Fitch sees Cyprus Popular Bank upgrade on recap hopes

Fitch Ratings has upgraded the Cyprus Popular Bank's Viability Rating (VR) to 'cc' from 'f' following a government recapitalisation of 1.8 bln euros with the state now becoming the major shareholder with an 84% stake. The bank’s support-driven Issuer Default Ratings remained unaffected.
However, the rating agency said that Popular's first-quarter pro-forma core capital ratio, adjusted for capital actions completed by 30 June 2012 (including the state capital injection) remains at 7.9%, temporarily below the 9% minimum required by the European Banking Authority (EBA).
As a result, CPB will need further capital injections which are likely to come from international authorities, Fitch said.
The EBA stated on July 11 that it has received reassurance that Cypriot banks will comply with the EBA recommendation as a result of the government's decision to request the support of the EFSF. The EBA also notes that it is possible that additional capital needs will be required after assessment by the relevant EU authorities and the IMF in the framework of the assistance programme.
The island’s largest lender, Bank of Cyprus, also sought 500 mln euros in state support to overcome its EBA shortfall, caused by the bank’s exposure to Greek government bonds.
Despite CPB's improved capitalisation, the rating agency said the VR continues to reflect capital needs and sensitivity to developments in Greece and to the economic downturn in Cyprus, which could lead to further asset quality and profitability pressures. The latter would ultimately increase pressure on its capital.
Also, the continued closure of wholesale markets for funding is likely to make a reduction in central bank funding difficult, Fitch added.
Rating agencies have slashed the Cyprus sovereign ratings to ‘junk’ effectively shutting the country out of international markets, forcing the government to seek loans from outside the EU, specifically from Russia and China, to bail out the banks and reduce the runaway public sector debt.
Fitch said CPB remains highly exposed to the economic downturn in Greece. Greek loans represented 49% of end-Q112 gross loans (including international shipping loans booked in Greece), while the carrying value of Greek government bonds stood at 360 mln euros at this date.
Sustained high loan impairments charges led to operating losses in Q112, it said, adding that, “it will prove challenging for CPB to return to profit in 2012 due to continued asset quality deterioration and subdued business activity.”
The bank is also constrained by the closure of wholesale markets for funding, meaning it is unable to reduce its very high reliance on central bank funding (about 25% of total assets at end-Q1 2012).
More positively, group deposits have remained stable since end-2011. However, these will need to increase or loans to decline to balance its relatively high loans/deposits ratio of 131% at end-Q1 2012.
CPB's larger than domestic peers' exposure to Greek risks and increasing loan quality concerns in Cyprus are likely to result in asset quality deterioration. The bank's impaired loan ratio worsened to 16% at end-Q1 2012 from 13.9% at end-2011.