Moody's improves Cyprus banks and points to the country's robust economy

Moody's reported on Wednesday that it has raised the Bank of Cyprus and Hellenic Bank's long-term ratings, including their Baseline Credit Assessments (BCAs) to b1, from b2, and their long-term bank deposit ratings to Ba2, from Ba3.

The agency added that both banks' long-term deposit ratings continue to be positive.

According to the agency, "the main driver for today's rating upgrade is the resilience of the Cypriot economy, which is supporting the operating conditions of the banking system," raising Cyprus' macro profile from "Weak+" to "Moderate-" is due to this.

Additionally, a higher macro profile score indicates that Cypriot banks would face less severe post-failure losses and lower downside risks.

According to the rating agency, "The positive outlooks reflect Moody’s expectations that 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 positive outlook on the banks’ long-term deposit ratings also reflects a potential higher buffer from more junior instruments, as the clarity and certainty around their future debt issuances improves," they continued.

The fact that Cyprus' economy responded to Russia's invasion of Ukraine with greater resilience than was anticipated (Caa3 negative) and that it recovered well from the pandemic shock, indicating no permanent damage, was taken into account by Moody's. Non-tourism-related services and the government's support measures stabilized the economy and lessened the impact of the shock.

Additionally, the agency stated that it anticipates 4.8% growth for Cyprus this year, followed by 2% growth in 2023.

These numbers would be higher than the average for the euro area, which is 2.2% in 2022 and 0.9% in 2023.

Following that, Moody's stated that Cyprus' economic prognosis is still favorable, with potential GDP growth predicted to be between 2.5 and 3.0 percent.

According to the agency, "Moody’s notes that credit conditions have improved in recent years, with a significant drop in system nonperforming exposures (NPEs) to 11.2 per cent of total domestic loans and advances in June 2022, from a peak of 49.8 per cent as of May 2016."

"The rating agency however notes that challenges remain as a result of still-high levels of indebtedness and the legal framework governing foreclosures that remain vulnerable to frequent political interference," they continued.

The long-term deposit and senior unsecured debt ratings for the Bank of Cyprus have a positive outlook, according to Moody's, which reflects their assumption that non-performing exposures and foreclosed real estate assets would continue to decline. Additionally, it is anticipated that profitability would continue to increase, helped by the environment of increasing interest rates and the bank's cost-cutting activities.

According to the rating agency, "Moody’s expects Bank of Cyprus’ profitability to benefit from the increases in the European Central Bank (ECB)’s policy rate, primarily as the bank’s significant cash balances with the central bank (around €9.9 billion or 38 per cent of assets as of June 2022) reprice immediately." However, deposits will reprice more slowly and by less, given the bank's excess liquidity, the agency added.

Due to the aforementioned, the bank anticipates achieving a return on tangible equity of above 10% in 2023, two years earlier than expected.

The agency said that as the clarity and certainty around the bank's potential future debt issuances increases, "the positive outlook on the long-term deposit rating also reflects a potential higher buffer by more junior instruments."

In regards to Hellenic Bank, the rating agency noted that the favorable outlook reflects Moody's forecast that NPEs would continue their downward trend and profitability will grow, backed by the environment of increasing interest rates.

Given its sizeable balances with the ECB of around €6.9 billion as of June 2022, corresponding to 36% of total assets, that will reprice promptly after any increases in interest rates, the agency said it expected Hellenic Bank's profitability to gain from higher interest rates.

"More gradually, the investment of its large portfolio of bonds, an additional 24 per cent of assets, will also increase net interest income as maturing bonds are invested in higher-yielding bonds with a similar credit quality," it continued.

Additionally, Moody's observed that because of the extra liquidity, deposits will reprice more gradually and by a smaller amount.

"Hellenic Bank estimates that net interest income will increase by more than €130 million (or around 0.7 per cent of assets before tax) by 2023 onwards," according to Moody's.

In light of probable future debt issuances by the bank, it added, "The positive outlook on the long-term deposit rating also reflects a potential higher buffer by more junior instruments."

By fLEXI tEAM