Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings today said it affirmed its long-term issuer and issue credit ratings on 11 Uzbek banks and their rated bondsfollowing a revision to its criteria for rating banks and nonbank financial institutions and for determining a Banking Industry Country Risk Assessment (BICRA).

The affirmations include those on:

- National Bank Of Uzbekistan (BB-/Stable/B)

- KDB Bank Uzbekistan JSC (BB-/Stable/B)

- Ipoteka Bank JSCM (BB-/Stable/B)

- Uzpromstroybank (BB-/Stable/B)

- Hamkorbank JSCB (B+/Positive/B)

- Orient Finans Bank (B+/Stable/B)

- Khalq Bank (B+/Stable/B)

- Turon Bank (B/Stable/B)

- Davr-Bank (B/Stable/B)

- Kapitalbank (B-/Positive/B)

- Ravnaq Bank (B-/Negative/B)

Our assessments of economic risk and industry risk in Uzbekistan are at ‘7’ and ‘9’, respectively. These scores determine the BICRA and anchor, or starting point, for our ratings on financial institutions that operate primarily in that country. The trends we see for both economic and industry risks are stable.

Our base-case scenario remains that the Uzbekistan economy and financial system remains resilient to effects of the pandemic.

We expect GDP growth of about 6.5% in 2021 and 5.5% in 2022, with inflation remaining at 10.5%-10% over 2022-2023. We note some moderation in credit growth in 2021 to about 17% compared with higher levels in 2020, given the more stringent regulatory requirements and the more stable exchange rate for the national currency.

Credit costs were at 2.0% in 2021 and we expect them to remain at this elevated level in 2022. This has improved from 2.6% in 2020, but is still higher than the 1.6% average for 2016-2019. We expect that nonperforming loans (NPLs) to remain at 4%-6% in 2022 versus the regulatory-reported 5.2% at the end of 2021. The stock of NPLs appears lower than for some regional peers, but we believe an additional 7%-8% of loans could be restructured.

We assess industry risks for banks operating in the country as high. This mainly reflects the government’s high intervention in the state-owned enterprises’ decision-making processes, the regulator’s selective approach to supervision, and a complex competitive landscape dominated by these enterprises. The funding profiles of Uzbek banks are largely stable, supported by funding from the state, growth in corporate and retail deposits, and more recently, by an increase in external funding.

The recent rapid spread of the omicron variant highlights the inherent uncertainties of the pandemic as well as the importance and benefits of vaccines. While the risk of new, more severe variants displacing omicron and evading existing immunity cannot be ruled out, our current base] case assumes that existing vaccines can continue to provide significant protection against severe illness. Furthermore, many governments, businesses, and households around the world are tailoring policies to limit the adverse economic impact of recurring COVID-19 waves.

Consequently, we do not expect a repeat of the sharp global economic contraction of second-quarter 2020. Meanwhile, we continue to assess how well each issuer adapts to new waves in its geography or industry.

National Bank For Foreign Economic Activity of the Republic Of Uzbekistan (NBU)

We affirmed our ‘BB-/B’ long- and short-term issuer credit ratings, with a stable outlook, on NBU.

Our ratings reflect the bank’s dominant market share and leading position in Uzbekistan (BB-/Stable/B) in servicing the largest government-related entities (GREs), local and regional authorities, private companies, and individuals. NBU’s improved earnings capacity is supported by the expanding share of commercial loans in its lending mix and increasing net interest margin. We expect the bank’s capital buffer will remain solid, with a risk-adjusted capital (RAC) ratio remaining in the 8.2%-8.4% range at year-end (YE) 2023 versus 9.5% at YE2020, and will remain an important factor supporting the bank’s creditworthiness in the next one-to-two years. We expect NBU will face greater problem assets in the next 12 months and maintain higher provisioning, with stage 3 loans increasing to 4.0%-4.3% of its loan portfolio by YE2021.

