This rating action was driven by the rating agency’s concerns about Turonbank’s weak economic capitalisation against the background of relatively high credit risk exposures, low level of loan loss provisions to date, the bank’s rendering support to troubled companies as part of the respective state programme and the rating agency’s uncertainty about the Turonbank’s ability to attract additional capital from external sources in the short-to-medium term.

Turonbank’s capitalisation metrics have been historically low compared to other banks rated by Moody’s in Uzbekistan, with the bank’s equity-to-total assets ratio fluctuating around 10% value (as defined in accordance with local GAAP) throughout recent years. Although the UZS2.2 billion (USD1.5 million) capital injection in 2009 boosted this indicator to 10.31% at YE2009 from 9.3% a year earlier, the rating agency believes that this capital level does not provide sufficient loss absorption capacity.

"Moody’s believes that the loan loss provision of just 0.96% accrued in local accounts as at YE2009 does not provide sufficient coverage of possible further credit losses putting the bank at risk of breaching statutory minimum capital requirements," says Olga Ulyanova, a Moody’s Assistant Vice-President/Analyst and lead analyst for Turonbank.

The rating agency’s concerns are elevated by Turonbank’s participation in the state programme for bail-out of insolvent manufacturing corporates. Banks participating in such programmes are generally required to invest in reorganising and re-equipping of these production sites, to restore their production capacity before they are sold to third-party investors. According to Turonbank’s management, the bank currently runs three such projects, of which two do not impose investment obligations, while the third project envisages investment of UZS9 billion (USD6 million) within the next three years, which accounts for approximately 40% of the bank’s statutory Tier 1 capital as at YE2009. Although these investments are not deductible from core capital for statutory capital adequacy purposes, they will suppress the bank’s economic capitalisation.

Whilst Turonbank’s management has communicated to Moody’s the bank’s preliminary plans for capital increase in 2010, these plans still need to be approved by the shareholder meeting, and are also subject to execution risks, as the bank’s private shareholders may lack financial flexibility or be reluctant to buy out the new share issue in full. According to the rating agency, in the absence over the next 6 months of visible steps taken by the bank towards attracting a new capital Moody’s may downgrade the bank’s BFSR and deposit ratings.

The last rating action on Turonbank was on 26 September 2008 when Moody’s assigned E+/B3/Not Prime first-time ratings to the bank, with stable outlook.