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

January 31, 2011 Moody's Investors Service
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