Uzbekistan-Based Turkiston Bank Ratings Raised To ‘B-/B’ On Stabilized Liquidity; Outlook Stable
Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings raised to ‘B-/B’ from ‘CCC+/C’ its long- and short-term issuer credit ratings on Turkiston Bank. The outlook is stable.
“The rating action reflects our view of the bank’s stabilized liquidity profile, supported by an inflow of deposits from government-related entities (GREs) and a somewhat more cautious liquidity policy. Therefore, our concerns about the bank’s reliance on business, financial, and economic conditions to meet its financial commitments have diminished (see "Criteria For Assigning ‘CCC+’, ‘CCC’, ‘CCC-’, And ‘CC’ Ratings," Oct. 1, 2012). The upgrade also acknowledges that Turkiston Bank received Uzbekistani sum (UZS)63 billion ($7 million) of capital injections in 2018 and this equity support enabled it to meet regulatory requirements on the minimum amount of authorized capital starting from 2019,” the agency said.
“Turkiston Bank’s funding and liquidity metrics improved in 2019 after deterioration in 2018. Year-end liquidity strain was connected with early withdrawal of a large deposit, which coincided with a real estate acquisition, resulting in a cumulative outflow of about 25% of the bank’s liabilities. We also note that during 2018, Turkiston expanded its loan book at the expense of liquid assets. However, we understand that the bank did not violate statutory liquidity metrics,” S&P Global Ratings said.
“On Feb. 28, 2019, the bank’s reliance on volatile short-term wholesale funding had fallen to 19% of total funding (compared with 34% on Nov. 22, 2018), while the stable funding ratio had improved to 99% (from 78% on Nov. 22, 2018). This has alleviated our concerns to some extent about deficiencies existing in the bank’s asset and liability management. We also understand that the bank’s management is determined to hold at least 20% of assets in liquid instruments going forward. At the same time, we note that the bank’s financial and business profiles remain vulnerable and that the recent improvements in its financial profile could be unsustainable,” it added.
The rating agency still think that the bank’s funding base is undiversified and highly concentrated. The top 20 depositors accounted for 61% of total customer accounts on March 1, 2019, which is high in our view. Around one-third of all deposits mature in 2019, which, if not renewed, might make the funding base vulnerable.
“After a capital infusion by the shareholder, our risk-adjusted capital (RAC) ratio for the bank improved above 10% as of Dec. 31, 2018, from 7.8% a year earlier. However, in our base-case scenario, we anticipate that Turkiston’s RAC ratio will be 7.5%-9.2% in the next 12-18 months, balancing high loan growth and an anticipated further capital injection of UZS20 billion. Although the bank reported zero nonperforming loans as of Dec. 31, 2018, its loan growth, which is expected to exceed that of its local peers, poses heightened credit risk, in our opinion. Although loan growth comes from a low base, we think the larger seasoned portfolio in the still challenging operating environment might result in higher credit costs over time. We note that reported related-party transactions are relatively modest,” S&P Global Ratings said.
The stable outlook reflects Turkiston Bank’s restored liquidity levels and increased capital buffers. It also incorporates our expectation of a fast growth strategy over the next 12 months, the agency underlined.
“We could consider a negative rating action over the next 12 months if we see unexpected deterioration in the bank’s funding and liquidity profile, or significant asset quality deterioration,” the agency said.
“A positive rating action over the next 12 months is unlikely. However, we could consider an upgrade if Turkiston’s RAC ratio remains sustainably above 10%, with its seasoning loans not resulting in significantly higher-than-expected credit losses, all else being equal,” S&P Global Ratings underlined.