Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings said it revised its outlooks on National Bank For Foreign Economic Activity Of The Republic Of Uzbekistan (NBU), Uzpromstroybank, Ipoteka Bank JSCM, and KDB Bank Uzbekistan to negative from stable. At the same time, S&P Global Ratings affirmed its ratings, including the 'BB-' long-term issuer credit rating, on each bank.

The outlook revisions mirror the similar rating action on Uzbekistan (see "Uzbekistan Outlook Revised To Negative On Rising External Debt; 'BB-/B' Ratings Affirmed," published June 5, 2020, on RatingsDirect) and reflects the negative impact that potential deterioration of the sovereign's creditworthiness can have on the banks’ credit profile. The negative outlook on Uzbekistan reflects our view that the sovereign's external and fiscal debt could continue increasing rapidly over at least the next 12 months, potentially faster, for instance because of COVID-19-related spending, while benefits of government investment related to increased borrowing will only become apparent in the medium term. We expect current account deficits will remain elevated, and government borrowing will finance reforms and investment programs aimed at improving infrastructure and modernizing the economy. We expect growth will decelerate this year to 1% because of the fallout from COVID-19, and weakness in key trading partners due to low oil prices. We expect real GDP growth will average just under 5% over our forecast period through 2023, supported by growth in the services, manufacturing, and natural resources sectors.

The outlook revisions on the three state-owned banks (NBU, Uzpromstroybank, and Ipoteka) also reflect the application of our criteria (see "Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions," published Nov. 19, 2013), given that all banks are owned by the government and all of them are exposed predominantly to the Uzbekistan market.

NBU

The negative outlook on NBU mirrors that on Uzbekistan. 

We could take a negative rating action in the next 12 months if we were to lower our sovereign credit ratings on Uzbekistan. We could also take a negative rating action if the adverse economic environment in Uzbekistan would lead to higher problem assets and credit losses than we currently anticipate.

We could consider revising the outlook to stable if we took a similar action on the sovereign, provided that asset quality dynamics are in line with our expectations and the bank maintains an adequate capital buffer, with our forecast risk-adjusted ratio (RAC) higher than 7.0%.

A positive rating action is unlikely over the next 12 months, in our view.

Uzpromstroybank 

The negative outlook on Uzpromstroybank mirrors that on Uzbekistan.

We could take a negative rating action in the next 12 months if we were to lower our sovereign credit ratings on Uzbekistan. We could also take a negative rating action if the adverse economic environment in Uzbekistan would lead to higher problem assets and credit losses than we currently anticipate.

We could consider revising the outlook to stable if we took a similar action on the sovereign, provided that asset quality dynamics are in line with our expectations and the bank maintains an adequate capital buffer, with our forecast RAC higher than 7.0%.

A positive rating action is unlikely over the next 12 months, in our view.

Ipoteka Bank JSCM        

The negative outlook on Ipoteka Bank mirrors that on Uzbekistan.

We could take a negative rating action in the next 12 months if we were to lower our sovereign credit ratings on Uzbekistan. We could also take a negative rating action if the adverse economic environment in Uzbekistan would lead to higher problem assets and credit losses than we currently anticipate.

We could consider revising the outlook to stable if we took a similar action on the sovereign, provided that asset quality dynamics are in line with our expectations and the bank maintains an adequate capital buffer, with our forecast RAC higher than 7.0%.

A positive rating action is unlikely over the next 12 months, in our view.

KDB Bank Uzbekistan JSC

The negative outlook on KDB Bank Uzbekistan reflects our view that, despite the material liquid assets in foreign currency placed in developed countries and high capitalization, the bank would become more exposed to domestic risks in the medium term as per the approved strategy. We do not rate KDB above the sovereign. This is because of the likely direct and indirect influence of sovereign distress on domestic banks' operations, including their ability to service foreign and local currency obligations. We believe the bank would likely not withstand hypothetical sovereign stress, because it might accelerate pressure on liquidity.

The negative outlook on KDB also mirrors that on Uzbekistan. 

We could take a negative rating action in the next 12 months if we were to lower our sovereign credit ratings on Uzbekistan. We could also consider a negative rating action if asset quality would deteriorate, with the amount of nonperforming assets and credit losses materially exceeding our expectations. Also, significant lending growth, which could compromise the bank’s superior asset quality and capitalization, might also lead to us to take a negative rating action.

A positive rating action is unlikely over the next 12 months, in our view.