All three rated Cypriot banks on review for downgrade
Limassol, June 12, 2012 -- Moody's Investors Service has today taken actions on three Cypriot
banks to reflect the increased risk of a Greek exit from the euro area.
Moody's says that the banks' extensive operations in Greece
render their capital positions vulnerable to such an event.
Moody's has taken the following rating actions:
- Bank of Cyprus (BoC): The deposit and senior unsecured
debt ratings were downgraded by one notch to B2 from B1, and the
standalone credit assessment lowered to b3 from b2 (within the E+
bank financial strength rating). The bank's ratings were
placed on review for downgrade.
-Hellenic Bank Ltd (Hellenic): The deposit ratings were downgraded
by one notch to B1 from Ba3 and the standalone credit assessment lowered
to b2 from b1 (within the E+ BFSR range). The bank's
ratings were placed on review for downgrade.
-Cyprus Popular Bank (CPB): The bank's B3 senior unsecured
debt and deposit ratings were placed on review for downgrade. Moody's
will also re-assess the bank's standalone credit assessment
of caa1 (mapped from its E BFSR) during the review period.
A full list of affected ratings is provided at the end of the press release.
RATINGS RATIONALE
Today's actions on the Cypriot banks primarily reflect Moody's
view, as expressed on 1 June 2012, of the increased risk of
Greece exiting the euro area. Although a Greek exit is not Moody's
central scenario, the rating agency says that it considers the risk
of a euro exit by Greece as substantial and recognises that the probability
of such an outcome may increase further following the Greek parliamentary
elections on 17 June. For further information please see Moody's
special comment, entitled 'Greek Country Ceiling Reflects
Heightened Risk of Euro Area Exit -- Implications for Greek Domiciled
Ratings', published 1 June 2012.
The rated Cypriot banks maintain extensive branch operations in Greece,
with exposures to Greek borrowers amounting to 42% of net loans
for CPB, to 34% of gross loans for BoC, and 17%
of gross loans for Hellenic. As such, their capital positions
remain susceptible to the direct and indirect consequences of a Greek
exit. The heightened risk of a euro exit could lead to an acceleration
in deposit outflows from Cypriot banks' Greek branches, pressuring
liquidity, whilst a euro area exit -- triggering currency
redenomination, a likely sovereign default and widespread economic
stresses -- would materially weaken the banks' solvency.
Today's downgrades incorporate the impact of the increased risk
of a Greek exit in the Cypriot banks' ratings and reflect,
on a relative basis, BoC's sizable and Hellenic's moderate
exposures to the Greek operating environment. CPB's ratings
incorporate the severe solvency and liquidity risks that the bank faces.
RISK OF A GREEK EXIT FROM THE EURO AREA
Over the last 15 months, aggregate deposit outflows from rated Cypriot
banks' Greek branches amounted to 27%, roughly in line
with the decline in the Greek banking system's deposits.
As a result of the outflows, Moody's notes that the banks'
Greek operations are increasingly funded by the Cypriot banks' headquarters.
The increased risk of a euro exit by Greece augments the potential for
an acceleration in deposit outflows that would erode the banks'
liquidity cushions and expose the banks' capital to sizable losses
in the event of an exit. In an exit scenario, the banks'
already weakened capital buffers would be further eroded by (i) the redenomination/devaluation
loss on the difference between banks' Greek assets and Greek liabilities
(the 'funding gap'); (ii) losses on the banks'
holdings of post debt-exchange Greek government bonds (GGBs) from
a likely sovereign default; and (iii) the accelerated provisioning
needs generated by a sharp deterioration in asset quality.
Impact of the funding gap
As of March 2012, the funding gap from the banks' branch operations
in Greece amounted to 125% of CPB's core Tier 1 capital --
pro forma figures for core Tier 1, incorporating the EUR1.8
billion capital increase that the government of Cyprus has fully underwritten
-- 67% of BoC's core Tier 1 capital--excluding
the bank's Convertible Enhanced Capital Securities (CECS)--
and 21% of Hellenic's. The corresponding loss from
redenomination/devaluation in an exit scenario would be significant,
leading to reductions in the banks' capital positions.
