Fitch Ratings Agency has taken negative rating actions on Cypriot banks ratings endorsement policy.
According to Fitch Ratings, it has placed Bank of Cyprus (BOC), Cyprus Popular Bank (CPB) and Hellenic Bank's (HB) Long-term Issuer Default Ratings (IDRs) and Support Rating Floors (SRFs) of 'BB+' and Support Ratings of '3' on Rating Watch Negative (RWN).
At the same time, the agency has downgraded BOC's and HB's Viability Rating (VR) to 'b-' from 'bb-' and CPB's to 'f' from 'b-'.
''The RWNs reflect the fact that Cypriot banks remain highly sensitive to heightened risks in Greece, in particular if Greece was unable to sustain its membership of Economic and Monetary Union'' it is said.
Fitch adds that in the event that ''the new general elections scheduled for 17 June fail to produce a government with a mandate to continue with the EU-IMF programme of fiscal austerity and structural reform, an exit of Greece from EMU would be probable and this would likely result in widespread default on private sector as well as sovereign euro-denominated obligations''.
It is furthermore noted that ''while the propensity of the Cypriot government to support Cypriot banks remains unchanged, its ability would largely depend by the scale of the problems derived from Cypriot banks' Greek operations''.
CPB is the most exposed to Greek loans (49% of gross loans at end-2011; including international shipping loans booked in Greece), followed by BOC (34% at end-March 2012) and HB (17% at end-2011).
Exposure to Greek government debt has substantially declined after impairments in 2011 and ranges between EUR35m at HB and around EUR350m at CPB.
The downgrade of BOC's and HB's VR reflects their capital needs due to large losses in 2011 as a result of impairments on their Greek sovereign debt exposures and a deterioration of their credit risk profiles.
Fitch also notes that further loan deterioration in 2012, particularly on the Greek loan portfolio, could add to capital needs.
The RWN on their VRs reflects their sensitivity to developments in Greece, asset quality deterioration and adverse confidence shifts, it is added.
BOC and HB were in breach of Central Bank of Cyprus' minimum 8% core capital requirement at end-2011. BOC's core capital ratio was 6.8% (including EUR592m capital raised in Q112) and HB's was 7.1%. BOC is under greater pressure as it also has to meet EBA's 9% core capital requirement by end-June 2012. However, the two banks have capital strengthening plans under way, Fitch notes.
Fitch also considers in BOC's VR its leading domestic franchise in Cyprus, sound funding structure (gross loans/deposits ratio of 98% at end-Q112) and tangible results in improving capital during Q112.
HB's VR is supported by its comparatively lower exposure to Greece and good funding profile (gross loans/deposits ratio of 77% at end-2011), although it has reliance on non-resident deposits.
The downgrade of CPB's VR to 'f' from 'b-' reflects the bank's failure in absence of timely external support, it notes.
Fitch will maintain CPB's VR at 'f' for a short period of time, until capital is restored, which ''is likely to be primarily sourced from the Cypriot government''.
