Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has affirmed Private Joint Stock Bank Trustbank’s Long-Term Issuer Default Ratings (IDRs) at ‘B’ with Stable Outlook and Viability Rating (VR) at ‘b’. 

Fitch has withdrawn the bank’s Support Rating and Support Rating Floor as they are no longer relevant to the agency’s coverage following the publication of our updated Bank Rating Criteria on 12 November 2021. In line with the updated Criteria, we have assigned Trustbank a Government Support Rating (GSR) of ‘No Support’.

The IDRs of Trustbank are driven by its intrinsic creditworthiness, as captured by its ‘b’ VR. The VR reflects the bank’s limited franchise, untested quality of the loan book and high concentration of the funding base. The VR also factors in the bank’s conservative assets composition, high profitability and improved capitalisation.

Net loans made up only 45% of total assets at end-1H21, as the bank maintains a conservative liquidity buffer against high funding from its sister company, the Uzbek Commodity Exchange. Impaired loans ratio (Stage 3 under IFRS) was low 1.4% at end-1H21. However, Stage 2 loans increased to 15% at the same date from 3% at end-2020. Loan dollarisation is less than at peer banks (16% at end-3Q21 compared with the 50% sector average), as the bank is focused mainly on lending to the private sector. We view Trusbank’s asset quality as largely untested, with loans in grace periods and prolonged credit holidays representing about 39% of total loans at end-3Q21.

Trustbank’s profitability is a rating strength, helped by low-cost funding from related parties. Focus on higher-yielding SME lending and good operating efficiency (cost-to-income ratio of 36% in 1H21), also contribute to a solid pre-impairment operating profit (19% of average loans in 1H21, annualised). The cost of risk increased to 3% in 2020 and remained high 3.6% (annualised) in 1H21; however, profitability was resilient with an annualised return on equity of 39% in 1H21 and 47% in 2020. We believe pre-impairment profit is adequate to absorb potential further asset-quality pressure.

Strong returns and sizable liquid assets underpin our assessment of the bank’s capital adequacy. The Fitch Core Capital to regulatory risk-weighted assets ratio was 20.8% at end-1H21, the regulatory Tier 1 and Total capital ratios were 13.5% and 17.9% at end-3Q21, respectively, reasonably above the regulatory minimums (10% and 13%, respectively). We estimate the bank would be able to book an additional 7% loan impairment charges (LIC) before breaching its statutory limit, while good pre-impairment profitability allows the bank to absorb higher credit costs without putting pressure on capital.

Funding from the Uzbek Commodity Exchange and other related parties accounted for 61% of total liabilities at end-1H21, while other customer deposits made up a further 33%. Cheap current accounts represented 78% of total liabilities at end-1H21 and included mostly related-party funding. Wholesale debt is low and the cushion of liquid assets (net of 12 months wholesale repayments) covered about 58% of customer accounts at end-1H21.

The GSR of ‘No Support’ factors in Trustbank’s low market shares in the highly concentrated Uzbek banking sector (1.4% of system assets at end-3Q21) and thus limited systemic importance. Support from private shareholders cannot be reliably assessed and is therefore not factored into the ratings.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The bank’s IDRs and VR could be downgraded as a result of material deterioration in asset quality that would lead to higher impairment charges and larger net losses. Furthermore, the VR could be downgraded if rapid loan growth translates into weaker capitalisation that threatens to breach regulatory requirements.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Upgrade of the bank’s IDRs and VR would require a substantial improvement in Uzbekistan’s operating environment and strengthening of the bank’s business model, asset quality and underwriting standards while maintaining strong capitalisation and profitability metrics.

The asset quality score of ‘b+’ has been assigned below the ‘bb’ category implied score, due to the following adjustment reason: loan classification policies (negative)

The earnings & profitability score of ‘b+’ has been assigned below the ‘bb’ category implied score, due to the following adjustment reason: historical and future metrics (negative).