“The affirmation reflects our base-case assumption that, over the next several months, OFB will minimize the risk of violation of regulatory requirements on its open currency position and consequently also the risk of regulatory sanctions,” the agency said.

“Following the liberalization of the foreign currency regime in Uzbekistan on Sept. 5, 2017, when the Uzbek sum weakened by 48%, we’ve observed OFB breaching regulatory open currency position requirements from time to time. In our view, such breaches stem from the bank’s historical balance-sheet structure, which featured substantial long currency positions. Despite an already significant mismatch between assets and liabilities denominated in foreign currency, we observe the bank occasionally acquiring large amounts of foreign currency from its clients, thereby further distorting its balance-sheet structure and regulatory ratios,” the statement said.

“We view such practices as opportunistic and the result of poor risk management. At the same time, under our base-case scenario, we do not expect any regulatory sanctions, such as restrictions on OFB’s active operations, that would impair OFB’s liquidity and funding position. We expect the Central Bank of Uzbekistan to remain tolerant of such violations until the banking system and regulatory framework adjust to the new exchange rate environment,” S&P Global Ratings underlined.

“We also note that OFB’s regulatory capital buffers have diminished as a result of the revaluation of its foreign currency-denominated assets. In our view, low capital buffers put OFB at risk of breaching the minimum regulatory capital adequacy requirements in the event of higher-than-expected growth of risk-weighted assets, or unexpected losses. We have therefore revised our capital and earnings assessment to weak from moderate, but this has a neutral impact on the rating,” the statement of the agency reads.

“We factor into our base-case scenario an anticipated improvement of the bank’s regulatory ratio to satisfactory levels in January 2018, when OFB includes the full amount of income earned during 2017 in its regulatory capital. Due to local regulation, until an auditor confirms the current year’s earnings, only 50% of earned income can be included in regulatory capital. We project an average return on equity of 70%-80% for 2017, supported by almost Uzbek sum (UZS) 80 billion (about $9.9 million as of Nov. 13, 2017) of one-time revaluation profits resulting from the exchange rate liberalization on Sept. 5, 2017. We expect such earnings to be sufficient to improve the bank’s capital buffers to satisfactory levels,” the agency said.

S&P Global Ratings said: “The stable outlook reflects our expectation that OFB’s business and financial profiles will remain broadly unchanged over the next 12 months, and it will gradually improve its regulatory ratios while maintaining strong profitability.”

“We might consider a negative rating action if we saw no improvement in OFB’s regulatory ratios over the next 12 months, with clear signs that the Central Bank of Uzbekistan intended to impose sanctions on OFB. We consider a positive rating action on OFB to be unlikely in the next 12 months,” it concluded.