Capital Intelligence (CI), the international credit rating agency situated in Limassol, has raised the Bank of Cyprus' (BoC) Financial Strength Rating (FSR) to 'B-' (from 'C+') to reflect the greatly improved capital position.
Despite this upward revision, an official statement cautions that, nonetheless – as is the case with other European banks – capital adequacy is still subject to some uncertainty until the results of the European Central Bank (ECB) stress tests are released in late October.
The revised FSR is described as capturing the rebound in operating and net profit, as well as good progress in the implementation of the Bank’s restructuring programme, though remains constrained by the very weak asset quality and very tight liquidity.
“Although expected to continue to reduce following the latest capital increase of EUR1 billion and sale of non-core assets, BoC’s dependence on Eurosystem funding remains high,” CI notes, adding that downside risks to the economic and sovereign risk outlook for Cyprus also weigh heavily on the FSR.
CI also affirmed the support rating at ‘4’ (in view of the Bank’s improved financial condition), the Long-Term Foreign Currency Rating (FCR) at ‘B-‘ (from ‘C+’), and the Short-Term FCR at ‘B’ (from ‘C’) reflecting the significant injection of liquidity due to the capital increase.
The agency notes: “The ratings are premised on the base case scenario of the Republic of Cyprus continuing to meet its fiscal targets and other commitments with the Troika (international lenders). Sustained compliance remains a crucial ingredient of banking system stability in Cyprus, particularly in view of the objective of relaxing external capital controls by year end.”
BoC maintains estimated market shares of deposits and loans of 25.5% and 39.5%, respectively. On July 30, 2013, the Bank had exited resolution following a deposit for equity conversion which re-established its capital base, the absorption of assets and liabilities of Laiki Bank and the sale of its operations in Greece. Since then, the branch network in Cyprus has been reduced by 36% to 130, and personnel numbers by 24%, with staff costs reduced by 35%.