OREANDA-NEWS. May 17, 2011. Moody's Investors Service has today changed the outlook on the standalone D- bank financial strength rating (BFSR) of

Raiffeisen Bank Aval (RBA)from negative to stable. Concurrently, Moody's has affirmed all other ratings of the bank: Ba1 long-term local currency bank deposit rating, B3 long-term foreign currency bank deposit rating, Not Prime short-term local and foreign currency deposit rating, Ba1 domestic currency debt rating and Aa1.ua National Scale Rating (NSR).

All global scale ratings and the BFSR carry a stable outlook, whilst the NSR carries no specific outlook.

The rating actions follow Moody's assessment of RBA's audited financial statements for 2010, prepared under IFRS.

RATINGS RATIONALE

Moody's says the change of the outlook on RBA's ratings is driven by stabilisation of the bank's asset quality indicators and improvements in its profitability in 2010, which, combined with healthy revenue generation, adequate provisioning and regulatory capitalisation, should ensure that RBA remains well capitalised in the medium term.

“Non-performing loans, which showed deterioration during 2009-2010 and reached 33% at year-end 2010, although weighed down by significant loan book contraction, are close to their peak.

Therefore Moody's expects RBA's asset quality to improve gradually in 2011.

Any upward trend will be aided by a gradually reviving regional economy and resumed loan growth,” says Yaroslav Sovgyra, a Moody's Vice-President -- Senior Credit Officer and lead analyst for the bank.

Moody's also notes that RBA's capitalisation ratio and reserve coverage appear sufficient to absorb potential losses, even under stress scenarios.

The bank reported a Tier 1 ratio and total capital adequacy ratio of 13.4% and 20.8%, respectively, as of year-end 2010.

Notwithstanding the stable rating outlook, Moody's notes risks constraining RBA's rating.

The main challenge to RBA's asset quality is its foreign-currency-denominated loan portfolio.

Many borrowers, particularly in the retail sector, are unhedged with regard to the currency risk on these loans.

Although the Ukrainian hryvnia has been rather stable since its devaluation in late 2008/early 2009, Moody's cautions that the event risks that stem from the foreign-currency exposures will remain for several years, given the long-dated maturity of the existing mortgage portfolio.

The rating agency also notes risks stemming from relatively high single-name and industry concentration, and -- in particular -- material exposure to construction and real estate loans.

This asset class quickly deteriorated against the background of a weakening Ukrainian property market, and continues to face downward pressure despite the upward trend in the national economy.

RBA's deposit rating of Ba1 receives a two-notch rating uplift from the bank's Ba3 base line credit assessment due to parental support considerations.

"Moody's judges the probability of parental support from the bank's owner -- Raiffeisen Bank International AG (RBI, rated

A1/Prime-1/D+, positive outlook on the D+ BFSR) -- as “very high” in the event of a stress situation, based on RBI's 96.2% ownership of RBA, and a track record of liquidity and capital support during the global financial crisis," Mr. Sovgyra explains.

RBA's D- BFSR has limited upside potential in the near term. However, in the longer term, improvements in the bank's asset quality and profitability indicators, as well as steady build-up of new high-quality loans could exert upward pressure on the bank's ratings.

The bank's local currency deposit rating is likely to move in line with its BFSR, whilst the foreign currency deposit rating is constrained by the country ceiling for Ukraine, and can be upgraded only if Moody's upgrades this country ceiling.

Moody's also notes that negative pressure could be exerted on RBA's BFSR and local currency deposit rating following a substantial deterioration of asset quality beyond current levels and a significant increase in provisioning volumes.

PREVIOUS RATING ACTIONS AND PRINCIPAL METHODOLOGIES

The previous rating action on RBA was implemented on 12 October 2010, when Moody's changed to stable from negative the outlook on the bank's foreign currency debt rating following the change in outlook on Ukraine's sovereign ceilings.

The principal methodologies used in this rating were Bank Financial

Strength Ratings: Global Methodology published in February 2007,

Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A

Refined Methodology published in March 2007.