The rating actions follow the strengthening of Halk Bank’s capitalization, with a regulatory capital ratio at 12.9% as of 1 November 2015--well above the current regulatory minimum of 10%. This improvement is on the back a Uzbek sum (UZS) 39 billion capital injection from the Central Bank of Uzbekistan and the Ministry of Finance as part of the government’s plan to inject the bank with a total of UZS185 million over 2015-2017.

“We factored this short-term government support into the rating under our previous review, and we have revised our assessment of Halk Bank’s stand-alone credit profile (SACP) to ‘b+’ from ‘b-’ to reflect the bank’s now strengthened capital position,” the agency said.

The recapitalization program was approved by presidential decree on 25 March 2015, and will be completed by the end of 2017; the bank is scheduled to receive another UZS23 billion by end-2015, UZS54 billion by mid-2016, and UZS69 billion over 2017.

“Under our base case, we expect that these capital increases will sufficiently support Halk Bank’s capitalization over 2015-2017, sustaining the regulatory capital ratios above the minimum set by the central bank. We take into account the expected gradual increase of the minimum regulatory capital ratio to 11.5% in 2016, incrementally increasing annually by 1% until it reaches 14.5% by the end of 2019. At our ‘B+’ rating level, we expect a bank to operate with capital levels sustainably and substantially above the regulatory minimum. Today’s rating action incorporates our belief that Halk Bank will gradually shift to a less aggressive capital management approach,” the agency underlined.

“After factoring in the expected capital increases, we project our risk-adjusted capital ratio for the bank will stay between 5.5% and 6.0% over the coming two and a half years. However, we note that our forecast is highly contingent on the pace of asset growth. In addition, control of operating expenses, which rose substantially in 2014 and wiped out 74% of the revenues, is key to generating enough profit to match asset growth and stabilize capital ratios,” the S&P noted.

S&P forecast is based on the following main assumptions:

• No dividends.
• Capital injection of UZS62 billion in 2015, UZS54 billion in 2016, and UZS69 billion in 2017;
• Growth in loan portfolio and risk-weighted assets of 10%-15%; and
• Cost of risk (close to covering Standard & Poor’s normalized losses) of about 2%.

“Our ratings on Halk Bank continue to reflect our view of the bank’s "adequate" business position, driven by its wide franchise across the country and the bank’s important role as the exclusive manager of the country’s pension fund deposits. We also factor in our opinion of the bank’s "adequate" risk position, driven by low single-name concentrations and loss experience comparable to other Uzbek state-owned banks. Furthermore, we regard the bank’s funding as "above average," due to a granular funding profile, with a stable retail deposits share of almost 60% of total deposits, and its liquidity as “adequate”, the agency said.

“In addition, we view Halk Bank as of "high" systemic importance due to its exclusive role as the pension fund deposits operator and its wide franchise across the country with material penetration in the retail segment, holding a 25% share of the country’s retail deposits. Although we consider the Uzbek government as "supportive," we do not give any uplift to the rating, due to the relatively high SACP that already incorporates the government’s strong ongoing support to the bank,” it added.

“The negative outlook indicates that the expected capital increase from the government does not remove all our concerns about the bank’s long-term capital management, which has been aggressive over past years. In particular, the bank still needs to demonstrate it’s ability to align growth in risk-weighted asset and retained earnings, and to stabilize regulatory capital ratios (temporarily boosted by the capital increase) well above the minimum established by the central bank,” the agency stated.

“We could lower the ratings over the next 12-18 months if we saw, contrary to our expectations, that the bank’s historic aggressive capital management persists, with a higher risk appetite than we anticipated, leading to asset growth above the 10%-15% that we currently project under our base case. In particular, if the bank operates with capital close to the minimum regulatory requirements (within less than 100 basis points), we would reassess, based on our criteria, Halk Bank’s capital and earnings as "weak," at best, regardless of the forecast risk-adjusted capital ratio,” the agency underlined.

“We could revise outlook to stable if over the next 12-18 months we observe that the bank’s asset growth rates stabilized and the bank follows more conservative capital management that leads to maintaining its regulatory capital ratio above the minimum requirement by more than 100 basis points,” the agency said.