Bank of Cyprus credit ratings upped at S&P Global due to sector’s improved funding profile

Investing.com -- S&P Global Ratings has upgraded the long-term issuer credit ratings of Bank of Cyprus Holdings PLC and Bank of Cyprus Public Co. Ltd. This upgrade, announced on February 7, 2025, comes in light of the improved funding stability in Cyprus’ banking system.

Cypriot banks have managed to decrease their reliance on less stable non-resident depositors, and have improved their loans-to-core-deposits ratio. The economic environment in Cyprus is expected to remain supportive, and banks are making efforts to improve efficiency, which will partially offset the impact of falling interest rates.

S&P Global Ratings has raised its long- and short-term issuer credit ratings on Bank of Cyprus Public Co. Ltd. (BOC) to ’BBB-/A-3’ from ’BB+/B’. It has also affirmed its long- and short-term resolution counterparty ratings on BOC at ’BBB/A-2’. The long-term issuer credit rating on BOC’s nonoperating holding company, Bank of Cyprus Holdings PLC, has been raised to ’BB+’ from ’BB-’, with the ’B’ short-term rating affirmed. The issue rating on the holding company’s subordinated debt has also been raised to ’B+’ from ’B-’. The outlook for both BOC and its holding company is stable.

The average loan-to-domestic core customer deposits ratio for Cypriot banks stood at about 62%-63% at the end of 2024, a significant drop from the peak of 185% in 2013. Lending is slowly regaining momentum, with domestic customer deposits increasing by 7.2% over 2024. Cypriot banks have also exited targeted longer-term refinancing operations while maintaining strong regulatory ratios.

Deposits from non-residents have continued to decline, reaching 14.1% of total systemwide deposits in December 2024, down from about 38% at the end of 2012. This decline reflects the authorities’ actions to close accounts related to Russian customers and the impact of Western sanctions on some Russian entities and individuals.

Cypriot banks have also seen improved access to capital markets, although external funding will remain limited. Strong economic momentum and improved banks’ creditworthiness have boosted investor confidence, allowing Cypriot banks easier access to foreign capital markets.

The improved assessment of the operating environment for Cypriot banks has led to the upgrade of BOC. BOC has a highly liquid balance sheet, with about 29% of its assets being cash as of September 2024. Its loan-to-deposit ratio stood at 50%, with 20% of deposits from non-resident depositors, and only about 9% from outside of the EU.

BOC’s risk-adjusted profitability is expected to remain resilient over the next two years, despite the reduction in interest rates. The bank has built up significant hedging positions that have reduced the net interest income sensitivity to 11% at end-September 2024 from a high 35% as of end-2022.

The long-term issuer credit rating on BOC Holdings has been raised by two notches, to ’BB+’ from ’BB-’, due to the improved risk assessment of the operating company, BOC. The issue rating on the holding company’s subordinated debt has also been raised to ’B+’ from ’B-’.

The stable outlook on BOC and BOC Holdings reflects the bank’s strong capitalization and leading position in the Cypriot banking system, balanced against the still-elevated risks for banks operating only in Cyprus.

Potential downgrade scenarios for BOC and BOC Holdings could occur over the next two years if the operating bank’s risk-adjusted capital (RAC) ratio fell below 10% or if its risk-adjusted profitability deteriorated. A downgrade could also happen if asset quality significantly deteriorated or if double leverage was likely to significantly exceed 120%.

On the other hand, upgrades are unlikely for BOC and BOC Holdings. Potential upgrades could occur if the bank’s capitalization materially strengthened and its forecast RAC ratio increased to above 15% due to significantly stronger profitability, while asset quality metrics remained resilient.

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