Moody’s says BoC-Pepper deal a “credit positive”

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By Stelios Orphanides

Bank of Cyprus’s decision to enter an agreement with Australia’s delinquent loans specialist Pepper Group Ltd is a credit positive for the lender, Moody’s Investors Service said.

The ability of Cyprus’s largest bank to reduce bad loans will improve as a result of the cooperation with Pepper and the resources the latter will provide, Moody’s said in an emailed statement on Thursday.

The bank announced last week that it received the approval of the board and its workers’ union, Etyk, to outsource management of up to €800m of non-performing retail loans and credit extended to small and medium size enterprises (SMEs) to Pepper.

“Pepper’s expertise and additional resources will help the bank improve the restructuring and servicing of the SME loan book, which is more resource intensive,” the rating company said. “Furthermore, Bank of Cyprus expects the servicing solution to be scalable during 2018, which will allow the bank to accelerate asset quality improvement”.

According to the agreement, Pepper will initially provide around 40 professionals with experience in the area who will operate under the bank’s internal unit for recoveries and restructurings.

“Bank of Cyprus aims to reduce its ratio of non-performing loans to gross loans to below 20 per cent over the next three years, from 37 per cent as of September 2017,” the rating company said.

Pepper Ltd, listed on the Australian Stock Exchange and parent company of Pepper Cyprus Ltd, “operates as a residential mortgage and consumer lender and loan servicer in Europe and Asia,” and has more than €35bn of assets under management, Moody’s said.

“Among Cypriot banks, Bank of Cyprus has made the most progress in repairing its balance sheet. Still, its high stock of troubled loans weighs on its credit quality”.

While the bank reduced 43 per cent its non-performing exposures over the past 11 quarters, €9.2bn at the end of September, its “asset quality metrics remain among the weakest in our rated universe,” Moody’s added.

The rating company said the drop in delinquent loans resulted mainly from corporate loans which were larger in size compared to retail loans, and was the outcome of a combination of solutions including restructurings, debt-to-asset swaps, and write offs.

Write offs in the first nine months of 2017 amounted to 5 per cent of gross loans and the value of onboarded real property reached 60 per cent of the bank’s equity by September or €1.5bn, Moody’s said.

Between December 2015 and September this year, bad loans in Bank of Cyprus’s corporate book dropped 47 per cent, against a 26 per cent drop in the case of the SME book, and as a result the delinquent loan ratio stood at 46.4 per cent and 66.8 per cent respectively, Moody’s said.

Moody’s assigned a Caa1 rating to the bank’s long-term debt and a Caa1 rating to its long-term deposits which carries a positive outlook. Its baseline credit assessment is caa1.

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About Author

Stelios Orphanides is a journalist at CyprusBusinessMail.com. To contact Stelios Orphanides: [email protected]

  • Kevin Ingham

    It’s a start that should already have been made, but better late than never

    For the record Moody’s Caa1 rating equates to “Rated as poor quality and very high credit risk”-it’s 4 notches above the lowest possible rating,16 below the best and about 10 short of being investment grade

    There is a long way to go and implementation won’t be pretty

    • Cydee

      The longer you leave a bad apple the more rotten it gets…

  • AnalogMind

    It’s the borrowing costs that count the most; rating is secondary. Cyprus has very low borrowing costs and getting lower.

  • Bob Ellis

    Too little, too late.

    More interested in why CM won’t let us comment on the bilge in the other story about CIPA. I fear they are aware of the derision and humour this fantasist piece will promote. Rather that promote this smokescreen, why not actually investigate the real goings on at the CIPA and what they actually achieve ?

    • Cydee

      Just read it. and it reads as if they’re promoting Cyprus as an EU laundry.