Turon Bank ratings affirmed At ‘B/B’; Outlook Stable
Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings affirmed its ‘B/B’ long- and short-term issuer credit ratings on Uzbekistan-based Turon Bank. The outlook is stable.
The affirmation reflects our expectation that, despite significant recent and projected lending growth, Turon Bank will maintain its stable asset quality, with the level of nonperforming assets (NPAs) remaining close to the system average. This is because the government guarantees about 23% of the bank’s loan portfolio, and Turon Bank’s new commercial lending is mainly in sectors where it has developed good expertise over the past 15 years. We further believe that expected pressure on the bank’s capital position will not impair its creditworthiness.
We think the bank has a strong link with the government, which now owns about 98% of the bank’s capital. Although the government has decided to privatize the bank, we think this will take several years and the government will retain control of the bank over the next two-to-three years. At the same time, we think that the bank’s role for the government remains limited due to its small market share and the relatively small scope of its investment projects. Nevertheless, we believe Turon Bank benefits from ongoing government support in the form of guarantees, regular capital injections, and government funding.
In 2019, Turon Bank’s loan portfolio increased by about 89% compared with a systemwide average of 26%. We note that systemwide growth would have been close to 60% without the state-initiated transfer of assets from state-owned banks to Uzbek Fund for Reconstruction and Development. Implementation of government-led infrastructure projects and new lending to the agriculture and food processing sectors were key factors behind Turon Bank’s significant growth. In particular, in the past few years the bank continued financing government-driven infrastructure projects to upgrade Uzbekistan’s hydropower capacity. The government chose Turon Bank as the project’s key financing bank in 2017, and has provided it with a substantial capital support totaling Uzbekistani sum (UZS) 835 billion (about $100 million) over the past three years. We expect Turon Bank will provide about UZS1.5 trillion (about $150 million) of new financing in 2020-2021 to the hydropower sector. We also expect the bank will continue to actively expand its lending business in agriculture and the food industry, as well as in retail lending, to support profitability and increase its client base.
In our view, the bank’s risk-adjusted capital (RAC) ratio will deteriorate to about 6.4% by year-end 2021 from 11.2% at year-end 2019. This mainly reflects high expected lending growth, averaging 40% in 2020-2021, and the bank’s modest profitability. We note that all projects in the hydropower sector have a very low net interest margin, which will drag on the bank’s earnings capacity. We do not incorporate potential government support in our RAC forecast, and instead assume a 50% dividend payout ratio. However, the payout ratio could be lower, depending on the government’s decision.
We note that over the past two years, Turon Bank has maintained good asset quality and the inflow of new NPAs has been low, despite rapid lending growth. In 2019, the bank’s cost-of-risk was close to 0.6%, with share of NPAs of about 1.6% of the loan portfolio. We estimate the share of problem assets in the system at year-end 2019 was about 2.5%. Although we recognize that high lending growth may distort the bank’s true asset quality, we do not expect it to be worse than the system average. We note, in particular, that although loans provided to hydropower projects are denominated in foreign currency, the government guarantees the debt, mitigating credit risks for the bank.
We think the bank’s funding profile and liquidity metrics are close to the system averages, while its liquidity management remains prudent.
The stable outlook reflects our expectation that over the next 12 months, Turon Bank will likely maintain stable asset quality, with NPA levels similar to the system average. The stable outlook also incorporates our assumption that the bank will remain involved in government-led projects in the hydropower industry, while its capital buffer will remain sufficient to support lending growth.
We may lower the ratings on Turon Bank in the next 12 months if the bank’s asset quality deteriorates, with the share of NPAs in the loan portfolio materially exceeding that of peers. Although not our base case, we may consider a negative rating action if the bank’s liquidity buffer declines materially because of aggressive asset growth and unexpected outflows of funds from international financial institutions or depositors. Significant deterioration of the bank’s capital position, with the RAC ratio falling below 3.0%, may also prompt us to consider a negative rating action.
Although unlikely, we could consider a positive rating action if the bank’s capitalization materially improves because of the government support, and we forecast a RAC ratio sustainably over 10%.