Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings had revised its outlook on Davr-Bank to positive from stable, and affirmed its ‘B-/B’ issuer credit ratings.

“We revised the outlook to positive because Davr-Bank’s asset quality metrics over the last five years have shown resilience. Specifically, credit costs have been below 0.6% of the average loan book over this period, which is one of the lowest levels among Davr-Bank’s peers. Problem loans (Stage 3 loans under International Financial Reporting Standard 9) remained low and amounted to only 0.5% of gross loans, one of the lowest levels among Uzbek banks we rate,” the agency said.

“Such low credit losses are, in our view, a reflection of the bank’s selective approach to clients and conservative underwriting policies, despite its rapid lending growth. The bank’s lending concentrations compare favorably with peers’ in the Commonwealth of Independent States: the bank’s 20 largest borrowers accounted for only 17% of the total loan book (and 83% of common equity) as of Aug. 31, 2019. At the same time, we view positively its share of foreign currency loans, which was only 22% on Aug. 31, 2019, compared with the 57% sector average. The low share of foreign currency loans protects the bank from sharp Uzbekistani sum exchange rate spikes,” S&P Global Ratings said.

“Another positive factor was Davr-Bank’s moderation in 2019 of the pace of its growth. It halved the growth of its loan book in the first nine months of 2019, versus 94% growth in 2018. We anticipate gross loans will increase at about 45% annually over the next 12-18 months, close to the system average and in line with the bank’s forecasts,” the agency noted.

“At the same time, Davr-Bank has proven its ability to support lending growth with sound earnings, recording a return on average equity above 30% over the last five years. We understand that this is predominantly thanks to the bank’s high net interest margin. Such high interest earnings are supported by its higher share than peers of relatively cheap on-demand deposits in its liabilities structure and the loyalty of its customers. The bank’s earnings are also supported by a material share of commissions in the revenue mix.

S&P Global Ratings expects that the bank’s capitalization will remain at an adequate level, with our risk-adjusted capital (RAC) ratio improving closer to 10% in the next 12-18 months. At the same time, we expect the bank will maintain a solid profitability, with return on equity at 35%-40%.

“We expect the bank’s funding composition will remain broadly unchanged over the next 12-18 months. Customer deposits will remain the main source of financing over the next 18 months, comprising 74% of total liabilities as of Sept. 30, 2019. The bank’s liquidity cushion is commensurate with that of peers,” the agency said.

“The outlook is positive because we would likely raise the rating in the next 12 months if DAVR-Bank continues to demonstrate low credit losses and a low share of nonperforming loans (NPLs), while maintaining stable capitalization and profitability metrics. In addition, we would expect the bank’s funding and liquidity position not to deteriorate,” S&P Global Ratings said.

“We would revise the outlook to stable if Davr-Bank’s lending growth results in weaker capitalization of the bank, with our RAC ratio dropping close to 7%. This could happen if the bank increases its lending activity much faster than we currently expect. Additionally, we would revise our outlook to stable if we saw a deterioration of the bank’s underwriting standards resulting in a greater share of NPLs and higher impairment charges than we currently forecast, or if its funding and liquidity metrics deteriorate,” it concluded.