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Rating Action:

Moody's downgrades three Cypriot banks and concludes review

14 Mar 2012

Limassol, March 14, 2012 -- Moody's Investors Service has today downgraded the ratings of three Cypriot banks:

-- Bank of Cyprus Public Co Ltd (BoC): deposit and debt ratings downgraded by two notches to B1 with a negative outlook from Ba2 and standalone credit assessment downgraded to B2 from Ba3.

-- Marfin Popular Bank Public Co Ltd (Marfin): deposit and debt ratings downgraded by one notch to B3 with a developing outlook from B2 and standalone credit assessment to Caa1 from B3.

-- Hellenic Bank Public Company Ltd (Hellenic): deposit and debt ratings downgraded by one notch to Ba3 with a negative outlook from Ba2 and standalone credit assessment to B1 from Ba3.

Today's rating actions conclude the review for downgrade initiated by Moody's on 8 November 2011. A full list of affected ratings is provided at the end of this press release.

The downgrades reflect, to differing degrees, the combined pressures on the banks' standalone credit profiles from the following factors:

1. The crystallisation of losses on banks' holdings of Greek government bonds (GGBs) after Greece's debt exchange, requiring an increase in the banks' capital to bring their core Tier 1 ratios back up to the domestic regulatory minimum level of 8% and to cover the shortfall indicated by the 9% stress test target of the European Banking Authority (EBA).

2. An acceleration in problem loan formation in 2011 and Moody's expectation of continued severe asset-quality pressure from the weak operating environments in Cyprus and Greece, Cypriot banks' two main markets, leading to higher loan loss provisions.

3. The weakening funding and liquidity positions, which are the result of deposit outflows which in turn have triggered an increased reliance on central bank funding for some banks.

4. Moody's expectation that declining business volumes will pressure pre-provision profitability, thereby weakening internal loss-absorption capacity.

Today's action also removes systemic support from the subordinated and junior subordinated debt instruments of the affected Cypriot banks, in line with actions already taken on some other European banks.

RATINGS RATIONALE

- BANK OF CYPRUS (BoC)

The two-notch downgrade of BoC's standalone credit assessment, which underpins the downgrade of the bank's debt and deposit ratings, reflects the following drivers:

1. The primary driver of the rating action on BoC is the crystallisation of large losses on the bank's GGB holdings, which have materially reduced capitalisation levels. Following a 60% impairment in the nominal values of GGBs, as indicated by its preliminary 2011 financial results, which is below the 70% expected net present value loss, BoC's core Tier 1 ratio, excluding its Convertible Enhanced Capital Securities (CECS), fell to 5.1% (below the 8% regulatory minimum) in December 2011, compared to 8.4% in December 2010.

Moody's acknowledges the bank's intention to execute a capital-strengthening plan, which includes a capital increase of EUR397 million and the voluntary conversion of EUR600 million of CECS aimed at increasing core Tier 1 to 9.1%. In addition the bank is also in the process of implementing deleveraging measures as demonstrated by the sale of their Australian subsidiary. However, Moody's recognises the challenges related to the implementation of the capital-strengthening plan and believes that the ongoing pressure on the bank's capital position is commensurate with the risk profile of a B2 standalone rating. Moody's notes that the bank's remaining exposure to GGBs is still material -- with a book value of 44% of Tier 1 capital, as of December 2011-- leaving BoC's capital position exposed to potential future losses beyond the current debt exchange. Moody's believes that the risk of another Greek sovereign default, even after the debt exchange, will remain high.

2. Another key driver of BoC's downgrade is the recent acceleration in the formation of problem loans and Moody's expectation that these pressures will continue to build over the near to medium term. While the acceleration of problem loans formation is signalled by an increase in reported non-performing loans (NPLs) to 10.2% of gross loans in December 2011, from 8.2% in June 2011, Moody's notes that these reported ratios do not capture delinquent loans that are fully covered by tangible collateral. As Moody's remains concerned about the timeliness of the recoverability of collateral in the current market, and given that such loans accounted for an additional 5% of gross loans in 2010, Moody's estimates that problem loan levels may be over 15%, as of December 2011. Furthermore, BoC has reported that the provisioning coverage of problem loans has declined to 51% from 55% a year earlier and Moody's notes that, against a backdrop of dropping collateral values, the bank does not maintain on balance sheet provisions for delinquent loans that are full covered by tangible collateral. As of December 2010, coverage including such loans had been around 33%, leaving the bank's capital more vulnerable to losses.

