In “B-” Fitch confirmed the long-term rating of the Bank of Cyprus and in “b-” the Sustainability rating, maintaining the Bank's negative outlook, while emphasizing that at present the possibility of upgrading the existing rating of the bank is limited.
The American house states that the Bank of Cyprus announced on January 18, 2021 an agreement for the sale of a portfolio of non-performing exposures, for a gross amount of approximately 0.5 billion euros and emphasizes that the transaction is credit positive and will offer the bank additional margin in this level of valuation, but does not sufficiently alleviate, as he emphasizes, the medium-term pressures to stabilize the prospects in relation to the long-term valuation of the bank, mainly due to the still large capital burden from the troubled assets.
As for the negative outlook, Fitch says it still reflects its view that the bank's ratings remain extremely sensitive to a negative scenario based on the firm's main expectation of a healthy recovery.
In such a scenario, according to the house, the bank's ratings are likely to be under pressure from higher than expected inflows of new NPLs, creating greater credit losses, weak revenues, resulting in greater capital erosion than expected.
Bank of Cyprus ratings reflect the poor quality of assets, even after the announcement of the release of NPLs, which leads to a very high capital burden on troubled assets and low profitability, which is still limited by high impairment charges. , underlines.
He also states that the bank's ratings also reflect the strong franchise and its position as the largest bank in Cyprus, which is a small market with an acceptable financing profile.
He adds that his assessment of the quality of the bank's assets and capitalization significantly affects the bank's ratings, while noting that the negative outlook reflects its medium-term risks in the bank's ratings from the coronavirus outbreak.
Bank upgrade factors
Regarding the factors that could, individually or collectively, lead to a positive assessment or upgrade of the bank, Fitch says the outlook could be upgraded to stable “if the bank's operating environment stabilizes and the bank successfully manages the challenges.” resulting from the economic downturn, reversing the negative risks “for the quality of its assets and for its profitability, while maintaining current levels of capital.
This would mean bringing the percentage of non-performing assets closer to 20% with a steady downward trend, he said, noting that this would mean “structurally lower loan impairment and, therefore, a return to positive operating profits on a more sustainable basis”.
Noting that the possibility of upgrading the bank's rating is limited at the moment, Fitch emphasizes that in the long run, an upgrade would require improved outlook for the operating environment and a substantial and sustained improvement in core profitability, combined with a significant improvement in quality. of assets (percentage of troubled assets below 15%) and a reduction of the capital charge to 100% with a net downward trend.