006 although challenges remain in sustaining their improvement.

According to Fitch’s analysts, one of the key challenges for the banks is to maintain the current level of income generation. All banks have benefited from strong growth in their operating income, supported by the strong loan growth and a benign capital markets environment. A less stable revenue stream resulted from large gains from financial assets which contributed positively to the banks’ operating income in 2006. The banks also

benefited from FX income contribution, which will be reduced with the adoption of the euro.

This, however, will also give the banks opportunities to expand into new business areas and should partly reduce the volatility in financial gains from foreign exchange assets.

Fitch’s report stipulates that BOC and HB reported sound profitability and generated

adequate internal capital. Both banks benefited from restructuring and improved asset

quality, which resulted in smaller impairment charges in 2006. However, Fitch stated that

MPB’s profitability was slightly weaker than its local peers due to high integration expenses in 2006.

In addition, the report stresses the fact that the three local banks have only limited growth

possibilities in Cyprus and can only expand on a small base by taking share from the cooperative banks. A key element of the major banks’ strategy is international expansion. All the three banks are already in Greece, which represents their second “local” market. Some

Cypriot banks are considering expanding further in South-Eastern Europe, targeting

countries with fast-expanding economies, unsophisticated banking sectors and cultural

affinities or large Cypriot communities, such as the Balkans, Romania, Ukraine and Russia. Fitch is watching these activities closely.

The report also considers the asset quality improvement of the three banks which continued in 2006, through the strengthening of their loan impairment coverage ratios to above 70%.

Fitch views this level as satisfactory, considering the banks hold a high level of collateral and guarantees against both performing loans and impaired loans.

Although Fitch analysts state that Cypriot banks in 2006 reported adequate solvency ratios they believe that the banks need to maintain additional capital to offset their large stocks of impaired loans, strong loan growth and further acquisitions, in less developed markets.

Fitch rates the three banks as follows:

• BOC is rated at Issuer Default ‘A-‘ (A minus)/ Stable/ ‘F2’/ ‘C’/ ‘2’

• MPB is rated at Issuer Default ‘BBB+’/ Stable/ ‘F2’/ ‘C’/ ‘2’

• HB is rated at Issuer Default ‘BBB’/ Stable/ ‘F3’/ ‘D’/ ‘2’/.

• The Support Floors for all three banks remains unchanged at ‘BBB’.