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Rating Action:

Moody's downgrades Marfin Popular Bank to Baa3/P-3/D-; outlook negative (Cyprus)

Global Credit Research - 02 Mar 2011

Limassol, March 02, 2011 -- Moody's Investors Service has today downgraded the deposit and debt ratings, as well as the standalone bank financial strength rating (BFSR) of Marfin Popular Bank Public Co Ltd (MPB) to Baa3/Prime-3/D- from Baa2/Prime-2/D+. The outlook on the ratings is negative. Today's rating action concludes the review for possible downgrade, which Moody's initiated on 13 January 2011.

The key drivers for today's rating action 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 MPB's debt and deposit ratings to Baa3/Prime-3 from Baa2/ Prime-2 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 MPB, 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. The realignment of the SSI with the government's rating reflects the government's reduced capacity and size of the 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 MPB benefit from a three-notch rating uplift from their stand-alone ratings due to systemic support considerations.

STANDALONE BFSR

The standalone BFSR of MPB has been downgraded to D- (mapping into a baseline credit assessment of Ba3) from D+ in order to capture the bank's tighter liquidity and funding position, as well as the rating agency's expectations of a further deterioration in the bank's asset quality.

Moody's notes that MPB has a higher reliance on ECB financing than its domestic peers (17% of consolidated assets), which in conjunction with its lower ECB-eligible assets (due to stricter ECB collateral policies), makes the bank more susceptible to any additional event-risk related to its investment portfolio or a weakening in its funding profile. In addition, erosion of market confidence, over the last years, has curtailed access to the wholesale/bond markets for its Greek subsidiary Marfin Egnatia Bank ('MEB', expected to be merged into MPB at end-March 2011). Although Moody's acknowledges the bank's high overall liquidity ratios and its ability to reduce ECB financing if required, this would have a negative impact on both its profitability and capital adequacy ratios. A reduction in ECB financing would require the sale of investments and the realisation of mark-to-market losses on instruments that are being held at amortised cost. Liquidity concerns are partly mitigated by the bank's growing deposit-funded profile in Cyprus (with a 7% growth in group deposits despite deposit outflows in Greece) and moderate market funding needs over the next two years.

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.

NEGATIVE OUTLOOK

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.

The following ratings were downgraded with a negative outlook:

- Deposit and senior debt ratings to Baa3/Prime-3 from Baa2/Prime-2;

- Subordinated debt rating to Ba1 from Baa3;

- Standalone BFSR to D- (mapping to a baseline credit assessment of Ba3) from D+;

The previous rating action on MPB'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 previous rating actions on the standalone BFSR was implemented on 5 July 2010, when Moody's downgraded the bank's BFSR, deposit and debt ratings and assigned a negative outlook.

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, Marfin Popular Bank 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 Marfin Popular Bank to Baa3/P-3/D-; outlook negative (Cyprus)
No Related Data.

 

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