In addition, given that 35% of BoC's lending is related to Greece, Moody's expects asset-quality pressures from this segment of the loan book to continue to mount and weaken the bank's balance sheet in the coming years. As the Greek economy enters its fifth consecutive year of contraction in 2012, and unemployment continues to surpass 20%, the rating agency expects Greek repayment capacity to deteriorate further. Moody's also expects that overall asset-quality pressures will be compounded by the weakening Cypriot economy (51% of BoC's loan book), with real GDP for Cyprus forecast to contract by 1% in 2012.

3. The third driver of the downgrade of BoC's standalone credit assessment to B2 is the bank's weakening liquidity and funding position, owing primarily to deposit outflows. During 2011, deposit outflows from Greek branches and foreign-owned corporate entities accounts amounted to approximately 7% of total deposits, thereby reducing the bank's liquidity cushion, with liquid assets (defined as cash, bank placements and investments) declining to 21.6% of total assets at December 2011 from 30.4% at December 2010. Whilst the bank has limited market funding, Moody's expects further pressures stemming from additional withdrawals of deposits sourced in Greece, which currently account for 26% of total deposits. In Moody's opinion, deposits from foreign-owned corporate entities sourced in Cyprus, which account for 27% of total deposits, are also vulnerable to shifts in market sentiment. Accordingly, the rating agency recognises that BoC's use of funding from the European Central Bank (ECB), which increased to 5% of assets in December 2011 from 3% in September 2011, may rise further in coming quarters.

4. The fourth rating driver for BoC is Moody's expectation that declining pre-provision profitability will dampen the bank's internal loss-absorption capacity. Despite recent gains in pre-provision income, as indicated in the bank's preliminary 2011 results, Moody's expects that lower business volumes, due to deleveraging and a weakening domestic operating environment, will exert downward pressure on pre-provision profitability and lower internal loss-absorption capacity.

- Systemic support embedded in debt and deposit ratings

BoC's debt and deposit ratings continue to benefit from one notch of uplift, reflecting Moody's view of the balance between (i) the constrained domestic capacity of the Cypriot government to provide support to the banking system, if needed, and (ii) the additional resources that could potentially be made available to Cyprus in the context of its membership in the European Monetary Union.

- Negative outlook

The negative outlook on BoC's ratings primarily reflects the challenging operating environments in Greece and Cyprus and related downside risks for asset quality and profitability.

- What could move the ratings up/down

A rating upgrade is unlikely in the medium term, unless there is a material improvement in the operating environments in Cyprus and Greece.

Moody's would consider downgrading BoC's standalone rating further in the event of (i) an acceleration in asset-quality deterioration beyond the rating agency's current expectations; (ii) a crystallisation of further losses from GGB holdings that would weaken the bank's capital position; or (iii) an acceleration of deposit outflows that would make the bank increasingly reliant on central bank funding.

- MARFIN POPULAR BANK

The one-notch downgrade of Marfin Popular Bank's standalone credit assessment, which underpins the downgrade of the bank's debt and deposit ratings, was driven by the following factors:

1. The primary driver of the rating action on Marfin is the recent erosion of its capital base. As a result of EUR1.1 billion in loan impairments, following a due diligence on its loan book, and the crystallisation of EUR1.9 billion in losses on the bank's GGBs, Moody's estimates that the bank's core Tier 1 ratio was depleted in December 2011, from 8.2% in September 2011.

Moody acknowledges the bank's intention to execute a capital-strengthening plan, which includes a capital increase of up to EUR1.8 billion, an exchange of current securities into instruments that are core Tier 1 capital and substantial deleveraging aimed at increasing core Tier 1 to 9%. However, Moody's believes that this plan faces challenges and that the extent of the current reduction in capital levels is more closely aligned with the risk profile of a Caa1 standalone rating. Furthermore, Moody's also acknowledges that the bank's remaining exposures to GGBs -- with a book value of 137% of Tier 1 capital (estimated by Moody's), as of December 2011-- are also much larger than its domestic peers, leaving Marfin's capital position particularly exposed to potential future GGB-related losses beyond the current debt exchange.

2. The downgrade of Marfin also takes into account the recent acceleration in the formation of problem loans and Moody's expectation that asset quality pressures will remain over the near to medium term. The acceleration of problem loan formation is illustrated by an increase in reported non-performing loans (NPLs) to 13.9% of gross loans in December 2011, from 8.4% in June 2011. Nevertheless, Moody's also highlights that these reported ratios do not capture delinquent loans that are fully covered by tangible collateral. Accordingly, as Moody's remains concerned about the timeliness of recoverability in the current market, and given that such loans accounted for an additional 3% of gross loans in 2010, Moody's estimates that problem loan levels may be over 17% as of December 2011.

