Moody`s ratings agency assigned to the Cooperative Central Bank Ltd (CCB) Caa2 long-term local and foreign currency deposit ratings, in its first ever rating for the state-owned cooperative bank.
The agency also assigned Not-Prime short-term local and foreign currency deposit ratings and a caa2 baseline credit assessment (BCA) with a stable outlook. The agency assigned long- and short-term Counterparty Risk Assessments (CR Assessment) of Caa1(cr)/Not-Prime(cr).
Moody;`s said the CCB`s caa2 BCA reflects five main reasons. Namely the challenging operating environment in Cyprus as indicated by the country`s `Weak` macro profile; its weak asset quality metrics and Moody`s expectation that they will gradually improve over time; the strengthened capital buffers, which, however, remain vulnerable due to the high portion of problematic loans that are not covered by provisions; the bank`s stable funding structure based on domestic deposits and relatively large liquidity buffers and the ongoing integration challenges arising from the fact that CCB is the product of the merger of a large number of credit institutions.
“We expect CCB`s asset quality metrics to improve gradually from their currently very weak levels, as the bank maintains the momentum in its restructuring efforts” says Melina Skouridou, Assistant Vice President at Moody`s.
The agency said that loan restructurings are supported by the economic recovery in Cyprus, which makes revised repayment terms easier for borrowers to cope with, adding however that the CCB`s stock of nonperforming loans (NPLs) will remain large for a significant period of time, representing a key credit weakness.
The bank`s ratio of Non-Performing Exposures (NPEs; the European Banking Authority`s more broad definition of problematic debt) to gross loans ratio stabilised at 59.8% of gross loans as of September 2016 while the stock of NPEs declined by 3%, whereas the ratio of 90 days past due loans to gross loans declined to 47.9% as of September 2016 from 53% a year earlier.
Moody`s pointed out the CCB`s relatively high CET1 capital (16.5%) compared to similarly rated peers, noting however, “the bank`s capital buffers remain vulnerable because of its high stock of problem loans that are not covered by loan loss reserves, with the uncovered portion of problem loans covered mainly by tangible real estate collateral.”
The agency also notes CCB`s funding by “stable domestic deposits, which the rating agency views as a credit strength.”
“CCB also maintains ample liquidity buffers, which will allow the bank to counter potential deposit withdrawals,” the agency said, adding that the CCB`s liquid assets consisting of cash and balances with banks stood at 23.4% of assets as of September 2016 with the ratio climbing to 30.7% when the bank`s debt investments to the Cyprus government and predominantly investment-grade banks are added to liquid assets.
Furthermore, Moody`s highlighted the CCB`s challenges facing the bank with regard to its merger process.
“This mainly includes the limited history since the centralisation of operations in 2015, and the different staff culture and varied performance leading to a less coherent staff base,” the agency pointed out.
The CCB was recapitalised twice by the Cypriot government, as the bank received €1.5 billion in 2014 and €0.17 billion in 2015.