Fitch Ratings upgrades Hellenic Bank to BBB-; outlook stable

Credit rating agency Fitch Ratings this week upgraded Hellenic Bank’s long-term Issuer Default Rating (IDR) to ‘BBB-‘ from ‘BB+’, with a stable outlook, and its Viability Rating (VR) to ‘bbb-‘ from ‘bb+’.

In an announcement released on Tuesday, Fitch stated that this upgrade primarily reflects the recent upgrade of Cyprus’ economic rating to BBB+/positive and the improved assessment of the Cypriot operational environment.

According to Fitch, the upgrade of Cyprus’ economy was driven by the reduction in private sector debt and the expectation of continued economic growth.

These factors, the agency explained, support the long-term sustainability of Cypriot banks’ business models and reflect improvements in the fundamental metrics of the banking sector.

The upgrade also reflects Hellenic Bank’s ongoing record of healthy profitability, resulting in capital accumulation, consistent asset quality following the completion of legacy exposure clean-up, and low-cost deposit-based funding.

Fitch also said that following Eurobank’s increase in its stake in Hellenic Bank to 55.4 per cent as of June (it now stands at 55.48 per cent), it no longer considers the bank’s rating for government support as relevant, as Eurobank is now the more likely support provider. Consequently, Fitch has assigned a shareholder support rating of ‘bb-‘.

What is more, according to Fitch, Hellenic Bank’s long-term rating is determined by its Viability Rating (VR), which reflects the bank’s strong competitive position as the second-largest bank in the small Cypriot market, steady deposit-based funding, and robust liquidity.

It also highlights adequate profitability prospects in a favourable interest rate environment, above-average regulatory capital ratios, and manageable asset quality metrics.

Fitch further mentioned that Hellenic Bank’s business profile is characterised by traditional commercial banking activities.

Although fee diversification from activities and insurance operations is limited, this is expected to improve following the acquisition of CNP Assurances SA’s Cypriot and Greek operations, which is slated to be completed in the first quarter of 2025.

In addition, Hellenic Bank holds strong domestic market shares, particularly with households, though Cyprus’ small size limits growth opportunities.

Regarding the bank’s exposure to non-performing loans (NPLs), Fitch reported that the non-performing exposure (NPE) ratio was at 2.5 per cent at the end of March 2024 (excluding NPEs guaranteed by the asset protection scheme), significantly lower than historical highs.

Fitch stated that it expects this ratio to remain below Hellenic Bank’s mid-term target of 3 per cent over the next two years, aligning with the Southern European average.

Moreover, the rating for Hellenic Bank’s asset quality reflects that nearly two-thirds of its assets are in cash and high-quality securities, which pose significantly lower risk than its loan portfolio.

Factors that could lead to a downgrade in the future, Fitch pointed out, include a sharp deterioration in Cyprus’ economic environment.

This could be triggered by an unexpected domestic recession and a sudden rise in unemployment without short-term recovery prospects, leading to a significant decline in borrowers’ creditworthiness and reduced business opportunities for banks.

Furthermore, a downgrade could occur if Hellenic Bank’s problematic asset ratio (including NPLs and foreclosed real estate but excluding state-guaranteed NPLs) were expected to rise above 6 per cent for a prolonged period and the CET1 ratio fell below 15 per cent, significantly burdening CET1 capital with unreserved problematic assets.

On the other hand, Fitch said that a further positive rating action is unlikely unless there are further improvements in the Cypriot operating environment.

This would require the bank’s business opportunities to exceed current expectations through structurally stronger credit demand and wealth management and insurance product penetration.

An upgrade would also require evidence of a stronger business profile, a problematic asset ratio falling below 3 per cent, and a CET1 ratio remaining above 15 per cent.

Finally, the agency said that a track record of stable risk governance, steady funding, and continuous compliance with the Minimum Requirement for Own Funds and Eligible Liabilities (MREL) would be necessary for an upgrade.