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Moody’s placed the Bank of Cyprus ‘Ca’ deposit ratings on review for an upgrade on September 2, following the successful €1 bln capital increase that strengthened capital buffers, bolstering the bank’s loss-absorbing capacity and are a positive step towards the bank’s regeneration, Moody’s said in a report on Friday.
It added that the “already high level” of non performing loans could even rise beyond the current 58% of the bank’s loanbook.
“But the extent to which these developments will lead to a sustained improvement in the bank’s financial performance remains unclear, given the acute asset quality pressures the bank faces and its low provisioning against losses from problematic exposures,” explained Melina Skouridou, Moody’s lead analyst for Bank of Cyprus.
The rating agency’s review, expected to be concluded in the fourth quarter of the year, is focusing on the adequacy of the bank’s capital levels against the rising pool of problem loans and the additional loan-loss provisions; the stability of customer deposits and its ability to gradually repay the €9.6 bln of Euro-system borrowings.
“The capital increase strengthens the bank’s ability to absorb credit losses from its large pool of troubled assets. The cash injection takes the bank’s Core Equity Tier 1 ratio to 15.1%, from 11.3% as of June 2014, well above the regulatory minimum. The move also improves the bank’s funding and liquidity profile by enabling a 10% repayment of €9.6 bln of outstanding euro-system funding that weighs on the bank’s balance sheet,” explained Skouridou.
The analyst added that “this is a vital first step in restoring fragile depositor confidence, which could help stem further erosion of its deposit base. In addition, following the capital increase, the bank’s ownership structure is more concentrated with the participation of high-profile investors, such as the European Bank for Reconstruction and Development (EBRD), which will likely improve decision-making and corporate governance.”
Skouridou added that the bank still faces acute challenges.
“The Cypriot economy continues to contract, unemployment is high and property prices are falling. As a result, we expect the share of non-performing loans (NPLs) in the bank’s loan portfolio to continue to rise from already high levels (58% of total loans as of June). We consider the loan-loss provisions (covering only 33% of NPLs) inadequate to cover future losses from troubled exposures,” she said.
“Although real-estate collateral provides some extra coverage, property prices are still declining and more provisions will have to be set aside, causing losses that will erode capital. Moreover, the bank’s ability to collect the value of collateral depends on amendments to laws governing the foreclosure process in Cyprus. These amendments are in progress and their conclusion is as yet unknown.”
