TEXT-Fitch cuts Cyprus banks following sovereign downgrade

Thu Jan 31, 2013 11:10am EST

Jan 31 - Fitch Ratings has downgraded Bank of Cyprus' (BOC), Cyprus
Popular Bank's (CPB) and Hellenic Bank's (HB) Long-term
Issuer Default Ratings (IDRS) and Support Rating Floors (SRFS) to 'B' from 'BB-'
and Support Ratings to '4' from '3' following the downgrade of Cyprus' sovereign
rating (see "Fitch Downgrades Cyprus to 'B'; Outlook Negative" dated 25 January
2013 at www.fitchratings.com). The Outlooks on the banks' Long-term IDRs are
Negative in line with that of the sovereign. Fitch has affirmed all three banks'
Short-term IDRs at 'B'.

The three banks' Viability Ratings (VR), which are at very low levels primarily
due to asset quality-driven capitalisation concerns (for more detail see 'Fitch
Downgrades Cypriot Banks Following Sovereign Downgrade' dated 23 November 2012
at www.fitchratings.com.), are unaffected by the sovereign rating action.

In line with Fitch's criteria, Recovery Ratings (RR) have been assigned to
banks' senior debt issues. The RR on senior notes is 'RR4'. A full list of
rating actions is provided at the end of this comment.

SENSITIVITIES/RATING DRIVERS - IDRs, SENIOR DEBT, SUPPORT RATINGS AND SRFs
The downgrade of BOC, CPB and HB's Long-term IDRs, which remain at their SRFs,
and of their senior debt and Support Ratings is a consequence of the downgrade
of Cyprus' sovereign rating. The sovereign downgrade indicates a weakening of
the sovereign's ability to provide extraordinary support to its banks.

In the near term, lingering uncertainty exists over the timing and details of an
official financing programme for Cyprus, including in respect of banking sector
support/recapitalisation costs. However, Fitch expects such a programme will be
agreed before 3 June and that it will provide financing for the recapitalisation
of the banking system. This recapitalisation cost could be up to EUR10bn,
although Fitch anticipates that this figure may include a degree of headroom.
Fitch will re-assess the major Cypriot banks' VRs, including in relation to the
current level of their IDRs, after recapitalisation.

Fitch currently considers sovereign and bank risks as being closely
interconnected in Cyprus. A lack of progress in negotiations with Troika would
put the receipt of a support programme to address Cypriot banks'
recapitalisation needs at risk.

Fitch incorporates in its assessment of support propensity for the three rated
Cypriot banks i) their systemic importance in the domestic economy; ii) the
limited amount of bail-inable senior debt compared to potential recapitalisation
needs; and iii) the precedent of support for senior bank creditors in other
Eurozone bank bail-outs during this crisis. Fitch does not rate any of the
banks' junior liabilities.

The Negative Outlooks indicate that any further downgrade of Cyprus's sovereign
rating would be likely to lead to a further downgrade of the banks' Long-term
IDRs, senior debt ratings and SRFs. In addition, any development that reduced
the likelihood of international support for bank senior creditors would be
likely to lead to a further downgrade of these ratings.

Fitch revised upwards potential losses and capital needs for the three largest
Cypriot banks by stressing further some of the variables. In addition to the
EUR1.8bn injection into CPB by the government in July 2012, Fitch assesses that
the three major Cypriot banks are likely to need further capital injections of
at least EUR4.8bn under a base case scenario (which requires a Fitch Core
Capital (FCC) ratio of 9%) and EUR6.6bn in the adverse case (which requires a
FCC of 6%). These amounts are, however, within the EUR10bn capital backstop
facility, leaving some buffer to support the cooperative banks. Fitch
acknowledges that its estimates are subject to considerable uncertainty and are
sensitive to changes in assumptions.

SENSITIVITIES/RATING DRIVERS - RECOVERY RATINGS

A 'RR4' has been assigned to BOC's and CPB's senior debt issues, which reflects
average recovery prospects. RRs are sensitive to various factors, most
importantly valuation and availability of free assets and the mix of unsecured
and secured liabilities.

The ratings actions are as follows:

BOC
Long-term IDR downgraded to 'B' from 'BB-'; Negative Outlook
Short-term IDR affirmed at 'B'
Viability Rating unaffected at 'c'
Support Rating downgraded to '4' from '3'
Support Rating Floor revised to 'B' from 'BB-'
Senior notes downgraded to 'B'/RR4 from 'BB-'
Commercial paper affirmed at 'B'

CPB
Long-term IDR downgraded to 'B' from 'BB-'; Negative Outlook
Short-term IDR affirmed at 'B'
Viability Rating unaffected at 'c'
Support Rating downgraded to '4' from '3'
Support Rating Floor revised to 'B' from 'BB-'
Senior notes downgraded to 'B'/RR4 from 'BB-'

HB
Long-term IDR downgraded to 'B' from 'BB-'; Negative Outlook
Short-term IDR affirmed at 'B'
Viability Rating unaffected at 'cc'
Support Rating downgraded to '4' from '3'
Support Rating Floor revised to 'B' from 'BB-'

The rating impact, if any, from the above rating actions on the banks' covered
bonds will be detailed in a separate comment.


Additional information is available at www.fitchratings.com.

The ratings above were solicited by, or on behalf of, the issuer, and therefore,
Fitch has been compensated for the provision of the ratings.

Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 15
August 2012, Recovery Ratings for Financial Institutions, dated 15 August 2012
and 'Evaluating Corporate Governance', dated 12 December 2012 are available at
www.fitchratings.com.

Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
Recovery Ratings for Financial Institutions
Evaluating Corporate Governance
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.