Moody’s ups rating on BOCY

Moody’s Investors Service, the credit rating agency has changed Bank of Cyprus’ (BOCY) outlook to positive from stable for the Baa1 foreign currency long-term deposit rating and D+ financial strength rating (FSR). Moody’s also changed BOCY’s outlook to positive from stable, for its Baa1 foreign currency senior debt and Baa2 foreign currency subordinated debt ratings. At the same time, Moody’s affirmed the Prime-2 for both foreign currency short-term deposits and for commercial paper.

According to Moody’s, this rating action reflects the ongoing enhancement of BOCY’s financial fundamentals over recent quarters. BOCY has witnessed a significant improvement in its financial metrics, arising from management’s actions to restore the bank’s financial condition. Asset quality improved significantly during 2006 as a result of: (i) the higher problem loan recoveries and write-offs, (ii) the reduction in the inflow of new problem loans, and (iii) the loan portfolio growth, the bank’s ratio of NPLs to gross loans declined to 6.6% in 9M06 (from 8.6% in 1Q06), while the provisioning coverage for problem loans increased to 60% in 9M06 (from 50% in FY05).

Moody’s cautions that BOCY’s main indicators are weaker than those of similarly-rated banks in Europe, while the current regulatory requirement of not classifying overdue loans irrespective of performance, in the case that they are fully covered by tangible collateral, continues to qualify these ratios.

Moody’s notes that the Bank’s economic capital position has recovered significantly, supported by enhanced provisioning coverage for problem loans and a sharp reduction in uncovered pension liabilities. Moody’s also feels that a higher level of equity position would be more appropriate given the Bank’s overseas expansion plans, through branches in Greece and in light of future plans in Russia and Romania.

The positive outlook is also based on BOC’s positive franchise dynamics, characterised by a dominant position in its domicile market and an increasingly valuable franchise in Greece. A more focused strategy in its domestic operations, coupled with better execution, is yielding market share gains in the retail lending business at the expense of the country’s credit cooperatives, reinforcing an already dominant, largely unthreatened market position. The overall franchise is complemented by the growing operations in Greece. Furthermore, the ongoing maturing of a relatively young branch network is expected to lead to greater business volumes and better operational efficiencies that could boost the group’s profitability