Outlooks On Three Uzbekistan-Based Financial Institutions Revised To Stable
Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings had revised its outlooks on National Bank For Foreign Economic Activity Of The Republic Of Uzbekistan (NBU), Ipoteka Bank JSCM, and KDB Bank Uzbekistan JSC (KDB Uzbekistan) to stable from negative.
The outlooks on Uzpromstroybank and Joint-stock Commercial Khalq Bank of the Republic of Uzbekistan (Khalq Bank) remain negative.
At the same time, the ‘BB-/B’ ratings on all five banks were affirmed.
The outlook revisions to stable mirror the similar rating action on.
At the same time, for Uzpromstroybank and Khalq Bank S&P Global Ratings sees continued risks related to pressure on their capitalization levels and potentially higher credit losses, which is why the agency kept outlooks negative.
In contrast to most emerging markets that saw economic contractions, Uzbekistan’s economy expanded 1.6% in 2020 and we forecast growth will accelerate to just below 5% this year.
“Continued growth of Uzbekistan’s economy in 2020 was supported by significant government stimulus measures to counteract the effects of the pandemic. We also note that large economic segments remained operational, despite COVID-19 restrictions, including the agricultural sector and the important industrial sector (food processing, manufacturing, oil refining, and metals and mining), which occupy a very large portion of the banks’ corporate lending books,” S&P Global Ratings said.
The agency expects GDP growth will rebound in 2021 to 4.8%, led by a recovery in the services sector and economic recoveries in key trading partner countries. S&P Global Ratings expects real GDP growth to average about 5% annually over our 2021-2024 forecast period, supported by growth in the services, manufacturing, and natural resources sectors--and consequently of the banking sector.
S&P Global Ratings considers that the overall effect of the COVID-19 pandemic remains manageable for the Uzbek banking system. We expect that nominal lending growth in the system will remain high and accelerate in 2021-2022, to 30% from 27% in 2020, reflecting improvements in economic prospects overall. We believe that credit costs will remain elevated at around 2%, an improvement from 2.6% for 2020, but still higher than the average for 2016-2019 (1.6%). We expect nonperforming loans to gradually increase closer to 3.0%-4.5% in 2021 and stay at this level in 2022-2023.
The stable outlook on NBU 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.
We could lower the rating on NBU in the next 12 months if we were to lower our sovereign credit ratings on Uzbekistan.
A positive rating action over the next 12 months would hinge on a similar rating action on the sovereign.
In addition to affirming our ‘BB-/B’ ratings on Ipoteka Bank, we also revised our view on the likelihood of government support to the bank to moderate from moderately high. This is neutral for the rating; however, this revision reflects the expectation of the upcoming privatization already in 2021-2022. At the same time, we believe that government support remains in place if necessary to ensure a smooth privatization process and will be discontinued only once the bank is fully private.
The stable outlook on Ipoteka Bank reflects our view that the bank will maintain adequate capital and keep ties with the government over the transition period before privatization is finalized in the next 12-24 months.
We could take a negative rating action on Ipoteka Bank if we took a similar action on Uzbekistan. If we see a significantly riskier profile of the bank post privatization that is not offset by new owner support, we could downgrade the bank.
A positive rating action on Ipoteka Bank is unlikely in the next 12 months. It would hinge on a combination of a positive rating action on the sovereign and simultaneous improvement in the bank’s own credit quality.
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 current business model and maintain a low risk profile, while it continues displaying solid profitability and strong capitalization.
We could take a negative rating action on KDB Uzbekistan if we took a similar action on Uzbekistan.
A positive rating action on KDB Uzbekistan would hinge on a positive rating action on the sovereign, assuming that there is no change in parent Korea Development Bank’s commitment to provide extraordinary support to its Uzbek subsidiary if needed.
The outlook on Uzpromstroybank remains negative, reflecting the risk that, over the next 12 months, the bank’s creditworthiness may deteriorate due to continuing pressure on its asset quality and elevated credit losses, leading to erosion of the bank’s capital adequacy ratios.
We could lower the ratings on Uzpromstroybank in the next 12 months if the bank’s capitalization deteriorates with our risk-adjusted capital (RAC) ratio falling below 7% owing to higher credit losses and/or aggressive lending growth. Continuing deterioration of the bank’s asset quality with problem assets materially exceeding those of peers might also prompt us to downgrade the bank.
We could revise the outlook to stable in the next 12 months if the bank stabilizes its asset quality indicators with its share of problem loans and cost-of-risk reducing closer to systemwide averages. Such a revision would be possible only if the bank demonstrates sustainable capital management with our actual and forecast RAC ratios remaining above 7% and regulatory capital ratios noticeably exceeding the regulatory threshold.
The outlook on Khalq Bank remains negative, reflecting our view that the bank’s capital buffer might come under higher pressure, with our RAC ratio falling below 10%. This might be the result of more aggressive lending growth than we currently expect or more significant deterioration of the bank’s asset quality due to recently aggressive credit growth and a high share of unseasoned loans.
We could take a negative rating action in the next 12 months if Khalq Bank’s capitalization deteriorates, with our RAC ratio falling below 10%. A negative rating action may also follow if the recent improvement in the bank’s profitability proves unsustainable and it continues being heavily dependent on the government for capital support. This could happen, for example, due to significantly higher credit losses than we currently expect or if management fails to improve the bank’s operating efficiency and risk governance. A material deterioration of the bank’s asset quality, with problem assets exceeding those of peers with similar lending mixes, would likely lead to a negative rating action, as well.
We could consider revising the outlook to stable in the next 12 months if the bank maintains a solid capital buffer and demonstrates sustainable improvement of its core profitability, and there is no sign of asset-quality deterioration beyond our current expectations.