S&P Global Ratings has revised its outlook on Bank of Cyprus Public Co. Ltd. (Bank of Cyprus) to positive from stable and affirmed its 'BBB-/A-3' long- and short-term issuer credit ratings on the bank.
According to S&P's statement, "The outlook revision primarily reflects our view that economic risk for banks operating in Cyprus is easing. Bank of Cyprus could therefore benefit from the more supportive economic environment."
"In our view," the statement continues, "Cyprus’ strong economic expansion over the past few years will support the private sector's creditworthiness. The economy has benefited from a booming services sector--particularly tourism and information, technology, and communications services--the latter as a result of firms relocating to Cyprus."
S&P also noted that, "The economy has shown resilience to various events, including regional conflicts and trade wars. We believe that the private sector’s creditworthiness is strengthening, even recognizing that Cyprus’ high U.S. dollar-based GDP per capita could overstate the average prosperity of domestic residents due to the relatively high share of foreign investments in Cyprus. We expect this positive trend to continue, supported by a tight labor market, strong real income growth, and large investments, including from Next Generation EU funds."
Also according to the ratings agency's statement, "The private sector’s deleveraging continues to converge toward the EU average. A rapid economic improvement has led to substantial deleveraging of the private sector, and more specifically, of nonfinancial corporations. We forecast the private sector's leverage at 127% of GDP at end-2025, down from 185% at end-2021, and nonfinancial corporations’ debt at 72% of GDP at end-2025, down from 105% at end-2021. We believe that nonfinancial corporations’ operating performance is strengthening on the back of the economic momentum, while their debt capacity will benefit from lower spreads as credit risks in Cyprus are receding. Household debt remains high relative to that of peer countries, but initiatives to tackle nonperforming loans (NPLs), especially in the mortgages segment, has eased the debt burden significantly. In addition, following banks' frequent recourse to NPL sales and securitizations over the past few years, most of the debt now stands on the balance sheet of Credit Acquiring Co.--outside the banking system--limiting the credit risk for banks."
The statement also pointed out that, "Cypriot banks have cleaned up a large portion of their legacy NPLs. NPLs represented 4.5% of Cypriot banks' gross loans as of end-September 2025, and we forecast that this share will drop to 3.3% at year-end 2027. The gap with the rest of the European banking sector is therefore closing. Moreover, most NPLs are at the smallest Cypriot banks. The four largest Cypriot banks represent about 95% of the market and had an average ratio of 2.4% at year-end 2024 (excluding NPLs covered by the asset-protection scheme), which is in line with European peers. We expect limited asset-quality pressures thanks to a favorable macroeconomic environment and an organic cost of risk (stripping out nonrecurring provisions relating to the legacy portfolio) ranging between 35 basis points (bps) and 45 bps over 2025-2027. Cypriot banks’ loan books continue to be moderately concentrated on cyclical sectors, notably tourism (9% of loans) and real estate and construction (13% of loans). We believe that concentration is a structural feature of the Cypriot banking system because of the small size of the economy."
"We continue to believe that Cypriot banks face high risks stemming from the country's position as an international financial center. This constrains our ratings on banks incorporated in Cyprus. As a small and open economy, Cyprus remains vulnerable to external shocks, and we believe that its economic performance is more cyclical than that of peer countries. In addition, existing inherent anti-money laundering (AML) and combat the financing of terrorism (CFT) cross-border risks stemming from the country's position as an international financial center pose a risk to banks in terms of compliance costs, potential fines, correspondent banking relationships, and reputational damage. That said, we recognize banks' efforts to improve anti-money-laundering practices and combat financing-of-terrorism risks, and overall improvement in judicial efficiency and capacity supported by the Recovery and Resilience Facility," the statement went on to note.
