“The outlook revision to positive reflects our view that Ravnaq-bank has demonstrated clear signs of business recovery since the regulator authorized a foreign currency license for the bank almost a year ago. Although the bank has not sustained these results over a long period of time, we believe it will likely be able to continue expanding its client base, while diversifying its business profile and improving earnings capacity. That said, we see high risks stemming from the fact that active business expansion requires aggressive growth. Fast loan growth on the back of tight competition and developing risk-management practices could result in higher-than-expected losses. Therefore, we still see prevailing downside pressure, which is reflected in our ratings on the bank,” the agency said.

“We believe that obtaining the foreign currency license enabled Ravnaq-bank to strengthen ties with its customers and broaden and diversify its deposit base. During the first nine months of 2016, Ravnaq-bank increased its client base by one-third to almost 22,000 clients. This growth is approximately 2x greater than in 2015, when the bank was operating without a foreign currency license. Additionally, Ravnaq-bank markedly improved the stability of its funding base as the ratio of less confidence-sensitive primary accounts to secondary accounts has increased to 3.6x for the first nine months of 2016 from 1.2x at the beginning of the year. Importantly, the bank has built a larger number of clients with primary accounts, which has contributed to the diversification of revenue sources, with net fee and commission income forming about 40% of operating revenues compared to 20% in 2015. The planned branch opening in Tashkent will also likely be a positive factor for diversification of the bank’s client base and earnings in the future,” S&P underlined.

“At the same time, we still believe that further development of Ravnaq-bank depends on favorable operating conditions and a competitive environment, owing to the bank’s early development stage after receiving its foreign currency license and its small size. That said, we observe downside pressure on the bank’s funding rates and note that the planned annual 110% loan growth in 2016 and 55% in 2017 (even higher than targeted by other small Uzbek banks) potentially adds credit risks, however the bank is coming from a very low base. Therefore, we will closely monitor the quality and granularity of this growth in the next 12 months as well as the bank’s ability to generate stable profits, which so far were relatively low to support business stability,” S&P stated.

S&P noted that the positive outlook on Ravnaq-bank incorporates its view that over the next 12 months the bank will likely sustain positive developments in funding and continue expanding its customer base and strengthening its franchise.

“We might consider a negative rating action if we observed signs of regress in the bank’s business profile, while asset quality deteriorated more than we currently expect. Deterioration in its funding and liquidity metrics might also trigger a negative rating action,” it said.

“We might consider a positive rating action if Ravnaq-bank continued strengthening its funding base and expanding business, and proved able to deal with potentially,” S&P concluded.