Managementexpects impaired and restructured loans to reach 15% at the maximum inthe medium term. In addition, VTBA has a large exposure to market andcredit risks through CDS sold on Russian and CIS counterparties, whichaccounted for ca. 100% of Tier 1 capital. The BFSR on VTBC is negatively pressured by uncertainties over the impact of the bank's new strategy -- focussing on investment banking and away from wholesale banking, on its franchise value and risk profile. Although we acknowledge that the bank is making good progress in building thenecessary managerial, operational and risk infrastructure for aninvestment bank, as well as inking high-profile deals, this strategicrepositioning leads to high execution risk. VTBC's financial fundamentalsare under pressure: Tier 1 capitalisation dropped to 10% at YE2008, from25% in 2007, following a rapid increase in risk assets and a large netloss. However in 2008 VTBC received US$250 million in Tier 1 capital andUS$600 million in upper Tier 2, which brought its total CAR back to 20.1%at YE2008, the same level as in 2007. Although the quality of VTBC'scapital base has weakened because of a larger Tier 2 component thanpreviously, overall CAR remains strong. The share of impaired loans inthe bank's portfolio increased substantially in 2008, to 10% of grossloans at year-end. Moody's notes that credit risk concentration is veryhigh with the top 20 corporate loans exceeding 230% of Tier1 capital atYE2008; those are legacy loans, however, with no new origination in linewith new strategy. The BFSR on VTBF is impacted by asset quality deterioration. At YE2008, problem loans accounted for around 7% of total exposure to banks andcustomers. The bank also has large single party concentrations, with the20 largest borrowers exceeding 200% of Tier 1 capital. Although VTBF is astrongly capitalised bank compared to VTBA and VTBF (with total capitalfunds covering 70% of assets), we still believe that higher loan lossprovisions would impact its capital base, however without materiallyaffecting Tier 1 capitalisation -- which stood at 13.6% at YE2008. The banks' long- term global local currency (GLC) deposit ratings wereaffirmed at Baa3, based on their baseline credit assessments (BCA) of Ba3and VTB's supported rating (Baa1; this rating incorporates Moody's viewof the very high likelihood of support for VTB and its subsidiaries fromthe Russian government). According to Moody's joint default analysis(JDA) methodology, in most cases when incorporating parental support intobank ratings of a foreign subsidiary, we use the parent's stand-alonerating (Ba3 in case of VTB) - that is, the rating without benefit of anysystemic support - to determine the parent's ability to support itsforeign bank subsidiaries. However, in case of VTBA, VTBC and VTBF, weused the parent's supported rating (Baa1), to reflect our opinion thatthese foreign subsidiaries are very likely to indirectly benefit fromsystemic support provided by the Russian government to VTB. We base ouropinion on a track record of support to these banks from the Russiangovernment and its bodies. Moody's believes that these banks are unlikely to receive systemic support from their domicile countries (UK, France and Austria);therefore their deposit ratings only benefit from support from VTB andthe Russian government, resulting in three notches of uplift above theirstand-alone BCAs of Ba3. Moody's previous rating action on VTBA, VTBC and VTBF was implemented on 24 February 2009, when the BFSRs and deposit ratings on all three banks were placed on review for possible downgrade. VTBA is headquartered in Vienna. At YE2008, it reported consolidatedassets of EUR5.3 billion (year-end 2007: EUR4.1 billion). The bankposted a net loss of EUR5 million for 2008, versus net income of EUR25million for 2007. VTBC is headquartered in London. As at YE2008, it reported total assets of GBP5.2 billion under IFRS (x2.15 increase over 2007). However, themajority of this increase relates to short-term interbank assets withinvestment grade developed-market banks which arose as the result of theimplementation of a defensive liquidity strategy by VTBC. The bank posteda net loss of GBP140 million under IFRS for 2008 (2007: net income ofGBP26 million).

Originally published by Info-Prod Strategic Business Information.

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