Fitch Ratings has affirmed Bank of Cyprus's (BOC) Long-term Rating at A-, its Short-term Rating at F2 and its Individual and Support ratings at C/D and 2, respectively. The Outlook for the Long-term Rating remains Stable.
BOC's ratings reflect its position as the island's largest bank and its importance to the domestic economy, but they also take into account its poor profitability and weak asset quality. In affirming its ratings, Fitch has recognized the progress made by the bank to address its problems, but notes it will need to strengthen its financial condition to avoid pressure on its ratings.
BOC results in 2002 were dominated by heavy loan loss provisions and rising staff costs, which absorbed almost all its revenues. Personnel wages in Cyprus are indexed to a cost of living adjustment, which creates earnings pressure during a cyclical downturn when revenue generation slows. It also has a large funding shortfall in its defined benefit company pension scheme, estimated to be €90 million at end-2002, which will need to be funded by additional contributions for the next 20 years.
The bank's other significant weakness is its large stock of non-performing loans, which represented a hefty 8.4 percent of total lending at end-March 2003. BOC's weak asset quality partly reflects the economic slowdown but also the lengthy legal process for realizing collateral in Cyprus and the bank's policy of not writing off loans until all recovery efforts have been exhausted.
Nevertheless, revenue generation is improving in Cyprus, as the bank has used its leading market position to carry out a complete revision of rates for both loans and deposits, and productivity is improving gradually as smaller branches are being merged, the number of clerks is being reduced and back office employees are transferred across the group. The bank has reduced its sensitivity to a fall in interest rates. Its equity risk has declined and the bank is also starting to tackle its asset quality problems by strengthening loan loss reserves, taking a tougher line with its clients and by prizing profitability above gaining market share.
Fitch Ratings' Support and Individual Ratings for Banks Fitch's Individual ratings assess how a bank would be viewed if it were entirely independent and could not rely on external support. Its Support ratings deal with the question of whether a bank would receive support from its owners or from the state if it were to get into difficulty. These ratings are not debt ratings but rather, respectively, an assessment of the intrinsic strength of a bank and of any level of outside support that may, or may not, be available to it. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
