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Rating Action:

Moody's downgrades Bank of Cyprus to Baa2/D+ from A3/C-; outlook stable

02 Mar 2011

Limassol, March 02, 2011 -- Moody's Investors Service has today downgraded the long-term deposit and debt ratings, as well as the standalone bank financial strength rating (BFSR) of Bank of Cyprus Public Co Ltd (BoC) to Baa2/D+ from A3/C-. Today's rating action concludes the review for possible downgrade which Moody's initiated on 13 January 2011. BoC's Prime-2 short-term rating has not been affected by today's rating action. The outlook on all ratings is now stable.

The key drivers for today's rating actions are:

1. The rating agency's 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;

2. The re-assessment of the bank's intrinsic financial strength (as reflected by its standalone BFSR), primarily due to the deterioration in asset quality over the past year, and Moody's expectations of a further deterioration in asset quality both in Greece and Cyprus;

A detailed list of the ratings affected is provided at the end of this press release.

RATINGS RATIONALE

DEPOSIT AND DEBT RATINGS

The downgrade of BoC's long-term debt and deposit ratings to Baa2 from A3 follows Moody's decision to downgrade the ratings of the Cypriot government to A2 from Aa3. The downgrade of the Cypriot government's rating has prompted Moody's to lower its assessment of the capacity of the Cypriot government to support its banking system and in turn BoC, whose balance sheet size exceeds total GDP for Cyprus.

Moody's utilises a systemic support indicator (SSI) as an anchor to assess a country's capacity to support its banking system in case of need, and uses the SSI to assign the supported deposit and debt ratings of banks. Cyprus' SSI has been repositioned at the same level as the national government's new debt rating of A2. The SSI was previously Aa2, one notch above the old rating of the government. This realignment of the SSI with the government's rating not only reflects the weakened ability of the government, but also the size of contingent liabilities of the banking system relative to the balance sheet of the government and, in Moody's opinion, the somewhat increased risk that these contingent liabilities may crystallise on the sovereign's balance sheet.

However, Moody's notes that the national government's commitment to support its banking system in case of need remains high, and the deposit and senior debt ratings of BoC continue to benefit from a two-notch rating uplift from their stand-alone ratings due to systemic support considerations.

STANDALONE BFSR

The standalone BFSR of BoC has been downgraded to D+ (mapping into a baseline credit assessment of Ba1) from C- previously, primarily due to the deterioration in asset quality over the past year. Moreover, the rating action reflects Moody's expectations of a further deterioration in asset quality given the still challenging operating conditions domestically and more so in Greece, where the bank has significant exposures. The bank's problematic loans (impaired loans + loans not impaired but past due over 90 days) climbed to 12.4% at end 2010 from 8.5% as at end-2009. Through its sizeable branch network, the bank has a high exposure to the Greek market (loans to Greece account for 35% of group loans), where adverse macroeconomic fundamentals continue to lead to high non-performing loan (NPL)-formation rates and depress profitability for the bank's Greek operations. As regards Cypriot operations that account for the majority of Group assets, an expected fragile economic recovery during 2011 is likely to lead to a further rise in NPLs.

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.

Positively, Moody's notes the bank's good liquidity position, its deposit-funded profile and its ample capital adequacy ratios (Tier 1 at around 11.1%) that are expected to increase further as a result of management's proposed EUR1.3 billion issue of convertible enhanced capital securities. Furthermore, current profitability levels should allow the bank to absorb higher levels of provisioning if needed.

STABLE OUTLOOK

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.

The following ratings were downgraded with a stable outlook:

- Deposit and senior debt ratings to Baa2 from A3;

- Subordinated debt rating to Baa3 from Baa1;

- Junior subordinated notes rating to (P)Ba2 (hyb) from (P)Baa3 (hyb);

- Standalone BFSR to D+ (mapping to a long-term equivalent of a Ba1) from C-;

The previous rating action on BoC's deposit and debt ratings was implemented on 13 January 2011, when Moody's placed these ratings on review for downgrade following a similar action on the ratings of the Republic of Cyprus.

The principal methodologies used in rating these issuers were "Bank Financial Strength Ratings: Global Methodology" published in February 2007; "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology" published in March 2007; and "Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt", published in November 2009. All three methodologies are available on www.moodys.com.

Headquartered in Nicosia, Cyprus, Bank of Cyprus Public Co Ltd reported total consolidated assets of EUR42.6 billion as of December 2010.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Limassol
Christos Theofilou, CFA
Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Yves Lemay
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Cyprus Ltd.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Bank of Cyprus to Baa2/D+ from A3/C-; outlook stable
No Related Data.
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