In a new report - “Estimating Bank Credit Losses for Financial Institutions in the CIS” - the rating agency describes the credit loss assumptions currently used for countries in the Commonwealth of Independent States (CIS), thereby building on an initial report published in May 2009 (“Moody’s Approach to Estimating Bank Credit Losses and their Impact on Bank Financial Strength Ratings”), which describes Moody’s global framework. The CIS countries covered in this report are Russia, Ukraine, Kazakhstan, Belarus, Azerbaijan, Uzbekistan and Kyrgyzstan.

“Moody’s approach to measuring credit losses starts with an analysis of macroeconomic conditions and a comparison of the current cycle with previous downturns to form our expectations on losses relating to the asset side of banks’ balance sheets. For the purpose of forming our forward-looking view, we analyze the evolution of a bank’s capital ratios under both our expected case and worse-than-expected case scenarios. Capital has lately become a key driver in a bank’s rating process as it is perhaps the most predictive factor of the need for external support in the current environment. As part of our `stress tests’, we also take into account weakened internal capital generation capacity; i.e. lower earnings,” says Yaroslav Sovgyra, a Moscow-based Moody’s Vice-President - Senior Credit Officer, and author or the report.

“Based on this approach, Moody’s has already taken a number of rating actions on CIS banks that have been triggered both by estimated credit losses and by their impact on capital since September 2008,” adds Mr Sovgyra.

Given the ongoing macroeconomic turbulence that CIS countries confront, Moody’s expects pressure on banks’ asset quality to mount, putting further pressure on Bank Financial Strength Ratings (BFSRs). This will be especially true for banks that cannot count on capital support either from a financially stronger parent and/or shareholders or the government. However, where external support is present, debt and deposit ratings are likely to be more stable.