“We expect that the bank will maintain its capitalization and asset quality near the current levels over the next 12-18 months. However, we note that the fast lending growth may constrain asset quality and can be sustainable only if the bank continues to develop its IT and risk management systems. This is especially relevant given the bank’s recent active expansion of retail lending,” the agency said.

“We revised our assessment of the bank’s risk position to moderate from weak to reflect our view that the bank has expanded its lending book while maintaining good asset quality. As of Sept. 30, 2016, nonperforming loans (NPLs; loans overdue more than 90 days) accounted for 0.8% of the total loan book. We expect NPLs will likely increase but not exceed 1.5% of total loans in the next 12-18 months. We forecast cost of risk at around 1.5% of average loans in the same period, which is in line with our expectations for the banking sector in Uzbekistan,” it added.

“Davr-Bank’s lending concentrations compare favorably with domestic peers. Exposure to the 20-largest borrowers accounted for about 30% of the total loan book (or 85% of common equity) as of Sept. 30, 2016. Also, while the bank was previously focused predominantly on lending to and servicing the small and midsize enterprise sector, the bank has been actively expanding its consumer lending this year, which supports good loan portfolio diversification,” S&P Global Ratings stated.

S&P Global Ratings added: “At the same time, we revised our assessment of capital and earnings of Davr-Bank to adequate from strong to reflect the bank’s decreased capital adequacy due to rapid asset growth. Our risk-adjusted capital (RAC) ratio before diversification and concentration adjustment for Davr-Bank was 11.2% at year-end 2015, and we forecast it will decrease to 8.0%-10.0% in the coming 12-18 months. Our forecast assumes that the bank will grow its gross customer loans by 35%-40% annually in 2016-2017. Furthermore, we incorporate in our projections return on average equity of about 30% in 2016 and 20%-25% in 2017”.

“The stable outlook reflects our view that Davr-Bank will maintain adequate capitalization and steady asset quality while expanding its lending activities over the next 12-18 months. The outlook also reflects our expectation that the bank’s liquidity position will remain adequate over the same period, despite faster-than-sector-average asset growth,” the agency stated in the press release.

“We could lower the ratings if Davr-Bank’s capitalization weakened faster than we currently anticipate, resulting in our projected RAC ratio dropping below 7%. This could happen if the bank grows its lending activity much faster than we currently expect and/or its asset quality rapidly deteriorates, weakening the capital base because of the elevated levels of new provisions to be created. Another negative rating action trigger could be aggressive lending growth that is not supported by the development of adequate IT or risk management systems. This could cripple asset quality, with NPL levels and credit costs increasing above sector averages. A pronounced deterioration of the bank’s funding and liquidity positions could also prompt a negative rating action,” the agency underlined .

S&P Global Ratings said it considers a positive rating action on Davr-Bank within the next 12-18 months to be remote at this stage.