Fitch Ratings, the international rating agency has placed Bank of Cyprus's (BOC) long-term rating of A, its short-term rating of F1 and its Individual rating of C on Rating Watch Negative. At the same time, the bank's Support rating remains unchanged at 2.
The rating action reflects concerns over BOC's high costs, its asset quality indicators and an uncertain economic outlook. They also take into account its position as Cyprus's leading bank as well as its efforts to increase the diversity of its income by expanding in Greece.
Fitch expects BOC to report a low level of net income in 2002, as result of interest rate cuts, the economic downturn and a weak domestic stock market. Cyprus recorded a substantial decline in tourist arrivals in 2002, undermining the strength of its economy and causing non-performing loans to pick up.
By end-June 2002 BOC's gross non-performing loans represented 7.3 percent of total lending. While all the major Cypriot banks have large stocks of impaired loans due to the lengthy legal process for realizing pledged security, Fitch considers that the level of loan loss reserves covering BOC's non-performing loans could be insufficient.
In terms of its cost base, the bank's Cypriot operations are heavily unionized and wages are indexed to a cost of living adjustment, creating pressure for BOC to maintain strong revenue growth in a more difficult economic environment. It intends to offset this trend by boosting productivity through modernizing its IT systems, transferring staff within the group and implementing a hiring freeze.
In Greece, the bank is funding an expansion program aimed at increasing and diversifying revenues. Its Greek operations have performed well to date and, despite bearing the additional costs of several new branch openings, are expected to contribute around a third of the group's pre-provision operating profit in 2002. Fitch notes that the loan portfolio in Greece has yet to be observed through the cycle.
Following its peak in late 1999, the Cyprus Stock Exchange has fallen dramatically, causing BOC's fee income to stagnate and resulting in realized and unrealized losses on its securities portfolio. The bank also has a large shortfall in its defined benefit company pension scheme. BOC has some sensitivity to a fall in interest rates, owing to a mismatch between its short-term assets and one year maturity fixed rate customer deposits, although it is gradually addressing the imbalance.
Fitch considers BOC's Tier 1 capital ratio as adequate. The bank's capital adequacy may come under pressure due to its expansion. It may also have to make additional provisions to build up loan loss reserves and supplementary contributions to make up the pension fund shortfall. BOC is expected to issue 50 million Cypriot pounds ($89 million) of Tier 1 capital securities in early-2003, which should provide relief in the near term.
BOC is the oldest bank in Cyprus and, with 40 percent of retail deposits, has by far the largest market share on the island. BOC complements its core retail banking business with a full range of peripheral financial services including life and general insurance. It operated a network of 188 branches and had 3,459 staff in Cyprus at end-June 2002.
The bank expects to have 75 branches open in Greece by end-2002, offering services similar to those in Cyprus. Its national market share is growing but remains small at around three percent of loans. BOC also has small subsidiaries in both Australia and the UK.
Fitch Ratings's support and individual ratings for banks 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)
© 2002 Mena Report (www.menareport.com)