Impact on the banks' GGB holdings
An exit would also result in losses on the banks' holdings of post
debt-exchange Greek government debt. As of March,
these securities accounted for 19% of CPB's pro forma core
Tier 1, 15% of BoC's and 2% of Hellenic's.
Impact on asset quality
The acute dislocations in the real economy in Greece following an exit,
including a potential standstill in the Greek payment system, would
likely accelerate losses on the banks' Greek loan books.
In addition, the negative knock-on effects for the Cypriot
operating environment would also lead to deterioration in Cypriot loan
books beyond Moody's current expectations.
CYPRUS POPULAR BANK (CPB)
CBP has the largest exposure to the Greek operating environment and the
weakest liquidity position amongst the rated Cypriot banks. However,
Moody's notes that the bank's stand-alone ratings incorporate
the severe solvency and liquidity risks that the bank faces, which
are partially mitigated by the government's commitment to restore
the bank's solvency.
SYSTEMIC SUPPORT EMBEDDED IN DEBT AND DEPOSIT RATINGS
The three rated Cypriot banks' debt and deposit ratings all 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.
FACTORS TO BE CONSIDERED DURING THE REVIEW
The review will primarily focus on developments in Greece and how these
developments may translate into heightened risks for Cypriot banks'
solvency and liquidity, as well as contingency measures that the
banks and the government of Cyprus are considering to mitigate these risks.
The political situation in Greece remains very fluid and Moody's
considers that following the Greek parliamentary elections on 17 June,
the risk of euro exit by Greece may increase further.
As part of the review, Moody's will also assess the implementation
of the banks' current recapitalisation plans and efforts by the
government to seek external funding from the euro area to provide capital
support to the banking sector.
WHAT COULD MOVE THE RATINGS DOWN/UP
An increase in the likelihood of an exit by Greece from the euro area
would exert downward pressure on the ratings of the three banks.
Mounting asset-quality deterioration or rapidly deteriorating funding
and liquidity positions would also exert downward pressure on the ratings.
Lack of credible contingency plans to inject capital into the banking
system would also exert downward pressure on the ratings.
As indicated by the review for downgrade, upward rating pressure
is unlikely in the near term unless the operating environments in the
banks' key markets of Cyprus and Greece improve materially or their
capital bases are strengthened materially to levels sufficient to withstand
a potential Greek exit.
LIST OF AFFECTED RATINGS
Bank of Cyprus Public Co Ltd:
- Deposit and senior unsecured debt ratings downgraded to B2/Not-Prime
from B1/Not-Prime
- Subordinated debt rating downgraded to (P)Caa1 from (P)B3
- Junior subordinated notes rating downgraded to (P)Caa2 from (P)Caa1
- Standalone BFSR affirmed at E+ (now mapping to b3 from b2)
- All ratings are on review for downgrade
Cyprus Popular Bank Public Co Ltd:
- B3/Not-Prime deposit and senior unsecured debt ratings
are placed on review for downgrade
- Subordinated debt rating is affirmed at Ca with developing outlook
- Standalone BFSR affirmed at E/caa1; No outlook is assigned
on the E BFSR
Egnatia Finance plc (the funding subsidiary of Cyprus Popular Bank):
- Senior unsecured debt ratings of (P)B3 are placed on review for
downgrade
- Subordinated debt rating of (P)Ca is affirmed with developing
outlook
Hellenic Bank Public Co Ltd:
- Deposit ratings downgraded to B1/Not-Prime from Ba3/Not-Prime
- Greek branch ratings downgraded to Caa2/Not-Prime from
B1/Not-Prime
- Standalone BFSR affirmed at E+ (now mapping to b2 from b1)
- Caa2 Greek branch deposit ratings carry a negative outlook;
All ratings except the Not Prime short term ratings are on review for
downgrade
The methodologies used in these ratings were Bank Financial Strength Ratings:
Global Methodology published in February 2007, and Incorporation
of Joint-Default Analysis into Moody's Bank Ratings:
Global Methodology published in March 2012. Please see the Credit
Policy page on www.moodys.com for a copy of these methodologies..
As of March 2012, Bank of Cyprus had total assets of EUR38.6
billion, Cyprus Popular Bank EUR31.8 billion and Hellenic
Bank EUR8.6 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 their 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, 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 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 two Cypriot banks
