Moody's downgrades Bank Moscow-Minsk (Belarus) to Ba3; Negative outlook

Moscow, July 09, 2009 -- Moody's Investors Service has today downgraded the global scale long-term local currency rating of Bank Moscow-Minsk ("BMM") to Ba3 from Ba2 and assigned a negative outlook. BMM's other ratings remained unchanged with a stable outlook. "The downgrade of the Ba2 long-term local currency rating reflects Moody's view of the increased interdependence between the financial profiles of BMM and its parent, Bank of Moscow, rated Baa1 with a negative outlook, following a deterioration of macroeconomic environment in Belarus," says Vladlen Kuznetsov, a Moscow-based Moody's Assistant Vice President -- Analyst, and lead analyst for BMM. BMM is highly dependant on its parent for future capital injections in order to withstand further possible asset quality deterioration. Moody's notes that BMM's asset quality is particularly vulnerable to industries like manufacturing and production, construction and machinery manufacturing which have already started to demonstrate deteriorating credit quality, representing 1.7x, 0.7x, and 0.2x, respectively, of year-end 2008 equity. Although the level of overdue corporate loans in BMM's portfolio is currently low (less than 1%), the level of delinquencies is expected to rise significantly. Thus the capital is expected to experience significant pressure, especially given the sizeable concentrations of loans in proportion to equity. In addition, Moody's highlights that the retail loan portfolio, which accounts for almost half of the loan book, also shows signs of deterioration with the ratio of overdue loans increased by two times to 4% since year-end 2008. As a mitigating factor, there is a high integration of risk management standards between Bank of Moscow (which displays a reasonable level of credit risk management) and BMM which provide for additional assurance over the ability of BMM to select better borrowers and ensure reasonable credit enhancements of deals. In addition, BMM has a high level of dependence on the parent for funding and liquidity (e.g. 22% of total funding at year-end 2008 or USD92 million to date), which grew in significance and is expected to grow further given that alternative funding sources for BMM being constrained. Moody's also observes that the bank places a considerable reliance in its operations on the continuity of funding from Bank of Moscow which is currently being rolled over constantly, enabling BMM to continue lending with a moderate reduction of business volumes. Apart from the high level of dependence on the parent, the bank's liquidity is challenged by concentration on both sides of the balance sheet (e.g. with one customer accounting for 45% of customer funding) as well as potential asset quality deterioration that could squeeze liquidity, thus additional liquidity support from the parent could be needed. Moody's notes that Belarus' economy is closely correlated to the economies of its neighbours, and is especially dependant on demand from the CIS countries (e.g. Russia) which have experienced the impact of global financial instability slightly earlier, hence the credit standing of both BMM and Bank of Moscow are subjected to the same macroeconomic trends going forward. Moody's rating action also takes into account weakening financial profiles of both the parent and subsidiary, resulting in higher possible needs for support to BMM and lower ability of Bank of Moscow to provide support. Moody's also notes that the BMM's Ba3 long-term local currency deposit rating continues to factor in (i) its B2 Baseline Credit Assessment (BCA), (ii) low systemic support given the bank's notable market shares and (iii) Moody's assessment of a very high probability of parental support from Bank of Moscow (rated Baa1/D, negative outlook) -- in the event of a stress situation. Moody's assessment of the support probability is based on the bank's 100% ownership by Bank of Moscow, its strategic fit to their operations in light of its importance for Bank of Moscow and the City of Moscow in supporting their relationship with the Belarusian administration. As a result, the long-term local currency deposit rating receives a two-notch uplift to Ba3 from the bank's B2 BCA. The negative outlook reflects Moody's concerns that the worsening economic conditions in Belarus are likely to translate into a deterioration of BMM's financial fundamentals. In particular, potential asset quality deterioration -- given Bank of Moscow's exposure to industries most affected by the downturn -- is likely to deplete the bank's capital cushion and put pressure on its liquidity which is substantially dependant on wholesale funding. The outlook also reflects the negative outlook on Bank of Moscow's D bank financial strength rating (BFSR) which is used as a measure of ability to provide support. Moody's explained that it has applied a number of scenarios (base-case and stressed) to the banks' loan books and revealed that BMM's capital adequacy may rapidly decline as soon as the overall asset quality deteriorates, and BMM is likely to need additional recapitalisation from its parent. Moody's previous rating action on BMM was on 24 February 2009 when the rating agency changed the outlook on the bank's Ba2 long-term local currency ratings to negative from stable. The principal methodologies used in rating BMM are "Bank Financial Strength Ratings: Global Methodology" and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology", which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating BMM can also be found in the Credit Policy & Methodologies directory. Headquartered in Minsk, Belarus, BMM reported total consolidated assets of USD517 million and total equity of USD50 million, and ranked ninth by assets among Belarusian banks as of 31 December 2008. BMM is active in corporate and retail transactions, with the former supported by its links with Bank of Moscow. Headquartered in Moscow, Russian Federation, Bank of Moscow reported total consolidated assets -- as at year-end 2008 -- of RUB801 billion (USD28 billion) and equity of RUB68 billion (USD2.3 billion). Bank of Moscow was the fifth largest bank in the country at end-Q1 2009. It is majority controlled by the City of Moscow (directly and indirectly).

• Full name
  Bank Dabrabyt JSC
• Registration country
  Belarus
• Industry
  Banks