TEXT-Fitch takes negative rating actions on Cypriot banks

Mon May 21, 2012 11:52am EDT

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(The following statement was released by the rating agency)	
    May 21 - Fitch Ratings has placed Bank of Cyprus (BOC), Cyprus Popular Bank
(CPB) and Hellenic Bank's (HB) Long-term Issuer Default Ratings (IDRs) and
Support Rating Floors (SRFs) of 'BB+' and Support Ratings of '3' on Rating Watch
Negative (RWN). At the same time, the agency has downgraded BOC's and HB's
Viability Rating (VR) to 'b-' from 'bb-' and CPB's to 'f' from 	
'b-'. A full list of rating actions is at the end of this comment.	
	
The RWNs reflect the fact that Cypriot banks remain highly sensitive to 	
heightened risks in Greece, in particular if Greece was unable to sustain its 	
membership of Economic and Monetary Union (see "Fitch Takes Negative Rating 	
Actions on Greece" dated 17 May 2012 on www.fitchratings.com).	
	
In the event that the new general elections scheduled for 17 June fail to 	
produce a government with a mandate to continue with the EU-IMF programme of 	
fiscal austerity and structural reform, an exit of Greece from EMU would be 	
probable and this would likely result in widespread default on private sector as	
well as sovereign euro-denominated obligations. 	
	
While the propensity of the Cypriot government to support Cypriot banks remains 	
unchanged, its ability would largely depend by the scale of the problems derived	
from Cypriot banks' Greek operations. 	
	
CPB is the most exposed to Greek loans (49% of gross loans at end-2011; 	
including international shipping loans booked in Greece), followed by BOC (34% 	
at end-March 2012) and HB (17% at end-2011). Exposure to Greek government debt 	
has substantially declined after impairments in 2011 and ranges between EUR35m 	
at HB and around EUR350m at CPB. 	
	
The downgrade of BOC's and HB's VR reflects their capital needs due to large 	
losses in 2011 as a result of impairments on their Greek sovereign debt 	
exposures and a deterioration of their credit risk profiles. Fitch also notes 	
that further loan deterioration in 2012, particularly on the Greek loan 	
portfolio, could add to capital needs. The RWN on their VRs reflects their 	
sensitivity to developments in Greece, asset quality deterioration and adverse 	
confidence shifts. 	
	
BOC and HB were in breach of Central Bank of Cyprus' minimum 8% core capital 	
requirement at end-2011. BOC's core capital ratio was 6.8% (including EUR592m 	
capital raised in Q112) and HB's was 7.1%. BOC is under greater pressure as it 	
also has to meet EBA's 9% core capital requirement by end-June 2012. However, 	
the two banks have capital strengthening plans under way.	
	
Fitch also considers in BOC's VR its leading domestic franchise in Cyprus, sound	
funding structure (gross loans/deposits ratio of 98% at end-Q112) and tangible 	
results in improving capital during Q112. HB's VR is supported by its 	
comparatively lower exposure to Greece and good funding profile (gross 	
loans/deposits ratio of 77% at end-2011), although it has reliance on 	
non-resident deposits. 	
	
The downgrade of CPB's VR to 'f' from 'b-' reflects the bank's failure in 	
absence of timely external support. Fitch will maintain CPB's VR at 'f' for a 	
short period of time, until capital is restored, which is likely to be primarily	
sourced from the Cypriot government. However, Fitch anticipates that the VR 	
will, at best, remain at a deeply sub-investment grade rating level to reflect 	
the numerous challenges the bank is faced with and its substantial weak credit 	
fundamentals. 	
	
The ratings actions are as follows:	
	
BOC	
Long-term IDR at 'BB+'; placed on RWN	
Short-term IDR affirmed at 'B'	
Viability Rating downgraded to 'b-' from 'bb-'; placed on RWN	
Support Rating at '3'; placed at RWN	
Support Rating Floor at 'BB+'; placed at RWN	
Senior notes at 'BB+'; placed at RWN	
Commercial Paper affirmed at 'B'	
	
CPB	
Long-term IDR at 'BB+'; placed on RWN	
Short-term IDR affirmed at 'B'	
Viability Rating downgraded to 'f' from 'b-'	
Support Rating at '3'; placed at RWN	
Support Rating Floor at 'BB+'; placed at RWN	
Senior notes at 'BB+'; placed at RWN	
	
HB	
Long-term IDR at 'BB+'; placed on RWN	
Short-term IDR affirmed at 'B'	
Viability Rating downgraded to 'b-' from 'bb-'; placed on RWN	
Support Rating at '3'; placed at RWN	
Support Rating Floor at 'BB+'; placed at RWN	
	
 (Caryn Trokie, New York Ratings Unit)
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