It also stated that, "The outlook revision also reflects Bank of Cyprus’ strengthening performance and resilience. Bank of Cyprus is ahead of the banking system in terms of cleaning up asset quality. Bank of Cyprus has continued to report low, manageable impairment levels since 2016, with more than 99% of the loan book classified as performing. In recent years, most of the bank’s efforts have been to tackle the stock of legacy NPLs. With the NPL ratio down to 1.2% at the end of September 2025 from 2.4% the previous year, and NPL coverage of 124%, the long process of aligning asset quality with that of EU peers has ended. The bank has also made significant progress in disposing of its real estate management unit (REMU) portfolio. This portfolio now stands at €420 million, or 1.5% of total assets, meaning that the bank has exceeded its target to downsize the portfolio to about €500 million by end-2025. One-off costs linked to cleaning up legacy items have inflated the cost of risk in recent years, but we forecast that it will move toward 50 bps by end-2027, including impairments stemming from the REMU portfolio. The organic cost of risk is already close to 30 bps."
As S&P said in its statement, "We expect Bank of Cyprus' profitability to remain resilient to a less supportive rate environment. Bank of Cyprus has mitigated the pressure from spread and margin compression by building up significant hedges. The bank's net interest income continues to display greater volatility than that of peers due to its balance sheet being heavily skewed toward cash and liquid assets. However, the bank has successfully reduced its sensitivity, with a 100 bp reduction in rates now translating into a 10% negative impact on net interest income, compared with 35% at end-2022. As of the end of September 2025, net interest income was down 12% year on year, but profitability was resilient, with the reported return on tangible equity still strong at 18.5% in the third quarter of 2025. Disciplined cost management has been instrumental in preserving Bank of Cyprus’ strong operating performance, with the cost-to-income ratio below 40%, a sustained contribution from fees, a lower cost of risk, and the resumption of lending. We anticipate that these trends will continue in 2026-2027."
It also said that, "Bank of Cyprus’ capital buffer will remain a positive consideration for the ratings. The bank's regulatory common equity Tier 1 ratio stood at 20.2% as of the end of September 2025. We expect our risk-adjusted capital (RAC) ratio for Bank of Cyprus to remain at 13.5%-14.0% over 2025-2027 compared with 13.9% as of end-2024. We incorporate total capital distributions (subject to the bank's and regulator's discretion) of about 70% in 2025 and beyond, which is at the higher end of the bank's guidance. We acknowledge that the current buffer could decrease over time, but we do not expect the RAC ratio to decline below 10%."
"We regard Bank of Cyprus' funding as average. This reflects the bank's strong domestic retail franchise, which mainly comprises stable and diversified retail deposits. Bank of Cyprus' funding profile is similar to that of other Cypriot banks that have seen significant inflows of new retail deposits coupled with muted lending over the past decade," the ratings agency also said in its statement.
"We now view Bank of Cyprus' liquidity position as strong thanks to the bank's low reliance on short-term wholesale funding and high liquidity buffer. The liquidity buffer mainly consists of cash and well-diversified liquid debt securities. As of the end of September 2025, Bank of Cyprus’ ratio of broad liquid assets to short-term wholesale funding reached 66x; its overall broad liquid assets represented about 43% of its total assets; and its regulatory liquidity coverage ratio stood at 313%. This ratio is stronger than the ratios of the majority of the banks we rate, underscoring our view that Bank of Cyprus will withstand adverse market shocks without access to wholesale funding in the next 12 months. We believe that the bank’s liquidity position is unlikely to change materially, despite its efforts to expand its lending portfolio," it went on to say.
"The positive outlook on our ratings on Bank of Cyprus reflects our view that credit risks will ease over the next 12-18 months and that this will support the bank's creditworthiness.
We could revise the outlook to stable if economic risks do not ease as we anticipate. Although it is a remote possibility at this stage, we could revise the outlook to stable if Bank of Cyprus adopts a more aggressive lending strategy to deploy excess capital and liquidity, notably in its international operations.
We could raise the ratings on Bank of Cyprus if we conclude that:
- Economic risks for Cyprus' banking sector have receded; and
- Bank of Cyprus' risk-adjusted profitability remains resilient and in line with that of higher-rated peers despite the pressure on its margins," the statement said.
