S&P Global Ratings Boosts Bank of Cyprus' Credit Rating to BB+

In a move signaling growing confidence in Cyprus' financial sector, S&P Global Ratings has upgraded the credit ratings of Bank of Cyprus Public Co. Ltd. (BOC) and its holding company. The decision, announced on June 18, 2024, reflects reduced economic risks and stronger capitalisation in the Cypriot banking landscape. This follows S&P upgrading Cyprus to BBB+ (Outlook positive) on June 14th, after Cyprus posted the highest consolidated fiscal surplus in the eurozone last year. 

The rating agency raised BOC's long-term issuer credit rating to 'BB+' from 'BB', while maintaining its 'B' short-term issuer credit rating. Simultaneously, the bank's resolution counterparty rating saw an increase to 'BBB/A-2' from 'BBB-/A-3'. Bank of Cyprus Holdings PLC, the bank's nonoperating holding company, received a boost to its long-term rating, moving up to 'BB-' from 'B+'.

S&P Global Ratings attributes this upgrade to the improving economic landscape in Cyprus. "We believe economic risks affecting Cypriot financial institutions have receded since banks have cleaned up a large portion of the nonperforming loans (NPLs) accumulated during the last crisis and now face more supportive economic conditions," the agency stated.

The Cypriot banking sector has made significant strides in addressing its NPL issue, a legacy of the 2012 financial crisis. As of March 31, 2024, the sector's average NPL ratio stood at 7.3%, a marked improvement from 11.0% at the end of 2021. This progress is particularly evident among the country's four largest banks, which represent about 90% of the market and boast an average NPL ratio of approximately 3.3%.

"After years of sizeable sales of NPLs, securitizations, write-offs, and recoveries, Cyprus' banking sector has largely absorbed the hit to asset quality following the 2012 financial crisis," S&P Global Ratings noted. The agency also highlighted that the current NPL figures include assets covered by Cyprus' asset-protection scheme, which carry minimal risks.

Looking ahead, S&P Global Ratings forecasts a positive trajectory for Cyprus' economy, projecting average growth of 3% per year from 2024 to 2027. This economic upswing is expected to fuel lending growth in the banking sector, with an estimated average of 2.5% over the same period. The agency anticipates that credit losses will remain limited, with the cost of risk averaging 55 to 65 basis points over the next two to three years, significantly below the 195 basis point average of the past decade.

The agency also highlighted the improved profitability of Cypriot banks, driven by higher interest rates and efficiency gains. "We estimate the systemwide return on equity at 23.3% in 2023 and forecast it will reach 16.5%-17.5% in 2024 before stabilizing at 10%-12% by 2025-2026," S&P Global Ratings reported. This profitability is supported by ample deposit bases, which have reduced the loans-to-deposits ratio to 52% as of March 31, 2024, down from a peak of 185% in 2013.

For Bank of Cyprus specifically, the outlook appears promising. The agency predicts that BOC will maintain a return on tangible equity higher than 16% in 2024, settling at 12%-13% in 2025-2026. This strong performance is attributed to resilient net interest margins expected to remain at 350-400 basis points in 2024 and 2025, tight cost control with cost-to-income ratios moving toward 44%-46% by year-end 2026, and a normalization of the cost of risk to lower than 80 basis points.

The positive outlook on BOC's ratings indicates potential for further upgrades. S&P Global Ratings stated, "We could raise the ratings if we conclude that industry risks for Cyprus' banking sector have receded and the bank's risk profile has improved to levels more in line with that of higher-rated peers, including stronger asset quality with the NPL ratio and cost of risk reducing from current levels, and sustained high earnings despite the European Central Bank's expected monetary loosening."

However, the agency cautioned that the outlook could be revised to stable if industry risks do not ease as anticipated or if the holding company's double leverage was likely to significantly exceed 120%.

This upgrade marks a significant milestone in Cyprus' ongoing economic recovery, signaling growing confidence in the nation's banking sector and its largest financial institution.