HELLENIC BANK PUBLIC COMPANY LIMITED
Fitch Ratings has upgraded
The Outlook on the Long-Term IDR is Stable.
The upgrade reflects the imminent completion of 'Project Starlight', HB's securitisation and deconsolidation of a
The upgrade also reflects our expectation that HB's profitability and internal capital generation will benefit from rising interest rates and from the recent reduction in the bank's workforce. We also expect continued economic growth in
Key Rating Drivers
Franchise, Capital Underpin Ratings: HB's ratings reflect its strong competitive position as the second largest bank in the small Cypriot economy, supporting its business prospects, stable deposit-based funding and robust liquidity. They also reflect above-average regulatory capital ratios and manageable asset quality metrics.
Strengthened Operating Environment: Cypriot banks' have continued cleaning up their balance sheets, and capitalisation and profitability have strengthened since end-2019 despite the pandemic. Cypriot banks have benefited from strong economic growth and interest rate hikes in 2022. The economic environment is likely to get tougher in 2023, but should remain resilient and supportive of the banks' performance and risk profiles. Nevertheless, the Cypriot economy remains small and open, which makes it sensitive to shocks.
Limited Business Diversification: HB's business profile is characterised by traditional commercial banking activities, with limited diversification in fee-generating activities and insurance. The bank operates almost exclusively domestically, where it has strong market shares, especially towards households. Our assessment of the business profile is constrained by
Prudent Underwriting, Above-Average Concentrations: We believe that HB's underwriting standards are prudent and adapt quickly to changing circumstances, and that risk controls and tools are adequate for the bank's complexity. HB remains exposed to higher single-name and industry concentrations than larger peers, due to its small size and the composition of the local economy, which is skewed towards tourism, trade and services. The bank also has large exposure to Cypriot government bonds, although this is reducing.
Average NPE Ratio Following De-risking: HB's NPE ratio of 3.8% at
Interest-Driven Profitability, Reduced Costs: HB's profitability is primarily driven by healthy net interest income. We expect rising interest rates, the recently-completed voluntary exit scheme and normalised loan impairment charges to result in structurally higher profitability. However, our assessment remains constrained by HB's limited business diversification in fee-generating activities and limited scope for further operating efficiency improvements, given the bank's small size and need to continue investing in innovation.
Adequate Capital Buffers, Manageable Encumbrance: HB's pro-forma phased-in common equity Tier 1 (CET1) ratio of 18.7% at
Deposit-Based Funding, Sound Liquidity: HB's gross loans/deposits ratio has fallen well below 50% in recent years due to continued deposits growth, NPE disposals and prudent new loan origination. HB's deposit base is stable and highly granular, owing to the bank's strong franchise and retail focus. As deposits exceed loans, liquidity buffers are consistently strong. HB recently completed an inaugural wholesale debt issuance, but funding diversification remains limited and market access less certain than at most frequent and higher-rated issuers.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
We could revise the Outlook to Negative if the economic environment in
We could downgrade the ratings if we expected HB's problem asset ratio (which includes post-disposal NPEs and net foreclosed assets, but excludes APS-guaranteed NPEs) to rise towards 10% on a sustained basis, CET1 ratio to fall below 14% or CET1 capital encumbrance by unreserved problem assets to rise significantly.
A decline of operating profit/risk-weighted assets (RWA) to below 1% of RWA due to structural weaknesses in HB's business model, or evidence of funding instability and inability to access the wholesale debt markets for a prolonged period, could also be rating negative.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Upside for ratings would likely come from HB's demonstrated ability to generate solid profitability levels, resulting in increased financial flexibility and improved internal capital generation, without compromising its risk profile.
An upgrade would also require improved long-term business model sustainability by means of stronger revenue generation and diversification in fee-generating activities, improved operating efficiency or increased business scale. An upgrade would also require a problem asset ratio of sustainably below 3%, maintenance of the CET1 ratio above 14% with low CET1 capital encumbrance by unreserved problem assets, operating profit/RWAs sustainably above 2.5%, and stable funding. Continued build-up of minimum requirement for own funds and eligible liabilities (MREL) buffers could also be rating positive.
An upgrade of our assessment of operating environment in the 'bbb' category would also benefit the ratings, and would require evidence of continued economic growth in
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
DEPOSITS
HB's long-term deposit rating is one notch above the Long-Term IDR because of full depositor preference in
SENIOR PREFERRED (SP) DEBT
HB's SP debt is rated in line with its Long-Term IDR, reflecting our view that the default risk of the notes is equivalent to that of the bank as expressed by the IDR, and that SP obligations have average recovery prospects. This is based on our expectation that HB's resolution buffers under MREL will comprise both SP and more junior debt instruments, as well as equity. The rating also reflects our expectation that the combined buffer of Additional Tier 1, Tier 2 and senior non-preferred (SNP) debt is unlikely to sustainably exceed 10% of the bank's RWA.
SNP DEBT
SNP debt is rated one notch below the Long-Term IDR to reflect the risk of below-average recoveries arising from the use of more senior debt to meet resolution buffer requirements and the combined buffer of Additional Tier 1, Tier 2 and SNP debt being unlikely to exceed 10% of RWAs.
GOVERNMENT SUPPORT RATING (GSR)
HB's GSR of 'no support' (ns) reflects Fitch's view that senior creditors cannot expect to receive full extraordinary support from the sovereign if the bank becomes non-viable. This is due to the EU's Bank Recovery and Resolution Directive and the Single Resolution Mechanism for eurozone banks provide a framework for the resolution of banks that requires senior creditors participating in losses, if necessary, instead of, or ahead of, a bank receiving sovereign support.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The SP, SNP debt and deposit ratings are primarily sensitive to changes in the bank's Long-Term IDR. The SP and SNP debt ratings could be upgraded by one notch if HB is expected to meet its resolution buffer requirements only with SNP and more junior instruments, or if the size of the combined buffer of SNP and junior debt is expected to sustainably exceed 10% of RWA.
The long-term deposit rating could be downgraded if we deemed HB unable to increase the size of its senior and junior debt buffers and comply with its final MREL.
An upgrade of the GSR would be contingent on a positive change in the sovereign's propensity to support the bank. In Fitch's view, this is highly unlikely, although not impossible.
VR ADJUSTMENTS
The operating environment score of 'bb' has been assigned below the 'bbb' category implied score, due to the following adjustment reasons: size and structure of economy (negative), level and growth of credit (negative).
The asset quality score of 'bb-' has been assigned above the 'b & below' category implied score due to the following adjustment reason: historical and future metrics (positive).
The funding & liquidity score of 'bb-' has been assigned below the 'bbb' category implied score, due to the following adjustment reason: non-deposit funding (negative).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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