Moody's on Dec. 14 upgraded the long-term foreign- and local-currency deposit ratings of Bank of Cyprus Public Co. Ltd. and Hellenic Bank Public Co. Ltd. to Caa2 and Caa1 from Caa3 and Caa2, respectively.

The outlook on the ratings of both entities is positive.

The banks' baseline and adjusted baseline credit assessments were upgraded to "caa2" from "caa3", reflecting improvements in operating conditions in Cyprus, for which the macro profile was revised to "Weak" from "Very Weak+". Both banks' long-term counterparty risk assessments were upgraded to B2(cr), from Caa1(cr) for Bank of Cyprus and B3(cr) for Hellenic Bank.

The upgrade of the long-term deposit ratings reflects the banks' improved financial metrics, mainly asset quality and capitalization. The agency noted Bank of Cyprus' improved funding as well.

The upgrade also takes into account Moody's expectation that Bank of Cyprus will turn profitable in 2016 after five loss-making years and that Hellenic Bank will continue to be profitable after booking a modest gain in 2015.

However, Moody's noted that the ratings of the two banks remain at low levels, reflecting that their capital buffers remain vulnerable to their high levels of bad debt.

Moody's affirmed the two banks' Not Prime short-term foreign- and local-currency deposit ratings and Not Prime(cr) short-term counterparty risk assessments.