“The ratings on KDB Bank Uzbekistan incorporate the structurally elevated economic and industry risks that we factor into our ‘b+’ anchor, or starting point for assigning a long-term rating to a bank operating in Uzbekistan. Standard & Poor’s bases its ratings on KDB Bank Uzbekistan on the bank’s "moderate" business position, "adequate" capital and earnings, "adequate" risk position, "average" funding, and "adequate" liquidity, as our criteria define these terms. We assess the bank’s stand-alone credit profile (SACP) at ‘b+’. Our long-term rating on the bank could be three notches higher than the SACP under our criteria, reflecting our view of its status as a "strategically important" subsidiary of Korea Development Bank. However, the long-term rating on KDB Bank Uzbekistan is constrained by our assessment of Uzbekistan’s creditworthiness,” the agency underlined.

“We consider KDB Bank Uzbekistan’s business position to be "moderate." Our assessment reflects the bank’s weak business diversity, mainly owing to the bank’s conservative development strategy and deliberately narrowed customer base, because it chooses to serve only high-profile clients with good credit standing. The bank concentrates mostly on providing financial services, namely settlement services and trading finance facilities, which is quite a competitive field in Uzbekistan. Its other primary long-run focus is the gradual doubling of the loan portfolio share, which formed only 5% of its total assets on Nov. 30, 2014. As a result of its integration with RBS NB Uzbekistan, KDB Bank Uzbekistan’s total assets doubled in 2013, and it became Uzbekistan’s largest commercial bank with foreign investments. However, the bank is still a midsize bank with a market share of about 3.8% and ranks eighth out of 26 domestic banks in terms of total assets. We do not expect the bank to gain market share in the next two years. The bank’s shareholders are Korea Development Bank (86.3% stake), the National Bank for Foreign Economic Activity of the Republic of Uzbekistan (10.3%), and Turon Bank (3.4%). We view the ownership structure as a strength for the business profile, versus those of local midsize peers, as it underpins adequate corporate governance and transparency and appropriate risk management architecture,” the agency’s statement said.

“We base our assessment of capital and earnings as "adequate" on our forecast risk-adjusted capital (RAC) ratio of 9% for KDB Bank Uzbekistan for the next two years. We base our RAC ratio on our view of the bank’s low risk profile on its loan book representing just 5% of total assets, in addition to its limited growth appetite in 2015-2016. Overall, we assume no major change in the bank’s balance sheet structure or risk profile during the observed rating period. We believe that internal capital generation is strong and should remain at 16.5% annually in 2015-2016, with estimated return on equity of 15% over the same period," the agency said.

"We assess KDB Bank Uzbekistan’s risk position as "adequate," based on the loan book’s low proportion in total assets and our view that it will likely increase only gradually to 10% of total assets by year-end 2016. Therefore, credit risks linked to lending activities--typically very high in Uzbekistan--are limited in KDB Bank Uzbekistan’s case. We view positively the bank’s asset exposures to interbank placements that are geographically well diversified, although we regard single-name concentrations in these placements as high. The top-20 interbank exposures amounted to approximately 93% of the total due from other banks on Nov. 30, 2014. Lastly, the bank’s focus on settlement services and trade finance exposes it to limited asset risks,” S&P underlined.

“We regard KDB Bank Uzbekistan’s funding as "average." The bank’s stable funding ratio is several times higher than the 124% average for its peers. We view the bank’s funding needs as limited owing to the loan portfolio’s small size and the overall short-term nature of assets. The bank’s funding profile--with customer demand accounts forming about 80% of total liabilities on Nov. 30, 2014--is justified for its current business model, in our view. However, the funding profile limits KDB Bank Uzbekistan’s asset diversification and loan portfolio growth and potentially increases funding volatility. Single-name concentrations are high, with the top-20 depositors representing 73% of total liabilities,” the rating agency said.

“Liquidity is "adequate," in our view, with the bank’s liquid assets covering approximately 100% of short-term customer deposits,” it added.

“We consider KDB Bank Uzbekistan to be a "strategically important" subsidiary of its majority owner Korea Development Bank. We think KDB Bank Uzbekistan is unlikely to be sold in the long term. The bank is important to Korea Development Bank’s long-term strategy and supports strong ties between the Uzbek and South Korean governments, in our opinion. Moreover, the parent has indicated it considers its subsidiary in Uzbekistan as a platform for expansion opportunities into other Central Asian countries and has a track record of support to its overseas subsidiaries, including KDB Bank Uzbekistan. Operational integration between the two banks is significant, notably via IT, management, and risk platforms,” the agency noted.

“The stable outlook on KDB Bank Uzbekistan reflects our view that the bank will follow its conservative strategy, focusing on serving corporate clients. Simultaneously, we anticipate that the bank will preserve its market share and maintain its risk profile at current levels, which are lower than for domestic peers,” the agency said.

“We could consider a negative rating action on KDB Bank Uzbekistan if it fails to continue expanding its customer franchise because it cannot sustainably face stiff competition from state-owned banks. Such an inability to develop a sustainable, and profitable, business model would prompt us to review the stability of the bank’s franchise and its strategic importance for its parent,” Standard & Poor’s underlined.

“A positive rating action on KDB Bank Uzbekistan is remote at this stage, unless our assessment of Uzbekistan’s creditworthiness improves, because it constrains our long-term rating on the bank. Taking into account the linkages between the ratings on banks operating in Uzbekistan and the sovereign’s creditworthiness, bank-specific factors leading to a possible upgrade of KDB Bank Uzbekistan appear limited,” the agency concluded.