Tashkent, Uzbekistan (UzDaily.com) -- Standard & Poor's Ratings Services has raised its long-term counterparty credit rating on Uzbekistan-based Halk Bank to 'B+' from 'B', while affirming the 'B' short-term rating. The outlook is stable.

The ratings on Halk Bank reflect the bank's "adequate" business position, "moderate" capital and earnings, "adequate" risk position, "above average" funding, and "adequate" liquidity, as Standard & Poor's criteria define these terms. The bank's stand-alone credit profile (SACP) is 'b+'. While Standard & Poor's does not rate the Republic of Uzbekistan, the ratings on Halk Bank are constrained by the agency’s assessment of the sovereign's creditworthiness.

Under Standard & Poor's bank criteria, the agency uses Banking Industry Country Risk Assessment economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. Standard & Poor's anchor for a commercial bank operating only in Uzbekistan is 'b+'.

Standard & Poor's assessment of Halk Bank's business position is "adequate". With assets of Uzbek sum 1.6 trillion ($900 million) on Oct. 1, 2011, Halk Bank is the country's fifth-largest bank in terms of assets. It acts as the national savings bank and has a leading market share of 20% in terms of retail deposits. Although Halk Bank's annual growth target of about 30% is aggressive and exposes the bank to heightened financial risk, the strategy is subject to continuous government approval, and Standard & Poor's believes that additional capital will be available to maintain capitalization. The bank recently revised its strategy with a plan to widen its product range, including products on offer to corporate customers. Unlike other state-owned banks, which serve large corporates, Halk Bank focuses on small enterprises and independent farmers.

However, retail loans represent only 30% of its total loans. Standard & Poor's assesses Halk Bank's capital and earnings as "moderate". According to agencies criteria, however, a "moderate" assessment of capital and earnings is a neutral rating factor for banks with a 'b+' anchor. Standard & Poor's projects that the bank's risk-adjusted capital (RAC) ratio, before adjustments for diversification, will range between 5%-6% over the next 18-24 months. In S&P projections, agency assume that the bank will receive additional capital from shareholders in 2012 equivalent to 25% of its existing capital, which will somewhat compensate for the ongoing rapid business growth. Halk Bank's capital base comprises share capital and retained earnings, however S&P quality assessment of the bank's capitalization is constrained by the relatively small absolute size (about $100 million) of its capital, calling into question the bank's ability to withstand significant shocks. “Assessment of Halk Bank's earnings capacity is constrained by the bank's very high cost-to-income ratio of about 90%”, said S&P in report. Conversely, revenues are likely to be supported by an adequate interest margin of about 5%, which is higher than that of some other large Uzbek state-owned banks. The bank's three-year average earnings buffer is close to breakeven, and we expect the cost of risk to be flat during 2012-2013, not exceeding 1.5% a year.

Agency assesses Halk Bank's risk position as "adequate". Credit risk has been heightened by rapid loan growth over the past five years (70% a year on average) and 30% loan exposure to the seasonal rural sector. These factors are mitigated by an absence of single-name concentrations with about 80% of the loan portfolio consisting of loans of less than $10,000. Reported impaired loans (overdue by more than one day) stood at a very low 0.5% of gross loans on Oct. 1, 2011. However, S&P believe that this figure may overstate the bank's loan quality given strong government support for the key sectors of the economy. Agency expects the government to continue to provide ongoing and extraordinary support (if needed) to key industry sectors, thereby mitigating Halk Bank's credit risk.

S&P assess Halk Bank's funding as "above average". Funding is dominated by granular and stable retail deposits. On Oct. 1, 2011, 45% of Halk Bank's deposits consisted of pension fund deposits by individuals, for which the bank acts as the exclusive manager. This represents a fairly stable source of funding, together with state-related funds placed within the bank (18% of liabilities). Halk Bank's liquidity profile is "adequate", in our view, with liquid assets in excess of 30% of total assets on Oct. 1, 2011.

In agencies view, Halk Bank has "high" systemic importance. S&P consider the bank to be a government-related entity (GRE) with a "very high" likelihood of support from the Republic of Uzbekistan, reflecting its "very important" role for and "very strong" link with the sovereign. However, given our assessment of the sovereign's creditworthiness, which is based on publicly available information, we include no notches of uplift in the ratings. Our view of the likelihood of government support is based on:

• Halk Bank's position as the country's largest savings bank with a solid share of systemwide retail deposits. We understand that if the bank were to default or suffer credit stress, the subsequent disruption would have a significant negative impact on the domestic economy.
• Halk Bank's government ownership. The Ministry of Finance owns a 51% stake, and the Central Bank of Uzbekistan the remainder.

The stable outlook balances Halk Bank's heightened credit risk due to rapid growth with our expectation of continued state ownership and ongoing government support. S&P believe that the bank's financial and business profiles will remain stable, at least over the next 12-24 months.

Agency is unlikely to raise the ratings on the bank without an improvement in our assessment of the sovereign's creditworthiness, given that it is a constraining factor on the ratings. Because of the tie between the ratings on Uzbek banks and the creditworthiness of the sovereign, bank-specific factors that might lead to an upward revision of the ratings appear limited.

Accordingly, the ratings on the bank are likely to be largely driven by operating conditions. For instance, S&P would likely lower the ratings on the bank if their assessment of economic and industry risk, including the sovereign's creditworthiness, were to deteriorate. At the same time, any positive changes in agencies assessment of the country's relatively high political risk or currently limited monetary and fiscal flexibility could lead S&P to consider upgrading the bank. A material deterioration in the bank's business or risk positions would put pressure on the bank's SACP. However, Standard & Poor's currently do not consider this a likely scenario.