Moody's Downgrade Russian Bank Outlook To Negative

The outlook rating for Russia's banking system was changed today from "stable" to "negative" by Moody's Investors Services. The Banking System Outlook Report (published today) clited slowing asset growth, higher inflation, the slump in equities and funds leaving the country, all of which could result in deteriorating fundamentals for banks, according to the credit rating agency.

Moody's thus joins the other two large credit rating agencies - Fitch Ratings and Standard and Poor's in downgrading at least a part of the Russian financial system. Fitch said in a report last week that Russian real estate and construction companies were the most at risk as domestic and international banks curb lending, while Russia's credit outlook was cut to ``stable'' from ``positive'' at Standard & Poor's on Sept. 19. S&P's cited the growing pressure on Russian authorities to spend resources from the National Wealth Fund, undermining the nation's long term credit strength. Despite the outlook change S&P's continued to maintain Russia's BBB+ rating, the third- lowest investment grade ranking. Any downward move on this will mean loss of investment grade status, and the consequence will be that credit to both companies and households will become more expensive.

PNB Paribas now estimates that foreign investors pulled $56.7 billion from Russia from Aug. 8 to Sept. 19, up from their $35 billion figure two weeks ago..

Russian stocks, led by financial shares, slumped on the news of Moody's downgrade.

OAO Sberbank, Russia's largest lender, dropped 4.7 percent to 43.85 rubles, the biggest decline since regulators halted stock trading last week. The cost to protect bonds sold by VTB Group, the second-biggest lender, rose 3 basis points to 740, close to a record of 750, according to credit-default swap prices from CMA Datavision.

The Micex Index was down 1.5 percent today, hitting 1,079.04 at the close in Moscow. The drop so far this year is now 43 percent. Russian government bonds fell, raising the yield on the benchmark 30-year dollar note by 8 basis points to 6.98 percent.

Russia's international reserves, the world's third-largest, fell another $900 million last week to $559.4 billion, the lowest level in three months following central bank currency sales to support the ruble.