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Moody’s downgrades three Cyprus banks

Following in the wake of its decision last week to downgrade Cyprus government bond ratings, yesterday Moody’s Investor Services announced that it had downgraded three Cyprus banks.

MOODY’S Investors’ Service has downgraded the Bank of Cyprus, the Marfin Popular Bank and the Hellenic Bank following its announcement last week that it had downgraded Cyprus government bond ratings by two notches to A2 from Aa3.

According to yesterday’s announcements:

Bank of Cyprus – outlook stable

Long-term deposits, debt and financial strength downgraded two notches from A3/C to Baa2/D.

The stable outlook reflects Moody’s view that the Baa2 deposit and debt ratings sufficiently capture current credit risks from the bank’s asset quality deterioration, and that, at present, upside and downside risks are evenly balanced.

In their announcement, Moody’s said: “An important consideration that has led to today’s rating action is the increased, and high in absolute terms, level of problem loans (as defined by Moody’s to include all loan past due by over 90 days) that are not covered by provisions. Furthermore, while net problem loans (problem loans net of provisions) are fully covered by tangible (mostly real estate) collateral, the recent downturn in the real estate market has had a negative impact on the liquidity of the market, leading to concerns over the recoverability of such collateral.”

Marfin Popular Bank – outlook negative

Deposits downgraded one notch from Baa2/Prime-2/D+ to Baaa3/Prime-3/D.

The negative outlook on the bank’s ratings primarily reflects the downside risks imbedded in MPB’s operating environment over the next year, which could lead to an erosion of asset quality beyond what is currently assumed under our base case scenario.

Moody’s notes that relative to its capital base, the bank’s exposure to single-party credit-related event risk is large. MPB’s holdings in low-rated Greek sovereign debt of approximately EUR3 billion (90% of pro-forma Tier 1) is the highest amongst Cypriot banks.

Moody’s also notes that, despite some flexibility in its domestic market, the bank’s liquidity and funding position entails some elements of uncertainty due to the significance of its Greek operations.

In their announcement, Moody’s said: Among the top three Cypriot banks, Marfin Popular Bank’s exposure to Greece (45% of group loans) presents significant downside risks to the bank’s asset quality. As at December 2010, the bank’s non-performing loans had risen to 7.3% from 6.1% as at end-2009.

More positively, however, Moody’s notes the bank’s recently successful capital raising, which has strengthened its capital adequacy ratio to an estimated pro-forma Tier 1 ratio of 12.0%; the rating agency considers this adequate to withstand possible losses arising from the deterioration in the operating environment.”

Hellenic Bank – outlook stable

Deposits, debts and financial strength downgraded one notch from Baa2/Prime-2/D to Ba1/Not Prime/D-.

The stable outlook reflects Moody’s view that the Ba1 deposit and debt rating sufficiently captures current credit risks from the bank’s asset quality deterioration, and that, at present, upside and downside risks are evenly balanced.

In their announcement, Moody’s said: Although net problem loans (problem loans net of provisions) are fully covered by tangible (mostly real estate) collateral, they comprise a large share of the bank’s shareholder’s equity, with the recent downturn in real estate prices having an impact on the liquidity of the Cyprus property market, leading to concerns on the recoverability of such collateral. Moody’s expects bottom line profits to remain under pressure, primarily due to the bank’s loss-making Greek operations, and high provisioning charges.

More positively, the rating agency notes the bank’s capital raising efforts that have lifted its Tier 1 capital to 12.3%, which is considered adequate to withstand future losses arising from the deterioration in the operating environment. Furthermore, Hellenic’s liquidity position is good, reflecting conservative liquidity management practices, which partly mitigate the bank’s high reliance on offshore deposits.”

Key drivers

In all three cases, the ratings agency said that its key drivers for its rating action were:

  • Its recent decision to downgrade the ratings of the Cypriot government by two notches to A2 from Aa3 and the subsequent repositioning of the country’s systemic support indicator at the level of the national government debt rating of A2 from Aa2;
  • Its re-assessment of the banks’ intrinsic financial strength (as reflected by its standalone BFSR), primarily due to the deterioration in asset quality over the past year, in conjunction with Moody’s expectations of a further deterioration in asset quality.

Bad debts

According to a report in Stockwatch, the decline in the banks’ profitability is mostly linked to increased bad debts due to the financial crisis. The total bad debts of the banks rose to €241.42 million in the fourth quarter of 2010 compared with €169.67 million in the third quarter and €170.36 million in the fourth quarter of 2009.

The bad debts of the Bank of Cyprus surged 85% to €145 million from €78 million in 2009, while in Greece they rose 54% to €184 million from €120 million in 2009. Bad debts in Russia and other countries recorded a slight decrease.

The increase in Marfin’s bad debts increased by 6.1% to €266.1 million from €250.6 million, while the decline in its profitability is mostly attributable to the drop in finance income.

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