ON MONDAY, Moody’s Investors Service said it downgraded the deposit and debt ratings of Marfin Popular Bank Public Co Ltd to Baa2/Prime-2 from A3/Prime-1 and Bank of Cyprus Public Co Ltd to A3/Prime-2 from A2/Prime-1. At the same time, Moody’s has confirmed the deposit and debt ratings of Hellenic Bank Public Co Ltd at Baa2/Prime-2.
The outlook on all the banks’ ratings is negative. The Russian subsidiaries of MPB and BoC – Rosprombank and Bank Uniastrum, respectively – are not affected by Monday’s rating action.
These actions reflect the banks’ direct sizable exposure to the Greek economy through their operations in Greece, and their relative capacity to manage the resulting pressure on asset quality, earnings and capitalisation.
Concerns about the economic conditions in Cyprus and the performance of its domestic real estate market also contributed to Monday’s rating actions.
Marfin Popular Bank Public Company Ltd
THE two-notch downgrade of MPB’s long-term debt and deposit ratings stems from the bank’s considerable exposure to Greece – the highest among the three rated Cypriot banks.
MPB operates in Greece via its subsidiary, Marfin Egnatia Bank SA (“MEB”), which reported gross loans of EUR14.0 billion in Greece (52% of group loans) and EUR10.5 billion of deposits (43% of group deposits).
As a result of its Greek operations, problem loans on a group level are on an upward trend and reached 6.3% of gross loans at the end of March 2010. According to Moody’s, the expected erosion in asset quality will pressure the bank’s earnings and capitalisation for the next several years.
An additional concern regarding this bank is the challenged funding position of its Greek subsidiary MEB. The latter’s access to the bond market is now very limited and its access to the interbank market has also been significantly curtailed.
This situation at the subsidiary level has also caused some lessening of liquidity in MPB’s Cypriot operations and has made the group increasingly dependent on ECB funding. Moody’s notes that MPB intends to fully integrate MEB’s operations through a merger planned for later this year.
Bank of Cyprus Public Company Ltd
MOODY’s decision to downgrade the BoC by one notch reflects the increasing levels of problem loans, which again comes primarily from its Greek operations.
Having reached 6.0% as of March 2010, Moody’s expects this upward trend to continue and depress the bank’s earnings and capitalization levels in the next few years.
Among the three rated Cypriot banks, BoC has the second-largest Greek exposure, with 167 branches and a number of subsidiaries. As of March 2010, the bank reported gross loans of EUR9.9 billion in Greece (36% of group loans) and deposits of EUR10.7 billion (37% of group deposits).
Moody’s notes however that the bank’s capital buffers remain adequate with a Tier 1 ratio at 10.2%. Its funding and liquidity position also remains satisfactory, reflecting a dominant position in its domestic market through a strong branch network that provides for a group loans-to-deposit ratio of 90%.
Hellenic Bank Public Company Ltd
MONDAY’s confirmation of Hellenic Bank’s Baa2 deposit ratings is based on Moody’s view that this rating level sufficiently captures current credit risks stemming from the bank’s comparatively small exposure to Greece.
Hellenic Bank is a relatively recent entrant to the Greek market, where it now operates 21 branches, with gross loans of EUR953 million (18% of group loans) and deposits of EUR949 million (15% of group deposits) as of March 2010.
As in the case of its two larger competitors, Hellenic Bank’s problem loans have been rising, reaching 8.9% as of March 2010. Indeed, Moody’s adjusted the bank’s stand-alone financial strength rating to D/Ba2 from D+/Ba1 to reflect the bank’s growing challenges.
However, the rating agency notes that capital buffers continue to provide adequate protection and that the bank’s funding and liquidity position is satisfactory due to its primarily Cyprus-based activities.
THE negative outlooks on the banks’ ratings reflect the uncertainties regarding the banks’ operating environment over the next two years, which could lead to pressures on asset quality that are more pronounced than what is assumed currently under our base case scenario.
In Cyprus, the economic activity remains weak, with GDP contracting again in Q1 this year.
At best, Moody’s expects a weak recovery in 2011. The country’s real estate market, which is a significant component of the banks’ loan books, remains a risk area with unclear growth prospects and weak demand.
Moody’s also notes that it will continue to actively monitor the liquidity and funding position of the Cypriot banks in light of the tight capital market conditions, the so far modest outflow of deposits from their Greek operations and the relatively high cost of funding in Cyprus.
The agency however pointed out that concerns in this area are mitigated by a few factors. The banks are primarily deposit-funded, with recent indicators pointing to a relatively stable deposit base at the group level, and relatively low wholesale refinancing needs over the next 18 months. Liquidity is also supported by highly stringent liquidity regulations in Cyprus.
Moody’s notes that the deposit and debt ratings of the three banks continue to benefit from systemic support from the Cypriot authorities, reflecting the national government’s capacity and commitment to support its banking system in case of need.
The deposit and debt ratings of the three Cypriot banks currently benefit from an average two-notch rating uplift from their stand-alone ratings as a result of the imputed systemic support assumption.