Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings raised its long-term issuer credit rating on Kapitalbank to ‘B+’ from ‘B’. The outlook is stable.

The agency also affirmed our ‘B’ short-term issuer credit rating on Kapitalbank.

Kapitalbank’s well-recognized brand, advanced digital product offering, and continued investments in digital innovation should sustain the bank’s competitive advantage and it position as one of the leading private retail lenders in Uzbekistan. While it is the sixth largest bank in Uzbekistan by total assets as of 1v 2024, Kapitalbank has a 11.5% market share in retail lending and close to a 20% share in retail deposits. We expect Kapitalbank to continue investing in new technologies and maintain its leading position in digital innovation in the Uzbek market. 

The bank will remain focused on improving customers’ experience through offering simple and efficient digital banking platforms as well as preserving its operating efficiencies via digitalization and automation of internal processes. Additional opportunities for growth in both retail and the small and midsize enterprise (SME) segment come from integration of the bank with e-commerce ecosystem Uzum market space, with already a significant proportion of shared SME clients. All this positions the bank well to expand its market share even further, despite tightening competition.

Kapitalbank’s consistent strategic focus and good execution support solid earnings generation capacity. We expect the bank to continue growing its loan book by 30%-40% annually and further expand its fee generating business such as providing a full range of services to SME clients over the next two to three years. This will support total revenue growth at about 35%-38% per year. Despite continued investments to support further business growth and high inflation, we expect Kapitalbank will remain focused on maintaining its good operating efficiency, with a cost-to-income ratio at 40%-45%. As a result, S&P Global Ratings forecasts return on equity of about 40%, which compares well with peers.

At the same time, S&P Global Ratings considers that while the bank has developed a good risk management and underwriting system, a longer track record is needed to assess whether it can control the risks of fast lending growth throughout the economic cycle. As of end-2023, Kapitalbank reported nonperforming loans (NPLs) under IFRS at 1.7% and cost of risk of 31 basis points (bps) (versus an estimated sector average of 7.2% and over 200 bps, respectively). However, this is to some extent a reflection of very fast growth of the loan book, at close to 85% on average over the past three years, significantly above the levels we observed in the domestic market. The agency expected Kapitalbank will continue reporting good asset quality metrics and maintain its credit costs at 80-100 bps, with NPLs reported under IFRS within 1.8%-2.2%.

Kapitalbank has a strong track record of expanding its deposit base, reaching an impressive market share of about 20% in retail deposits. To a large extent, this growth was also supported by an increase in nonresident deposits in 2022 related to the Russia-Ukraine war. While a substantial share of these deposits has proven to be fairly stable so far, we typically consider nonresident deposits to be more volatile than domestic deposits. Therefore, for Kapitalbank, the future challenge related to its funding base could be increased volatility of its deposit base that will test the bank’s ability to maintain a stable funding base and ensure further growth.

Taking all above factors into account, the agency sees Kapitalbank’s creditworthiness overall comparable to peers with a ‘b+’ stand-alone credit profile. S&P Global Ratings considered PJSB Trustbank and Orient Finans Bank as comparable peers at this rating level, but also include higher-rated peers such as Ipoteka Bank and Hamkorbank in the peer group when performing the rating analysis.

Additionally, S&P Global Ratings considered that geopolitical risks for banks operating in Uzbekistan remain elevated. Specifically, we consider that risks related to sanctions introduced against Russia, Uzbekistan largest trading partner, are growing and will remain high in the near term for the banks operating in Uzbekistan and in the region. Therefore, the bank’s ability to manage respective risks on its retail and corporate operations continues to be important for maintaining its creditworthiness.

The stable outlook reflects S&P Global Ratings’ view that Kapitalbank is well positioned to continue demonstrating solid profits and good asset quality indicators, while maintaining strong new business growth in line with its strategy and preserving its capital buffer.