Tashkent, Uzbekistan (UzDaily.com) -- Rating-Agentur Expert RA GmbH confirmed the credit rating of Bank Saderat Tashkent at ‘B’ (Moderately low level of creditworthiness) according to the international scale. The rating outlook is stable which means that in the mid-term perspective there is a high probability of maintaining the rating score.

The bank’s operations are concentrated 100% in Uzbekistan, and the bank’s funding base is concentrated 100% in Iran. The banking system risk (BSR) of Uzbekistan and Iran is high. Therefore, the overall systemic risk of Bank Saderat Tashkent was assessed as high.

The Agency confirmed the rating of Bank Saderat Tashkent at ‘B’ mainly due to the fact that the agency did not observe in the current and mid-term perspective any material or potential changes in the underlying factors. On the positive side, the rating remains supported by outstanding capitalization, low exposure to credit and interest rate risks and very strong liquidity metrics.

Nonetheless, the creditworthiness of the entity remains constrained by the negative macro profile, low competitive position and high captivity levels. Moreover, profitability figures are below the Uzbek market average and the exposure to foreign exchange risk, albeit currently  being mitigated, could potentially harm the stance of the bank in case there is UZS appreciation.

The bank has capital adequacy and liquidity figures well above the requirements of the CBU and the agency expects them to remain this way going forward. Both positive figures are the reflection of the almost non-existing liabilities in the bank; as of June 2018 the ratio of liabilities to assets was as low as 9.9%.

Moreover, the low amount of loans to customers reduces the potential impact of a counterparty default in the capital metrics of the bank. Also, despite the low interest rate risk, the fact that most of the income generating assets are short-term (mostly three months) could potentially hurt profitability in case there is a significant movement in the yield curve.

“Our BSR score shows once again a high systemic risk for the bank since it is exposed to the Uzbek and Iranian financial systems, both of which we assessed to have high market risks mainly due to the underdevelopments of the systems, subdued transparency and low depth of their respective banking sectors. In addition, the competitive position of Saderat Tashkent remains negative and its geographical diversification minimal,” the agency said.

As of as of June 2018, Saderat Tashkent’s assets accounted for as low as 0.2% of the Uzbek banking system and its loans to a merely 0.001% of the sector. It is also ranked 25th out of 28 banks in terms of assets. These figures show a low level of participation in the Uzbek market which, alongside a state-owned-bank-dominated sector, would make it more difficult for the bank to penetrate the market.

Additionally, the bank showed significant signs of captivity since 97% of the bank’s assets and 93% of the income as of June 2018 were assigned to Bank Saderat Iran (BSI). Moreover, the funding base remains very low as the bank is mostly funded by equity accounting for 90% of the equity and liabilities as of June 2018.

Furthermore, on the liabilities side, 100% of the funds due to other banks are from BSI and 98% of the customer accounts of legal entities belong to the Embassy of the Republic of Iran.

The combination of the concentration of assets and equity on BSI augments the risk of the sustainability of the bank’s capitalization and profitability in case a distress situation were to occur in BSI. Nevertheless, we consider BSI to be reliable as we assess it as a systematically important bank for Iran as it is the largest bank in the country, has a track record of adequate performance, maintains the Iranian government support and has a global branch network.

However, the lack of an internationally recognized credit rating restricts a fully positive counterparty risk assessment. The bank is exposed to currency risks both transactional and translational as the financial position and the amount of capital can change in case there is an adverse exchange rate fluctuation. In 2017, the bank benefited from the devaluation of the UZS since around 60% of the income came from dealing with FX operations.

In contrast, after the exchange rate was liberalized, the UZS has appreciated by 5% in the last five months, hurting the bank’s income. Even though we do not expect this to negatively affect the bank in the short-term, potential volatility in the UZS/USD exchange rate could create imbalances for the bank.

Profitability remains subdued as the ROE figure posted by the bank in 2017 was 5% as compared to a market average of 17.1%. Moreover, most of the increase in profit in 2017 was due to the extreme devaluation of the UZS against the USD back in September 2017.

“The stable outlook still reflects our view of the bank’s stable structure and operations. We believe the link of the bank to the BSI serves a regular and certain source of income and funding which contributes to the stability of the bank,” the agency said.