Furthermore, with 42% of Marfin's lending related to Greece, Moody's expects asset-quality pressures from this segment of the loan book to continue to mount and weigh heavily on the bank's balance sheet in the coming years. As the Greek economy enters its fifth consecutive year of contraction in 2012, and unemployment continues to surpass 20%, Moody's expects Greece's repayment capacity to deteriorate further. Moody's also expects that overall asset-quality pressures will be compounded by the weakening Cypriot economy (43% of Marfin's loan book), with real GDP for Cyprus forecast to contract by 1% in 2012.

Although provisioning coverage of problem loans as reported by the bank increased to 51.9% from 50.5% a year earlier, Moody's notes that these figures do not account for delinquent loans that are fully covered by tangible collateral. As of December 2010, coverage including such loans had been around 34%, leaving the bank's capital vulnerable to losses from such loans.

3. The downgrade of the standalone credit assessment to Caa1 also captures the magnitude of Marfin's deteriorating liquidity and funding position, owing to sizable deposit outflows. During 2011, deposit outflows from its Greek branches, foreign-owned corporate accounts and Cyprus branches amounted to approximately 21% of total deposits. This deterioration has led to Marfin being significantly reliant on central bank funding, which Moody's does not expect to diminish in the short term.

- Systemic support embedded in debt and deposit ratings

Marfin's debt and deposit ratings continue to benefit from one notch of uplift, reflecting Moody's view of the balance between (i) the constrained domestic capacity of the Cypriot government to provide support to the banking system, if needed, and (ii) the additional resources that could potentially be made available to Cyprus in the context of its membership in the European Monetary Union.

Developing outlook

The developing outlook on the bank's ratings primarily reflects the uncertainty regarding its capital and funding position.

- What could move the ratings up/down

Marfin's ratings could be upgraded following (i) a successful recapitalisation that would restore the bank's solvency, and (ii) a material reduction in central bank funding.

Moody's would consider further downgrading Marfin's standalone rating in the event of (i) a failure to successfully implement its recapitalisation plan; (ii) further material asset-quality deterioration, resulting in losses that would further erode the bank's capital position; (iiii) further impairments in the bank's GGB holdings, resulting in losses that would further erode the bank's capital position; or (iv) continued deposit outflows.

- HELLENIC BANK

The one-notch downgrade of Hellenic's standalone credit assessment, which underpins the downgrade of the bank's debt and deposit ratings, was driven by the following factors:

1. The primary driver of the rating action on Hellenic is the recent increase in its problem loans, which is compounding legacy asset-quality issues, and Moody's expectation that problem loans will continue to build over the near to medium term. Non-performing loans (NPLs) reported by the bank increased to 13.2% of gross loans in December 2011, from 9.8% in December 2010; however, Moody's notes that these reported ratios do not capture delinquent loans that are fully covered by tangible collateral. As Moody's remains concerned about the timeliness of collateral recoverability in the current market, and given that such loans accounted for an additional 8% of gross loans in 2010, the rating agency estimates that problem loan levels may be over 21% as of December 2011. While the bank reports that provisioning coverage of problem loans stood at 68%, from 73% a year earlier, Moody's points out that these figures do not account for delinquent loans that are fully covered by tangible collateral. As of December 2010, coverage including such loans had been around 49%, leaving the bank's capital vulnerable to losses from such loans.

Furthermore, Moody's expects that asset-quality pressures stemming from the weakening Cypriot operating environment, which accounts for the bulk of Hellenic's loan book, and from the depth of the Greek economic crisis (which accounts for 17%) will continue to contribute to further problem loan formation. This view is based on (i) mounting economic pressures in Cyprus, with real GDP for Cyprus forecast to contract by 1% in 2012; and (ii) further deterioration in the repayment capacity of Greek borrowers, with Greece's economy entering its fifth consecutive year of contraction in 2012.

2. The second driver of Hellenic's downgrade is the impact of the crystallisation of losses on Hellenic's GGB holdings, albeit at lower levels than has been recorded by other rated Cypriot banks. Following a 70% impairment charge on the nominal value of GGBs, as indicated in the bank's preliminary 2011 financial results, Hellenic's Tier 1 ratio decreased to 10% in December 2011, from 12% in December 2010 (core Tier 1 data is not publically available). Moreover, as Hellenic's remaining GGB exposures are now relatively small -- with a book value of EUR35 million (8% of reported equity), as of December 2011 -- the bank remains less exposed to potential future losses, beyond the current debt exchange, compared to domestic peers.

