The agency also removed the "under criteria observation" (UCO) designation from this rating, which was applied on 7 April 2017, at the start of the criteria review.

At the same time, the agency affirmed the ‘B-’ long-term counterparty credit rating on Turkiston Bank. The outlook is stable.

“We raised the short-term rating solely based on the application of our revised methodology for linking long-term and short-term ratings. This upgrade does not reflect any change in our assessment of the bank’s credit quality,” the agency said.

“The affirmation of the long-term rating reflects our view that Turkiston Bank’s business is gradually recovering since the regulator authorized a foreign currency license in May 2016. However, we also take into account downside pressure coming from potential risk related to anticipated rapid growth. We believe the bank will continue expanding its funding and customer bases, as well as attempting to diversify its business profile,” S&P Global Ratings said.

“As a positive factor, we expect Turkiston Bank’s profitability to become less volatile thanks to stronger commission income. Commission income more than doubled in 2016 compared with 2015, because customers have found the bank more attractive with the foreign currency license. Thus, we expect that Turkiston Bank’s capitalization will be supported through improving earnings capacity and also a planned capital injection from a foreign investor, despite the relatively rapid loan growth we expect in 2017-2018,” the statement of S&P Global Ratings reads.

“We see Turkiston Bank’s current risk profile and asset quality as stable. Reported nonperforming loans (NPLs; loans overdue by 90 days or more) comprise about zero percent of total loans as of Feb. 28, 2017, which is in line with other small banks in Uzbekistan and Turkiston Bank’s track record. We believe that the historically low NPLs are mostly driven by the close personal or business relations between the bank and its borrowers. Therefore we think NPLs will not exceed the market average expectation of 1.5% over the next 12-18 months. However, this assumption is subject to the bank’s ability to manage its expected about 65% increase in lending in 2017 and 30% in 2018,” the agency underlined.

“While this growth is expected from a very low base, we still consider it potentially risky, because a larger seasoned portfolio, combined with still developing risk-management practices, tight competition, and the challenging operating environment, might result in higher credit losses. To offset that somehow, Turkiston Bank’s single-name concentrations have notably improved, with the top 20 borrowers accounting for 55% of the loans or 1.7x of total equity as of Feb. 28, 2017 (against 72% of the loan book, or twice the total equity as of Aug. 1, 2016). This level is now more comparable with that of local peers, but is still high in a global context,” the agency stated.

Turkiston Bank’s adequate liquidity buffer and a planned Uzbekistani sum 5 billion (about US$1.4 million) equity injection in 2017 supports the bank’s credit stance, it added.

“The stable outlook reflects our view that the bank will be able to cope with the challenging operating environment and retain adequate capital and liquidity comparable with that of peers over the next 12-18 months,” S&P Global Ratings said.