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Fitch raises the rating of the BOC, noting NPE reduction and the resilience of the Cypriot economy

Fitch Ratings has raised the Bank of Cyprus's Long-Term Issuer Default Rating (IDR) to 'B+' from 'B-' and its Viability Rating (VR) to 'b+' from 'b-'.

Furthermore, the agency's prognosis on the Long-Term IDR is Positive.

“The two-notch upgrade reflects the execution of the sale of €0.6 billion non-performing exposures (NPEs, as defined by the European Banking Authority) and €0.1 billion foreclosed real-estate assets,” the agency said in its update.

“The sale (project Helix 3) together with the organic reduction of impaired assets, has improved BoC’s asset quality, resulting in a significant decline in the level of capital encumbered by legacy problem assets (NPEs and net foreclosed assets)”, the agency added.

According to the report, the improvement is also supported by Fitch's assessment of the Cypriot economy's resiliency, even in the face of mounting economic concerns.

Furthermore, the Positive Outlook represents increased recurring profits possibilities for the Bank of Cyprus, owing to a less hazardous balance sheet and considerable gains from higher interest rates, according to the agency.

Fitch also predicted that capital encumbered by net problem assets would fall further in the short to medium term.

The agency went on to say that the recent upgrade for the Cypriot bank takes a number of important rating determinants into account, including asset quality, the bank's operating environment and standing in its home market, its non-performing exposure percentage, and steady deposit base, among other things.

“The Cypriot banking sector has made significant and continued progress since end-2019, improving its resilience to shocks; despite the coronavirus crisis, banks’ continued cleaning up their balance sheets while capitalisation and profitability have further strengthened,” the agency said.

“We expect Cypriot banks to benefit from a strong economic recovery and interest rate increases in 2022 before entering a tougher environment in 2023,” the agency added.

However, Fitch stated that this should continue to be supportive of the banks' performance and risk profiles, before stressing that the Cypriot economy is small and open, making it vulnerable to large shocks.

The survey also considered the fact that, despite the fact that the local market is limited and narrow, the Bank of Cyprus is the top franchise in Cyprus.

“The Bank of Cyprus’ business model is centred on traditional retail and commercial banking with some diversification in insurance and payment,” Fitch said, noting that “the reduction of a stock of legacy problem assets and improved profitability supports long-term stability of the business profile”.

According to the report, the bank's ratings reflect improving asset quality, particularly after the conclusion of the Helix 3 project. The agency did, however, point out that "a significant portfolio of residual foreclosed properties results in still considerable although declining capital encumbrance by unreserved problem assets."

"Ratings are also backed by a leading franchise in Cyprus, increased profitability prospects as a result of higher interest rates and cost savings from workforce reduction, as well as a solid deposit base," the company noted.

According to the agency, the bank's profitability has been below worldwide industry averages in recent years, but de-leveraging has enhanced the bank's ability to create recurring earnings.

“We expect the bank to reach an operating profit/risk-weighted assets (RWAs) of close to 2 per cent in 2022,” the agency said.

“The Bank of Cyprus’ earnings will strongly benefit from higher interest rates and improved operational efficiency thanks to a reduction of the branch network and the voluntary staff exit plan, which will reduce staff costs by about 20 per cent from 2023,” it concluded.



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