Moody’s upgrades Bank of Cyprus’ long-term deposit ratings to Baa1

Moody’s Ratings announced on Thursday that it has upgraded the Bank of Cyprus’ long-term deposit ratings to Baa1 from Baa3, changing the outlook to stable from positive.

According to the agency, this upgrade reflects the ongoing improvements in the bank’s solvency profile and the increased protection for depositors following the issuance of senior unsecured debt.

The upgraded ratings include the Baseline Credit Assessment (BCA) and Adjusted BCA, now ba1 from ba2, long- and short-term deposit ratings to Baa1/P-2 from Baa3/P-3, and long-term Counterparty Risk Assessment to Baa1(cr) from Baa2(cr).

Moreover, the long-term Counterparty Risk Ratings were also upgraded to Baa1 from Baa2, along with the long-term senior unsecured and junior senior unsecured Medium-Term Note (MTN) programme ratings to (P)Ba1 from (P)Ba2, and the long-term local-currency senior unsecured debt rating to Ba1 from Ba2.

Moody’s said that the Bank of Cyprus’ long-term senior unsecured MTN programme ratings were upgraded to (P)Ba1 from (P)Ba2, and its long-term subordinated MTN programme ratings to (P)Ba2 from (P)Ba3.

Additionally, the long-term local-currency subordinated debt rating was raised to Ba2 from Ba3, and the long-term local-currency Preferred Stock Non-cumulative rating to B1 (hyb) from B2 (hyb).

“The rating action captures the ongoing improvements in Bank of Cyprus’ solvency profile in conjunction with the increased protection afforded to the bank’s depositors, following its recent issuance of senior unsecured debt,” Moody’s stated.

Specifically, the bank has strengthened its capital adequacy metrics over the last few quarters. As of March 2024, the Bank of Cyprus reported a high regulatory CET1 capital ratio of 17.1 per cent, up from 15.6 per cent in June 2023.

Moody’s expects the bank’s capital to continue increasing, supported by improved internal capital generation, while risks to capital are gradually receding as legacy asset quality issues are addressed.

The agency also highlighted the bank’s significant profitability improvements due to higher interest rates, with a reported net income to tangible assets of 2.1 per cent during the first quarter of 2024.

“Although profitability will drop from recent highs as interest rates decline to a more normalised level, we expect the bank to maintain solid bottom-line profitability of over 1 per cent of assets supported by its cost-cutting and ongoing digital transformation initiatives,” Moody’s stated.

The rating action also acknowledges the bank’s recent €300 million senior unsecured green bond issuance in the second quarter of 2024, which has increased depositor protection.

Incorporating this issuance and the bank’s upcoming maturities and planned refinancing over the next three years, Moody’s forward-looking LGF analysis now indicates an extremely low loss-given-failure for junior depositors, resulting in a three-notch uplift from its Adjusted BCA, up from a two-notch uplift previously.

What is more, the stable outlook on the long-term deposit and senior unsecured ratings balances potential further asset quality improvements against lower normalised profitability metrics, a broadly stable operating environment, and stable funding, liquidity, and capital metrics.

The agency also stated that it also incorporates the bank’s upcoming maturities and planned refinancing.

Moody’s further explained that factors which could lead to an upgrade of the bank’s deposit ratings include improvements in the domestic operating environment, further reductions in residual asset quality risks, and successful ongoing digital transformation initiatives that significantly diversify the bank’s franchise and earnings.

Conversely, a downgrade could occur if the operating environment weakens, asset quality improvements reverse, or profitability metrics weaken beyond similarly rated peers.