Capital Intelligence Ratings (CI Ratings) has "upgraded" Hellenic Bank's long-term foreign currency rating (LT FCR) to 'BBB-' from 'BB' and its short-term foreign currency rating (ST FCR) to 'A3' from 'B'.
At the same time, the agency changed the outlook to 'stable' from 'positive', citing the bank's strong capitalisation, its ability to withstand future shocks and the synergies expected from its acquisition by Greece's Eurobank SA. The agency noted that Hellenic Bank has a well-diversified and stable retail deposit base and limited reliance on markets for funding.
The rating upgrade is also based on HB's higher profitability, liquidity and stable, diversified funding base in its domestic market. Capital Intelligence Ratings said that the acquisition of Eurobank is seen as a positive strategic development for Hellenic Bank, given the expected synergies, particularly between the two Cypriot banks.
We expect the proposed merger to result in a more diversified balance sheet and earnings profile and to help address the strategic challenges faced by the financial institution to date. Prudent credit risk management and remedial actions taken in recent years to address problem loans through NPL sales have resulted in a significant reduction in Hellenic Bank's NPLs," the agency said.
Incidentally, the bank's total NPL ratio stood at 6.7 percent in the third quarter of 2024. However, according to CI Ratings, it could fall to 2.4 per cent when adjusted for loans backed by government guarantees. The loan loss reserve (LLR) coverage for NPLs at Hellenic Bank is 46 per cent, but this rises to 74 per cent if government-guaranteed NPLs are excluded. According to the bank's management, the increase in NPLs on loans originated since 2018 is well below 0.5 per cent of the total. The quality of non-loan assets is good, as they mainly comprise placements with the European Central Bank (ECB) and a portfolio of highly rated investment securities (average rating in the AA range), which together account for two-thirds of the bank's balance sheet.
We expect overall asset quality to remain stable post-merger, given the robust risk profile of Eurobank Cyprus," the rating agency added.
Hellenic Bank's capitalisation is very strong, as improved profitability and low dividend payments have led to significant internal capital generation.
Meanwhile, higher capitalisation combined with lower NPLs has improved the bank's extended NPL coverage. This has offset the modest LLR coverage. Capitalisation is expected to remain strong after the proposed merger due to Eurobank Cyprus's strong capital ratios.
Looking ahead, we expect the quality of the combined organisation's funding base to remain good, despite Eurobank Cyprus having a much lower proportion of retail deposits," the rating agency added.
Hellenic Bank's profitability and efficiency ratios have strengthened, but earnings quality is currently moderate. Revenues are highly dependent on interest rate sensitive placements with the Central Bank, while the bank's (higher yielding) loan portfolio is relatively small (both as a result of deleveraging and slower new lending).
Similarly, non-interest income is modest, although we expect it to improve following Hellenic Bank's acquisition of one of the largest life and general insurance companies in Cyprus, which is expected to be completed in the first quarter of 2025,' CI Ratings concludes.