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Announcement:

Moody's affirms Ba3 ratings of Far Eastern Bank; stable outlook

02 Apr 2012

London, 02 April 2012 -- Moody's Investors Service has today affirmed the following ratings of Far Eastern Bank: Ba3 long-term local and foreign currency deposit ratings, Not Prime short-term local and foreign currency deposit ratings, and E+ standalone Bank Financial Strength Rating (BFSR, mapping to b3 on the long-term scale). All of the bank's ratings carry a stable outlook.

Moody's assessment is primarily based on Far Eastern Bank's financial statements for 2011 (audited) -- prepared under IFRS, and (unaudited) Russian GAAP as at 1 January 2012.

RATINGS RATIONALE

According to Moody's, Far Eastern Bank's ratings are constrained by (i) high single-name concentration in the loan book, (ii) maturity mismatches, (iii) weak asset quality and (v) low capitalisation. However, the ratings are supported by Moody's assessment of a high probability of capital and liquidity support from its parent Russian Regional Development Bank (Ba2/Not-Prime/E+, stable outlook, with the BFSR mapping to b2 on the long-term scale) and by Rosneft (Baa1, stable outlook) which is, in turn, the owner of Far Eastern Bank's parent. Other supporting factors include Far Eastern Bank's recognised name and established branch coverage in the Russian Far East.

Bank Financial Strength Rating

The key factors that position Far Eastern Bank's standalone credit strength in the b3 category are as follows:

Firstly, Far Eastern Bank has high borrower concentrations. The 20 largest loans accounted for 42% of gross loans at YE2011 (in accordance with IFRS). In relation to Tier 1 capital, Far Eastern Bank's exposure to the largest 20 borrowers was around 470% at YE2011 (the average for Russian banks is below 250%). Moody's notes that this exposes the bank's creditworthiness to the financial standing of a few large borrowers, with potential for earnings and asset quality volatility.

Secondly, Far Eastern Bank's exposure to liquidity risk is high due to the high proportion of short-term customer accounts in the funding base. This leads to substantial negative liquidity gaps in all 'time buckets', as assessed in Moody's liquidity stress test. Total deposits with maturity 'on demand' and 'less than a month' accounted for more than half of total customer accounts at YE2011. In Moody's opinion, this renders the bank's liquidity profile vulnerable to deposit outflows.

Thirdly, Far Eastern Bank's asset quality is relatively weak, with problem loans (loans overdue more than 90 days and restructured loans) accounting for 13% of gross loans at YE2011. Moreover, due to high concentrations, the bank's loan quality is sensitive to the financial standing of its largest borrowers. In addition, almost a third of total loans have been extended to industries regarded by Moody's as higher risk, such as financial services and construction which accounted for 22% and 9% of gross loans, respectively, as at YE2011 (under IFRS).

Finally, Far Eastern Bank's capital buffer is small, with the regulatory capital adequacy ratio standing at 11.58% at 1 March 2012, which is just above the 10% minimum regulatory requirement. Based on Far Eastern Bank's current level of loan loss provisions and expected earnings, Moody's does not expect capitalisation to fall below the required minimum in the rating agency's central scenario. However, in an adverse scenario Far Eastern Bank might require capital support.

Moody's notes positively that Far Eastern Bank's ownership structure was significantly streamlined following the 100% acquisition of its voting shares by Russian Regional Development Bank (initiated in 2011 and completed in March 2012). Previously, Far Eastern Bank's ownership structure had been relatively complex and non-transparent.

Overall, Moody's believes that the risks stemming from high single-name concentrations in the loan book, maturity mismatches, weak asset quality and low capitalisation outweigh the recent positive change in Far Eastern Bank's ownership structure. Therefore, the bank's standalone credit strength remains adequately positioned in the b3 category.

Global local and foreign currency deposit ratings

Far Eastern Bank's Ba3 deposit ratings continue to benefit from a three-notch uplift from its b3 standalone credit strength due to Moody's assumption of a high probability of parental support from Russian Regional Development Bank which fully owns and consolidates Far Eastern Bank. Far Eastern Bank plans to merge with Russian Regional Development Bank by the end of 2013.

According to Moody's, a reduction in concentration levels, improvements in the liquidity profile and asset quality as well as a higher capital buffer could exert upward pressure on Far Eastern Bank's standalone and supported ratings. Conversely, negative pressure could be exerted on these ratings as a result of any material adverse changes in the bank's risk profile, particularly any impairment of its liquidity position, and any failure to maintain control over asset quality. Furthermore, any evidence of a lower probability of support from the parent bank and/or Rosneft could result in a downgrade of the bank's long-term deposit rating and/or could result in a lowering of the standalone credit strength.

PRINCIPAL METHODOLOGIES

The methodologies used in these ratings 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 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Vladivostok in the Russian Far East, Far Eastern Bank had total assets of RUB31.5 billion (USD977.2 million) and total equity of RUB3.2 billion (USD98.7 million), and reported a net profit of RUB496.4 million (USD15.4 million) as at YE2011, according to audited IFRS.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Katrin Robeck
Analyst
Financial Institutions Group
Moody's Investors Service Limited, Moscow Branch
7th floor, Four Winds Plaza
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Russia
Telephone: +7 495 228 6060
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Yves Lemay
MD - Banking
Financial Institutions Group
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Moody's affirms Ba3 ratings of Far Eastern Bank; stable outlook

No Related Data.
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