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Rating Action:

Moody's downgrades ratings of Marfin and Bank of Cyprus; confirms ratings of Hellenic Bank

28 Jul 2011

Limassol, July 28, 2011 -- Moody's Investors Service has today downgraded the deposit and debt ratings of Marfin Popular Bank Public Co Ltd (MPB) to Ba2/Not Prime, from Baa3/Prime-3, and Bank of Cyprus Public Co Ltd (BoC) to Ba1/Not Prime from Baa2/Prime-2.

At the same time, Moody's confirmed the deposit and debt ratings of Hellenic Bank Public Co Ltd (Hellenic) at Ba1.

The outlook on the ratings of all three banks is negative.

Today's rating actions conclude the review for possible downgrade Moody's initiated on 13 May 2011. The full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

The main factors driving the rating actions are:

1. High exposures to Greek government bonds (GGBs), amounting to approximately 95% of Tier 1 capital for MPB and 55% for BoC. These exposures will subject the banks to economic losses and reductions in capitalisation levels under the terms of the current Greek sovereign-debt exchange, albeit to different degrees. With GGB holdings equivalent to 17% of Tier 1 capital, Hellenic is less exposed than its rated peers.

2. Significant lending exposure to the Greek private sector, which will also likely cause a further rise in the banks' non-performing assets and, as a result, weaken profitability.

3. Challenges to sustain their current funding and liquidity profiles in the context of high levels of uncertainty in the region.

The rating actions also factor in the reduced capacity of the Government of Cyprus to extend systemic support to the banking system, reflected in the recent downgrade of Cyprus to Baa1, from A2, counterbalanced by the EU announcement last week indicating that the European Financial Stability Facility (EFSF) is able to finance bank recapitalisations via loans to governments in non-programme countries.

CAPACITY TO ABSORB LOSSES ON GREEK GOVERNMENT EXPOSURES

The primary driver underpinning the rating actions is the high level of direct GGB exposures. In Moody's view, all rated Cypriot banks are likely to take part in the current Greek debt exchange. Accordingly, despite recent measures to increase shock absorption capacity, evidenced by increases in aggregate Tier 1 ratios to around 12.0% in 2011 from 7.8% in 2008, and plans to further increase capital levels in the second half of 2011, these GGB exposures render capital levels vulnerable to material reductions.

The debt exchange recently proposed by the Institute of International Finance (IIF) calculates that instruments will be priced to generate a 21% net present value (NPV) loss, based on a 9% discount rate. As this discount rate is below market rates, Moody's believes that losses will likely be greater when a higher discount rate is applied to future interest and debt repayments.

Although the debt exchange would have a material impact on the tier 1 ratios of MPB, and BoC to a lesser extent, our primary concern is that their ability to deal with any further deterioration in operating conditions under a stress scenario is now weakened. Specifically, Moody's recognises that the risk of further potential losses on Greek sovereign debt holdings beyond the current debt exchange cannot be ruled out. Looking further ahead, the EU programme and proposed debt exchanges will increase the likelihood that Greece will be able to stabilise and eventually reduce its overall debt burden. However, Greece will still face significant solvency challenges: its debt burden will remain in excess of 100% of GDP for many years and it will still face very significant implementation risks to its fiscal and economic reforms. Historical experience shows that small sovereign restructurings have often been followed by larger defaults.

LENDING EXPOSURE TO THE GREEK PRIVATE SECTOR

In conjunction with direct exposures to the Greek government, high lending exposure to the Greek private sector will also likely cause a further rise in the banks' non-performing assets and, as a result, weaken their profitability. Currently, lending to the Greek private sector accounts for an estimated 46% of gross loans at MPB and 35% at BoC. With private sector lending equivalent to 18% of gross loans, Hellenic is less exposed than its rated peers.

We expect credit conditions in Greece to deteriorate, exerting further pressure on the asset quality of banks' Greek portfolios. These developments will likely lead to higher loan loss provisions and lower profitability, with operations in Greece reporting losses on aggregate for the three rated banks.

