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Fitch Ratings has placed Hellenic Bank ‘s Long-Term Issuer Default Rating (IDR) of `B` and Viability Rating (VR) of `b` on Rating Watch Positive (RWP), following the announcement on June 25, that the bank has signed an agreement with Cyprus Cooperative Bank “to acquire certain assets and liabilities.”

The credit ratings agency has also affirmed the bank’s Short-Term IDR at `B`, adding that other ratings of the bank “are unaffected.”

“We will likely resolve the RWP and upgrade HB`s Long-Term IDR and VR upon the completion of the transaction, including the completion of the capital increase by Hellenic Bank, which is expected no earlier than 4Q18, provided that the final terms do not materially deviate from what has been disclosed so far” Fitch says.

At the same time, it adds that “if the acquisition does not go through, the ratings are likely to be affirmed.”

Hellenic Bank, it notes, “will acquire total assets of €10.3 billion comprising mainly loans (€4.6 billion net), Cyprus government bonds (€4.1 billion) and cash (€1.6 billion), as well as customer deposits of €9.7 billion.”

“The RWP reflects our view that the acquisition will overall be positive for Hellenic Bank’s credit profile through a significantly strengthened franchise in Cyprus, improved asset quality and better longer-term profitability prospects” Fitch says.

“The still weak quality of the combined loan book and high capital encumbrance by unreserved problem loans by international standards, as well as significant execution risks related to the integration of a balance sheet that is roughly 1.5x HB`s current size, mean that any upgrade at this stage is likely to be limited to one notch,” it adds.

It continues noting that the combined entity will become the second-largest bank in Cyprus after Bank of Cyprus with estimated market shares in performing loans and deposits of over 20% and over 30% respectively.

“We believe that this will improve the Hellenic Bank’s pricing power and would be positive for the bank`s profitability over the longer term”, it points out.

In the shorter term, it continues, Hellenic Bank could benefit from a repricing of the acquired deposit base, which is on average 80bp more expensive than the bank’s, “but any repricing is likely to be gradual to manage potential deposit outflows.”

The credit ratings agency believes that overall the bank`s business mix will shift towards servicing retail clients as opposed to the more corporate and SME focused franchise that HB has at present.

It estimates that the transaction “will improve the quality of HB`s loan book.”

“The ratio of non-performing exposures (NPEs, EBA definition) to gross loans in the acquired loan book (14%) was significantly below HB`s 52% at end-March 2018,” Fitch says.

It continues pointing out that “the NPE ratio for the combined entity would be about 33%.”

It further adds that the transaction “will include an asset protection scheme, ultimately backed by the Republic of Cyprus (BB+/Positive), whereby Hellenic Bank will be protected against 90% of losses on the covered loan portfolio.”

The protection scheme Fitch explains, “is expected to include all NPEs (€0.5 billion net), performing exposures that Hellenic Bank views as higher-risk (about €1 billion) and some other performing loans (€1.1 billion).”

In total €2.6 billion or 56% of the acquired net loans will be within the scope of the scheme, it says.

Source: Stockwatch