“The rating action on Orient Finans Bank reflects our view of the increasing stability of its revenue base and improving business position, demonstrated by a jump in both operating activity and clientele. We consequently revised our assessment of Orient Finans Bank’s business position to "moderate" from “weak”. The bank’s expansion strategies over the past year have strengthened its competitive position in the currency conversion business--a very important revenue source for Uzbek banks. The bank’s asset base reached Uzbek sum (UZS) 275 billion (US$ 128 million) as of Sept. 30, 2013, under Uzbek generally accepted accounting principles (GAAP), compared with UZS198 billion as of Dec. 31, 2012. Also, the new branch in the Samarkand region further diversifies the bank’s operations”, the agency said.

“Moreover, because Orient Finans Bank has operated for more than three years, we don’t consider it a start-up entity. We view the bank’s strategy as sustainable despite our view of potential risks linked to the bank’s continued expansion into lending activities,” it added.

Standard & Poor’s noted: “Nevertheless, our assessment of Orient Finans Bank’s business position remains constrained by the following: the bank’s marginal market share in Uzbekistan is only a rough 1% of total assets; we see its client base of 1,300 legal entities and 35,000 individuals as limited; and we regard the dynamics of the bank’s loan book as generally unstable.”

“With low net interest margin in 2013 of about 1.8% under Uzbek GAAP, net interest income is a marginal contributor to the bank’s operating revenues. Meanwhile, fee and commission income represented roughly 95% of preprovision operating revenues for the first nine months of 2013 under Uzbek GAAP. This makes Orient Finans Bank highly vulnerable to the risks associated with a possible revocation of its foreign currency license,” Standard & Poor’s said.

“In our view, high growth rates could squeeze capitalization. We project that our risk-adjusted capital (RAC) ratio for the bank, before adjustments for concentrations and diversification, will decline over the next 18 months to 3.5%-4.0%, versus our previous estimate of 4%-5%. Yet, we believe that this slight decrease in the ratio is currently not enough of a contraction to affect the bank’s credit quality,” the agency underlined.

“We also incorporate into our ratings our ‘b+’ anchor for banks operating predominantly in Uzbekistan and our view of the Orient Finans Bank’s "moderate" business position, "weak" capital and earnings, “moderate” risk position, “average” funding, and "adequate" liquidity, as our criteria define these terms,” the agency noted.

“Our stable outlook on Orient Finans Bank reflects our expectation that the bank’s financial profile will remain broadly unchanged over the next 12 months, mainly because retained earnings will likely prevent a substantial erosion of capital,” Standard & Poor’s said.

Standard & Poor’s underlined: “Because we view the bank’s capital position as the main weakness for the ratings, a deterioration would most likely trigger a negative rating action. We could lower the ratings if the bank’s already weak RAC ratio (before adjustments) decreased to below 3% as a result of insufficient capital build-up to match asset growth or higher-than-expected losses, which would burden profit generation. We could also consider lowering the ratings if the bank failed to expand its lending activities or did not complete its planned business expansion.”

“We do not expect to raise the ratings on Orient Finans Bank in the next 12 months. A positive rating action could occur on the back of a material and sustainable improvement in the bank’s capitalization, such as an increase in its RAC ratio (before adjustments) to above 7%, or an improvement in the granularity of the loan book and deposit bases. We believe these improvements are unlikely in 2014,” the agency said.