Nevertheless, we think that relatively low exposure to retail and small and midsize enterprise (SME) clients and the material share of loans guaranteed by the government reduce credit risk for the bank. In our view, NBU’s funding profile and liquidity position is comparable with those of other large state-owned banks in the country. The bank’s liquidity buffer is not excessive, but sufficient considering its historically stable funding base. As of YE2021, its broad liquid assets covered around 37% of total customer deposits and represented around 14.5% of total assets. We understand that the government will retain control of NBU in the next three-to-five years, taking into account the bank’s special and highly strategic status for the government and the local economy. While we consider NBU of high systemic importance and a GRE with a very high likelihood of support from the Uzbek government, we do not incorporate any notches of support in our ratings because the bank’s stand-alone credit profile (SACP) of ‘bb’ is one notch higher than the sovereign rating. Our assessment of the bank’s SACP incorporates the government’s ongoing support in terms of funding, capital, and guarantees.

Outlook

The stable outlook on NBU mirrors that on the sovereign and reflects our view that adequate capital buffers and strong links with the government will help the bank preserve its creditworthiness and overcome post-pandemic risks.

Upside scenario: We could lower the rating on NBU in the next 12 months if we were to lower our sovereign credit ratings on Uzbekistan.

Downside scenario: A positive rating action over the next 12 months would hinge on a similar rating action on the sovereign.

Ratings score snapshot

Issuer credit rating: BB-/Stable/B

Stand-alone credit profile: bb

- Anchor: b+

- Business position: Strong (+1)

- Capital and earnings: Adequate (+1)

- Risk position: Adequate (0)

- Funding and Liquidity: Adequate and Adequate (0)

- Comparable ratings analysis: 0

Support: 0

- Additional loss-absorbing capacity (ALAC) support: 0

- GRE support: 0

- Group support: 0

- Sovereign support: 0

Additional factors: -1

ESG credit indicators: E-2 S-2 G-4

KDB Bank Uzbekistan JSC

We affirmed our ‘BB-/B’ ratings on KDB Bank Uzbekistan with a stable outlook. Our ratings on KDB Uzbekistan reflect the ‘bb-’ anchor, which is one notch higher than the ‘b+’ anchor for banks that only operate in Uzbekistan. The higher anchor reflects the lower risks we see for KDB Uzbekistan compared with other Uzbek banks due to its significant liquid investments outside its country of domicile, predominantly in southeast Asian markets.

We incorporate into our ratings the bank’s focus on large corporate clients and plans to increase its lending business in Uzbekistan, which will somewhat expand its narrow customer base. We also factor in its strong capital buffer, with a forecast RAC ratio of 11.7%-12.2% in the next 18 months, primarily low-risk assets, and good profitability. We think that KDB Uzbekistan’s high asset quality and prudent risk management so far balance potential risks from high business growth, as well as high dollarization and low diversity of its loan portfolio. Our ratings also reflect the bank’s historically large liquidity buffer, mitigating the periodic volatility of its depositor base.

We consider KDB Uzbekistan a strategically important subsidiary of Korea Development Bank (AA/Stable/A-1+). We could rate KDB Uzbekistan up to three notches higher than the SACP to reflect potential extraordinary support from the group. However, we cap the ratings on the bank at the level of our foreign currency long-term sovereign credit rating on Uzbekistan because, in our view, the group would not be able to fully mitigate the stress associated with a hypothetical sovereign default.

Outlook

The stable outlook on KDB Uzbekistan reflects that on the sovereign and includes our view that, in the next 12-18 months, the bank will adhere to its business model and maintain a low risk profile, while it continues displaying solid profitability and strong capitalization.

Downside scenario: We could take a negative rating action on the bank if we took a similar action on Uzbekistan.

Upside scenario: A positive rating action on KDB Uzbekistan would hinge on a positive rating action on the sovereign, assuming that parent Korea Development Bank’s commitment to provide extraordinary support to its Uzbek subsidiary if needed is maintained.

