Tashkent, Uzbekistan (UzDaily.com) -- Standard & Poor’s Rating Services (S&P) assigned its ’B/B’ long and short-term counterparty credit ratings to Halk Bank, located in the Republic of Uzbekistan (not rated). The outlook is stable.

“The ratings on the bank reflect its high credit risk, heightened by rapid loan growth and government-directed lending, low diversification, and weak core earnings and efficiency. The bank’s aggressive growth targets in the deteriorating economic environment create additional risks”, S&P said.

These negative factors are partly mitigated by the bank’s leading position in the retail sector as the national savings bank, good funding and liquidity profile, as well as its status as a government-related entity (GRE) with a very high likelihood of extraordinary government support in case of need.

In accordance with S&P criteria for GREs, S&P view of a "very high" likelihood of extraordinary government support is based on S&P assessment of Halk Bank’s:

• "Very important" role for the local economy, and
• "Very strong" link with the government of Uzbekistan due to its ownership by the Ministry of Finance (51%) and the Central Bank of Uzbekistan (49%).

Halk Bank is the sixth-largest bank in Uzbekistan, with total assets of US$372 million on 31 December 2008. It is the leading bank in terms of retail deposits, with a 23% market share. Halk Bank is turning into a universal bank, willing to grow its corporate loan book and increase its international visibility, which is positive for its business diversification.

As the global crisis reached Uzbekistan, Halk Bank is exposed to heightened credit risk accentuated by rapid loan growth and government-directed lending to the rural economy. Reported impaired loans stood at only 0.5% of gross loans at 31 December 2008. However, S&P believes that this is not representative of the bank’s asset quality, as some restructured and overdue loans show signs of impairment. Nonperforming loans guaranteed by the government are usually not classified as impaired. “We expect problem loans across the banking industry of Uzbekistan to increase significantly in the near future, which would require additional provisions”, S&P said.

Halk Bank has no foreign debt. Its depositor base, including accumulating pension fund deposits of individuals, for which it is the exclusive manager, provides a fairly stable source of funding. Liquidity profile is strong, with liquid assets in excess of 44% of total assets at end-2008. Part of its activities is related to its role as a public sector bank, and as such Halk Bank exhibits weak core earnings. Net income of US$0.7 million in 2008 represented a return on assets of only 0.3%. The cost base is quite rigid due to the bank’s large distribution network (about 3,000 outlets) and staff (about 12,000 employees). The bank’s cost-to-income ratio stood at a high 97% in 2008.

“Capitalization is adequate following a 10x capital increase in 2008. The ratio of adjusted total equity to adjusted assets stood at 18.7% at Dec. 31, 2008, up from 2.4% a year earlier. Shareholders intend to double the bank’s capital over the next three years--a positive rating factor. However, this should be viewed in conjunction with very rapid business growth and rising risks”, S&P said.

The stable outlook balances Halk Bank’s heightened credit risk with S&P expectation of continued state ownership and very high likelihood of extraordinary government support.

“We are unlikely to raise the ratings on the bank without an improvement in the sovereign’s creditworthiness. At the same time, we would lower the ratings on the bank if sovereign creditworthiness deteriorated or the bank’s very important role or link with the government was to weaken. A material deterioration in the bank’s stand-alone credit profile would also put pressure on the ratings on the bank”, S&P said.

S&P Credit Research provides analysis on issuers and debt obligations of corporations, states and municipalities, financial institutions, insurance companies and sovereign governments. S&P also offers insight into the credit risk of structured finance deals, providing an independent view of credit risk associated with a growing array of debt-securitized instruments.