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Rating Action:

Moody's downgrades three Cypriot banks to Caa2; outlook negative

14 Jan 2013

Actions triggered by the downgrade of Cyprus's government bond rating and conclude review

Limassol, January 14, 2013 -- Moody's Investors Service has today downgraded the senior unsecured debt and deposit ratings of three Cypriot banks to Caa2 and lowered the standalone credit assessments of two of those banks, Hellenic Bank Public Company Ltd to caa3 from caa2 and Cyprus Popular Bank Public Co Ltd to ca from caa3. The outlook on the banks' senior debt and deposit ratings is negative.

These rating actions are triggered by the downgrade of Cyprus's government bond rating to Caa3 (please refer to Moody's press release "Moody's downgrades Cyprus's government bond ratings to Caa3 from B3; negative outlook " published on 10 January 2013) and they reflect (1) uncertainty regarding the timing and conditions of a finalised Memorandum of Understanding (MoU) between the Cypriot government and the International Monetary Fund, the European Union and the European Central Bank to finance bank recapitalisations; (2) heightened risk of sovereign default, which could jeopardise the effectiveness of bank recapitalisations once the external support programme is in place; and (3) the associated impact of increased sovereign credit risk on banks' standalone credit profiles, given the banks' sizable portfolios of government securities.

The three affected banks are:

--Cyprus Popular Bank Public Co Ltd (CPB): Senior unsecured debt and deposit ratings downgraded to Caa2 from Caa1; standalone credit assessment lowered to ca from caa3, within the E standalone bank financial strength rating (BFSR) category.

--Hellenic Bank Public Company Ltd (Hellenic): Deposit ratings downgraded to Caa2 from B3; standalone credit assessment lowered to caa3 from caa2, within the E standalone BFSR category.

--Bank of Cyprus Public Company Limited (BoC): Senior unsecured debt and deposit ratings downgraded to Caa2 from Caa1; standalone credit assessment of caa3 remains unchanged within the E BFSR category.

These rating actions conclude the review for downgrade initiated on 19 November 2012. A full list of the banks' ratings can be found at the end of this press release.

RATING RATIONALE

--- INCREASED UNCERTAINTY OF SUPPORT AND INCREASED SOVEREIGN DEFAULT RISK

The downgrade of the three banks' senior debt and deposit ratings to Caa2 reflects uncertainty regarding the finalisation and terms of a MoU with the International Monetary Fund, the European Union and the European Central Bank, also collectively known as the Troika, to finance bank recapitalisations. Moody's believes that the current agreement in principle between Cyprus and the Troika on a MoU represents significant progress, however, the rating agency notes (1) that the finalisation of an agreement and disbursement of funds that will finance bank recapitalisations have been delayed and (2) that the terms targeting the banking system remain uncertain. Moreover, Moody's also notes that the risk of sovereign default has risen, which could jeopardise the effectiveness of bank recapitalisations once the external support programme is in place. For these reasons, the rating agency has lowered the assumptions of external support it imputes in Cypriot banks' ratings, aligning the senior unsecured debt and deposit ratings of the three systemically important banks at Caa2.

---EXPOSURE TO CYPRIOT GOVERNMENT SECURITIES ALSO INCREASE STANDALONE BANK RISK

The lowering of the standalone credit assessments of two of the three rated banks was primarily triggered by the increase in sovereign credit risk, given the banks' sizable portfolios of government securities.

CYPRUS POPULAR BANK

The lowering of CPB's standalone credit assessment to ca from caa3 reflects Moody's views of the higher vulnerability of CPB's capital position. While Moody's notes that its estimated recapitalisation needs for all three rated banks have grown, owing to the recent acceleration in asset-quality deterioration and the weakening of sovereign creditworthiness, Moody's views the vulnerability of CPB's capital position as more acute than those of its domestic peers. This reflects (1) CPB's weaker asset quality, owing to its higher exposure to Greek borrowers (accounting for 44% of net loans, including shipping loans booked in Greece); and (2) the more pronounced impact of weakening sovereign credit risk, given CPB's large exposure to Cyprus government bonds, which Moody's estimates at 282% of its core Tier 1 (including EUR1.8 billion in Cyprus government bonds received in June 2012 as government capital support).

HELLENIC BANK

The lowering of Hellenic Bank's standalone credit assessment to caa3 from caa2, primarily reflects the impact of the weakening credit profile of the Cypriot government, given Hellenic's sizable holdings of government securities. According to the bank's financial statements, investments in Cyprus government bonds accounted for 78% of Hellenic's proforma core Tier 1 as of September 2012 (including capital raised after the 30th of September), closely linking Hellenic's credit-risk profile to that of the government of Cyprus.

BANK OF CYPRUS

The standalone credit assessment for BoC remains unchanged at caa3, reflecting Moody's view that this assessment (in line with the government of Cyprus's bond rating of Caa3) continues to capture BoC's current balance-sheet risks and recapitalisation needs.

WHAT COULD MOVE THE RATINGS DOWN/UP

Asset-quality pressures beyond those currently envisaged leading to further material increases to the three banks' recapitalisation needs would exert downwards pressure on the ratings.

Upwards pressure could develop over time, following (1) the restructuring and/or removal of non-performing assets from the banks' balance sheets; and (2) significant strengthening of the banks' capital buffers.

LIST OF AFFECTED RATINGS

Bank of Cyprus Public Company Limited:

- Deposit and senior unsecured debt ratings: Downgraded to Caa2, with negative outlook, from Caa1 on review for downgrade

-Short term deposit and commercial paper ratings: Not Prime unaffected

- Subordinated debt rating: (P)C unaffected

- Junior subordinated notes rating: (P)C unaffected

- Standalone BFSR: E equivalent to caa3 unaffected

No outlook is currently assigned to the BFSR, subordinated and junior subordinated debt ratings.

++++++

Cyprus Popular Bank Public Co Ltd:

- Deposit and senior unsecured debt ratings: Downgraded to Caa2, with negative outlook, from Caa1 on review for downgrade

-Short term deposit ratings: Not Prime, unaffected

- Subordinated debt rating: C, unaffected

- Standalone BFSR: E equivalent to ca from E/caa3

No outlook is currently assigned to the BFSR and subordinated debt ratings.

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

- Senior unsecured debt rating: Downgraded to (P)Caa2, with negative outlook, from (P)Caa1 on review for downgrade

- Subordinated debt rating: (P)C unaffected

No outlook is currently assigned to the subordinated debt ratings.

++++++

Hellenic Bank Public Company Ltd:

- Deposit ratings: Downgraded to Caa2 with negative outlook from B3 on review for downgrade

- Short-term deposit and commercial paper ratings: Not Prime, unaffected

- Standalone bank financial strength rating (BFSR): E equivalent to caa3 from E/caa2

No outlook is currently assigned to the BFSR.

Principal Methodology

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 three Cypriot banks to Caa2; outlook negative
No Related Data.
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