This marks a significant milestone for the bank, reflecting its strengthened financial position and the broader stability of the Cypriot banking sector. “The upgrade mainly reflects BoC’s improved asset quality from a reduced stock of legacy problem assets (which include non-performing exposures (NPEs) and net foreclosed properties) and strengthened capitalisation, which resulted in reduced and manageable capital encumbrance by unreserved problem assets,” Fitch said in its report.

Moreover, the agency noted that the Bank of Cyprus has successfully reduced its non-performing exposures to a level comparable with similarly rated European peers. Fitch explained that “structurally sound profitability, which we expect to remain satisfactory despite falling interest rates,” has contributed to the bank’s rating upgrade. The agency acknowledged that the bank’s ability to generate capital internally, along with its robust deposit base, supports its upgraded status. The positive outlook assigned by Fitch “reflects the revision of the outlook on the ‘bbb-‘ Cypriot operating environment score to positive from stable”.

The agency also stated that ongoing economic stability and prudent risk management would be key factors in sustaining the bank’s rating trajectory. Fitch further stressed that “further reduction in problem assets while maintaining sound capitalisation and resilient profitability” would support additional upward rating momentum. However, the agency cautioned that external economic shocks or a deterioration in asset quality could impact future rating adjustments.

The report also stated that the Bank of Cyprus’ net interest income has improved, driven by higher interest rates and a well-managed loan portfolio. Fitch mentioned that “BoC’s profitability is structurally sound, underpinned by healthy pre-impairment operating profit, stable funding, and a solid capital buffer”. Additionally, strong liquidity levels and solid capital buffers have positioned the bank well to navigate potential economic challenges.

Fitch credited the bank’s management strategy for focusing on operational efficiency, cost control, and digital transformation. The agency stated that “BoC’s digital transformation is progressing well, contributing to cost efficiency and customer satisfaction”. The agency also highlighted the broader recovery of Cyprus’ financial sector following years of restructuring and regulatory strengthening. “The Cypriot banking system has undergone significant transformation, with tighter regulations, improved governance, and a more resilient economic foundation contributing to overall stability,” Fitch said. 

The upgrade is expected to enhance investor confidence in Cyprus’ banking system, potentially improving access to international funding and reinforcing the country’s reputation as a stable financial hub. Increased confidence in the bank’s creditworthiness could also lead to lower borrowing costs and greater lending capacity to support economic growth in Cyprus.

Looking ahead, Fitch indicated that “further reduction in problem assets while maintaining sound capitalisation and resilient profitability” will be critical in determining whether additional rating upgrades are warranted.

The report concluded by stating that the bank’s ability to maintain robust profitability while managing potential risks will be key to future rating actions.

Source: Cyprus Mail