Capital Intelligence Ratings said it had affirmed the bank’s long-term foreign currency rating (LT FCR) and short-term foreign currency rating (ST FCR) at ‘BB-’ and ‘B’, respectively.

CI Ratings has affirmed HB’s bank standalone rating (BSR) of ‘bb-’.

It said the outlook for the LT FCR and BSR remains ‘stable’.

The ratings were last updated in November 2020.

The rating agency said the strongest credit strength that supports the Core Financial Strength (CFS) rating of ‘bb-’ remains that of funding and liquidity.

“The bank enjoys a well-diversified and stable retail customer deposit base and has very little reliance on wholesale funding of any type.”

It said that liquidity metrics continue to be strong, while the capital position is “less strong”. Headline ratios are strong, and capital quality is good, it explained.

“However, the ratio of unprovided non-performing exposures (NPEs) to equity remains high, albeit on a downward path.

“Part of the gross NPEs benefit from what is tantamount to a 90% government guarantee; this allows HB to hold lower loan loss reserves (LLR) than would otherwise be the case.”

The large deposit base and relatively low proportion of loans in the balance sheet means that HB maintains a large share of its asset base in the form of investment securities.

These are almost wholly made up of debt securities with a mix of Cyprus Government bonds, high-quality bank debt and covered bonds.

“The holdings are very liquid.

“With investment securities representing a rising share of total assets, the impact of NPEs on the overall asset quality of the asset base as a whole has lessened, particularly when the 90% of face value government guarantee on the ex-CCB (Cooperative Central Bank) part of the NPE portfolio is factored in.”

Nonetheless, loan asset quality remains the most important credit challenge after Covid-19 itself, and one that will take an extended period to whittle away, CI Ratings said.

Weak profitability

The other main credit challenge is weak profitability.

This reflects the high cost of credit and the large proportion of operating profit consumed by provisioning at the net level.

However, profitability is also modest at the operational level.

Net interest income is impacted by the carry cost of unprovided NPEs and lower yields on investment securities; the share of operating income provided by non-interest income also remains low.

The main headwinds are weak income generation overall coupled with a large cost base and the resulting high cost-to-income ratio.

However, there are opportunities going forward to increase fee and commission income by cross-selling non-credit products to the ex-CCB portion of the customer base as that predecessor bank had a very limited offering for insurance and investment products.

CI Ratings concluded that two final credit challenges are the high exposure to the real estate market in the loan portfolio and Cyprus government risk.

In the first three months of 2021, the bank showed a marginal rise in non-performing exposures by 1% quarter on quarter or by just €18 million.

Total NPEs amounted to €1.52 billion in Q1 2021 from €1.52 billion in the previous quarter corresponding to 15.8% of total loans, while the net NPEs (after provisions) ratio remained unchanged at 5%.

Source: Financial Mirror