Fitch Upgrades Hellenic Bank to 'BBB-' with stable outlook

Fitch Ratings has upgraded Hellenic Bank's Long-Term Issuer Default Rating (IDR) to 'BBB-' from 'BB+', with stable outlook and its Viability Rating (VR) to 'bbb-' from 'bb+'.

According to Fitch, the upgrade mainly reflects the upgrade of Cyprus's sovereign rating to 'BBB+'/Positive and improved assessment of the Cypriot operating environment. The former was underpinned by reduced private sector indebtedness and the expectation of continued economic growth, factors Fitch believes are supportive of Cypriot banks' long-term business model sustainability, as well as improved banking sector fundamentals.

The upgrade also reflects HB's continued record of healthy profitability resulting in capital accumulation, stable asset quality since the completion of the clean-up of legacy exposures and inexpensive deposit-based funding.

Fitch has also withdrawn HB's Government Support Rating (GSR) of 'no support' (ns) as it is no longer considered by Fitch to be relevant to the agency's coverage. This is because in June 2024 Athens-based Eurobank S.A. increased its stake in HB to 55.4% from 29.2%, becoming HB's most likely support provider. Fitch has consequently assigned a Shareholder Support Rating (SSR) of 'bb-'.

HB's Long-Term IDR is driven by its VR, which reflect its strong competitive position as the second-largest bank in the small Cypriot market, stable deposit-based funding and robust liquidity. It also reflects adequate profitability prospects in a positive interest rate environment, above-average regulatory capital ratios and manageable asset quality metrics.

Fitch notes that HB's business profile is characterised by traditional commercial banking activities. Diversification in fee-generating activities and insurance is limited, but will improve upon closing of the acquisition of CNP Assurances SA's Cypriot and Greek activities in 1Q25. HB has strong domestic market shares, especially towards households. However, Cyprus's small size limits growth opportunities.

Regarding HB's non-performing exposure ratio of 2.5% at end-March 2024 (excluding NPEs guaranteed by the asset protection scheme; APS) is well below historical peaks and the rating agency expects it to remain below HB's medium-term target of 3% in the next two years, a level in line with the southern European average.

Moreover, their assessment of HB's asset quality reflects that nearly two-thirds of the bank's assets are cash and high-quality debt securities, which are significantly lower-risk than the loan book.

A negative rating action could arise if the economic environment in Cyprus deteriorates sharply. This could be triggered by an unexpected domestic economic recession and a sharp rise in unemployment without prospects of a rebound in the short term, leading to a material deterioration of borrowers' creditworthiness and reduced business opportunities for banks.

"We could downgrade the ratings if we expected HB's problem asset ratio (which includes NPEs and foreclosed real estate assets, but excludes APS-guaranteed NPEs) to rise above 6% for a prolonged period and the CET1 ratio to fall below 15%, causing CET1 capital encumbrance by unreserved problem assets to significantly rise", they note.

On the other hand, Fitch says that a positive rating action is unlikely unless there are further improvements in the Cypriot operating environment. This would require business opportunities for bank to exceed our current expectations, by means of structurally stronger credit demand and penetration of wealth management and insurance products.

An upgrade would also require evidence of a stronger business profile, including in a lower interest rate environment. The problem asset ratio (excluding APS-guaranteed NPEs) would also have to fall below 3% and the CET1 ratio to remain above 15%. An upgrade would require a record of solid risk governance and well-managed risk concentrations, stable funding and continued compliance with MREL.

(Source: CNA)