Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings affirmed its ‘BB-/B’ long- and short-term issuer credit ratings on Uzbekistan-based KDB Bank Uzbekistan JSC (KDB Uzbekistan). The outlook remains stable.

The affirmation reflects our view that over the next two years, KDB Uzbekistan will likely maintain its generally low risk business model, good asset quality, and high liquidity and capital buffers.

S&P Global Ratings expects that, despite the actively expanding loan portfolio, over the next two years the bank will retain material activities in developed countries, with exposure to economic risks in Uzbekistan not exceeding 50%. We note, in particular, that as of year-end 2019, about 60% of the bank’s assets were in the form of low-risk short-term interbank deposits placed with foreign banks primarily from South Korea, Europe, and the U.S.

The agency thinks that the bank will continue active development of its lending franchise in Uzbekistan, focusing on financially sound corporates from manufacturing, trade, and food industries. In 2019, the bank’s loan portfolio increased by 46% versus our expectation of a 60%-80% growth rate. We forecast that the loan portfolio will likely increase by 45%-50% per year over the next two years, which exceeds our expectations for average system wide growth. Nevertheless, we note that the bank is expanding its lending business from a very low base and that its loan portfolio is unlikely to exceed 30% of its total assets by year-end 2021. We also believe that management will maintain its conservative underwriting standards and low risk appetite, with asset quality remaining better than the system average.

S&P Global Ratings expects that the bank’s capital adequacy will remain solid: Our forecast risk-adjusted capital (RAC) ratio is close to 14.5% at year-end 2021. We think that the growing share of lending in the bank’s asset mix will support its net interest margin. The bank’s profitability will be lower than in the previous five years, in our view, due to lower commission income growth, with return on average equity (ROAE) remaining at 10%-15% over the next two years.

Volatility of customer accounts has materially increased over the past two years, as some large foreign corporates withdrew a material portion of their balances at the bank to repatriate profit and repay in advance debt at foreign counterparties. In 2018, the bank lost 16% of its customer deposits, and in 2019 it lost another 23%. This contrasts with the stability of customer deposits in previous years. Withdrawals became possible as capital and currency controls were relaxed in Uzbekistan over the past two years. We therefore no longer see KDB Uzbekistan’s funding profile as superior to that of peers and have revised our funding assessment to average. However, the observed volatility in customer accounts is more than offset by the bank’s material volume of liquid assets, which cover about 94% of its customer deposits.

We consider KDB Uzbekistan to be a strategically important subsidiary of Korea Development Bank. We base our view on the high operational integration between the parent and KDB Uzbekistan. Moreover, we acknowledge that KDB Uzbekistan’s commercial franchise, brand name, and financial profile all benefit from being part of a large and strong group. However, our long-term rating on the bank remains at ‘BB-’ as we cap the rating at the level of our rating on Uzbekistan (BB-/Stable/B).

The stable outlook on KDB Uzbekistan largely mirrors the stable outlook on Uzbekistan.

S&P Global Ratings could raise the long-term rating on KDB Uzbekistan or revise the outlook to positive over the next 12 months if we took a similar rating action on the sovereign, assuming that there is no change in the commitment of the parent, Korea Development Bank, to provide extraordinary support to its Uzbek subsidiary if needed.

The agency could take a negative rating action if we took a similar action on the sovereign.