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Rating Action:

Moody's downgrades Cypriot banks' deposit and senior debt ratings to Caa3 from Caa2; on review for downgrade

Global Credit Research - 22 Mar 2013

Heightened uncertainty over recapitalisation prompts review

Limassol, March 22, 2013 -- Moody's Investors Service has today downgraded to Caa3, from Caa2, the deposit and senior unsecured debt ratings of Bank of Cyprus Public Company Limited, Cyprus Popular Bank Public Co Ltd and Hellenic Bank Public Company Ltd. These ratings have also been placed on review for downgrade. At the same time, Moody's affirmed the Bank Financial Strength Ratings (BFSRs) at E, but added that the standalone credit assessments for Bank of Cyprus and Hellenic Bank, have been lowered to ca from caa3. Cyprus Popular Bank's standalone credit assessment continues to map to ca.

The actions on the deposit and senior unsecured debt ratings reflect (1) Moody's expectation of material losses for bank depositors; (2) the risk of further deposit controls once the banks reopen; and (3) the heightened uncertainty regarding the banks' recapitalisation plans.

The alignment of the banks' standalone credit assessments at ca reflects underlying risks related to (1) the increased likelihood of material deposit outflows; and (2) the long-term impairment to the banks' business models resulting from the recent turmoil.

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

RATINGS RATIONALE

RECENT EVENTS

On 19 March, the Cypriot parliament rejected a draft law to impose a tax levy that would result in a 6.75% loss on deposits between EUR20,000 and EUR100,000 and 9.9% on larger amounts. The imposition of losses is an integral condition of the support programme for bank recapitalisations proposed by the European Central Bank, the European Commission and the International Monetary Fund (commonly referred to as the Troika). On 21 March the European Central Bank stated that Emergency Liquidity Assistance (ELA) would only remain available to Cypriot banks if an acceptable support programme is in place by 25 March. The stalemate between the Cypriot government and the Troika has heightened uncertainty over the bank recapitalisation plan.

LOSSES, LIQUIDITY STRESS AND UNCERTAINTY DRIVE DOWNGRADES AND REVIEW

Today's actions on the banks' deposit and senior unsecured debt ratings reflect the rating agency's expectation of material losses for bank depositors, the risk of further controls to contain deposit outflows once the banks reopen, and the heightened uncertainty regarding the banks' recapitalisation or resolution plans.

The situation in Cyprus remains very fluid and the risk of significant losses has increased, as has the risk of a bank liquidation scenario.

Accordingly, Moody's review will assess the impact of the measures ultimately adopted to address the banking crisis. To this end, the review will focus on (1) the magnitude of losses imposed on depositors and/or senior unsecured bondholders; (2) the risk of continued deposit controls once the banks reopen; and (3) implementation risks associated with any agreed measures and the potential need for additional capital support resulting from further asset quality deterioration.

EROSION OF DEPOSITOR CONFIDENCE WEAKENS BANKS' STANDALONE PROFILES

The lowering of Bank of Cyprus' and Hellenic's standalone credit assessments to ca, and the affirmation of Cyprus Popular Bank's standalone credit assessment at ca, captures Moody's view of (1) the increased likelihood of accelerated deposit outflows, weakening the banks' already stressed deposit-funding bases; and (2) the long-term impairment to the banks' business models resulting from the recent turmoil.

Firstly, despite expectations that central bank funding will remain available if a recapitalisation plan is reached, Moody's considers that the risk of accelerated deposit outflows once the banks reopen has risen significantly. An acceleration of outflows would further destabilise the domestic banking system.

Secondly, Moody's believes that the banks' franchises and business models will remain impaired over the long term. The rating agency bases its view on (1) the weakening of market confidence, owing to the recent announcement regarding depositor losses; and (2) the signal that the European authorities aim to reduce the size of the Cypriot banking sector to the EU average over time (Cyprus' total banking sector assets totaled 697% of GDP at the end of 2011, compared with 354% for the EU).

WHAT COULD MOVE THE RATINGS UP/DOWN

Downwards pressure on the banks' ratings would develop following (1) a failure to secure a programme for bank recapitalisations or to maintain external liquidity support; and/or (2) higher loss rates for bank depositors or creditors (compared to the amounts rejected by the Cypriot Parliament on 19 March -- 6.75% loss on deposits between EUR20,000 and EUR100,000 and 9.9% on larger amounts); and/or (3) sustained deposit controls; and/or (4) uncertainty regarding the Cypriot authorities' and the banks' capacity to implement an agreed recapitalisation programme and/or (5) a lowering of the country risk ceiling for Cyprus.

As indicated by the review for downgrade, upwards rating pressure is currently limited. Moody's may confirm the ratings at their current levels if an agreement to recapitalise the banks is reached, provided that the agreement (1) does not necessitate increased burden-sharing of losses; and (2) restricts implementation risks.

LIST OF AFFECTED RATINGS

Bank of Cyprus Public Company Limited:

- Deposit and senior unsecured debt ratings: Downgraded to Caa3, on review for downgrade, from Caa2, negative outlook

-Short term deposit and commercial paper ratings: Affirmed at Not Prime

- Subordinated debt rating: Affirmed at (P)C

- Junior subordinated notes rating: Affirmed at (P)C

- Standalone Bank Financial Strength Rating: Affirmed at E, now mapping to a standalone credit assessment of ca, from caa3

The senior unsecured and deposit ratings are on review for downgrade. No outlook is currently assigned to the E BFSR, short term deposit and commercial paper ratings, subordinated and junior subordinated ratings.

++++++

Cyprus Popular Bank Public Co Ltd:

- Deposit and senior unsecured debt ratings: Downgraded to Caa3 on review for downgrade, from Caa2 negative outlook

-Short term deposit ratings: Affirmed at Not Prime

- Subordinated debt rating: Affirmed at C

- Standalone Bank Financial Strength Rating: Affirmed at E, mapping to a standalone credit assessment of ca

The senior unsecured and deposit ratings are on review for downgrade. No outlook is currently assigned to the E BFSR, short term deposit ratings and subordinated ratings.

Egnatia Finance plc (the funding subsidiary of Cyprus Popular Bank):

- Senior unsecured debt rating: Downgraded to (P)Caa3, on review for downgrade, from (P) Caa2, negative outlook

- Subordinated debt rating: Affirmed at (P)C

The senior unsecured debt ratings are on review for downgrade. No outlook is currently assigned to the subordinated debt ratings.

++++++

Hellenic Bank Public Company Ltd:

- Deposit ratings: Downgraded to Caa3 on review for downgrade, from Caa2 negative outlook

- Short-term deposit and commercial paper ratings: Affirmed at Not Prime

- Standalone Bank Financial Strength Rating: Affirmed at E, now mapping to a standalone credit assessment of ca from caa3

The deposit ratings are on review for downgrade. No outlook is currently assigned to the E BFSR, short term deposit and commercial paper ratings.

The principal methodology used in these ratings was Moody's Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Melina Skouridou
Analyst
Financial Institutions Group
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

Yves J Lemay
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
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 Cypriot banks' deposit and senior debt ratings to Caa3 from Caa2; on review for downgrade
No Related Data.

 

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