Ratings score snapshot

Issuer credit rating: BB-/Stable/B

Stand-alone credit profile: bb-

- Anchor: bb-

- Business position: Moderate (-1)

- Capital and earnings: Strong (+1)

- Risk position: Adequate (0)

- Funding and Liquidity: Adequate and Adequate (0)

- Comparable ratings analysis: 0

Support: 0

- ALAC support: 0

- GRE support: 0

- Group support: 0

- Sovereign support: 0

Additional factors: 0

ESG credit indicators: E-2 S-2 G-3

Ipoteka Bank JSCM

We affirmed our ‘BB-/B’ ratings on Ipoteka Bank, with a stable outlook. We think that the bank’s sizable market share, wide branch network, sustainably rising revenue, and focus on the socially important mortgage segment support its business position and the stability of its credit profile.

We incorporate in our ratings on Ipoteka our assessment of the bank’s sufficient capitalization, as reflected in our expected RAC ratio of 9.2%-9.7% in 2022-2023. We view positively the lower dollarization and single-name concentrations in Ipoteka’s loan portfolio as well as stabilizing loan portfolio growth. We expect the bank’s stage 3 loans will gradually decrease to around 6% of total loans in the next 12 months from 7.8% as of mid-2021, coming close to our estimate for the sector average level. We view Ipoteka’s funding profile as stable and diversified, with funds from the government, state-related entities, Eurobonds, and International Finance Corp. The bank adequately manages its liquidity position, which remains comparable with that of peers.

We consider that Ipoteka has high systemic importance in the Uzbek banking sector. We also see Ipoteka as a GRE with important role and limited link with the government. We do not incorporate in the ratings any notches reflecting the probability of extraordinary government support because Ipoteka’s SACP is already at the level of the sovereign rating on Uzbekistan.

Outlook

The stable outlook on Ipoteka reflects our view that the bank will maintain adequate capital and keep its ties with the government over the transition period related to its planned privatization in the next 12 months.

Downside scenario: We could take a negative rating action on Ipoteka if we took a similar action on Uzbekistan. If the bank’s profile is significantly riskier post-privatization and not offset by new owner support, we could also downgrade the bank.

Upside scenario: A positive rating action on Ipoteka is unlikely in the next 12 months. An upgrade would hinge on a positive rating action on the sovereign and simultaneous improvement in the bank’s own credit quality.

Ratings score snapshot

Issuer credit rating: BB-/Stable/B

Stand-alone credit profile: bb-

- Anchor: b+

- Business position: Adequate (0)

- Capital and earnings: Adequate (+1)

- Risk position: Adequate (0)

Funding and Liquidity: Adequate and Adequate (0)

- Comparable ratings analysis: 0

Support: 0

- ALAC support: 0

- GRE support: 0

- Group support: 0

- Sovereign support: 0

Additional factors: 0

ESG credit indicators: E-2 S-2 G-4

Uzpromstroybank

We affirmed our ‘BB-/B’ ratings, with a stable outlook, on Uzpromstroybank. In our view, the bank’s high market share, strong franchise in corporate banking, and close ties with several of the largest GREs support its business position. The bank demonstrates improving earning capacity bolstered by a growing share of commercial loans in its lending mix and an increasing net interest margin. We expect that the bank’s asset quality will gradually converge with the system average, with a share of nonperforming assets (NPAs) to total loans falling to 4.5%-5.0%. We also expect that the bank will maintain adequate capital buffer with our RAC ratio close to 8.2-8.3% by year-end 2023. We think this capital buffer will support its growing business and ability to continue distributing 50% of its net income to dividends as per the government decree.

In our view, Uzpromstroybank has high systemic importance in Uzbekistan. We also consider the bank a GRE, with a moderately high likelihood of receiving timely and sufficient government support. We believe it will maintain a significant volume of government business, including lending and settlement services to large GREs and lending to other industries supported by the government. We think that the link between the government and Uzpromstroybank remains strong because the government directly controls more than 90% of the bank’s capital. Although Uzpromstroybank is one of the GREs to be privatized, we do not think the link between the government and the bank will weaken in the next two-to-three years because the government will keep control of the bank and the privatization process will be gradual.

Our assessment of Uzpromstroybank’s ‘bb-’ SACP incorporates the government’s ongoing support to the bank in terms of funding and guarantees. We do not include additional uplift for potential government support because the SACP is at the same level as the sovereign rating.