3. The positioning of Hellenic's standalone rating above those of its domestic peers also takes into account its stronger liquidity position. Hellenic has maintained a relatively high level of liquid assets, with cash, bank placements and debt investments amounting to 36.4% of total assets in December 2011 and no central bank funding.

Nevertheless, and despite stable and growing balances in 2011, Moody's continues to highlight risks related to the bank's high reliance on deposits from foreign-owned corporate entities sourced in Cyprus. This exposes Hellenic to potential negative shifts in market confidence and the risk of deposit outflows.

- Systemic support embedded in debt and deposit ratings

Hellenic's debt and deposit ratings continue to benefit from one notch of uplift, reflecting Moody's view of the balance between (i) the constrained domestic capacity of the Cypriot government to provide support to the banking system, if needed; and (ii) the additional resources that could potentially be made available to Cyprus in the context of its membership in the European Monetary Union.

- Negative outlook

The negative outlook on the bank's ratings primarily reflects the challenging operating environments in Greece and Cyprus and related downside risks for asset quality and profitability.

- What could move the ratings up/down

A rating upgrade is unlikely in the medium term, unless there is a material improvement in the operating environments in Cyprus and Greece.

Moody's would consider further downgrading Hellenic's standalone credit assessment in the event of (i) an acceleration in asset-quality deterioration beyond current expectations, and/or (ii) material deposit outflows that would result in reliance on central bank funding.

- Assignment of deposit ratings for Hellenic's Greek branches

Moody's is today also assigning a deposit rating of B1, with a negative outlook, to the Greek branches of Hellenic bank to capture the still low, but rising, possibility of currency redenomination and the deposit freeze that such an event would probably entail. The current ratings of the other two Cypriot-rated banks are at or below B1 -- levels that sufficiently capture these specific risks.

SUBORDINATED AND JUNIOR SUBORDINATED DEBT RATINGS

As part of today's rating action on these three Cypriot banks, Moody's has also removed systemic support from their subordinated and junior subordinated debt instruments. This action was prompted by the rating agency's concerns that systemic support in Europe may not be extended to these types of instruments in case of financial distress. Subordinated debt is typically recognised in banks' capital structure as Tier 2 capital, and Moody's expects domestic authorities to make greater use of their resolution tools to allow burden-sharing with subordinated bondholders.

Subordinated debt is now rated one notch lower than a bank's standalone ratings, while any undated junior subordinated debt is now rated two notches below the standalone rating.

Today's downgrade follows similar removals of systemic support from subordinated debt instruments in Denmark, the UK, Ireland and Germany.

FULL LIST OF CHANGES TO THE RATINGS OF CYPRIOT BANKS:

Bank of Cyprus Public Co Ltd:

- Deposit and senior debt ratings downgraded to B1/Not-Prime from Ba2/Not-Prime

- Subordinated debt ratings downgraded to (P)B3 from (P)Ba3

- Junior subordinated notes rating downgraded to (P)Caa1 from (P)B1

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

- All ratings have a negative outlook, except the E+ BFSR which has a stable outlook.

Marfin Popular Bank Public Co Ltd:

- Deposit and senior debt ratings downgraded to B3/Not-Prime from B2/Not-Prime

- Subordinated debt rating downgraded to Caa2 from B3

- Standalone BFSR downgraded to E (mapping to Caa1 on the long-term rating scale) from E+, mapping to B3

- All long-term debt and deposit ratings deposits, and the E BFSR, have a developing outlook

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

- Senior unsecured debt ratings downgraded to (P)B3 from (P)B2

- Subordinated debt ratings downgraded to (P)Caa2 from (P)B3

- All ratings have a developing outlook

Hellenic Bank Public Co Ltd:

- Deposit ratings downgraded to Ba3/Not-Prime from Ba2/Not-Prime

- Greek branch ratings of B1/NP assigned

- Standalone BFSR downgraded to E+ (mapping to B1 on the long-term rating scale) from D-, mapping to Ba3

- All ratings carry a negative outlook, except the E+ BFSR which has a stable outlook.

The methodologies used in these ratings 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. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Other Factors used in these ratings are described in Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt published in November 2009.

As of December 2011, Bank of Cyprus had total assets of EUR37.8 billion, Marfin Popular Bank EUR34.0 billion and Hellenic Bank EUR8.3 billion. All three banks are headquartered in Nicosia, Cyprus.

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 ratings have been disclosed to the rated entities or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, parties not 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 entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings 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 entities or their related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

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.

Melina Skouridou, CFA
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 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 three Cypriot banks and concludes review
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.

Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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