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Rating Action:

Moody's downgrades Raiffeisenbank (Bulgaria) to Ba1; outlook stable

30 Jul 2012

Limassol, July 30, 2012 -- Moody's Investors Service has today downgraded Raiffeisenbank (Bulgaria)'s long and short-term local and foreign-currency deposit ratings to Ba1/Not Prime, from Baa3/Prime-3, and standalone bank financial strength rating (BFSR) to D-, mapping to a standalone credit assessment of ba3, from D+/ba1. All ratings carry a stable outlook.

This rating action reflects (i) Bulgaria's challenging operating environment; (ii) Raiffeisenbank's asset-quality deterioration and Moody's expectation of further deterioration given the bank's exposures to the construction and real-estate sector and high concentrations (although collateralized and within regulatory limits); and (iii) subsequent pressure on the bank's profitability, stemming from relatively high provisioning requirements and subdued loan growth.

Today's rating actions conclude the review initiated on Raiffeisenbank's deposit ratings initiated on 21 February 2012, and extended to all ratings on 17 May 2012.

RATINGS RATIONALE

--DOWNGRADE OF STANDALONE BANK FINANCIAL STRENGTH RATING

Moody's says that the downgrade of the standalone BFSR reflects both the recent deterioration in financial performance, owning to the challenging operating environment, and Moody's expectations that the weak economic prospects will constrain the bank's ability to stabilise and improve its asset-quality and profitability metrics.

Weak operating environment

The continued weak economic recovery has negatively affected the bank's financial performance. Moody's expects economic growth to decelerate to 0.9% in 2012, from 1.7% in 2011 (in Q1 2012 Bulgaria's real GDP grew by 0.5% year-on-year, according to the National Statistics Institute (NSI), compared with 2.8% in Q1 2011). The weak economic prospects reflect the country's high dependence on external demand for exports and private-sector capital inflows that render it vulnerable to the deepening economic slowdown in the euro area, an important trading partner. Although Moody's expects Bulgaria's economic performance to improve in the coming years, the rating agency anticipates that growth rates will likely remain well below the levels reported before 2008 (around 6% GDP growth per year), which will continue to result in subdued credit growth, lower revenues and asset-quality pressures for Raiffeisenbank.

Asset-quality deterioration

Within the context of subdued economic growth, the rating agency notes that large concentrations in Raiffeisenbank's loan portfolio (although collateralized and within regulatory limits), and high exposures to the construction and real-estate sector, expose its balance sheet to the risk of large corporate defaults. According to 2011 financial statements, Raiffeisenbank's impaired loans have grown to 15% of gross loans in December 2011, from approximately 9% in December 2010, mainly due to delinquencies in a small number of large construction and real-estate loans. The performance of this lending segment, which accounted for approximately 15% of the bank's gross loans in December 2011 (according to the bank's 2011 financial statements), is under pressure as real-estate prices remain depressed and foreign direct investment (FDI) remains well below pre-crisis levels.

Profitability metrics remain under pressure

Moody's also notes that Raiffeissenbank's profitability remains under pressure, stemming from the need to build provisioning coverage, which has declined to 50% of impaired loans as of December 2011, from 73% in December 2010, according to the bank's 2011 financial statements. Going forward, Moody's also expects that subdued lending opportunities and provisioning charges will dampen profitability.

STABLE OUTLOOK

The stable outlook on Raiffeisenbank's ratings reflects the bank's strong franchise, solid capital levels and adequate liquidity. First, the rating agency recognises that Raiffeisenbank benefits from a good domestic franchise as the fourth-largest institution in Bulgaria, with strong brand recognition and a good presence in the corporate sector. Second, the bank maintains sound capitalisation buffers, with a Tier 1 ratio of 16% as of December 2011, according to the bank's 2011 financial statements -- which provides a cushion to absorb losses. Third, Raiffeisenbank benefits from a growing deposit base in Bulgaria which underpins its adequate liquidity levels.

-- PARENTAL SUPPORT UPLIFT

Raiffeisenbank's Ba1 deposit rating incorporates two notches of uplift based on Moody's view of the high likelihood of parental support from Raiffeisen Bank International AG (RBI) (A2, stable outlook, D+/ba1, stable outlook). RBI provides the bank with operational, supervisory and funding support. Raiffeissenbank is a strategically important subsidiary and is well-integrated within the RBI group. These considerations, together with Moody's view of RBI's commitment to the Bulgarian market, underpin the rating agency's assumptions of high parental support for the bank, which result in a two-notch rating uplift from the current ba3 standalone credit assessment.

WHAT COULD MOVE THE RATINGS UP/DOWN

Upwards pressure on the ratings could stem from sustainable improvements in Bulgaria's operating environment, which would in turn allow Raiffeisenbank to stabilise and improve asset quality and profitability.

Downwards pressure on the ratings could stem from greater-than-expected deterioration in asset quality as a result of a prolonged economic contraction in the euro area, which would itself constrain Bulgaria's economic growth. In addition, a reduced commitment and/or ability of the parent bank to support its Bulgarian subsidiary could exert downwards pressure on Raiffeisenbank's ratings.

PRINCIPAL METHODOLOGIES

The principal methodology used in this rating was Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Sofia, Bulgaria, Raiffeisenbank reported total consolidated assets of BGN6.45 billion (EUR3.3 billion), as of end-December 2011, according to the bank's 2011 financial statements.

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.

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Information sources used to prepare the rating are the following : parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

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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.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

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.

Elena Panayiotou
Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves J Lemay
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Raiffeisenbank (Bulgaria) to Ba1; outlook stable
No Related Data.
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