Moody’s upgrades major banks

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Moody’s Investors Service has upgraded Bank of Cyprus and Hellenic Bank’s long-term ratings, including their deposit ratings to Ba2, from Ba3, maintaining a positive outlook citing “the resilience of the Cypriot economy”.

The agency upgraded the two largest banks’ Baseline Credit Assessments (BCAs) to b1 from b2. The outlook on both banks’ long-term deposit ratings remains positive.

“The main driver for today’s rating upgrade is the resilience of the Cypriot economy, that is supporting the operating conditions of the banking system,” Moody’s said.

This has led Moody’s to raise the Macro Profile of Cyprus to “Moderate-” from “Weak+”.

According to Moody’s, Cyprus’ economy has seen a stronger-than-expected resilience to Russia’s invasion of Ukraine and has recovered well from the pandemic shock, indicating no permanent damage, as non-tourism-related services and support measures stabilised the economy and mitigated the impact of the shock.

Moody’s expects GDP growth for Cyprus of 4.8% this year and 2% in 2023, which would be higher than the euro area average of 2.2% in 2022 and 0.9% in 2023.

“After that, Cyprus’ growth outlook remains solid with potential GDP growth estimated by Moody’s to be in the range of 2.5-3.0%.”

It also noted that a higher macro profile score suggests lesser downside risks and severity of post-failure losses for Cypriot banks.

“The two banks will strengthen their profitability in the context of the higher interest rate environment and will continue to improve their asset quality, despite potential new nonperforming loans (NPL) formation.

“The operating environment has proven more resilient, and credit risks are gradually receding, which leads Moody’s to expect lower post-failure losses for Cypriot banks”.

On Bank of Cyprus, the island’s largest lender, Moody’s said the higher BCA “reflects the reduced risks to the bank’s credit profile, due to the resilience in the Cypriot economy, but also the bank’s continued asset quality improvements.”

Moody’s said the bank has managed to improve asset quality significantly, because of organic and inorganic actions, with NPEs declining to pro-forma 5.7% of gross loans as of June, from 25% at year-end 2020, while maintaining a solid Common Equity Tier 1 (CET1) ratio of 14.2%, pro-forma for the latest NPE sale and the bank’s voluntary staff exit scheme.

“The bank’s profitability outlook has also strengthened, supported by the higher interest rate environment and the bank’s cost-cutting initiatives.”

Moreover, the agency said the positive outlook on the long-term deposit and senior unsecured debt ratings reflects Moody’s expectation that NPEs and foreclosed real estate assets will continue their downwards trajectory.

Moody’s expects Bank of Cyprus profitability to benefit from the increases in the European Central Bank’s policy rate, primarily as the bank’s significant cash balances with the ECB (around €9.9 bln or 38% of assets as of June) reprice immediately, noting that will reprice slower and by less, given the bank’s excess liquidity.

“As a result, the bank expects to reach a return on tangible equity of over 10% in 2023, two years ahead of plan.”


On Hellenic Bank, the second largest lender, Moody’s, said the higher BCA reflects the reduced risks to the bank’s credit profile due to the resilience in the economy, but also the bank’s continued asset quality improvements.

The agency noted that Hellenic Bank’s solvency benefits from solid capital buffers, with a CET1 capital ratio of 19.6% as of June, and the material reduction in its legacy problem loans, with NPEs accounting for 10.2% of gross loans, or 3.6% excluding NPEs guaranteed by the government, pro forma for the bank’s recent NPE sale.

It also said the bank’s profitability outlook has strengthened, supported by the higher interest rate environment and its ongoing initiatives to rationalise costs.

The positive outlook on the bank’s ratings reflects the agency’s expectation that Hellenic’s profitability will benefit from higher interest rates, given its large balances with the ECB of around €6.9 bln, equivalent to 36% of total assets, which will reprice immediately following any rises in interest rates.

More gradually, the investment of its large portfolio of bonds, an additional 24% of assets, will also increase net interest income as maturing bonds are invested in higher-yielding bonds with similar credit quality, while deposits will reprice slower and by less given excess liquidity.

Hellenic Bank estimates that net interest income will increase by more than €130 mln (around 0.7% of assets before tax) by 2023 onwards.