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Announcement:

Moody's affirms Vnesheconombank's ratings; outlook stable

Global Credit Research - 26 Jan 2011

Moscow, January 26, 2011 -- Moody's Investors Service has today affirmed the following ratings of Russia-based Vnesheconombank (VEB): Baa1/Prime-2 long- and short-term issuer ratings. All these ratings carry a stable outlook. The rating agency has also affirmed VEB's baseline credit assessment of 14 (BCA, which maps into B1 on Moody's traditional rating scale).

Moody's assessment is primarily based on VEB's audited financial statements for 2009 prepared under IFRS, as well as the bank's unaudited financial statements for the first half of 2010 prepared under IFRS.

RATINGS RATIONALE

According to Moody's, VEB's Baa1 issuer rating remains supported by the bank's exclusive role as a development bank in Russia operating under a special law. The very high probability of support from the government is based on VEB's 100% state control, and evidenced by a strong history of ongoing government support in the form of funding and capital injections. This very high probability of support from the government places VEB's Baa1 issuer rating six notches above the bank's BCA of B1.

Moody's notes that VEB's BCA is constrained by the bank's high exposure to credit risk due to industry concentrations in loans, very high exposure to market risk stemming from investments in equities, and concentrated funding base which is dominated by government funds. Moreover, VEB's strategy is dependent on politically motivated decisions, highlighted by its active role in financing companies and banks during the crisis. Moody's also sees high credit and operational risks related to VEB's acquisitions of the three failed banks (Globex Bank, Svyaz-Bank, Prominvestbank). VEB's BCA is supported by the bank's very close links to the government given its status as a specialised financial institution with a specific role to develop the national economy and support its recovery. The bank is also adequately capitalised for the risks its faces, with a 22% capital to assets ratio as of mid-2010.

At year-end 2009, 26% of VEB's corporate loans were either overdue or restructured, which was somewhat higher than the sector average for Russia (around 20%), as a result of high single-party concentrations. On a positive note, loan loss reserves covered 13% of loans at mid-2010 (under IFRS), providing an adequate buffer according to Moody's scenario analysis. VEB's capital base is also adequate to absorb unexpected credit losses. Moody's notes that VEB's loan book became more granular at year-end 2010, as all of its anti-crisis corporate loans were repaid (around RUB200 billion). As a result, the bank's ratio of top 20 loans / capital decreased to around 80% at year-end 2010 (management data), from 136% at mid-2010 (IFRS).

The rating agency views as negative that VEB increased its exposure to the equity market. At mid-2010, this exposure stood at $5.3 billion or 36% of the bank's capital at mid-2010 under IFRS. The bank further increased its exposure at year-end 2010 through the acquisition of a stake in Gazprom valued at $3.5 billion (the deal was funded by the government). This transaction increased VEB's exposure to equities to around $9.3 billion at year-end 2010, or around 60% of capital. On a positive note, Moody's analysis indicates that VEB's capitalisation allows the bank to withstand an equity market decline of 70% before its capital goes below 10%, which is a low probability scenario.

Moody's last rating action on VEB was on 23 March 2009 when the rating agency has withdrawn VEB's local currency deposit ratings of Baa1, foreign currency deposit ratings of Baa1/ Prime-2 and Bank Financial Strength Rating (BFSR), and replaced them with long-term local- and foreign-currency Issuer Ratings of Baa1 and short-term local- and foreign-currency Issuer Ratings of Prime-2. In line with other government related issuers (GRIs), Moody's has assigned Issuer Ratings to VEB. Moody's defines a GRI as an entity with full or partial government ownership or control, a special charter, or a public policy mandate from the national or local government.

The principal methodology used in rating VEB was "Government-related Issuers: Methodology Update" published in July 2010. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Headquartered in Moscow, Russia, VEB reported total assets of RUB1.97 trillion, total equity of RUB441 billion and net income of RUB14 billion according to IFRS at June 30, 2010.

Moscow
Eugene Tarzimanov
Vice President - Senior Analyst
Financial Institutions Group
Moody's Eastern Europe LLC
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091

London
Yves Lemay
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Eastern Europe LLC
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091

Moody's affirms Vnesheconombank's ratings; outlook stable
No Related Data.
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