The ratings on Kapitalbank reflect the bank's "moderate" business position, "weak" capital and earnings, "adequate" risk position, "average" funding, and "adequate" liquidity, as Standard & Poor's criteria define these terms. The bank's stand-alone credit profile (SACP) is 'b'.

Standard & Poor's assesses Kapitalbank's business position as "moderate" on the basis of the bank's limited business diversity and modest market share. With assets of Uzbek sum 465 billion ($260 million) on Oct. 1, 2011, Kapitalbank ranks among the top 10 Uzbek banks, but has a market share of less than 2%. The market is dominated by state-owned banks. The bank is a niche player, focusing on lending to small and midsize enterprises. Kapitalbank is one of the leading operators for money transfers in Uzbekistan, with a market share of about 25%.

Standard & Poor's notes that in Uzbekistan's still-developing financial and banking market, money transfer services play an essential role in the monetary flow system and remain one of the best fee-generating businesses for banks. Kapitalbank has good domestic brand recognition and is well-diversified across the country's regions.

The agency assesses Kapitalbank's capital and earnings as "weak". According to Standard & Poor's criteria, however, a "weak" assessment of capital and earnings is a neutral rating factor for banks with a 'b+' anchor. Standard & Poor's assessment reflects the bank's very low capitalization and constrained loss absorption capacity. “In our view, capitalization will remain a key negative rating factor and constrain business growth over the next two years,” the agency said. Standard & Poor's projects the bank's risk-adjusted capital (RAC) ratio, before adjustments for diversification, will remain slightly above 3% (factoring in a capital increase of at least 20% in 2012) over the next 12-18 months. At the same time, Kapitalbank's anticipated level of capitalization is subject to adequate performance of its loan portfolio, as any increase in the bank's risk profile could put additional pressure on profitability and equity.

“We assess Kapitalbank's risk position as "adequate". Single-name concentration in the bank's lending book is high but on a par with its Uzbek peers. Lending activity is highly concentrated, with 20% of clients accounting for more than 80% of interest income, according to the bank's estimate. As of Oct. 1, 2011, Kapitalbank's loans with signs of impairment accounted for about 4% of its gross loan portfolio. We do not expect problem loans to rise further, mainly owing to government support for industries through the cycle. This has somewhat sheltered the domestic economy from external shocks and global financial volatility. Since financial markets are undeveloped in Uzbekistan, we do not expect any material increase in market risk,” Standard & Poor's said.

“We view Kapitalbank's funding as "average" and its liquidity position as "adequate". The bank's major weaknesses in terms of funding are a lack of diversity, an absence of stable state-related funding, and the predominantly short-term nature of its funding sources. However, we view these weaknesses as consistent with our assessment of the domestic industry average. Cash and interbank placements accounted for almost one-third of Kapitalbank's assets on Oct. 1, 2011. We expect Kapitalbank will continue to maintain a relatively sizable level of liquid assets over the medium term, offsetting the adverse effects of any liquidity squeeze.”

The stable outlook balances Kapitalbank's credit weaknesses and the challenges of operating in Uzbekistan against the bank's more cautious and improved liquidity management.

“Even though the current ratings factor in a potential weakening of Kapitalbank's credit profile, we could lower the ratings if the bank's liquidity were to decline from its current levels or if its already weak RAC ratio (before adjustments) were to decrease below 3%,” the agency said.

“We could raise the ratings, but only if the bank were to demonstrate material and sustainable improvements in its capitalization, at least to the point where the RAC ratio (before adjustments) rose above 7%, while our assessment of the Uzbek sovereign's creditworthiness remains unchanged. However, we currently consider this scenario unlikely over the medium term,” it added.