Outlook

The stable outlook mirrors that of the sovereign and our view that Uzpromstroybank’s adequate capital buffers, improving asset quality, and solid business position in Uzbekistan will support its credit profile in the coming 12 months.

Downside scenario: We could take a negative rating action in the next 12 months if we were to make a similar ration action on Uzbekistan. We could also consider a negative rating action if contrary to our expectations, the bank’s asset quality deteriorates and remains worse than that of domestic peers.

Upside scenario: A positive rating action is unlikely over the next 12 months because it would require a similar rating action on the sovereign, together with further improvement of the bank’s SACP.

Ratings score snapshot

Issuer credit rating: BB-/Stable/B

Stand-alone credit profile: bb-

- Anchor: b+

- Business position: Adequate (0)

- Capital and earnings: Adequate (+1)

- Risk position: Adequate (0)

- Funding and Liquidity: Adequate and Adequate (0)

- Comparable ratings analysis: 0

Support: 0

- ALAC support: 0

- GRE support: 0

- Group support: 0

- Sovereign support: 0

Additional factors: 0

ESG credit indicators: E-2 S-2 G-4

Hamkorbank

We affirmed our ‘B+/B’ ratings, with a positive outlook, on Hamkorbank. In our view, the bank’s sound and stable franchise in SME and retail lending, sizable customer base, and diverse lending mix will support its business position. We believe asset-quality metrics will stabilize over the forecast period. We do not expect a new significant influx of problem loans from the restructured portfolio and believe that the stage 3 loans will have decreased to 4.7% in 2021 and will decrease to 4.3% in 2022, which is close to our systemwide expectations; and cost of risk will gradually fall to 1.0%-1.2% through 2022. We anticipate that Hamkorbank’s creditworthiness could strengthen thanks to continuing improvement of its capital position. We think that sustainably strong profitability in previous years, with annual return on average equity at 25% or greater since 2013, and no expected common dividends distribution support potential favorable dynamics of the  bank’s capital buffer in coming years. In our view, Hamkorbank’s funding profile and liquidity position are comparable with those of large state-owned banks. The bank’s liquidity management remains prudent. As of Dec. 31, 2021, its highly liquid assets covered about 52% of its total customer deposits and represented about 18% of its total assets. 

Outlook

The positive outlook on Hamkorbank reflects our view that the bank’s creditworthiness could strengthen in the next 12-18 months thanks to potentially stronger capital adequacy, with the forecast RAC ratio being sustainably above 10%. The outlook also reflects our expectations that the bank will continue to actively increase its business, with a focus on retail and micro lending; and demonstrate solid profitability, with return on average equity sustainably exceeding 20%. Finally, we believe Hamkorbank’s asset quality will gradually improve with a decreasing share of problem assets and the cost of risk remaining under 1.2%.

Upside scenario: We could raise our rating if Hamkorbank’s RAC ratio exceeds and remains sustainably above 10% in the next 12-18 months, supported by the bank’s solid profitability and capital generation capacity, and if its capital adequacy ratio remains at least 100 basis points above the regulatory threshold. An upgrade would be possible only if the bank’s asset quality improved further, with a share of problem assets closer to our system average assumptions and new loan loss provisions not exceeding those of domestic peers.

Downside scenario: We could revise the outlook to stable if the bank’s forecast capital buffer came under pressure from high asset growth and lower profitability, jeopardized by higher-than-expected credit losses. Significant deterioration of capital adequacy ratios with a buffer of lower than 100 basis points above the regulatory threshold, might prompt us to consider a negative rating action.

