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* Working with government on plan to boost capital, lending
* Provisions charge more than doubles in Q1
* Hit by fall in Ukrainian hryvnia
* Shares slide 3 pct in Moscow (Recasts with comments on capital strengthening)
By Megan Davies
MOSCOW, May 27 (Reuters) - Russia's No.2 lender VTB said it was working with the government on a plan toboost banks' capital and lending, as a plunge in its net profitand a rise in bad loan provisions showed the economic pain beinginflicted by the Ukraine crisis.
Once grouped with Brazil, China and India in the BRICacronym for fast-growing emerging markets, Russia is nowflirting with recession, hurt by tensions with Ukraine thatprompted the West to impose sanctions and led foreign investorsto flee as well as its currency and stock market to slide.
Russian President Vladimir Putin promised at an investmentforum on Friday the government would help systemically-importantbanks by allowing them to convert subordinated loans to shares.That would boost their capital positions and free them up tolend more in support of economic growth.
"We are currently working with the government in relation toa potential conversion of subordinated debt provided in2008-2009," VTB Chief Financial Officer Herbert Moos said onTuesday. This would be converted into preferred shares.
"We expect that this conversion would materially improve ourTier One (capital) ratio and we expect that this conversionwould be completed by end 2014," he said.
State-controlled VTB's Tier One ratio - a keymeasure of a bank's ability to absorb losses - was 10.3 percentat the end of the first quarter, lower than the average for the20 largest euro zone banks at the end of 2013 of 11.85 percent.
Chief executive Andrei Kostin said a volatile economy andgeopolitical tensions had a significant impact on VTB'squarterly performance, leading it "to be prudent and moreconservative in our lending and provisioning policies".
VTB's shares fell 3 percent in Moscow.
The bank said its provision charge for bad loans more thandoubled in the first quarter to 47.6 billion roubles ($1.4billion), hitting net profit which fell to 400 million roubles -far below analysts' forecasts of 12.9 billion.
"They charged a lot (for provisions) and the cost of riskwas far above our estimates," said Gazprombank analyst AndreiKlapko.
VTB's non-performing loan ratio jumped to 5.8 percent ofgross customer loans from 4.7 percent three months earlier. Itsretail bank VTB 24 has "considerably reduced approval rates forthe riskiest customer segments", the bank added.
Return on equity (RoE) - a measure of a bank's profitability- sank to 0.2 percent from 8.1 percent a year earlier, puttingit far below European peers.
Its cost of risk - a measure of its loan losses expressed asa percentage of its total loan portfolio - rose to 2.8 percentfrom 1.6 percent.
Net loss from foreign currencies was 8.2 billion roubles,hit by a fall in the Ukrainian hryvnia, which is downmore than 40 percent this year. VTB had previously said itsexposure to Ukraine was 20 billion roubles and its operationsthere amounted to about 2-3 percent of its total operations.
($1 = 34.1780 Russian roubles) (Additional reporting by Oksana Kobseva and Laura Noonan,;Editing by Elizabeth Piper and Mark Potter)
