“The affirmation reflects our expectation that KDB Uzbekistan’s market position and financial performance will remain stable in the next 12-18 months. We also anticipate that KDB Uzbekistan will maintain close strategic and operational ties with its parent, Korea Development Bank (AA/Stable/A-1+), which supports its above-average funding characteristics, while the bank’s conservative approach to lending and strict risk management practices will stay broadly unchanged,” the agency said.

“For the last year, KDB Uzbekistan has continued following its strategy of modest organic growth. The bank’s business focus remains predominantly on providing large and midsize corporate clients with treasury services, such as settlements and foreign currency conversion transactions, as well as with trade finance facilities. The bank’s lending activity remains minor and the share of the gross loan portfolio in total assets was 4.1% as of June 30, 2016. We expect that this share will not exceed 5%-6% in the next 12-18 months, owing to the challenging economic environment in Uzbekistan and the bank’s very conservative approach to business development,” it noted.

“In our view, the bank’s capital position will remain adequate in the next 12-18 months, as reflected in our projected risk-adjusted capital ratio of 8.4%-8.6%. The bank will keep its relatively sound ability to generate capital internally and we anticipate that the return on equity will be 20%-25% and the dividend payout ratio will not exceed 20% in the next two years,” S&P said.

“We have revised up our assessment of KDB Uzbekistan’s funding to above average from average. This reflects our view that the bank’s deposit base will be sticky, while its asset base will stay predominantly short term in nature, which is now reflected in the bank’s much stronger funding metrics than those of peers. In particular, the bank’s stable funding ratio was 814% as of year-end of 2015 versus an average of about 250% for peers. The bank’s funding mainly consists of current accounts of large local and international corporations operating in Uzbekistan. We note that, despite their short-term nature, current accounts have been very stable for the last two years. Moreover, customer balances are placed at interest rates close to zero. In our view, this reflects the bank’s sound client franchise as a subsidiary of a large and highly rated international banking group,” the S&P said in its release.

“In our view, KDB Uzbekistan’s asset quality will remain high and stable. Since 2014, the bank has had no nonperforming loans, while average credit losses for the last five years were close to zero. This reflects the bank’s selective and conservative approach to lending, which will likely remain unchanged,” the rating agency stated.

“We consider KDB Bank 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, we do not factor in group support in our ratings on KDB Uzbekistan, and our rating on the bank remains at the level of its ‘b+’ stand-alone credit profile (SACP), given that KDB Uzbekistan’s creditworthiness is already at the same level as our view of the sovereign’s creditworthiness,” the release reads.

“The stable outlook on KDB Uzbekistan reflects our view that the bank will continue to focus on servicing mostly corporate clients over the next 12-18 months, while maintaining its capitalization and risk profile at current levels,” S&P added.

S&P said it is unlikely to raise the ratings on KDB Bank Uzbekistan over the next 12-18 months, unless the sovereign’s creditworthiness improves.

“We might lower the ratings on KDB Uzbekistan to reflect heightened economic and industry risk, such as a deterioration in the sovereign’s creditworthiness. If Korean Development Bank were to reconsider its ongoing support for KDB Uzbekistan, and its presence in Uzbekistan, this might also lead us to reassess downward both the financial profile and business profile of the bank, and consequently to lower our rating on the bank,” S&P said.