Fitch Ratings has upgraded Cyprus Popular Bank’s (CPB) Viability
Rating (VR) to ‘cc’ from ‘f’ following the completion of the government
recapitalisation. CPB’s support-driven Issuer Default Ratings are
unaffected.
Fitch has upgraded CPB’s VR as a result of the partial restoration of its
capital base through a EUR1.8bn capital injection by the Cypriot government,
which has now become the major shareholder with 84% stake.
However, CPB’s Q112 pro-forma core capital ratio, adjusted for capital actions
completed by 30 June 2012 (including the state capital injection) remains
temporarily below the 9% minimum required by the European Banking Authority
(EBA) at 7.9% as per Fitch’s estimates. As a result, CPB will need further
capital injections. These are likely to come from international authorities.
The EBA stated on 11 July that it has received reassurance that Cypriot banks
will comply with the EBA Recommendation as a result of the government’s decision
to request the support of the EFSF. The EBA also notes that it is possible that
additional capital needs will be required after assessment by the relevant EU
authorities and the IMF in the framework of the assistance programme.
Despite CPB’s improved capitalisation, in Fitch’s view, the VR continues to
reflect capital needs and sensitivity to developments in Greece and to the
economic downturn in Cyprus, which could lead to further asset quality and
profitability pressures. The latter would ultimately increase pressure on its
capital. Also, the continued closure of wholesale markets for funding is likely
to make a reduction in central bank funding difficult.
CPB remains highly exposed to the economic downturn in Greece. Greek loans
represented 49% of end-Q112 gross loans (including international shipping loans
booked in Greece), while the carrying value of Greek government bonds stood at
EUR360m at this date.
Sustained high loan impairments charges led to operating losses in Q112. It will
prove challenging for CPB to return to profit in 2012 due to continued asset
quality deterioration and subdued business activity.
The bank is also constrained by the closure of wholesale markets for funding,
meaning it is unable to reduce its very high reliance on central bank funding
(about 25% of total assets at end-Q112). More positively, group deposits have
remained stable since end-2011. However, these will need to increase or loans to
decline to balance its relatively high loans/deposits ratio of 131% at end-Q112.
CPB’s larger than domestic peers’ exposure to Greek risks and increasing loan
quality concerns in Cyprus are likely to result in asset quality deterioration.
The bank’s impaired loan ratio worsened to 16% at end-Q112 from 13.9% at
end-2011.
The ratings actions are as follows:
CPB
Long-term IDR: unaffected at ‘BB’; Outlook Negative
Short-term IDR: unaffected at ‘B’
Viability Rating: upgraded to ‘cc’ from ‘f’
Support Rating: unaffected at ‘3’;
Support Rating Floor: unaffected at ‘BB’
Senior notes: unaffected at ‘BB’
