On Tuesday 18th June Standard and Poor's (S&P) upgraded Bank of Cyprus' long-term rating from BB to BB+, while affirming the short-term rating at 'B', citing a significant reduction in non-performing loans on the balance sheet. The agency also upgraded the counterparty's long-term and short-term ratings from 'BBB-/A-3' to 'BBB/A-2'.
It is worth noting that S&P's decision follows the upgrade of the Republic of Cyprus' credit rating last Friday.
The upgrade of the Bank of Cyprus' rating reflects the significant improvements in the reduction of non-performing loans, which strengthens the bank's position in a potentially more challenging environment. In addition, the financial institution's capitalisation has strengthened," S&P Global Ratings said in a statement.
According to the rating agency, the outlook for the bank remains positive, indicating that it could upgrade the financial institution's rating over the next 12-24 months if risks to the banking sector diminish and Bank of Cyprus's profile continues to improve.
The agency highlighted that since the maximum number of problem loans accumulated on the financial institution's balance sheet in 2014, Bank of Cyprus has been able to reduce their number by 96% through sales and organic efforts.
We expect the bank's management to continue to focus on monitoring the asset quality of Bank of Cyprus," the agency stressed.
The reduction of economic risks in Cyprus keeps the bank adequately capitalised and provides a reserve to support growth. In fact, Standard and Poor's estimates that the lower financial risk will have a positive impact of 115 basis points on the bank's risk-adjusted capital (RAC), which stood at 8 per cent at end-2021, adjusted for the Helix 3 package. As a result, Bank of Cyprus's capitalisation will remain consistently above 7 per cent over the next 18 months, providing some scope for a modest increase in its loan book and covering potentially higher credit losses.
More broadly for the banking system, the agency also noted that Cypriot banks have made significant progress in removing problem loans and improving lending practices since 2018.
Standard & Poors, one of the 'big three' credit rating agencies along with Moody's and Fitch Rating, dates back to 1860. The company is the creator of the S&P series of stock indices for the US and international securities markets. It has 6,300 employees. S&P issues two types of ratings: international and national.