Ratings score snapshot

Issuer credit rating: B+/Positive/B

Stand-alone credit profile: b+

- Anchor: b+

- Business position: Adequate (0)

- Capital and earnings: Adequate (+1)

- Risk position: Moderate (-1)

- Funding and Liquidity: Adequate and Adequate (0)

- Comparable ratings analysis: 0

Support: 0

- ALAC support: 0

- GRE support: 0

- Group support: 0

- Sovereign support: 0

Additional factors: 0

ESG credit indicators: E-2 S-2 G-3

Orient Finans Bank (OFB)

We affirmed our ‘B+/B’, with a stable outlook, on OFB based on the bank’s sustainable performance in terms of cost of risk and NPLs amid the pandemic, combined with very prudent capital management. In our base-case scenario, OFB will have better than average cost of risk in 2022-2023. We continue to believe that the bank has substantial capital buffers, underpinned by good profits, to absorb losses. While the RAC might be above 15% in the next 12-18 months, we do not believe this overcapitalization is sustainable over the next three years.

We believe OFB has lower loan dollarization than peers’, with loans in foreign currency at only 35% of gross loans as of 2021 year end, versus about 49% for the system average. This somewhat protects the bank’s performance from devaluation of the sum. 

While not owned by the government, OFB has access to large corporate customers and is involved in financing high-profile projects initiated by the Cabinet of Ministers, despite its relatively small market share and in contrast to other small and midsize banks in Uzbekistan. The projects have generally good credit quality, but this leads to relatively high single-name concentration versus peers.

OFB has ample liquidity buffers. Net broad liquid assets covered about 48% of demand customer deposits as of June 30, 2021, which is better than other Uzbekistani banks, but is explained by significant concentration of deposits. We expect these adequate liquidity buffers will remain available over the next 12-18 months to balance potential deposit outflow risks.

Outlook

The stable outlook reflects our view that OFB’s solid capital buffer and earnings capacity will support its credit standing over the next 12-18 months. The outlook also reflects our expectation that the bank’s liquidity position will remain adequate in that time.

Upside scenario: We believe that a positive rating action in the next 12-18 months is unlikely. Beyond then, we could take a positive rating action if OFB continues to show a track record of lower credit losses and lower share of NPLs compared with that of peers, while maintaining stable capitalization and profitability metrics, while committing to an RAC ratio above 15% with a buffer.

Downside scenario A significant decline in capitalization, either via higher-than-expected growth in exposure or large dividend distributions, could also lead us to revise outlook to negative or lower the rating.

Ratings score snapshot

Issuer credit rating: B+/Stable/B

Stand-alone credit profile: b+

- Anchor: b+

- Business position: Moderate (-1)

- Capital and earnings: Strong (+2)

- Risk position: Moderate (-1)

- Funding and Liquidity: Adequate and Adequate (0)

- Comparable ratings analysis: 0

Support: 0

- ALAC support: 0

- GRE support: 0

- Group support: 0

- Sovereign support: 0

Additional factors: 0

ESG credit indicators: E-2 S-2 G-4

Khalq Bank

We affirmed our ‘B+/B’ ratings, with a stable outlook, on Khalq Bank. We anticipate the bank’s asset quality will gradually improve after the dramatic hit in 2021, but remain materially weaker than that of peers. We expect its share of problem assets could reach up to 15% of gross loans at YE2021 under International Financial Reporting Standards. This reflects Khalq’s relaxed underwriting and previously aggressive growth, pandemic effects, as well as the conservative revaluation of loan portfolio quality by the new management. The bank will likely preserve a solid capital position with the RAC ratio remaining above 10% in the next 12-18 months thanks to large capital support from the government in 2021 (about Uzbek sum 3.0 trillion) and improved earnings capacity. In our view, Khalq’s relatively high market share, its extensive branch network, the widest in the country, and its solid franchise in retail and SME lending support the stability and diversity

of its business. We understand that the government’s stop to all new lending announced Aug. 1, 2021, due to issues with asset quality risk management, will be temporary and will not materially damage the bank’s business position. We expect that the bank’s funding profile will remain dominated by pension deposits and government-related funds, which anchors its stability. The liquidity buffer stands at about 18.3% of total assets, which we view as sufficient given the stability of its funding base, dominated by state-related funds.

In our view, Khalq Bank has moderate systemic importance in Uzbekistan due to its exclusive role as an administrator of pension fund deposits and its wide franchise across the country.

