Ratings firm Fitch Ratings has downgraded the two largest
Cypriot banks following the agreement Cypriot authorities reached
with European Union authorities on Monday morning.
The agreement previews the resolution and winding down of Cyprus
Popular bank, the second largest bank in Cyprus, commonly known as
Laiki Bank. It also previews a deep restructuring for Bank of
Cyprus, the country's largest bank.
Laiki Bank will be split into a "good bank" and a "bad bank,"
the latter will be liquidated over time. The "good bank" assets
will be transferred to Bank of Cyprus.
Therefore, Cyprus Popular Bank has been downgraded to D,
equivalent of Default.
Fitch expects its banking licence to be revoked and the bank to
be subject to liquidation proceedings.
Bank of Cyprus, the largest Cypriot bank, has been downgraded to
"SD", "Selective Default".
Under the agreement, Bank of Cyprus is likely to be subject to
considerable restructuring, which may include the disposal of its
Greek operations, affecting its overall credit fundamentals, Fitch
said.
Fitch expects enforcement of losses on its uninsured deposits to
be "material".
The downgrades of both banks come as an effect of losses imposed
on senior creditors agreed as part of Monday's deal, which
triggered a default, Fitch said.
The differences in ratings, one Default and one "Selective
Default" are because Bank of Cyprus, after a restructuring, will
continue to operate in Cyprus, while Cyprus Popular Bank (Laiki
Bank) would be wound down, Fitch said.
Fitch has also maintained the Rating Watch Negative on Hellenic
Bank's (HB) ratings. The bank isn't touched by the agreement
reached between Cypriot authorities and its international
creditors. However, Fitch says the bank has potential for a further
downgrade if its asset quality problems intensify, or if it becomes
clear that the bank is highly dependent on extraordinary liquidity
support from the European Central Bank to continue to service its
obligations.
The proposed sale of the Greek branch network and resulting
potential reduction of risk weighted assets may support the bank's
capital position, and depositors may be somewhat more willing to
keep funding the bank as a result of Hellenic Bank not being
included to date in any resolution measures, Fitch added.
Write to Serena Ruffoni at serena.ruffoni@dowjones.com
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