S&P raises BOCY to BB on improved funding

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S&P Global Ratings raised its long-term issuer credit rating on Bank of Cyprus Public Co. Ltd. (BOC) to ‘BB’ from ‘BB-‘ and affirmed the ‘B’ short-term rating, citing “significant progress toward rebalancing funding profiles, while further reducing dependence on nonresident depositors”.

The rating agency also raised the bank’s long-term resolution counterparty rating (RCR) to ‘BBB-/A-3’ from ‘BB+/B’.

At the same time, S&P raised its long-term issuer credit rating on the parent non-operating holding company Bank of Cyprus Holdings PLC to ‘B+’ from ‘B’ and affirmed the ‘B’ short-term rating. It also also raised the issue rating on the holding company’s subordinated debt to ‘CCC+’ from ‘CCC’.

The outlook on both the parent and the operating bank is ‘positive’.

The share quoted on the London Stock Exchange was trading at €296.32 at noon Friday, steadily recovering from the lows of €151.75 at the start of the year. It is now at the same level as when it was listed on January 31, 2017 at €284.65.

S&P said it upgraded BOC and BOC Holding based on the improved operating environment for Cypriot banks.

“BOC has reduced its reliance on non-resident deposits and has an ample liquidity buffer (liquidity coverage ratio surplus amounted to €6.6 bln as of September 30), pro forma the repayment of its TLTRO III (targeted longer-term refinancing operations programme) funding.

“In addition, profitability prospects have improved because higher interest rates have yet to be passed through to funding costs and BOC has contained its credit losses.

“We expect credit losses, including impairment on repossessed real estate assets, to remain in line with 2021-2022 at about 80-90 bps over the next two years, although NPLs [non-performing loans] will increase moderately.

“We expect BOC’s return on equity to peak at about 20% in 2023 and then stabilise at a more-sustainable 10-15% in 2024-2025. This reflects the downsizing of the balance sheet as BOC repays its TLTRO III funding, combined with a gradual decline in interest rates.”

Return to dividend

S&P said better profitability will sustain the bank’s capitalisation, even though it returned to making dividend distribution in 2023.

“We forecast that BOC’s risk-adjusted capital (RAC) ratio will be 9.5-10.0% over the next 18-24 months.

S&P concluded that “the positive outlook on our long-term issuer credit ratings on BOC and BOC Holdings indicate that we could raise these ratings on both banks within the next 12 months if the group further improves its capitalisation.”

Last month, Bank of Cyprus, posted after-tax profits of €349 mln for the first nine months, substantially improving from the €19 mln loss last year.

Notably, the third quarter of 2023 contributed €129 mln to the profit after tax, marking a 3% increase from the previous quarter.

The non-performing exposure (NPE) ratio was at 3.5%, down six percentage points year on year.

The NPE coverage ratio stands at 77%, providing a substantial buffer against potential credit losses, and the cost of risk is reported at 58 basis points.

Panicos Nicolaou, the Group Chief Executive of Bank of Cyprus, expressed satisfaction and confidence.

He said net interest income accounted for €572 mln, more than double the previous year’s level, reflecting the impact of a higher interest rate environment and effective deposit pass-through management.

He also noted that Moody’s upgraded the bank’s long-term deposit rating to investment grade in October, “marking a new chapter in the institution’s journey towards becoming a strong, diversified, well-capitalised, and sustainably profitable organisation”.