Moody's Interfax downgrades NSR of First Czech Russian Bank (Russia) to Baa3.ru. B3/Not Prime/E+ affirmed, with a stable outlook

Moscow, January 28, 2011 -- Moody's Interfax Rating Agency has today downgraded the long-term national scale rating (NSR) of First Czech Russian Bank (FCRB) to Baa3.ru from Baa2.ru. Concurrently, Moody's Investors Service has today affirmed the bank's E+ bank financial strength rating (BFSR) and the B3/Not Prime long-term and short-term local and foreign currency deposit ratings. The outlook on all of the global scale ratings is stable. The national scale rating carries no specific outlook. Moody's assessment is primarily based on FCRB's audited financial statements for 2009 prepared under IFRS, signed on 28 May 2010, and monthly statutory accounts reported to the Central Bank of Russia. RATINGS RATIONALE According to Moody's Interfax, the rating downgrade is driven by a significant decrease in the bank's business whereby the bank has decreased its loan book by over 50% since Q3 2008 as a result of the global financial crisis. This decline in FCRB's loan book has resulted in reduced revenue generation capacity, and was one of the main reasons for the bank's losses in 2009 and Q3 2010. In addition, asset quality has also been significantly impacted and the bank has reported NPLs slightly over 10% at year-end 2009 according to audited IFRS financial statements, and slightly over 29% of loans were restructured as long-term project finance -- including projects in the construction sector -- accounted for a significant portion of the loan book. Moody's affirmation of the B3/Not Prime/E+ ratings is based on FCRB's high capital base, whereby the bank has reported a total capital adequacy ratio of over 30% at end-Q3 2010 according to statutory accounts, which is quite a comfortable cushion to absorb unexpected risk for the B3 rating category. In addition, the rating is supported by FCRB's established niche franchise which also forms the basis for a relatively stable funding base. Moody's cautions, however, that FCRB's ratings are constrained by: (i) lack of scale, which translates into a narrow franchise due to a niche-oriented strategy, and (ii) high concentration levels on both sides of the balance sheet. Moody's notes that high concentrations in the loan book, together with a high portion of restructured loans, render the bank's equity potentially vulnerable to large defaults in the loan book. FCRB's asset quality remains somewhat below average for the peers and is negatively affected by exposure to long-term financing of construction and real estate as well as lending to those companies displaying moderate creditworthiness. This is reflected in the significant level of NPLs and restructured loans. However, the majority of restructured loans are performing according to a new schedule and are substantially covered by collateral. The bank's ability to address a decline in earnings was challenged by its modest efficiency and inflexible cost base, resulting in negative PPI in 2009 and Q3 2010. Moody's explained that FCRB's ratings do not have upward potential in the short to medium term. An upgrade of the bank's ratings would require a notable strengthening and widening of its franchise, and better diversification of both assets and the funding base, which would also need to be accompanied by good asset quality, solid liquidity and good financial performance. Essential prerequisites for a ratings upgrade would include implementation of more advanced corporate governance and risk management practices. In contrast, negative pressure on FCRB's ratings could result from a material deterioration in asset quality and/or liquidity problems. Further shrinkage of FCRB's franchise could also result in a downgrade of the ratings. The principal methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007. Moody's Interfax Rating Agency's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".ru" for Russia. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Implementation Guidance published in August 2010 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings." ABOUT MOODY'S AND MOODY'S INTERFAX Moody's Interfax Rating Agency (MIRA) specializes in credit risk analysis in Russia. MIRA is controlled by Moody's Investors Service, a leading provider of credit ratings, research and analysis covering debt instruments and securities in the global capital markets. Moody's Investors Service is a subsidiary of Moody's Corporation (NYSE: MCO). Moody's last rating action on FCRB was on 18 June 2007 when the rating agency assigned B3/Not Prime/E+ first-time ratings to the bank, and Moody's Interfax affirmed the Baa2.ru NSR. Domiciled in Moscow, FCRB reported -- as at 31 December 2009 -- total IFRS (audited) assets of RUB17 billion (ca. USD530 million) and total equity of RUB4 billion (ca. USD120 million). The bank reported a net loss of RUB332 million (ca. USD11 million) at YE2009.

• Full name
  First Czech-Russian Bank, LLC
• Registration country
  Russia
• Industry
  Banks