Fitch downgrades Cypriot banks

Fitch downgraded BOC, MPB and HB’s long-term IDRs and SRFs to ‘BB+’ from ‘BBB-‘ and their short-term IDRs to ‘B’ from ‘F3’ and removed them from Rating Watch Negative.

These actions were the direct consequence of Cyprus’ sovereign downgrade last week to a notch shy of junk, as well as Fitch’s reassessment of the potential support available to the banks, the agency said.

Fitch said that while the Cypriot government’s propensity to support banks remains unchanged, its ability to do so has been reduced as reflected in the downgrade of Cyprus’ rating.

The Negative Outlook on the banks’ long-term IDRs indicates that any further downgrade of Cyprus’ sovereign rating and/or any change that reduced the likelihood of international support could lead to a further downgrade of the banks’ long-term IDRs and SRFs.

Fitch said its rating actions indicate its capital concerns, notably Marfin’s, due to the banks’ sizeable exposure to the Greek sovereign debt, and economy.

The additional one notch cut on Marfin’s VR reflects its poor liquidity and funding imbalance as shown in its large reliance on central bank funding.

Cypriot banks have varying degrees of sovereign debt and loan exposures to Greece, with Marfin having the largest.

The Bank of Cyprus and Marfin have submitted capital raising plans to the Central Bank of Cyprus to meet higher regulatory requirements by end-June 2012.

While these plans focus on raising capital by private means and should mainly help absorb impairments on their Greek government bonds exposures, Fitch said that doing so in the current operating environment would prove “challenging.”