Fitch Ratings downgraded on Tuesday the three largest Cypriot banks, following an agreement reached at Eurogroup level in the early hours of Monday morning.
The agency’s press release says that it has downgraded “the Long- and Short-Term Issuer Default Ratings (IDRs) of Cyprus Popular Bank (CPB) to Default (D) and those of Bank of Cyprus (BOC) to `Restricted Default` (RD) from `B`, respectively, on losses imposed on senior creditors”.
The fact that BOC will continue to operate in Cyprus, while CPB will be wound-down drives the difference in their Long-term IDRs (`RD` for BOC; `D` for CPB), it adds.
The Support Rating Floors (SRF) of the two banks have been revised to `NF` from `B` and Support Ratings (SR) to `5` from `4` as a result of the bail-in of senior creditors. Fitch says.
Following this, it is added, Fitch has also downgraded their VR to `f` from `c`.
It has further maintained the Rating Watch Negative (RWN) on Hellenic Bank’s (HB) ratings except for its `cc` VR, which has been revised to Rating Watch Evolving (RWE) from RWN.
Fitch, points out that it “expects enforcement of losses on BOC`s uninsured deposits to be material as the bank will have no access to state capital aid under the EUR10 billion rescue package”.
According to Fitch’s rating definitions, it is added, `D` ratings indicate an issuer that in Fitch’s opinion has entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, or which has otherwise ceased business.
This, the agency continues applies to CPB.
“`RD` ratings indicate an issuer that in our view has experienced an uncured payment default on a bond, loan or other material obligation but which has not entered into liquidation or ceased operating, which is the case for BoC”, it says.
The two banks` senior notes have been downgraded to `C`/`RR6` from `B`/`RR4` to reflect the defaults on the bonds and their write-down.
In a commentary on HB, Fitch notes that “unlike its two other peers, HB’s Long-term IDR and SRF of `B` and SR of `4` have not been downgraded due to the absence of any write-down of senior creditors to date and continued availability of liquidity support from the European Central Bank (ECB), as outlined in the Eurogroup Statement”.
However, the agency adds, “the RWN continues to indicate the potential for the Long-term IDR to be downgraded”.
“The RWE on HB`s `cc` VR reflects the potential for the rating to be either downgraded or upgraded depending on near-term developments”, Fitch explains.
It continues to warn that “the rating could be downgraded to `f`, indicating that HB has failed, if asset quality problems intensify to the extent that the bank needs recapitalising, or if it becomes clear that the bank is highly dependent on extraordinary liquidity support to continue to service its obligations”.
Conversely, however, “the VR could be upgraded if the bank is able to maintain its solvency and liquidity without external support”.
Fitch sees the proposed sale of the Greek branch network and resulting potential reduction of risk weighted assets with a positive eye, noting that “it may support the bank’s capital position, and depositors may be somewhat more willing to keep funding the bank as a result of HB not being included to date in any resolution measures”.
