TEXT-Fitch cuts Cyprus banks following sovereign downgrade
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
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