(Source: Info-Prod Research (Middle East))Moody's Investors Service today downgraded itsbank financial strength rating (BFSR) of VTB Bank (Austria) (or VTBA),VTB Capital plc (VTBC) and VTB Bank (France) (VTBF) to D- from D. Theoutlook on the BFSRs is negative. All three banks are owned by theRussian Bank VTB (rated D-/Baa1/Prime-2). At the same time, Moody'saffirmed the banks' Baa3 long-term global local currency (GLC) depositratings, with a stable outlook. The rating actions conclude the reviewprocess initiated in February 2009, when the BFSR and deposit ratings ofthose banks were put on review for a possible downgrade. The negative outlook on these banks' BFSRs reflects our medium term expectation that the operating environment in Russia and globally would continue to negatively impact their financial fundamentals, particularly capitalisation, asset quality, profitability and liquidity. The outlook on the GLC deposit ratings is stable, reflecting Moody's expectation that further lowering of the banks' BFSRs by one notch, if it happens, isunlikely to result in the downgrade of the banks' deposit ratings. The downgrade of the BFSRs mainly reflects the negative pressure onfinancial fundamentals of these banks, stemming from their historicallyhigh credit and market risk exposures to Russian counterparties. Thesevere stress in the Russian economy is leading to a rapid deteriorationin borrowers' credit quality. As a result, we see a rapid increase inproblem loans and much weaker profitability metrics at VTBA, VTBC andVTBF. Higher expected credit losses put additional stress on banks'capital levels, due to the need to allocate new provisions. These subsidiaries' D- BFSRs are now in line with the BFSR of VTB. TheBFSRs of all three banks are supported by their membership in the largeVTB group, which supports these banks through funding and capital, andfacilitates client and transaction origination. Although the three banksaccounted for a minor 10% of group assets, they play an important role inservicing foreign transactions of the group and its clients in areas liketrade finance (VTBA and VTBF) and investment banking (VTBC). All threeare closely supervised by the parent bank. VTBA's BFSR is pressured by a weaker Tier 1 capitalisation following the consolidation of VTBF and VTB Bank Deutschland -- Tier 1 ratio deteriorated to 8.3% at YE2008, from 10.5% at YE2007. The loan portfolio is concentrated, with the 20 largest borrowers accounting for 150% of Tier 1 capital and mostly composed of Russian and CIS companies (on aconsolidated basis). We estimate the share of problem loans to accountfor 6.7% of gross loans at YE2008 (this ratio already includes a highshare of legacy problem loans), with a negative trend in 2009.