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Rating Action:

Moody's takes rating actions on three Romanian commercial banks

26 Nov 2009

Limassol, November 26, 2009 -- Moody's Investors Service has today downgraded the ratings of three Romanian commercial banks in light of its global review of systemic support indicators for the country's banking system, and also because of the asset quality challenges faced by Romanian banks in the currently difficult operating environment. The ratings of the affected banks are as follows:

i) Banca Comerciala Romana SA (Erste Group)

- Bank financial strength rating (BFSR) of D remains unchanged with stable outlook.

- Global local currency (GLC) deposit ratings downgraded to Baa2/P-2 with a stable outlook from Baa1/P-2.

- Foreign currency (FC) deposit ratings of Baa3/P-3 remain unchanged with stable outlook.

ii) BRD -- Groupe Societe Generale

- BFSR of D+ (which maps to a Ba1 baseline credit assessment) downgraded to D with stable outlook.

- GLC deposit ratings downgraded to Baa2/P-2 with a stable outlook from A2/P-1.

- FC deposit ratings of Baa3/P-3 remain unchanged with stable outlook.

iii) Raiffeisen Bank SA

- BFSR of D remains unchanged with stable outlook.

- GLC deposit ratings downgraded to Baa3/P-3 with stable outlook from Baa2/P-2.

- FC deposit ratings of Baa3/P-3 remain unchanged with stable outlook.

Earlier this year, Moody's published a Special Comment on its review of the capacity of governments and central banks to support their banking systems, entitled "Financial Crisis More Closely Aligns Bank Credit Risk and Government Ratings in Non-Aaa Countries", available on moody.com.

Consistent with the analytical criteria specified in the Special Comment, and given Romania's current situation and future prospects, Moody's has changed the systemic support input for Romanian banks' ratings to Baa2 from the Aa3 local currency deposit ceiling (LCDC). The new Baa2 systemic support anchor for Romanian banks is placed one notch above the Baa3 local currency government debt rating. As a result of this, the local currency deposit ratings of Romanian banks have been downgraded, affecting each bank differently.

In the Special Comment, Moody's noted that the appropriate reference rating for the capacity of a national government to provide support to banks during a prolonged and widespread crisis would be aligned with or constrained by the government's own debt rating. However, Moody's also believes that this rating could be adjusted, usually positively, to reflect the non-fiscally dependent measures that many central banks and governments can deploy to support banks.

In deciding whether the systemic support anchor can be higher than the local-currency debt rating of the national government, Moody's considered a number of factors for each banking system. These are: the size of the banking sector relative to the government's resources; the level of stress in the banking system and in the economy; the FC obligations of the banking system relative to the government's own FC resources; political and historical patterns; and the possibility of any drastic shift in government priorities.

Moody's regards the systemic importance of the Romanian banking system as moderate given the ratio of banking assets to GDP of around 63%, with a weighted average bank financial strength rating (BFSR) of D for the rated Romanian commercial banks. The level of stress in the Romanian banking system has increased due to the deep recession in the country, with the proportion of non-performing loans (NPLs) growing steeply in recent quarters, reaching around 13.4% as of August 2009 based on local standards (loans classified as doubtful and loss).

Moody's notes that the impact of the downturn on the Romanian economy is significant given the slump on export-oriented sectors and on local retail demand for goods and services. The rating agency also notes that the banking system's FC obligations relative to the overall economy and the central bank's (NBR) FC reserves are quite significant, mainly in the form of deposits denominated in FC as well as FC borrowings that banks usually obtain from their European parent banks.

Political and historical evidence suggests that Romania's government is likely to show moderate support towards its banking system, although in Moody's opinion its stance towards supporting the systemically important banks has not changed and is not likely to change in the foreseeable future. That said, Moody's notes that Romania is currently facing presidential elections which will determine the stability and functioning of the country's government. The new government will need to regain the confidence of international investors. At the same time, the government will also need to undertake the necessary economic reforms to ensure the timeliness of a EUR20 billion international aid package, mainly coming from the International Monetary Fund (IMF) and the European Commission (EC).

The Baa2 systemic support input for Romanian banks is one notch above the Baa3 local currency government debt rating. This uplift is predicated on Moody's view of a "medium" risk of a system-wide banking crisis as well as a "medium" likelihood of the government ring-fencing its own fiscal position from the banking system. In addition, NBR's good regulatory and supervisory framework provides some added comfort about Romania's ability to provide systemic support to its banking system. In addition, it should be noted that all three Romanian banks' deposit ratings continue to benefit from external support coming from their European parent banks.

The BFSR of D+ for BRD, the majority-owned subsidiary of the French Group Societe Generale, was downgraded to D in the wake of the deep economic recession in Romania and its impact on the bank's asset quality and earnings. The rating action was driven by the bank's reduced financial flexibility, as reflected in depressed profitability, deteriorating asset quality and reducing provision coverage levels. Although BRD remains well capitalised with a capital adequacy ratio (CAR) of 12.3% as of September 2009, its net profits for the first nine months of 2009 declined 19% year-on-year, mainly due to higher provisioning costs that increased by almost 200%. During 2009, the bank's ratio of gross NPLs to gross loans has increased significantly based on local standards (classified as doubtful and loss), excluding any restructured loans, while the NPL provisioning coverage without considering any collaterals was relatively low at the end of September 2009.

Moody's believes that these challenges are better captured in BRD's new BFSR of D (mapping to a Ba2 baseline credit assessment) in line with the BFSR of the other two rated Romanian banks. Despite BRD's more prudent lending practices over the past few months, its relatively high exposure to the small and medium-sized enterprises (SMEs) segment makes its loan book vulnerable to the effects of the economic recession. Looking ahead, Moody's expects the elevated credit risk in Romania to continue exerting pressure on all banks' earnings capacity and capitalisation levels.

Moody's previous rating action for all rated Romanian banks named above was implemented on 22 June 2009 when the ratings were placed on review for a possible downgrade.

The principal methodologies used in rating this issuer are "Bank Financial Strength Ratings: Global Methodology", and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology". These can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Headquartered in Bucharest, Banca Comerciala Romana reported total assets of RON70.8 billion (EUR16.9 billion) as of the end of September 2009.

Headquartered in Bucharest, BRD -- Groupe Societe Generale posted total assets of RON47.9 billion (EUR11.4 billion) as of the end of September 2009.

Headquartered in Bucharest, Raiffeisen Bank had total assets of RON18 billion (EUR4.3 billion) as of the end of September 2009.

Limassol
Mardig Haladjian
General Manager
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Limassol
Nondas Nicolaides
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's takes rating actions on three Romanian commercial banks
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