Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings today revised its outlook on Uzbekistan-based Hamkorbank JSCB to negative from stable. We affirmed our ‘B+/B’ long- and short-term issuer credit ratings on the bank.

The outlook revision reflects our view that potential increase of problem loans and currently low provisioning coverage ratio may put pressure on Hamkorbank’s risk profile and capital position.

“We think that the bank’s problem assets may substantially increase and exceed those of peers due to COVID-19-related challenges and considering the significant share of borrowers who are on payment holidays. As of mid-2020, the bank provided customers with payment holidays to amounting to UZS4.0 billion, or 59% of its loan portfolio, which is higher than for other banks, both state owned  and private. Although, we expect that most of the bank’s borrowers will return to a normal servicing of their debt, the high share of restructured loans will likely give way to a pronounced increase of problem loans by year-end 2020. This reflects a significant exposure of the bank’s loan portfolio to retail, private entrepreneurs, and SME (about 68% as of year-end 2019)--the segments most vulnerable to COVID-19 lockdown and expected economic slowdown. In our base case, we expect that the bank’s problem assets (those in Stage 3 and repossessed collateral) could increase to 17% of total loans by year-end 2020. However, we cannot exclude that COVID-19 impacts on the bank’s asset quality may be greater or lesser depending on the toll lockdown measures take on the borrowers’ creditworthiness,” the rating agency said.

In the view of the agency, a very low provisioning coverage ratio is a weakness of the bank’s risk position and may lead to higher provisioning needs and profitability pressure. At year-end 2019, the bank’s provisioning coverage ratio was about 20%, versus 65%-70% for other banks in the system. Although high collateral somewhat offsets the lack of provisions, we think that the bank may face elevated  provisioning needs in the coming 12-18 months due to a simultaneous decline of collateral value caused by economic slowdown and rising problem loans.

Nevertheless, we think that the bank’s inherently strong earnings power will enable it to absorb an anticipated high amount of credit losses associated with COVID-19 and remain profit-making in 2020-2021. We also forecast that the bank will preserve its high capital buffer with our risk-adjusted capital (RAC) ratio remaining above 7.5% by year-end 2021. That said, downside risks to this forecast remain acute considering negative trends related to economic risk in Uzbekistan.

We note that de facto restrictions imposed by the Central Bank of Uzbekistan on lending interest rates in July 2020, coupled with our anticipation of higher cost-of-risk of 4.2% in 2020 and about 2.0% in 2021, will constrain the bank’s profitability. We cannot exclude that the bank may receive capital support in 2021 from the existing or a new shareholder to counterbalance pressure on its capital position and support growth, but it remains highly uncertain at this time.

In our view, the bank’s sound and stable franchise in SME and retail lending, sizable customer base, and diversified lending mix will support its business position. We view that the presence of international financial institutions among shareholders underpins the bank’s relatively good corporate governance and transparency, which we consider to be better than for other Uzbek banks, on average.

Hamkorbank has adequate liquidity, in our view. At July 1, 2020, the bank’s highly liquid assets covered about 40% of its total customer deposits. As of mid-2020, funds attracted from international financial institutions dominate the bank’s funding mix and represent about 50% of its total liabilities. We view these funds as relatively stable and long term, with maturity tied to the maturity of provided loans. That said, we cannot exclude that the bank may breach covenants on asset quality for some of the funds this year. Nevertheless, we expect that most of the international financial institutions will provide a waiver to the bank and will not withdraw their funds. In our base-case scenario, we therefore do not expect marked strain on the bank’s liquidity.

The negative outlook on Hamkorbank reflects our view that the bank’s creditworthiness may deteriorate in the next 12 months due to a significant increase of problem loans and credit losses caused by COVID-19 pandemic containment measures, which may weigh heavily on its risk profile and capital buffer.

We could downgrade Hamkorbank in the next 12 months if the share of the bank’s problem assets proves to be higher than we currently expect, materially exceeding those of peers, and the bank’s provisioning coverage ratio remains low. We could also take a negative rating action if the bank’s currently solid capital position materially deteriorates with our forecast RAC ratio going well below 7.0% due to higher economic risks in Uzbekistan and growing credit losses.

We could revise the outlook to stable if the bank’s share of problem assets remains close to that of peers with similar lending mix, and the bank materially improves its coverage of problem loans by provisions. An outlook revision to stable is possible only if the bank preserves its adequate capital buffer with our RAC ratio sustainably higher than 7.0% and capital adequacy ratio exceeding remaining at least 100 basis points above regulatory threshold.