Fitch Ratings has upgraded the issuer's long-term default rating and Hellenic Bank's sustainability rating from "B" to "B+". In addition, Fitch has changed the forecast of Hellenic Bank from negative to positive.
The positive outlook reflects our expectation of asset quality improvement, as Hellenic Bank is working to reach an agreement by the beginning of 2022 on the sale of non-performing loans in the amount of 0.7 billion euros," Fitch said regarding the Starlight bank project.
The Agency noted that if an agreement on the sale of NPE is concluded, the encumbrance of capital will decrease due to distressed assets, which include the previously mentioned NPE, as well as seized property assets.
As for the limited profitability of the bank, Fitch attributes this to dependence on net interest income and a high cost base, as well as high loan impairment losses.
The agency stressed that Hellenic Bank is the second largest bank in Cyprus, however, the small size of the local economy constrains its growth potential and is the reason for the concentration of risks above average. As for the bank's NPE volume and distressed asset ratios, Fitch stated that although they remain high by international standards, nevertheless these indicators have significantly improved compared to last year.
The NPE Hellenic Bank ratio of 14.5% and the distressed assets ratio of 16.8% are well below their historical peaks, but remain high compared to other countries. The bank's NPE ratio is expected to fall to mid-single digits after the completion of the Starlight project. Then the quality of assets will slowly improve due to write-offs and refunds, but will remain vulnerable to the shocks of the Cyprus economy," the agency added.
It is worth noting that Fitch Ratings also confirmed the long-term default rating of the issuer of Bank of Cyprus at the level of "B-" (the outlook is positive) and its stability rating at the level of "B-".
The agency links the revision of the forecast with the bank's recent agreement on the sale of 600 million euros of non-performing loans (NPE) and the seizure of real estate in the amount of 121 million euros.
It is noted that the agreement called Helix 3 will improve the quality of the assets of the Bank of Cyprus while reducing the encumbrance of capital caused by unreserved distressed assets, including the above-mentioned non-performing risks and seized property assets.
The positive outlook reflects significant progress in organic reduction of distressed assets since the end of 2019, despite the unfavorable operating environment in Cyprus, and our expectations that this trend will continue in the near future, Fitch Ratings said.
Fitch noted that the low profitability of the Bank of Cyprus, as well as the high capital burden caused by the current quality of the bank's assets, despite the improvement caused by the sale of NPE, are reflected in the rating.
The ratings also reflect the strong customer base and market position of Bank of Cyprus as the largest bank in Cyprus," Fitch said, explaining that the bank's current asset quality level was rated at "CCC+", and capitalization and leverage were rated at "B-".
Despite the CCC+ asset quality rating, which the agency described as "weak for a long period of time," Fitch stated that it is steadily improving due to organic and inorganic reduction of NPE by the bank's management.
The NPE ratio peaked at 63% at the end of 2014, and then dropped to 8.6% at the end of 2021, although it still remains quite high," the agency said.
Fitch also expects that the asset quality of the Bank of Cyprus will continue to improve, which is facilitated by two key factors: the bank's ability to get rid of obsolete distressed assets, a more favorable economic environment in Cyprus. Finally, the agency stated that it does not expect a significant influx of new NPEs due to loans previously subject to the moratorium, as the results to date have been positive and better than expected.