We also consider the bank a GRE, with a moderately high likelihood of receiving timely and sufficient government support, if needed. This, in turn, reflects Khalq’s important public policy role for the financial system and close link with the government, with the government directly owning 100% of the bank’s capital. We do not expect Khalq’s privatization in the next two-to-three years.

The bank continues to be an exclusive government agent to manage and distribute state pensions, and the transfer of the managing function has been postponed at least until next year. We think the bank will also remain important for the government in financing a number of social support programs, mainly in the entrepreneurship and SME sector.

Our assessment of Khalq’s SACP incorporates the government’s ongoing support to the bank in terms of capital, funding, and guarantees. Given the proximity of the bank’s ‘b+’ SACP to our local currency long-term rating on Uzbekistan, our long-term rating on the bank does not include any uplift for potential government support.

Outlook

The stable outlook reflects our view that, despite the substantial increase in problem assets and credit losses in 2021, Khalq will likely preserve its credit profile from further deterioration thanks to its sufficient capital and liquidity buffer, stable funding, and government support.

Downside scenario: We could take a negative rating action in the next 12 months if, contrary to our expectations, the bank’s capital position deteriorates significantly, with its capital adequacy ratio lower than or at risk of breaching the regulatory minimum, or its RAC ratio falling below 10%, while asset quality remains weak. This might happen if, for example, Khalq’s new loan loss provisions materially exceed our expectations and the government does not provide timely and sufficient support to offset pressure on the bank’s capital position. A negative rating action might also follow a significant outflow of depositors’ and foreign creditors’ funds, leading to pressure on the bank’s liquidity. Weaker client confidence and an inability to expand healthily, resulting in a deterioration of Khalq’s market footprint, might also lead us to take a negative rating action.

Upside scenario: We could consider a positive rating action over the next 12-18 months if management reduces problem loans and improves the bank’s risk management, with NPAs moving closer to the system average, and if the bank maintains its solid capital position with our RAC ratio sustainably above 10%.

Ratings score snapshot

Issuer credit rating: B+/Stable/B

Stand-alone credit profile: b+

- Anchor: b+

- Business position: Adequate (0)

- Capital and earnings: Strong (+2)

- Risk position: Constrained (-2)

- Funding and Liquidity: Adequate and Adequate (0)

- Comparable ratings analysis: 0

Support: 0

- ALAC support: 0

- GRE support: 0

- Group support: 0

- Sovereign support: 0

Additional factors: 0

ESG credit indicators: E-2 S-2 G-4

Turon Bank

We affirmed our ‘B/B’ ratings on Turon Bank. The ratings reflect Turon’s modest market share. We recognize the bank’s close ties with the government and increasing involvement in the implementation of government-led projects. This could support Turon’s business volumes and stability but also weigh on its profitability margin. Also, material capital injections from the government over past two years support the bank’s capital base. Turon keeps relatively good asset quality with NPAs not exceeding those of peers. In our view, this reflects low risk coming from government-related business and the bank’s focus on traditional areas of expertise. Turon’s funding is largely represented by international institutions, which we expect to remain stable given the long-term nature of these funds. The bank’s liquid assets are sufficient, in our view, to cover its obligations in a stress scenario. We estimate that the bank’s liquid assets compose about 13% of its total assets.

We consider Turon a GRE with a moderate likelihood of government support if needed. This reflects the strong link between the bank and the government, which now owns about 99% of Turon’s capital. At the same time, recently announced plans to privatize the bank could weaken the government’s willingness to provide timely extraordinary support, in our view. Nevertheless, we think that privatization will take several years and the government will retain control of the bank over the next two-to-three years. In our view, Turon’s role for the government is limited, considering its small market share, relatively small size of implemented government-related projects, and our understanding that the bank’s business can be easily undertaken by another state-owned bank.

Given the proximity of Turon’s ‘b’ SACP and our local currency long-term rating on Uzbekistan, our long-term rating on the bank does not include any uplift for potential government support.

Outlook

The stable outlook reflects S&P Global Ratings’ expectation that over the next 12 months, Turon’s asset quality will likely remain similar to the system average. We assume the bank will remain involved in government-led projects in the hydropower industry and its capital buffer will remain sufficient to support lending growth.

