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Rating Action:

Moody's confirms B2 ratings of Parex Bank (Latvia); outlook stable

30 Jul 2009

London, 30 July 2009 -- Moody's Investors Service today confirmed Parex Bank's B2 long-term local and foreign currency deposit and debt ratings. The outlook on these ratings is now stable. Moody's rating action concludes the review for further possible downgrade initiated in December 2008 after Parex Bank's ratings were downgraded to their current levels. The bank's E bank financial strength rating (BFSR), the outlook on which remains stable, and Not Prime short-term rating were affirmed.

AFFIRMATION OF BFSR

In affirming the bank's E BFSR, which maps to a baseline credit assessment (BCA) of Caa1, the rating agency notes the bank's impaired franchise value and weakened financial performance, especially in terms of asset quality and profitability. Moody's also notes the bank's weak liquidity position on a standalone basis (i.e. excluding Moody's assessment of the probability of external support).

The bank's impaired franchise value is primarily due to deposit withdrawal restrictions, which Moody's views as constituting a selective default. The Latvian financial services authority in June 2009 extended the restrictions, which were originally aimed at preventing money outflows from the bank, until the end of November 2009. Also, it should be noted that Parex Bank has ceased its new lending activities, which further impairs its franchise value.

Moody's notes that Parex Bank, as part of its current restructuring programme, is addressing the above concerns. However, the rating agency believes that, it will remain difficult for the bank to continue operating normally and competitively as a lending and deposit-taking institution without the deposit withdrawal restrictions being lifted.

Moody's recognises the bank's recent cost efficiency improvements resulting from the current restructuring. However, its financial performance continues to be severely impaired by significant loan loss provisioning needs. Indeed, for H1 2009, the bank reported unconsolidated net losses of LVL44.5 million (EUR64 million). Moody's believes that the bank's performance will continue to be adversely affected by a further increase in problem loans in H2.

The affirmation of Parex Bank's E BFSR was also supported by Moody's scenario analysis of expected losses on the bank's loan portfolio, considering both anticipated (base) and worse-than-expected (stressed) scenarios and the resulting impact on the bank's capitalisation. This analysis, which has also been conducted on other rated banks in the Baltic states, places greater emphasis on a bank's capital adequacy and its ability to replenish capital through future earnings generation in the context of the economic downturn in the region.

In its scenario analysis, Moody's has also taken into consideration the Latvian government's recent capital injection of LVL141 million (EUR202 million) into Parex Bank. Although Moody's views this positively, as well the announced EBRD shareholding in the bank, the rating agency is concerned that, based on its scenario analysis, the bank could suffer from a further deterioration of capital levels and potentially require more support from its shareholders.

Moody's says that its BFSR methodology remains unchanged, although it has increased the weight attached to certain rating considerations, particularly capital and future earnings prospects, to better reflect the present conditions. This approach is consistent with Moody's reports "Calibrating Bank Ratings in the Context of the Global Financial Crisis" and "Moody's Approach to Estimating Bank Credit Losses and their Impact on Bank Financial Strength Ratings", published in February and May 2009, respectively. Both reports are available on www.moodys.com.

CONFIRMATION OF LOCAL CURRENCY DEPOSIT RATINGS

Moody's confirmation of the bank's B2 long-term debt and deposit ratings reflects its strengthened ownership structure following the announced EBRD participation. It also reflects the Latvian government's strong proven commitment to support the bank, which has been demonstrated in the form of capital injections, deposits and guarantees for the bank's outstanding syndicated debt.

Moody's notes that on 23 July 2009, Parex Bank signed a subordinated debt agreement with the EBRD for a subordinated loan of EUR22 million, which qualifies as Tier 2 capital. As part of the transaction, the EBRD will also acquire an equity stake of 25% (plus one ordinary share) for LVL57.5 million (EUR82 million) in Parex Bank. Moody's understands that this transaction is due to be finalised in August 2009. Currently, the government of Latvia is the majority shareholder of Parex Bank, holding a 95.3% stake, but this will be reduced to 70.3% following the EBRD's investment.

Moody's recognises the strong commitment that the Latvian government and the EBRD have shown by rebuilding the bank's capital levels, which were depleted by reported net losses of LVL131 million (EUR188 million) in 2008. Consequently, Moody's continues to assess the probability of systemic support for the bank in the event of a stress situation as high. As a result, Parex Bank's deposit and debt ratings receive a two-notch uplift from the Caa1 BCA. The rating agency believes that this high level of support will likely continue as long as the current ownership structure is maintained.

The stable outlook on Parex Bank's long-term deposit ratings reflects not only its stabilised capital base and new ownership structure, but also Moody's expectation of continued strong support for the bank by the government and the EBRD. This has to be seen in the context of a difficult operating environment in the region, which continues to put pressure on the bank's standalone financial strength.

PREVIOUS RATING ACTION AND PRINCIPAL METHODOLOGIES

The previous rating action on Parex Bank was implemented on 11 May 2009, when Moody's maintained the review for possible downgrade on the bank's B2 long-term local and foreign currency deposit and debt ratings.

The principal methodologies used in rating Parex Bank 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 sub-directory. Other methodologies and factors that may have been considered in the process of rating Parex Bank can also be found in the Credit Policy & Methodologies directory.

Headquartered in Riga, Latvia, Parex Bank reported total assets of LVL3.0 billion (EUR4.3 billion) at the end of March 2008.

London
Reynold R. Leegerstee
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Kimmo Rama
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's confirms B2 ratings of Parex Bank (Latvia); outlook stable
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