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Rating Action:

Moody's upgrades Vneshprombank (Russia) to B2/Baa1.ru from B3/Baa2.ru

20 Apr 2010

E+ BFSR and Not-Prime short-term foreign currency deposit ratings affirmed

Moscow, April 20, 2010 -- Moody's Investors Service has today upgraded the long-term foreign currency deposit rating of Russia's Foreign Economic Industrial Bank (Vneshprombank) to B2 from B3. Consequently, Moody's Interfax has upgraded the bank's National Scale Rating to Baa1.ru from Baa2.ru. At the same time, Moody's has affirmed the following global scale ratings at the current levels: Not-Prime (NP) short-term foreign currency deposit rating and an E+ bank financial strength rating (BFSR -- mapping to a Baseline Credit Assessment -- BCA - of B2). The outlook for all ratings is stable. Moscow-based Moody's Interfax is majority-owned by Moody's, a leading global rating agency.

According to Moody's the rating action reflects Vneshprombank's resilience to the global financial crisis, which has enabled the bank to demonstrate a satisfactory performance in terms of (i) sustained growth, and (ii) core financial fundamentals -- such as asset quality indicators, funding, profitability and liquidity. These results were achieved due to the special niche in which the bank operates (boutique model with high-net-worth customers), and its below-average risk appetite. During 2009, shareholders also demonstrated willingness and ability to capitalise the bank in order to finance its growth, and Moody's expects this support to continue via a planned RUB1.3 billion (US$44 million) capital increase in 2010.

During 2009, Vneshprombank grew its balance sheet substantially, reflecting its capability to attract core customers. At the same time, the loan portfolio continued to perform better than average for the Russian banking system. This enabled the bank to demonstrate adequate profitability indicators due to the fact that (i) borrowers are usually well collateralised (LTV often less than 50%) and the bank uses a collateral-based approach and other credit risk mitigants in its lending procedures which, in this case, have proved to be working well, thus resulting in lower delinquencies; (ii) loans are usually short term and granted for operational purposes (no project finance); and (iii) the majority of borrowers have reasonably good credit standing.

Vneshprombank benefits from a high liquidity cushion which would enable it to manage very large withdrawal of customer funds without having to reduce business volumes.

At the same time, Moody's notes very high concentration levels in the funding base (e.g. top 20 customers account for 77% of customer deposits). However, despite historically high concentrations, the customer base has demonstrated satisfactory stability in the past -- including through crisis times. Nonetheless, this significant concentration in funding renders its franchise and business significantly exposed to the risk of major funding outflows. In addition, Moody's notes that Vneshprombank remains highly exposed to succession risk, given that a significant portion of the bank's business is based on the personal contacts of the current owners. As a result, the bank's franchise and other financial indicators (e.g. asset quality, funding) are potentially vulnerable and volatile. Moody's also notes high concentration levels in the loan book that -- in the current unstable economic environment -- could result in volatility of the bank's asset quality and franchise indicators.

The B2/NP foreign currency deposit ratings do not incorporate possible support from Vneshprombank's owners. In Moody's view, although such support has been forthcoming, its scope and timeliness are rather uncertain. Given the bank's size and market position, any support from the Russian financial authorities is unlikely.

Moody's notes that significant strengthening of the bank's franchise accompanied by improved financial fundamentals would likely exert upward pressure on the bank's BCA and long-term foreign currency deposit rating, although this is not expected in the near term. Vneshprombank's BCA and long-term foreign currency deposit rating could be downgraded if any significant asset quality problem should appear, causing deterioration in capitalisation levels or liquidity problems, although this is not expected in the near term. Downward pressure could also stem from the materialisation of succession risk which would, in time, exert pressure on franchise value.

The last rating action on Vneshprombank was on July 3, 2007 when the National Scale Rating was upgraded to Baa2.ru from Baa3.ru.

The principal methodologies used in rating Vneshprombank were Moody's "Bank Financial Strength Ratings: Global Methodology" (February 2007) and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology" (March 2007), and available on 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 Moscow, Russian Federation, Vneshprombank reported total consolidated assets of US$1.6 billion and total equity of US$100 million under IFRS at year-end-2009. It ranked among 80 largest banks by assets among Russian banks as of 31 December 2009.

Moscow
Vladlen Kuznetsov
Asst Vice President - Analyst
Financial Institutions Group
Moody's Eastern Europe LLC
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091

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

Moody's upgrades Vneshprombank (Russia) to B2/Baa1.ru from B3/Baa2.ru
No Related Data.
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