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Rating Action:

Moody's reviews six Baltic banks for possible downgrade

08 Jun 2009

London, 08 June 2009 -- Moody's Investors Service today placed the ratings of six Baltic banks on review for possible downgrade. The affected entities are Baltic International Bank (Latvia), BIGBANK (Estonia), Mortgage and Land Bank of Latvia (Latvia), Norvik Banka (Latvia), Siauliu Bankas (Lithuania) and Trasta Komercbanka (Latvia).

Moody's also notes that all the ratings of Swedbank AS (Estonia) and the long term debt and deposit ratings of Parex Bank remain on review for possible downgrade, the review having been initiated on 27 April 2009 for Swedbank AS (Estonia) and 5 December 2008 and 11 May 2009 for Parex Bank . The full list of rating actions can be found below.

The review of the banks' ratings will focus on Moody's expectation of credit losses following the deterioration of the Baltic operating environment and its potential impact on the banks' financial fundamentals and overall creditworthiness. Although the Baltic banks' capitalisation levels still appear to be adequate, Moody's believes that, with the three economies in deep recession, the likelihood of corporate defaults is rising in those countries and that this could lead to increased losses on the banks' corporate loan portfolios.

Moreover, delinquencies in the banks' retail portfolios are also expected to rise, reflecting higher unemployment and lower income levels and a likely further decline in house prices. These losses are expected to weaken the capital positions of most Baltic banks over the next two years. Moody's says that it has been incorporating expected losses on bank loan portfolios into its ratings for some time. However, the Moody's expectation regarding the probability of losses has increased because of the continuing deterioration of the Baltic operating environment.

Moody's notes that there has been some speculation that the Bank of Latvia may be forced to devalue the lat. Although the rating agency does not necessarily believe that this is the most likely scenario given the severe consequences and questionable positive effects stemming from a devaluation, its review will address the impact of such a devaluation on the banks' financial fundamentals and will also gauge the possible implications for neighbouring Baltic banking systems.

Overall, the key factor in these rating actions is Moody's concern that the banks' capitalisation levels and/or business franchises will come under pressure in light of the ongoing recession in the Baltic region.

REVIEW OF BFSRS AND DEBT AND DEPOSIT RATINGS

Those banks with capitalisation levels (Tier 1 and tangible common equity ratios) that Moody's believes could be significantly adversely affected as a result of high expected losses on their risk assets, primarily stemming from high exposures to the real estate sector or unsecured consumer finance, are likely to receive the biggest downgrades to their bank financial strength ratings (BFSRs). Moody's expects the possible downgrades of the senior debt and deposit ratings to be limited in most cases to one notch. However, in case of BIGBANK which is specialised in consumer finance, Moody's cautions that the downgrade of the deposit rating could be of several notches. This reflects the bank's high risk profile and recent rapid increase in problem loans.

Commenting on Mortgage and Land Bank of Latvia, Moody's notes that the bank's foreign currency deposit rating currently receives a three-notch uplift from its baseline credit assessment of Ba3 which reflects very high probability of systemic support given the 100% ownership by the government of Latvia. A possible multi-notch downgrade of the BFSR would lead to a downgrade of the bank's foreign currency deposit rating given the current support level.

Moody's BFSR methodology is unchanged, although the weight attached to certain rating considerations, particularly capital and future earnings prospects, has been increased to better reflect the impact of the current crisis. The refinements to Moody's approach to rating banks in this environment are discussed in two Special Comments entitled "Calibrating Bank Ratings in the Context of the Global Financial Crisis", published in February and "Moody's Approach to Estimating Bank Credit Losses and their Impact on BFSRs", published in May.

Moody's expects to conclude its review of these banks within a month, although for some entities the review process could be shorter.

RATING ACTIONS IN SUMMARY

The detailed rating actions are listed below (in alphabetical order).

Baltic International Bank

- B2 long-term local and foreign currency deposit rating placed on review for downgrade

- E+ BFSR and Not Prime short-term rating affirmed

BIGBANK

- B1 long-term local and foreign currency deposit rating and E+ BFSR placed on review for downgrade

- Not Prime short-term rating affirmed

Mortgage and Land Bank of Latvia

- D- BFSR and Baa3 long-term foreign currency deposit rating and Prime-3 short-term rating placed on review for downgrade

Norvik Banka

- Ba3 long-term local and foreign currency deposit rating and D- BFSR placed on review for downgrade

- Not Prime short-term rating affirmed

Siauliu Bankas.

- Ba2 long-term local and foreign currency deposit rating and D BFSR placed on review for downgrade

- Not Prime short-term rating affirmed

Trasta Komercbanka

- B2 long-term local currency deposit rating placed on review for downgrade

- E+ BFSR and Not Prime short-term rating affirmed

PREVIOUS RATING ACTIONS AND METHODOLOGIES

Moody's last rating action on Baltic International Bank was on 12 December 2008 when it downgraded Baltic International Bank's rating to B2, with a negative outlook.

Moody's last rating action on BIGBANK was on 3 September 2008 when it changed the outlook on BIGBANK's B1 rating to negative.

Moody's last rating action on Mortgage and Land Bank of Latvia was on 23 April 2009 when it downgraded Mortgage and Land Bank of Latvia's rating to Baa3/P-3, with a negative outlook.

Moody's last rating action on Norvik Banka was on 13 November 2008 when it changed the outlook on Norvik Banka's Ba3/D- ratings to negative.

Moody's last rating action on Siauliu Bankas was on 31 October 2008 when it changed the outlook on Siauliu Bankas's Ba2/D ratings to negative.

Moody's last rating action on Trasta Komercbanka was on 12 December 2008 when it changed the outlook on Trasta Komercbanka's B2 rating to negative.

The principal methodologies used in rating the banks were "Bank Financial Strength Ratings: Global Methodology" (February 2007) and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology" (March 2007), 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 these issuers can also be found in the Credit Policy & Methodologies directory.

Baltic International Bank is headquartered in Riga, Latvia, and reported consolidated total assets of LVL0.167 billion (EUR0.24 billion) at the end of December 2008.

BIGBANK is headquartered in Tallinn, Estonia, and reported consolidated total assets of EEK2.9 billion (EUR0.18 billion) at the end of December 2008.

Mortgage and Land Bank of Latvia is headquartered in Riga, Latvia, and reported total assets of LVL969 million (EUR1.4 billion) at the end of December 2008.

Norvik Banka is headquartered in Riga, Latvia, and reported total assets of LVL506 million (EUR0.7 billion) at the end of December 2008.

Siauliu Bankas is headquartered in Siauliu, Lithuania, and reported total assets of LTL2.1 billion (EUR0.6 billion) at the end of December 2008.

Trasta Komercbanka is headquartered in Riga, Latvia, and reported consolidated total assets of LVL0.28 billion (EUR0.4 billion) at the end of December 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 reviews six Baltic banks for possible downgrade
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