Fitch upgrades the two largest Cypriot banks amid improved economic environment

Fitch Ratings has announced significant upgrades for the two largest Cypriot banks, Bank of Cyprus and Hellenic Bank, underscoring the improving economic situation in Cyprus and the positive outlook for both institutions.

Fitch Ratings upgraded Hellenic Bank's Long-Term Issuer Default Rating (IDR) from 'BB-' to 'BB+', along with an upgrade of its Viability Rating (VR) from 'bb-' to 'bb+'. The outlook for Hellenic Bank's Long-Term IDR is now Stable.

This upgrade reflects several positive factors that have contributed to a more favourable assessment of the Cypriot operating environment and the continuous improvement of Hellenic Bank's credit profile. Cyprus' operating environment is expected to benefit from sustained domestic economic growth, improving fundamentals within the banking sector, and a reduction in private sector indebtedness, although it remains slightly above average.

The upgrade also acknowledges Hellenic Bank's enhanced capitalization, a reduced inventory of legacy problem assets, structurally improved profitability, and a strong deposit franchise, which has resulted in a large base of low-cost deposits.

Key drivers behind this upgrade include Hellenic Bank's robust competitive position as the second-largest bank in the small Cypriot market, its stable deposit-based funding, and strong liquidity. Additionally, the bank's profitability prospects have improved in a higher interest rate environment, its regulatory capital ratios are above average, and its asset quality metrics are manageable.

At the same time Fitch Ratings upgraded Bank of Cyprus by raising its Long-Term Issuer Default Rating (IDR) from 'B+' to 'BB', with a Viability Rating (VR) increase from 'b+' to 'bb'. The outlook for Bank of Cyprus's Long-Term IDR is Positive.

Similar to Hellenic Bank, the upgrade is driven by a more favourable evaluation of the Cypriot operating environment.

The upgrade also reflects BoC's strengthened capitalisation, reduced stock of legacy problem assets, structurally improved profitability, and strong deposit franchise, which translates into a large low-cost deposit base.

The Positive Outlook reflects the agency’s expectation that BoC will continue to strengthen its capitalisation, helped by higher profitability, and gradually reduce its stock of legacy problem assets, ultimately resulting in a further decline of capital encumbrance by net problem assets.

Key drivers behind this upgrade reflect BoC’s strong competitive position as the largest domestic bank in the small Cypriot market and continued progress with deleveraging legacy problem assets. They also reflect structurally improved profitability prospects in the higher interest rate environment and reduced capital encumbrance from net problem assets.

(Source: CNA)