Fitch: Bank recaps should boost Cyprus confidence, risks remain

The completion of the recapitalisation and restructuring process for the Cypriot banks should improve confidence and contribute to funding stability in the system, according to Fitch Ratings, adding, however, that the banks will remain vulnerable to funding and liquidity risks and exposed to intense asset quality and profitability pressures in the recession.
So, ratings are likely to stay deeply speculative-grade for some time.
“We expect Cyprus’ GDP to contract by 8.9% in 2013 and a further 4.9% in 2014. A much deeper and longer recession could aggravate already poor asset quality and profitability and renew pressures on capitalisation. This may put further pressure on funding and liquidity profiles. We see this as the major risk for Cypriot banks”, the rating agency added.
Fitch also noted that the banks’ recapitalisations and restructurings, due to be completed by end-2013, are milestones on the roadmap for the full lifting of capital and deposit restrictions first introduced in March.
“We expect to upgrade the ratings of Hellenic Bank shortly after it is recapitalised. For Bank of Cyprus, which was recapitalised with a bail-in by depositors at the end of July, ratings will be revised when the group’s restructuring commitments and financial and credit profiles are disclosed, so we can complete our analysis”, said the report.
“BoC’s pro forma core capital ratio stands at 11.8% following the recapitalisation. However, funding and liquidity remains affected by continuous deposit withdrawals.”
Regarding Hellenic, it said that it has until end-October to meet the regulatory minimum 9% core capital ratio by private means.