S&P Global Ratings removed the ratings from CreditWatch, where they were placed with negative implications on 2 May 2017.

“The affirmation reflects our view that over the past two months Ipoteka Bank’s capitalization has significantly improved on the back of support received from the government of about Uzbekistani sum (UZS) 380.8 billion (about $95 million) and the bank is now in compliance with the minimum capital regulatory requirement of 12.5%. Following first capital injection from the government of UZS124 billion, on May 31, 2017, Ipoteka Bank’s capital regulatory ratio stood at 13.3% (versus 11.7% at year-end 2016), and additional capital was provided at the end of June 2017. The total amount of UZS380.8 billion of capital provided to date includes UZS140.8 billion (part of committed total support of UZS155.7 billion) and $60 million (about UZS240 billion) of additional capital support from the Uzbek Fund for Reconstruction and Development in 2017 under a new presidential decree that a outlines capital support program to all state-owned banks, published in June 2017,” S&P Global Ratings said.

“We expect that the government support will counterbalance pressures on the bank’s capitalization stemming from high asset growth and ongoing devaluation of the Uzbekistani sum. Additional capital injected by the government in May-June 2017 will materially strengthen Ipoteka Bank’s regulatory capital ratios and enable the bank to operate with more than a 100 basis point buffer above the minimum regulatory requirements over the next 12-18 months. This takes into account the regulator’s intention to increase the regulatory minimum capital adequacy ratio to 13.5% from Jan. 1, 2018, and to 14.5% from Jan. 1, 2019. We, therefore, revised our assessment of the bank’s capital and earnings position to moderate from very weak and the stand-alone credit profile (SACP) to ‘b+’ from ‘b-’. Also, we removed two notches of uplift to Ipoteka Bank’s SACP, which reflected our earlier expectations of short-term capital support to be provided by the government,” the agency added.

“At the same time, we note that over the past five years, Ipoteka Bank’s average annual asset growth was about 38%, which is higher than the sector average of 25%-30%, driven by strong growth in corporate lending partly aimed at supporting strategic economic sectors in Uzbekistan. In our view, internal capital generation remains weak and additional capital injections remain crucial to support aggressive asset growth,” the rating agency noted.

“However, we think it highly likely the bank will continue receiving capital support from the government in 2017-2018. Our view is underpinned by Ipoteka Bank’s important public policy role in Uzbekistan. Ipoteka Bank services the government program to construct affordable houses in the urban areas, is the main servicer of Uzbekistan’s treasury, and provides funding to a number of important state-related entities. At the same time, in turn, this means that the bank is not immune from certain pressure from the government to finance some companies or economic sectors, which might eventually lead to a very strong asset growth that could potentially increase pressure on capital again,” it added.

“The stable outlook reflects our view that capital provided by the government to date and additional capital expected in 2017-2018 as well as ongoing funding support will support Ipoteka Bank’s creditworthiness at the current level in the next 12-18 months,” S&P Global Ratings underlined.

“We could lower the ratings if the bank expands significantly stronger than we currently expect, with the growth not being supported by additional capital provided by the government, lowering the bank’s regulatory capital adequacy ratios, with capital buffers falling to below 100 basis points above minimum capital regulatory capital requirements. Similarly, we could consider a negative rating action if the bank’s risk profile deteriorated, with the amount of problem loans increasing significantly higher than we currently expect and additional provisioning required negatively impacting the bank’s capital base and capital adequacy ratios,” the agency said.

“A positive rating action is currently unlikely, in our view, as the potential for significant improvement of key rating factors that could lead to an upgrade is limited within the outlook horizon,” it concluded.