Fitch affirmed both banks Long-term issuer default rating at “B-” for Bank of Cyprus and “B” for Hellenic Bank, citing weak asset quality, profitability and high-cost base as their common challenges.

For Bank of Cyprus, the largest lender, Fitch said the Outlook revision follows the announcement that it reached an agreement to sell €0.6 billion non-performing exposures (NPEs) and €121 million foreclosed real-estate assets.

“The sale (project Helix 3) will improve BoC`s asset quality and reduce capital encumbrance by unreserved problem assets (which include NPEs and foreclosed assets),” Fitch said.

Noting the positive outlook “also reflects significant progress in organically reducing problem assets since end-2019, despite an adverse operating environment in Cyprus, and our expectation that this trend will continue.”

Bank of Cyprus’ ratings reflects weak asset quality even after the announced NPE disposal, which results in high capital encumbrance by unreserved problem assets and weak profitability, which has been constrained by high loan impairment charges (LICs).

Fitch expects BoC’s asset quality to continue to improve “on a better economic environment in Cyprus and the bank`s proven ability to work-out legacy problem assets organically”.

It does not expect significant inflows of new NPEs from the loans previously under the moratorium, as performance to date has been positive and better than anticipated.

The agency described the bank’s profitability as volatile due to loan impairments, but it expects profitability to improve as loan impairments will reduce, and restructuring costs wane.

“Improving profitability will also depend on the bank`s ability to reduce costs and diversify revenue.”

On Hellenic Bank, the island’s second-largest bank, Fitch said the positive Outlook “reflects our expectation that asset quality will improve as HB is working to reach an agreement by early 2022 to dispose of €0.7 billion gross non-performing exposure.”

“If completed, the NPE trade will reduce capital encumbrance by unreserved problem assets, which include NPEs and foreclosed assets.”

According to Fitch, completing Hellenic’s project Starlight will reduce the bank’s NPL ratio to “mid-single digits”.

The agency said it expects asset quality to improve slowly through write-offs and recoveries but to remain vulnerable to shocks to the Cypriot economy.

The bank’s rating reflects weak profitability due to HB’s reliance on net interest income and a fairly high-cost base and remains constrained by high loan impairment charges (LICs).

It also noted the bank has comfortable buffers over regulatory requirements.

“We believe that capitalisation is still not commensurate with risks due to high capital encumbrance by unreserved problem assets of about half of fully-loaded CET1 capital.

“Revenue generation remains under pressure from a fairly undiversified business model and constrained by high loan impairment charges.

“Costs are structurally high relative to revenue, as the bank’s small size makes economies of scale difficult to achieve.”

Source: Financial Mirror