Moody's upgrades Bank of Cyprus' long- term deposit ratings to A3 from Baa1, changes outlook to stable

Moody's Ratings has upgraded Bank of Cyprus' long-term deposit ratings to A3 from Baa1, while also changing the island's largest bank's outlook to stable.

More specifically, Moody's ungraded the following long-term ratings and assessments: its Baseline Credit Assessment (BCA) and Adjusted BCA to baa3 from ba1, its deposit ratings to A3 from Baa1, its Counterparty Risk Assessment to A3(cr) from Baa1(cr), its Counterparty Risk Ratings to A3 from Baa1, its senior unsecured and junior senior unsecured Medium-Term Note (MTN) program ratings to (P)Baa3 from (P)Ba1, and its local-currency senior unsecured debt ratings to Baa3 from Ba1.

The outlook on the bank's long-term deposit and senior unsecured debt ratings has been changed to stable, from positive.

As part of the same rating action, we have upgraded Bank of Cyprus Holdings Public Ltd Company's (Bank of Cyprus Holdings) long-term ratings: its senior unsecured MTN program ratings to (P)Baa3 from (P)Ba1, its subordinated MTN program ratings to (P)Ba1 from (P)Ba2, its local-currency subordinated debt rating to Ba1 from Ba2 and its local-currency Preferred Stock Non-cumulative rating to Ba3 (hyb) from B1 (hyb).

Bank of Cyprus' following short-term ratings have been affirmed: the Prime-2 deposit ratings and Counterparty Risk Ratings (CRRs), and Prime-2(cr) Counterparty Risk (CR) Assessment.

The rationale behind the ratings

Standalone BCA

Bank of Cyprus' standalone BCA has been upgraded to baa3, from ba1. The rating action captures Bank of Cyprus' continued asset quality improvements and our expectations that the bank will continue to reduce residual asset risks and will sustain its improved standalone financial strength.

The upgrade reflects Bank of Cyprus' continued asset quality improvements. As of December 2024, the bank reported nonperforming exposures (NPEs) of 1.9%, proforma for two NPE sales agreements, down from 2.4% as of September 2024 (year-end 2023: 3.6%). We expect NPEs to remain stable, supported by Cyprus' solid macroeconomic conditions, lower lending rates, and the bank's selective lending practices.

The rating also reflects our expectation of subsiding residual asset risks, specifically a continued reduction in Bank of Cyprus' stock of foreclosed real estate property. The bank has reduced its stock to €660 million by year-end 2024, from €764 million in Q3 2024, and is on track to achieve its targets of around €500 million by year-end 2025 (24% of current CET1), supported by Cyprus' robust real estate market.

The upgrade also incorporates our expectations that Bank of Cyprus will maintain solid profitability and strong capital metrics, sustaining its improved standalone financial strength. The bank's net income remains solid at 1.8% of assets during 2024, compared to 1.7% during 2023. While we expect profitability to fall, as interest rates normalise, it will remain solid supported by the bank's sustained low loan loss provisioning charges, high non-funded income and improved efficiency.

Bank of Cyprus also maintains a very high regulatory Common Equity Tier 1 (CET1) capital ratio of 19.2% (including 2024 profits) as of year-end 2024, up from 17.4% as of year-end 2023. We expect capital to remain strong supported by its improved internal capital generation and moderate loan growth, despite a higher dividend distribution policy.

Bank of Cyprus' standalone assessment further reflects its low-cost, retail-deposit-based funding structure and ample liquid assets.

Loss Given Failure (LGF) analysis

Our forward-looking Advanced LGF analysis continues to indicate an extremely low loss given failure for Bank of Cyprus' junior deposits, CRRs and the CR Assessments, resulting in a three- notch uplift from the baa3 Adjusted BCA; and a moderate loss given failure for senior unsecured and junior senior unsecured ratings, resulting in no uplift. Bank of Cyprus Holdings' subordinated debt and preferred stock non-cumulative debt are faced with high and very high loss given failure, which results in a one-notch adjustment and three-notch adjustment below the bank's Adjusted BCA, respectively.

Stable Outlook

The stable rating outlook on the long-term deposit and senior unsecured debt ratings reflects our expectations for a continued decline in Bank of Cyprus' residual asset risks and broadly stable financial metrics, supported by Cyprus' solid macroeconomic conditions, and incorporates the bank's upcoming maturities and planned refinancing in the next three years.

Factors that could lead to an upgrade or downgrade

Bank of Cyprus' ratings could be upgraded if our assessment of the domestic operating environment improves, the bank further reduces residual asset risks, and it sustains its solid financial metrics.

Bank of Cyprus' ratings could be downgraded if the operating environment weakens materially or if the bank's financial fundamentals, specifically its profitability and capital weaken beyond our current expectations. Bank of Cyprus' deposit ratings may be negatively impacted by potentially lower volumes of more junior instruments, lowering the buffers available to absorb losses.