Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings raised its long-term issuer credit rating on Uzbekistan-based Halk Bank (People’s Bank) to ‘B+’ from ‘B’. At the same time, the agency affirmed ‘B’ short-term issuer credit rating on Halk Bank. The outlook is stable.

The agency said: “The upgrade of Halk Bank reflects our view that the bank’s capitalization strengthened materially in 2017 and will increase even further in 2018-2019 because of the material capital support that the Ministry of Finance and Uzbek Fund for Reconstruction and Development have provided and promised. In 2017, Halk Bank received Uzbekistani sum (UZS) 712 billion of capital support, which substantially improved its capitalization and regulatory ratios. The bank’s regulatory capital adequacy ratio stood at 25.6% at year-end 2017, well above the current minimum of 12.5%.”

“According to the presidential decree on May 4, 2018, Halk Bank is to receive an additional UZS1.6 trillion of capital over 2018-2019, and the bank will be free from all taxes until 2023. We believe that the promised capital support will be a significant boost for the bank’s capitalization and will improve its risk-adjusted capital ratio to close to 14.6% as of year-end 2019. The promised capital support would give the bank sufficient resources to further develop its lending to retail clients and small-to-midsize enterprises in Uzbekistan and improve its credit standing as a systemically important financial institution and administrator of the national pension system,” the agency underlined.

“In our capital forecast, we take into account growth in risk-weighted assets of 30%-35% over the next 12-18 months, driven primarily by retail lending and interbank placements. We also take into account weak profitability due to still-low operating efficiency and credit losses, which will likely remain elevated in 2018-2019,” S&P Global Ratings said.

“In 2017, Halk Bank’s asset quality deteriorated, and its cost of risk increased to 3.6% versus 2.2% in 2016. Likewise, the bank’s nonperforming assets increased to 4.9% in 2017 from 3.8% in 2016, reflecting the deteriorating financial situation of some of its private corporate borrowers. We note that historically, the bank’s key asset quality metrics have been slightly worse than those of its peers in Uzbekistan. For example, the bank’s reported average cost of risk for the past three years was 2.54%, versus 1.21% on average for its peers. In our view, this is because unlike other state-owned banks, historically Halk Bank has focused more on retail and private corporations, and to a lesser extent on projects that are guaranteed by the government. We therefore view the bank’s risk position as moderately negative for the ratings,” it added.

With total assets of UZS7.0 trillion (about US$900 million), Halk Bank is the seventh-largest bank in Uzbekistan. The bank acts as an exclusive manager for pension fund deposits and holds a leading market share of 20% in terms of retail deposits.

Halk Bank also has the widest branch network in the country. However, Halk Bank’s overall business profile remains a credit negative in our view, given the bank’s long history of insufficient profitability to support internal capital build-up, as evident from sporadic capital injections from the government.

Halk Bank’s funding profile is better than that of its domestic peers and takes the form of stable and granular pension fund deposits from individuals, which represent of about 60% of its total liabilities. The agency thinks that the bank’s liquidity position and management are similar to those of other state-owned banks.

“We view Halk Bank as a government-related entity (GRE) with a very high likelihood of extraordinary support from the Uzbek government. We factor into our assessment Halk Bank’s very important role for and very strong link with the sovereign. However, this does not lead to any uplift in the ratings,” the agency noted.

“The stable outlook on Halk Bank reflects our view that state ownership and ongoing government support, primarily in the form of capital, will prove sufficient to preserve the bank’s creditworthiness over the next 12 months,” S&P Global Ratings said.

“We could lower the ratings over the next 12-18 months if capital injections from the government are unexpectedly delayed, or the total amount of injections is lower than we incorporate into our forecast. We could also lower the ratings following the bank’s implementation of a more aggressive capital management strategy involving higher growth than we expect in risk-weighted assets that do not increase the capital base and that reduce capital buffers below sustainable levels,” the agency underlined.

“An upgrade over the 12-month outlook horizon hinges on our view of an improvement in the creditworthiness of the sovereign, as well as on a material improvement in Halk Bank’s profitability or asset quality metrics so that they are on par with those of its peers,” S&P Global Ratings said.