FUNDING AND LIQUIDITY CHALLENGES

The challenge of sustaining current funding profiles, in the context of higher levels of uncertainty in the region, is the third driver behind the rating actions. Despite experiencing deposit inflows since the Greek crisis began, Cypriot banks' relatively high reliance on deposits from foreign corporate entities -- accounting for around one third of total deposits for the three rated banks -- exposes these banks to potential negative shifts in market confidence and the risk of deposit outflows. Additionally, whilst the market's initial reaction to the Greek plan was positive, Moody's is concerned that a market destabilising event stemming from Greece could disturb market confidence in Cyprus. This remains a key short-term risk for Cypriot banks.

Moreover, although Moody's assesses the Cypriot banks' capacity to absorb deposit withdrawals as moderate to high, given that regulatory requirements require high liquidity reserve requirements against foreign currency deposits, deposit outflows could still trigger a disruptive deleveraging process that would have negative implications for the economy and the banking system.

HELLENIC RATINGS CONFIRMED

Today's confirmation of Hellenic Bank's Ba1 deposit ratings is based on Moody's view that this rating level sufficiently captures the current credit risks stemming from the bank's comparatively smaller exposure to Greece. Hellenic's GGB holdings amount to 17% of Tier 1, while lending to the Greek private sector amounts to roughly 18% of gross loans.

NEGATIVE OUTLOOK

The negative outlook on the banks' ratings reflects the high level of uncertainty surrounding credit developments in Greece and the impact this could have on the banks' overall credit risk.

The negative outlook also reflects the weak operating conditions in Cyprus. On 11 July 2011, as a result of an accidental discharge of stored explosives at a Cypriot naval base, the largest power station in Cyprus was severely damaged. This has caused ongoing power supply issues, leading Moody's to reduce its forecasts for Cyprus' economic growth to 0% in 2011 and 1% in 2012. We expect this weaker economic activity to weigh on banks' asset quality and performance.

SYSTEMIC SUPPORT CONSIDERATIONS

The rating actions also take into account the recent reduced capacity of the Government of Cyprus to extend systemic support to the banking system, as reflected in the recent downgrade of Cyprus to Baa1, from A2, counterbalanced by the EU announcement last week that the European Financial Stability Facility (EFSF) will be permitted to finance bank recapitalisations via loans to governments in non-programme countries.

THE SPECIFIC RATINGS CHANGES OF TODAY ARE AS FOLLOWS:

Marfin Popular Bank Public Co Ltd:

- Deposit and senior debt ratings of Ba2/Not Prime, from Baa3/P-3;

- Subordinated debt rating of Ba3, from Ba1;

- Standalone BFSR of E+ (mapping to B2 on the long-term rating scale), from D-/Ba3;

- The outlook on all the bank's ratings is negative.

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

- Senior unsecured debt ratings of (P) Ba2, from (P) Baa3;

- Subordinated debt ratings of (P) Ba3, from (P) Ba1;

- The outlook on all the bank's ratings is negative.

Bank of Cyprus Public Co Ltd:

- Deposit and senior debt ratings of Ba1/NP, from Baa2/ P-2;

- Subordinated debt rating of (P) Ba2, from (P) Baa3;

- Junior subordinated notes rating of (P) B1 (hyp), from (P) Ba2 (hyp);

- Standalone BFSR of D- (mapping to Ba3 on the long-term rating scale), from D+/ Ba1;

- The outlook on all the bank's ratings is negative.

Hellenic Bank Public Co Ltd

- Deposit and senior debt ratings confirmed at Ba1;

- Standalone BFSR confirmed at D- (mapping to Ba3 on the long-term rating scale);

- The outlook on all the bank's ratings is negative.

MOODY'S METHODOLOGIES

The principal methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Nicosia, Cyprus, Marfin Popular Bank Public Company Ltd reported total consolidated assets of EUR40.5 billion as of March 2011.

Headquartered in Nicosia, Cyprus, Bank of Cyprus Public Co Ltd reported total consolidated assets of EUR41.7 billion as of March 2011.

Headquartered in Nicosia, Cyprus, Hellenic Bank Public Co Ltd reported total consolidated assets of EUR8.3 billion as of March 2011.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

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

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

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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.

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 on our website www.moodys.com for further information.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

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

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 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.

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 ratings of Marfin and Bank of Cyprus; confirms ratings of Hellenic Bank
No Related Data.
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