The ratings on Ipoteka Bank reflect our view of the bank's "adequate" business position, "adequate" capital and earnings, "moderate" risk position, "average" funding, and "adequate" liquidity, as our criteria define these terms. The stand-alone credit profile is 'b+'.

“In our view, Ipoteka Bank has "high" systemic importance. We consider the bank to be a government-related entity (GRE) with a "high" likelihood of support from the Republic of Uzbekistan (see "Rating Government-Related Entities: Methodology And Assumptions," published Dec. 9, 2010, on RatingsDirect on the Global Credit Portal). This, in turn, reflects its "important" role in the domestic economy given its public policy role to finance residential mortgages in urban areas, its role as the main servicer of Uzbekistan's Treasury and utility companies, and its role as a finance provider for state-related entities. Its "very strong" link with the sovereign reflects the bank's 60% direct and indirect ownership by the state, as well as its links with the Uzbek Treasury. However, the issuer credit ratings on the bank incorporate no uplift for potential government support on the basis of our assessment of the sovereign's creditworthiness, which is based on publicly available information,” the agency said.

“We consider Ipoteka Bank's business position to be "adequate," owing to its sizable market share, wide branch network, and relatively good business diversity. With total assets of Uzbek sum (UZS) 1.5 trillion ($837 million) at year-end 2011, Ipoteka Bank is the sixth-largest bank in Uzbekistan. It has a public policy role to finance the construction of residential housing and mortgages in urban areas; however, it also acts as a commercial bank. At year-end 2011, 85% of the bank's lending portfolio was in corporate loans, whereas mortgage loans only accounted for 11.5%. In our view, this reflects the lack of long-term funding and good quality borrowers,” it added.

“We understand that Ipoteka Bank's strategy is to continue to develop as a commercial bank, and gain a niche in mortgage and consumer finance. We understand, however, that it will also continue to allocate funds, as directed, to a number of strategic sectors of the Uzbek economy. In our view, large government-related companies will continue to dominate the bank's lending book in the medium term”, the Standard & Poor's said.

“We assess Ipoteka Bank's capital and earnings as "adequate". We consider this to be a positive rating factor for a bank that has a 'b+' anchor. Our assessment is based primarily on our expectations that our projected risk-adjusted capital (RAC) ratio for the bank, before adjustments for concentration and diversification, will improve to more than 7% in the next 12-18 months.

“Ipoteka Bank's net interest margin of 5.4% for 2011 compares favorably with domestic peers, particularly large state-owned banks. Higher-than-average net interest margins and solid fee and commission income contribute to the bank's strong return on equity of 21% for 2011. We consider that the bank's good level of profitability and expected future capital injections should help to replenish capitalization, based on planned asset growth in the next two years,” the agency stated.

Ipoteka Bank's overall "moderate" risk position is largely driven by very high single-name concentrations in the loan portfolio, as well as a high level of loan growth that the bank has experienced in recent years. The bank's largest borrower accounted for 44% of total loans as of Dec. 31, 2011, while the top-20 borrowers made up 57% of the portfolio or four times total equity. The bank's largest borrower is the country's leading state-owned copper producer, which benefits from a monopoly position in the copper industry. The Uzbek government directly guarantees 85% of the bank's exposure to this largest borrower.

Standard & Poor's said: “We note that the bank's asset quality indicators have steadily improved since 2009. For example, the ratio of individually impaired loans to total loans decreased to 3.3% at year-end 2011 from 7.3% at year-end 2009, which is close to the industry average. Loan loss provisions fully covered impaired loans and accounted for 4.2% of the total loan portfolio as of Dec. 31, 2011. Going forward, we expect the bank's asset quality metrics to remain in line with the sector average (2%-3%). This is due to the ongoing benign economic conditions in Uzbekistan and the continued government guarantees on the bank's largest and most dominant exposure.”

“We consider Ipoteka Bank's funding to be "average" and its liquidity position "adequate". The bank's funding base is dominated by on-demand customer deposits, which accounted for 57.8% of total liabilities. Therefore, the bank maintains a significant liquidity cushion and has cash and cash equivalents that account for almost 30% of total assets at year-end 2011. The deposit base is relatively well diversified: the top-20 depositors made up 18% of the total deposit base. Ipoteka Bank's funding profile benefits from state-directed deposits. As of year-end 2011, 23% of total liabilities came from Uzbekistan's Fund for Reconstruction and Development, which was used primarily to finance investment loans to the bank's largest borrower,” the document said.

The stable outlook reflects our expectation that the bank's business and financial profiles will remain broadly unchanged over the outlook horizon of one year.

“We are unlikely to raise the ratings on the bank unless our assessment of the bank's SACP, and the sovereign's creditworthiness, improves. Because of the link between the ratings on Uzbek banks and the creditworthiness of the sovereign, bank-specific factors that could lead to a possible upgrade appear limited. However, an improvement in the bank's SACP could follow an improvement in our assessment of its risk position, either through a reduction in the very high concentration levels in the loan portfolio, or a more moderate risk appetite.

“At the same time, a negative rating action could occur if asset growth is higher than planned or if there were an unexpected material fall in earnings with a resulting deterioration in the bank's capitalization, reflected in a projected RAC ratio before adjustments falling below 7%. A drop in earnings would most likely be the result of increased provisioning needs due to unexpected asset quality deterioration or a substantial drop in fee and commission income. We would also lower the ratings on the bank if our assessment of economic and industry risk, including the sovereign's creditworthiness, were to deteriorate,” the Standard & Poor's concluded.