Downside scenario : We may lower the ratings on Turon in the next 12 months if the bank’s asset quality significantly deteriorates, with the share of NPAs in the loan portfolio materially exceeding that of peers. 

We could also consider a negative rating action if Turon’s liquidity buffer declines materially because of aggressive asset growth or unexpected outflows of funds from international financial institutions or depositors.

Upside scenario A positive rating action is unlikely considering the bank’s modest market shares and only moderate profitability.

Ratings score snapshot

Issuer credit rating: B/Stable/B

Stand-alone credit profile: b

- Anchor: b+

- Business position: Moderate (-1)

- Capital and earnings: Moderate (0)

- Risk position: Adequate (0)

- Funding and Liquidity: Adequate and Adequate (0)

- Comparable ratings analysis: 0

Support: 0

- ALAC support: 0

- GRE support: 0

- Group support: 0

- Sovereign support: 0

Additional factors: 0

ESG credit indicators: E-2 S-2 G-4

Davr-Bank

We affirmed our ‘B/B’ ratings on Davr-Bank with a stable outlook. Davr-Bank is an Uzbekistan-based bank with a small franchise and narrow clientele base, which makes it vulnerable to challenging operating conditions and tight competition. Over the past few years,

Davr-Bank expanded its lending book while maintaining good asset quality, profitability, and diversity of operations. However, ratings pressure might still come from rapid business expansion and eventually result in higher-than-expected credit risks. In addition to its focus on the SME sector, the bank continues to develop its consumer lending business. Davr-Bank possesses adequate capital buffer, with our forecast RAC ratio in the 9.7%-9.9% range in the next 18 months.

Single-name concentration that is lower than peers’ supports the stability of its operations, in our view. While liquidity metrics are somewhat weaker than local peers’, Davr-Bank’s prudent asset and liability management and mitigate the risks of unexpected fund outflows. Unlike most small Uzbek banks, Davr-Bank attracts long-term credit lines from international financial institutions, which lengthens the bank’s funding maturity profile.

Outlook

The stable outlook reflects our view that Davr-Bank’s solid capital buffer and earnings capacity will support the bank’s expected loan growth of 30%-35% in the next two years. The outlook also reflects our expectation that the bank’s liquidity position will remain adequate, with it maintaining access to funding from international financial institutions.

Upside scenario: We believe a positive rating action in the next 12-18 months is unlikely. Beyond that time, we could take one if Davr-Bank commits to raising and increasing its capitalization metrics, with the RAC ratio sustainably above 10%, either through lower growth or additional capital injections. A positive rating action would hinge on the bank’s funding and liquidity remaining adequate with no dependency on short-term funding.

Downside scenario: We could revise the outlook to negative if Davr-Bank’s asset quality deteriorated beyond our assumptions, which would result in higher impairment charges. Furthermore, a negative rating action is possible if lending growth that is above expectations results in weaker capitalization. In addition, we would revise our outlook to negative if the bank faced unexpected funding outflows.

Ratings score snapshot

Issuer credit rating: B/Stable/B

Stand-alone credit profile: b

- Anchor: b+

- Business position: Constrained (-2)

- Capital and earnings: Adequate (+1)

- Risk position: Adequate (0)

- Funding and Liquidity: Adequate and Adequate (0)

- Comparable ratings analysis: 0

Support: 0

- ALAC support: 0

- GRE support: 0

- Group support: 0

- Sovereign support: 0

Additional factors: 0

ESG credit indicators: E-2 S-2 G-4

Kapitalbank

We affirmed our ‘B-/B’ ratings on Kapitalbank with a positive outlook. Kapitalbank is a midsize bank focusing on small and retail businesses, and enjoys a good regional presence and brand recognition in these segments, comparable with that of much larger players. We expect the bank to continue showing solid earnings capacity and expanding its franchise, supported by diversified revenue, good operating efficiency, and a stable deposit base; and demonstrate return on equity above 17% in the next two years. Positively, Kapitalbank has demonstrated more prudent capital policy over the past two years, supported by several injections from shareholders, and we expect its RAC ratio to be 6.2%-6.7% in the next 18 months. While the current share of problem loans is low, pressure on asset quality could increase from an unseasoned loan book and material actual and expected growth of this loan book, as well as the pandemic’s prolonged economic consequences. The funding base is mostly composed of customer deposits, while the bank keeps sufficient liquidity buffer to cover its needs.

