Uzbekistan-Based Turon Bank ‘B-/B’ Ratings Affirmed; Outlook Stable
26/07/2017 10:03
Uzbekistan-Based Turon Bank ‘B-/B’ Ratings Affirmed; Outlook Stable
26/07/2017 10:03
Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings affirmed its ‘B-/B’ long- and short-term counterparty credit ratings on Uzbekistan-based Turon Bank. The outlook remains stable.
“The affirmation follows Turon Bank’s removal in June 2017 by the Uzbek government from a list of entities to be privatized. As such, we think that strategic uncertainty related to expected changes in the bank’s ownership has been largely resolved at this time and that the bank will continue developing as a state-owned bank in the medium term,” the agency said.
“We note that, since the beginning of 2017, the government has provided Turon Bank about Uzbek sum (UZS) 78 billion (about US$19.5 million) of capital support and increased its stake in the bank to about 81% from 63%. As a result, we now consider the bank to be a government-related entity. We believe there is a strong link between the bank and the government, mainly reflecting the government’s major stake in the bank’s capital and our view that the bank will remain in state ownership in the medium term. Nevertheless, we think that the bank still has a limited importance for the government, mainly due to its small market share and modest involvement in state-related projects. This leads us to anticipate only a moderate likelihood that the government would provide extraordinary support to the bank if needed. Given our assessment of the sovereign’s creditworthiness, which is based on publicly available information, our long-term rating on the bank does not include any uplift for potential government support,” the agency noted.
“We note that this year’s capital injection from the government has materially improved Turon Bank’s capitalization. However, we now expect that the bank will demonstrate much higher asset growth than before, which will likely be close to 30%-35% in 2017-2018 compared with a 15% average for the past four years. We also think that the bank’s earning capacity will remain low, mainly due to poor operating efficiency. For example, in 2016 the bank’s cost-to-income ratio reached 91%, and the bank remained profitable only thanks to its provisions recovery. We believe that the bank will not be able to support its growth through internal capital generation alone and will face eroding capitalization levels if it is unable to receive further capital injections from the government. We now forecast that the bank’s risk-adjusted capital (RAC) ratio will be in the 4.8%-5.8% range, as adjusted for the bank’s negative earnings buffer. Although this reflects an improvement from 4.2% at year-end 2016, we still assess the bank’s capital and earnings as weak,” the rating agency said.
“In our opinion, Turon Bank’s business position remains moderate, pointing to the bank’s modest market share and limited pricing power. These weaknesses are somewhat offset by the relative stickiness of the bank’s customer base, its established presence in helping to finance the energy and water industry, and its status as a state-owned bank. In our view, the bank’s business position and revenue base may now benefit from new government-related clients and state-related projects. However, we see risks of greater involvement of the government in the bank’s decision-making, which may not always reflect commercial nature of transactions,” it added.
“We assess the bank’s risk position as moderate reflecting its high share of NPAs in the loan portfolio and relatively high market risk stemming from its equity investments in unconsolidated and non-core subsidiaries. Positively, we see lower concentrations and foreign currency denominated exposures on Turon Bank’s balance sheet than those of its domestic peers. In our view, the bank’s funding is average reflecting its good funding metrics, lack of wholesale funding and relative stickiness of its customer deposits. We regard the bank’s liquidity as adequate, supported by a high liquidity buffer, which represented about 33% of the bank’s assets as of Dec. 31, 2017,” the S&P said.
“The stable outlook reflects our opinion that the capital support Turon Bank received from the government in 2017 and its likely greater involvement in government-related projects will help to preserve the bank’s credit profile,” it added.
“We could take a negative rating action if we saw that our forecast RAC ratio drops below 3%, for example, due to materially-higher-than-expected lending growth. Unexpected substantial losses coming from the bank’s equity investments or high credit losses, which lead to pronounced capital erosion, may also prompt us to lower our ratings on the bank,” the agency underlined.
“A positive rating action is remote at this stage. However, rating upside could stem from an improvement in the loan book’s credit quality and the borrowers’ payment culture. These supportive factors could lead us to view the bank’s risk position more positively, provided other risks remain adequately managed,” it added.
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