Rating Agency Standard and Poor’s revised Bank of Cyprus’, the country’s largest lender outlook to positive from stable, following a new NPL transaction titled “Helix 3” which would reduce the banks non-performing loans ratio to single digits, for the first time since the 2013 financial crisis.
The agency also affirmed its `B+/B` long- and short-term issuer credit ratings on the bank.
“We expect the bank`s NPE ratio will be about 9% following the transaction, materially below 25% as of year-end 2020, showing that BoC is close to completing its balance-sheet clean up from the previous financial crisis” S&P said in a press release issued on Thursday.
The agency added that the outlook revision “primarily reflects our view that BoC`s risk profile should materially improve as a result of the announced sale of problem assets” that would reduce its NPL rate to 9% of total loans.
“At this level, BoC will be better positioned to cope with potential increases in NPEs stemming from the COVID-19 pandemic, in our view,” S&P added, noting that their base case “reflects our expectation that the pressure on asset quality would be moderate, with its NPE ratio only growing to about 11%-13%.”
Furthermore, the agency said the positive outlooks on BoC and its non-operating holding company, Bank of Cyprus Holdings, “reflect our view that we could raise the long-term issuer credit rating over the next 12 months if the improvement in BoC`s risk profile is sustainable.”
“This could happen if the impact of knock-on effects of the pandemic remains manageable, and the overall NPE ratio remains broadly in line with the bank`s international peers`,” S&P said, noting that an upgrade would also depend on the bank`s ability to improve its underlying profitability prospects.
Nevertheless, the agency noted that BoC`s low profitability prospects remain a “rating weakness.”
“Although its multi-year restructuring and digitalization plan should continue supporting some cost reduction, the bank`s ability to sustainably improve its efficiency and bottom-line profitability to levels closer to higher-rated peers` will likely remain under pressure,” S&P added, noting that it expects “the bank`s cost-to-income ratio will hover at about 68% in the next 12-18 months, compared with our expectation of 50% for its peers.”