CI revises HB outlook to ‘positive’

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Capital Intelligence Ratings has revised the long-term foreign currency rating (LT FCR) and bank standalone rating (BSR) outlook of Hellenic Bank (HB) to ‘positive’ from ‘stable’.

HB’s core financial strength (CFS) rating has been raised to ‘bb+’ from ‘bb’.

CI Ratings has also affirmed the bank’s LT FCR of ‘BB’, short-term FCR (ST FCR) of ‘B’, BSR of ‘bb’, and extraordinary support level (ESL) of ‘uncertain’.

The rating agency said the revision of the outlook to ‘positive’ and the upward adjustment of the CFS rating reflect the bank’s strongly improved net and operating profitability, reduced NPL ratio, and increased capital ratios in Q3.

“These factors together have strengthened HB’s credit loss absorption capacity and resilience, especially in the event of potential adverse changes in the operating environment,” it said.

The bank’s BSR is derived from an improved CFS rating of ‘bb+’ and an operating environment risk anchor (OPERA) of ‘bb’, the latter reflecting moderate economic and industry risks.

Cyprus’ sound economic performance has helped improve the operating environment for banks in terms of asset quality risks, moderately increased lending opportunities, as well as profitability. The economy remained resilient in Q3, despite external adversities.

Earlier in October, Moody’s upgraded Bank of Cyprus and Hellenic Bank’s long-term deposit ratings to Baa3 from Ba1, citing the resilience of the economy and credit conditions favouring Cypriot banks.

This followed Moody’s upgrade of Cyprus’ long-term credit rating by two notches to Baa2 from Ba1, leading the island’s rating to the investment-grade category.

CI Ratings said Cyprus economic performance is expected to recover further, with the increase in investments and improving net exports in the second half of this year partially offsetting the impact of the war in Ukraine and high inflation.

HB’s strongly improved operating and net profitability is an important credit strength underpinning the CFS.

The bank reported substantial improvements in operating and net profitability in 9M 23 due to higher net interest income (NII; mostly increased interest income from central bank placements), an improved net interest margin, and well managed operating expenses. Lower loan-loss provision expenses also benefited the bottom line.

Last month, the bank announced a net profit of €240.7 mln for the first 9 months of 2023.

Above requirements

In addition, the bank retains a solid capital position with a CET1 ratio of 21.7% and a total capital ratio of 27.4%, significantly above minimum regulatory requirements.

“We expect that the high interest rate environment will likely have an ongoing positive impact on gross interest income in the short term, which may in turn further boost operating profitability, provided operating expenses remain under control.

“That said, moderate lending opportunities in the Cypriot economy somewhat restrict the bank’s ability to expand its interest-earning loan book. Thus, a stable or falling interest rate environment will likely produce significant swings in NII as liquid assets, namely cash placements with central banks, reprice much faster than loans.”

Substantially reduced NPLs over the last four years – as evidenced by the marked decline in the headline NPL ratio to below 10% in 2022 and Q3 23 – is a further credit strength. This has been largely achieved through NPL sales and securitisations. Further NPL reductions were seen in Q3 23 following the finalisation of the Starlight transaction, while exposure to the volatile construction and real estate sector is considered elevated.

However, CI considers HB’s persistently low loan-loss reserve (LLR) to NPL coverage ratio to be below prudent levels. The NPL coverage ratio seen is a function of the Bank’s high collateralisation rate of 145% in Q3 23 and, crucially, the Cyprus government guarantee which covers two thirds of the inherited NPLs from the erstwhile Cyprus Cooperative Bank (the latter constituted 28% of NPLs at end Q3 23).