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S&P Affirms BoC’s Credit Ratings At “B+/B”

S&P Affirms BoC’s Credit Ratings At “B+/B”

International rating agency S&P Global Ratings affirmed its 'B+/B' long- and short-term issuer credit ratings of Bank of Cyprus (BoC), Cyprus’ largest lender, maintaining a positive outlook, reflecting “the possibility of an upgrade if economic risks appear manageable and we have more certainty that the recent improvement of the bank's risk profile is sustainable in the medium term.”

S&P said it views “positively that Bank of Cyprus Public Co. Ltd. has gradually strengthened its capitalization and materially advanced in the clean-up of its legacy problem assets.”

However, the agency noted that, “although BoC's direct exposure is limited, we consider that Cyprus has closer economic links to Russia than other EU countries, which, coupled with a deteriorating macroeconomic environment and protracted inflation, makes the potential spillover effects on credit quality uncertain.”

S&P highlighted that BoC, which managed a 95% cumulative reduction of its stock of nonperforming exposures (NPEs) from a 2014 peak through a mix of market sales and organic efforts.

“NPEs represented 6.5% of gross loans at March 31, 2022, pro-forma for Helix 3, compared with 30% at year-end 2019. As a result, BoC enters a more challenging period in a stronger position than the recent past,” the S&P added.

Noting that Bank of Cyprus, similarly with its peers, won ́t be immune to the indirect effects of protracted inflation and high energy prices, S&P said that “some asset quality deterioration could eventually arise.”

“Cyprus' tourism and business links with Russia are stronger than those of other EU members, and therefore the economic stress currently being experienced by Russia could somewhat affect the island's tourism sector recovery,” the agency added.

The agency also noted that adequate capitalization should provide a buffer to accommodate growth, as following seven years of de-risking its balance sheet and reducing highly risk weighted problem assets, BoC's capitalization has gradually strengthened.

Moreover, the agency pointed out that the bank's ample liquidity mitigates the potential risk of Russia-linked deposit outflows with €10.2 billion in liquid assets at March 31 2022, covering 58% of customer deposits--mainly in the form of cash and reserves at the central bank.

“This, coupled with retail funding fully financing the loan book (loan-to-deposit ratio of 58% at March 31, 2022), provides enough of a buffer to absorb potential customer deposit outflows related to Russian citizens or businesses, even if this is not our base case,” the agency said, noting that, “BoC's Russia-linked deposits are limited at about 6% of customer deposits, which we consider manageable.”

Furthermore, S&P said that BoC's efficiency should reduce the gap with peers over the next 12-18 months.

“Ongoing efforts to reduce costs through voluntary staff exit schemes and digital transformation should somewhat offset inflationary pressures, resulting in BoC's feeble efficiency gradually improving,” the agency said noting it expects the bank’s cost-to-income ratio to reach 63% by year-end 2023, compared with about 70% calculated by S&P Global Ratings at March 31, 2022.

On that note, S&P said that BoC could benefit more than peers could from monetary policy tightening, since about 95% of its loan book is referenced to floating rates.

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