FITCH RATINGS, the international rating agency, yesterday downgraded Bank of Cyprus’ (BOC) long-term rating to ‘A-‘ from ‘A’, together with its short-term rating, to ‘F2’ from ‘F1’, and its Individual rating to ‘C/D’ from ‘C’.
BOC’s support rating was affirmed at ‘2’. The long-term, short-term and individual ratings have been removed from Rating Watch Negative and a Stable Outlook is in place, Fitch’s statement said.
A statement from Bank of Cyprus said the group does not expect negative consequences as a result of Fitch’s decision to downgrade its rating.
“The Bank of Cyprus Group’s revised A- and F2 ratings are still the highest among Greek and Cypriot banks that have recently been rated by Fitch,” the announcement said. “The outlook on both the long and short-term ratings is stable. It is noted that due to the international economic slowdown, the credit ratings of a lot of banks and financial institutions have recently been downgraded.”
The rating action reflects concerns over BOC’s high costs, its asset quality
indicators and loan loss reserve coverage levels as well as uncertainty
regarding the economic outlook.
Fitch expects BOC to report reduced net income in 2002 due to a combination of the economic slowdown in Cyprus, further falls in the domestic stock market, and a narrowing of margins following the interest rate cuts in 2001.
Loan loss provisions are also likely to rise, as the bank looks to strengthen its weak loan loss reserve coverage of non-performing loans. At end-June 2002, BOC’s gross non-performing loans represented a substantial 7.3 per cent of total lending as reported to the Central Bank of Cyprus.
“BOC’s Cypriot operations are heavily unionised and wages are indexed to a cost of living adjustment, which, together with the costs of expanding in Greece, creates pressure for the bank to maintain strong revenue growth,” Fitch said.
“BOC is confident it can achieve future revenue growth targets by expanding its loan book and increasing mark-up spreads and thus its net interest margin. It also intends to boost productivity by upgrading its IT systems, transferring staff within the group and implementing a hiring freeze in Cyprus. However, because tourism and financial services are the main drivers of its economic growth the Cypriot economy is sensitive to external factors and it is therefore likely that BOC’s profitability will continue to be subdued in 2003.”
This would make it more difficult for the bank to build up its loan loss reserve coverage, which is substantially lower than international best practice, despite the collateral backing, Fitch added.
It said that BOC’s Greek operations had performed well to date and,
despite bearing the additional costs of several new branch openings, was
expected to contribute around a third of the group’s pre-provision operating
profit in 2002.
“The bank has sound risk management controls in place, although
Fitch notes that the young loan portfolio in Greece has yet to be tested in an
economic downturn,” it said.
“The fall in the Cyprus Stock Exchange following its peak in late 1999 has
caused BOC’s fee income to stagnate, resulting in realised and unrealised losses on its securities portfolio. The bank also has a large shortfall in its defined benefit company pension scheme of EUR60m at end-June 2002, the cost of which Fitch understands will be spread over 20 years. BOC has some sensitivity to a fall in interest.”
ends
The Cyprus Mail is the only English-language daily newspaper published in Cyprus. It was established in 1945 and today, with its popular and widely-read website, the Cyprus Mail is among the most trusted news sites in Cyprus. The newspaper is not affiliated with any political parties and has always striven to maintain its independence. Over the past 70-plus years, the Cyprus Mail, with a small dedicated team, has covered momentous events in Cyprus’ modern history, chronicling the last gasps of British colonial rule, Cyprus’ truncated independence, the coup and Turkish invasion, and the decades of negotiations to stitch the divided island back together, plus a myriad of scandals, murders, and human interests stories that capture the island and its -people. Observers describe it as politically conservative.
