(Source: Info-Prod Research (Middle East))trackingMoody's Investors Service has today downgradedthe global scale long-term local currency rating of Bank Moscow-Minsk("BMM") to Ba3 from Ba2 and assigned a negative outlook. BMM's otherratings remained unchanged with a stable outlook. "The downgrade of the Ba2 long-term local currency rating reflectsMoody's view of the increased interdependence between the financialprofiles of BMM and its parent, Bank of Moscow, rated Baa1 with anegative outlook, following a deterioration of macroeconomic environmentin Belarus," says Vladlen Kuznetsov, a Moscow-based Moody's AssistantVice President -- Analyst, and lead analyst for BMM. BMM is highly dependant on its parent for future capital injections in order to withstand further possible asset quality deterioration. Moody's notes that BMM's asset quality is particularly vulnerable to industries like manufacturing and production, construction and machinerymanufacturing which have already started to demonstrate deterioratingcredit quality, representing 1.7x, 0.7x, and 0.2x, respectively, ofyear-end 2008 equity. Although the level of overdue corporate loans in BMM's portfolio is currently low (less than 1%), the level of delinquencies is expected torise significantly. Thus the capital is expected to experiencesignificant pressure, especially given the sizeable concentrations ofloans in proportion to equity. In addition, Moody's highlights that theretail loan portfolio, which accounts for almost half of the loan book,also shows signs of deterioration with the ratio of overdue loansincreased by two times to 4% since year-end 2008. As a mitigating factor,there is a high integration of risk management standards between Bank ofMoscow (which displays a reasonable level of credit risk management) andBMM which provide for additional assurance over the ability of BMM toselect better borrowers and ensure reasonable credit enhancements ofdeals. In addition, BMM has a high level of dependence on the parent for fundingand liquidity (e.g. 22% of total funding at year-end 2008 or USD92million to date), which grew in significance and is expected to growfurther given that alternative funding sources for BMM being constrained.Moody's also observes that the bank places a considerable reliance in itsoperations on the continuity of funding from Bank of Moscow which iscurrently being rolled over constantly, enabling BMM to continue lendingwith a moderate reduction of business volumes. Apart from the high levelof dependence on the parent, the bank's liquidity is challenged byconcentration on both sides of the balance sheet (e.g. with one customeraccounting for 45% of customer funding) as well as potential assetquality deterioration that could squeeze liquidity, thus additionalliquidity support from the parent could be needed. Moody's notes that Belarus' economy is closely correlated to the economies of its neighbours, and is especially dependant on demand from the CIS countries (e.g. Russia) which have experienced the impact of global financial instability slightly earlier, hence the credit standingof both BMM and Bank of Moscow are subjected to the same macroeconomictrends going forward. Moody's rating action also takes into account weakening financial profiles of both the parent and subsidiary, resulting in higher possibleneeds for support to BMM and lower ability of Bank of Moscow to providesupport.