“The strengthened capital buffers bolster the bank’s loss-absorbing capacity and are a positive step towards the bank’s regeneration,” Moody’s said. “But the extent to which these developments will lead to a sustained improvement in the bank’s financial performance remains unclear, given the acute asset quality pressures the bank faces and its low provisioning against losses from problematic exposures.”

BoC recently raised €1.0bn from foreign investors, including US-based Wilbur Ross and the European Bank of Reconstruction and Development.

The cash injection takes the bank’s Core Equity Tier 1 ratio to 15.1%, from 11.3% as of June 2014, well above the regulatory minimum.

The move also improves the bank’s funding and liquidity profile by enabling a 10% repayment of €9.6 bln of outstanding euro-system funding (emergency liquidity assistance) that weighs on the bank’s balance sheet, Moody’s said.

“This is a vital first step in restoring fragile depositor confidence, which could help stem further erosion of its deposit base,” the agency said. “In addition, following the capital increase, the bank’s ownership structure is more concentrated with the participation of high-profile investors, such as the EBRD, which will likely improve decision-making and corporate governance.”

However, BoC still faced acute challenges as the economy continued to contract, unemployment was high and property prices dropped.

Moody’s said the continued recession made it difficult for the bank to recover.

Real GDP has contracted by a cumulative 7.8% over the past two years and further contractions of 3.0% in 2014 and 2.0% in 2015 were expected.

Fiscal austerity and reduced business prospects have led to significant reductions in salaries, while declining property prices and the bail-in of bank depositors have eroded household and corporate net worth.

Moody’s said it expected the lender’s share of NPLs to continue to rise from already high levels – 58% in June.

“We consider Bank of Cyprus’s loan-loss provisions (covering only 33% of NPLs) inadequate to cover future losses from troubled exposures.”

Although real-estate collateral provides some extra coverage, property prices are still declining and more provisions will have to be set aside, causing losses that will erode capital, the agency said.

“Moreover, the bank’s ability to collect the value of collateral depends on amendments to laws governing the foreclosure process in Cyprus. These amendments are in progress and their conclusion is as yet unknown,” Moody’s said, referring to legislation passed by the opposition to limit the scope of the foreclosures law.

The four bills have been referred to the Supreme Court, which will have the final say over their legitimacy.

The agency said deposit outflows were moderating but depositor confidence remained fragile, making the bank vulnerable to potential capital flight once cross-border controls were lifted.

The bank will continue to rely on euro-system funds in the next two to three years, Moody’s said, as individuals tapped their deposits to maintain living standards and pay off loans.

Source: Cyprus Mail