Kapitalbank’s moderate systemic importance underpins our assessment, as the bank has a sustainably high share of retail deposits and operates one of the largest ATM networks in the country. However, we do not add notches of support to the bank’s SACP, given the narrow gap between the sovereign’s creditworthiness and the bank’s SACP.

Outlook

The positive outlook reflects S&P Global Ratings’ view that Kapitalbank’s creditworthiness may improve over the next 12-18 months. This could happen if the bank continues to demonstrate sustainable bottom-line results and increasing business volumes in line with its strategy, while preserving its capital buffer and asset quality.

Upside scenario: An upgrade in the next 12-18 months would hinge on Kapitalbank continuing to increase business volumes in SME and retail lending, as per its strategy, and demonstrating sustainable bottom-line results. This would enhance revenue diversification and support margins and profitability, allowing the bank to withstand stiff competition from large private and state-owned banks. An upgrade is only possible if the bank maintains prudent risk and capital management, with the solid quality of loan book significantly increased over the past year and with its local capital regulatory ratio remaining above 14%.

Downside scenario: An outlook revision to stable could follow if Kapitalbank’s capital becomes volatile, with regulatory capital ratios falling to minimum values. This could happen following substantial asset quality deterioration, leading to elevated credit losses, or if a fresh capital injection does not support greater-than-expected lending growth. A downgrade is possible if we see pronounced funding and liquidity pressures, which could lead to visible specific default scenarios over the next 12 months.

Ratings score snapshot

Issuer credit rating: B-/Positive/B

Stand-alone credit profile: b-

- Anchor: b+

- Business position: Moderate (-1)

- Capital and earnings: Moderate (0)

- Risk position: Moderate (-1)

- Funding and Liquidity: Adequate and Adequate (0)

- Comparable ratings analysis: 0

Support: 0

- ALAC support: 0

- GRE support: 0

- Group support: 0

- Sovereign support: 0

Additional factors: 0

ESG credit indicators: E-2 S-2 G-4

Ravnaq Bank

We affirmed our ‘B-/B’ ratings on Ravnaq-Bank with a negative outlook. Ravnaq-Bank is a small bank with little business diversity and a narrow customer base, benefiting from its shareholders’ close ties with customers. Lending expansion could mean higher losses because Ravnaq’s risk management practices are at an early stage of development and it faces strong competition. The bank’s core profitability is low and there is potential for additional capital volatility in the case of a spike in credit losses. Ravnaq’s financial standing was hit harder by the pandemic than most of its domestic peers in terms of asset quality deterioration. Therefore, we anticipate the bank will face pressure from substantial loan loss provisions, and project Ravnaq will be loss-making in 2021, and our risk-adjusted capital ratio will decline to 8.0%-8.1%. The bank’s funding mostly includes customer deposits and, unlike some peers, it does not attract long-term funds from international financial institutions. The bank keeps liquidity buffers just sufficient to service its needs. However, further delays in loan repayments could disrupt its liquidity position.

Outlook

The negative outlook reflects the bank’s still high amount of problem loans, low earnings, and high loan concentrations. In addition, it incorporates downside risks to the bank’s liquidity position.

Downside scenario We could lower the rating over the next 6-12 months if we see further asset quality deterioration or the liquidity buffer weakens, for instance via unexpected high deposit outflows.

Upside scenario An upgrade is a remote possibility, in our view. However, we might revise the outlook to stable if Ravnaq’s asset quality strengthens and it maintains sufficient liquidity buffers with no rise in deposit volatility.

Ratings score snapshot

Issuer credit rating: B-/Negative/B

ESG credit indicators: E-2 S-2 G-4