MOODY’S Investors Service yesterday placed on review for possible downgrade the deposit and debt ratings of Bank of Cyprus Marfin Popular and Hellenic Bank.
Moody’s said the rating action reflected concerns over the growing pressure on the banks’ financial performance that stems from their sizeable exposures to Greece through their branches and subsidiaries.
“The rating action also incorporates some concerns about the still elevated credit-related risks from the banks’ domestic and other international operations, despite some signs of improvement in operating conditions recently,” Moody’s said.
During the review, the rating agency plans to focus on three areas. One will be the extent to which the banks’ exposures to Greece — primarily in the form of SME and retail loans – will cause a material rise in the banks’ non-performing assets and, as a result, weaken profitability and potentially lead to an erosion of their capital base.
It will also focus on the strength of the banks’ liquidity position and the capacity to withstand potential liquidity pressures that might arise from current financial market developments in Europe.
Thirdly Moody’s will look at the likely performance of the banks’ domestic loan portfolio by reviewing the sustainability and strength of the recovery of the Cyprus economy and the local property market
“Moody’s initial assessment is that the pressure on Cypriot banks will come primarily from the impact on the banks’ asset quality through a higher estimated loss content on their Greek portfolio, leading to increased provisioning requirements that will impact profitability,” a statement said.
Although, Cypriot banks have adequate capital buffers, the size of their exposure and the outlook for the Greek economy is likely to lead to an erosion of their profitability and possibly their capital base, lowering their capacity to absorb any additional unexpected credit-related events, it added.
It also said at the same time, recent indicators pointed to a stable deposit base and favourable liquidity positions in all three banks.
“Moody’s also notes that, despite concerns regarding pressure on their profitability, the deposit and debt ratings of the three banks continue to benefit from the country’s willingness to support its banking system in case of need,” it concluded.
