MOODYS: Bank of Cyprus toxic debt sale to PIMCO is credit positive

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Bank of Cyprus agreeing to sell a portfolio of nonperforming loans with a gross book value of €916 mln to funds affiliated to global fixed-income investment manager PIMCO is a positive step, said Moody’s.

The bank expects to complete the sale in the first half of 2021, subject to conditions, including customary regulatory approval.

Upon completion, the sale, which relates primarily to nonperforming retail and small and midsize enterprise loans will reduce the bank’s non-performing exposure (NPE) ratio by five percentage points, a credit positive, said a Moody’s analysis.

The bank’s pro forma ratio of NPEs to gross loans will fall to 22%, from 30% as of year-end 2019, and includes an organic NPE reduction of €278 mln and the completion of an earlier sale of €133 mln of primarily retail unsecured NPEs.

“Despite its improving NPE ratio, weak asset quality remains the key credit challenge for Bank of Cyprus,” said the analysis.

“With heightened asset quality risks from the coronavirus-induced economic disruption that will lead to new asset quality pressure starting in 2021, the disposal will help maintain an NPE ratio well below the bank’s historical levels,” it added.

Moody’s expects widespread economic disruption caused by the coronavirus outbreak, with the Cypriot economy contracting by 7.5% in 2020, returning to healthy growth rates from 2021.

It said the bank has made progress in reducing its high stock of NPEs, with a combination of organic reductions and inorganic transactions.

“However, the coronavirus pandemic has prompted the bank to make concessions on the size of the sold portfolio, and on the price and structure of the transaction, to complete the sale.”

Before the coronavirus, Bank of Cyprus expected to finalise its NPE reduction structures, including outright sales of a portfolio around €2 bln, in the first half of 2020, with a positive effect on capital owing to a significant reduction in risk-weighted assets (RWAs).

“The announced transaction is around half the amount, while the potential reduction in RWAs upon completion will not offset the related losses of the transaction that will be reported by June 2020.”

According to BoC, once fully paid the transaction will have a positive nine basis point capital impact on the Group’s Common Equity Tier 1 (CET1) ratio despite a €68 mln loss reported in Q2, 2020.

The rating agency predicts an overall negative capital impact if the €75 mln related loss reported in 2019 is included.

“The consideration amounts to 46% of the gross book value and 29% of the contractual balance (around €422 mln) payable in cash.”

Of the €422 mln consideration, 35% is payable at the completion of the transaction and the remaining 65% is deferred over the next four years, without any conditions attached.

However, the consideration can rise through an earn-out arrangement if the portfolio outperforms current expectations.

Despite the related losses, the bank expects its CET1 ratio to be broadly unchanged from 14.3% as of 31 March 2020.

This is because of the European Union-wide capital benefit resulting from the amendments to capital regulations introduced in June