Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings lowered its long- and short-term issuer credit ratings on Turkiston Bank to ‘CCC+/C’ from ‘B-/B’. The outlook is negative.

The downgrade reflects that Turkiston Bank is in breach of regulatory liquidity ratios. It also reflects concerns regarding Turkiston Bank’s business model and its sustainability in the current economic environment. In the worst case, Turkiston Bank may be unable to honor its obligations in full and on time.

“We believe the deteriorated macroeconomic environment in Uzbekistan, with anemic GDP growth pressured by the COVID-19 pandemic in 2020, has negatively influenced the bank’s franchise and sustainability. We believe that the bank may need external support to restore its liquidity. We have not observed shareholder support in 2020 and we have no information about planned cash injections,” the agency said in a statement.  

“We note that the bank’s liquidity is fragile. Liquid assets stood at Uzbekistani sum (UZS)118 billion, (about 10.9% of total assets) as of Jan. 1, 2021. The bank’s liquidity coverage ratio was 0.915x, versus the regulatory minimum 1x and its net stable funding ratio was 0.843x, versus the minimum 1x. Despite this breach of regulatory ratios, we understand that so far the regulator has not imposed any prudential measures on Turkiston. We also understand that Turkiston Bank may turn to the Central Bank of Uzbekistan for a short-term liquidity line in case of further liquidity pressure,” the agency aded. 

“Turkiston Bank has reported profits under local accounting standards for 2020. That said, we believe that the amount of reported nonperforming loans (NPLs), at 1%, is underestimated. We note that accrued but not received interest income amounted to 11.8% of the total balance sheet or 17.3% of the total gross loan book in 2020. We believe that if Turkiston Bank were to make appropriate reserves for these exposures, it may post losses and report significantly lower capital. At the same time, as of year-end 2020, the reported Tier 1 ratio was 14% versus the 8% minimum, and total capital adequacy 15.1% versus the 13% minimum,” the statement said.

S&P Global Ratings understands that the bank’s management intends to restore the liquidity profile. However, the agency sees risks that during the time it will take to restore funding and improve the liquidity profile, the bank remains vulnerable to unexpected funding pressure, which is a common threat for small financial institutions in Uzbekistan.

The negative outlook reflects concerns of S&P Global Ratings that, over the next 12 months, the bank will remain vulnerable to liquidity stress in case of unexpected funding pressures. It also reflects the view that the franchise and business model could be unsustainable over the next 12 months without support.

S&P Global Ratings could lower the ratings over the next 12 months if the bank’s liquidity further deteriorates, with clear risk of default scenarios, and it is not fully compensated by support in a timely manner, either from the bank’s shareholder or the central bank as a lender of last resort. 

The agency could consider a revision of the outlook to stable if Turkiston Bank is able to materially and sustainably restore its liquidity, thus ensuring the sustainability of its franchise over the medium term.