Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings revised its outlook on Uzbekistan-based Hamkorbank JSCB to positive from stable. At the same time, we affirmed our ‘B+/B’ long- and short-term issuer credit ratings on the bank.

The agency believe that Hamkorbank’s creditworthiness may benefit from the bank’s long track record of sustainably high operating performance, supported by its solid franchise in commercial banking in Uzbekistan, especially in retail and SME lending.

Over the past two years, Hamkorbank sustained its leading positions in micro, SME, and retail lending despite increasing competitive pressure from state-owned banks. Hamkorbank’s market share in retail deposits increased to 8.1% by mid-2019 from 5.4% at end-2017, while its market share in unsecured retail lending was close to 6.8% as of mid-2019. Despite constraints on its net interest margin, the bank maintained solid profitability, with ROAE of 30%-35% in 2018-2019. We note that the bank’s diversified business mix--with about one-third of its loans provided to large corporate customers and the rest almost evenly spread to SME and retail customers--support the bank’s business stability.

In 2018, the Swiss Development Fund, the "responsAbility Participations Aktiengesellschaft," became the bank’s new international shareholder when it acquired a 7.66% stake from the International Finance Corporation (IFC); the fund will acquire 5.0% of additional issuance of ordinary shares before end-2019. The IFC and the Dutch Development Bank continue to hold shares of 7.66% and 15.3% stakes, respectively. The bank’s founder, Mr. Ikram Ibragimov, retains control of the bank. In our view, Hamkorbank will continue benefiting from international investors in its capital through better corporate governance, enhanced expertise and risk management in SME lending, and new funds in the form of capital and credit facilities.

We expect that Hamkorbank will maintain adequate capitalization; we project our risk-adjusted capital (RAC) ratio for the bank will increase to 8.1%-8.3% over the next 12-18 months from 7.7% at end-2018. We assume that the bank’s lending growth will gradually slow to 30%-40% in 2019-2020 from 58% in 2018, while the bank’s profitability will remain high with ROAE between 25% and 30%. As of Sept. 1, 2019, the bank’s prudential capital adequacy ratio (CAR) was 14.3% versus the regulatory minimum of 13.0%. We think that the bank will likely maintain its CAR above 14% over the next two years and not put its capital position in risk of breaching the regulatory minimum.

The bank’s asset quality has remained broadly stable over the past two years, with new credit losses sustainably below 100 basis points. The bank’s Stage 3 loans stood at 3.6% at end-2018--a notable increase from 1.2% a year earlier that stems from a technical delinquency of a large borrower. This loan became performing again at the beginning of 2019. As a result, we expect the bank’s Stage 3 loans will recover in 2019 to the 1.5%-2.0% range, which is in line with the system average. In our view, the bank’s generally good asset quality reflects its relatively sound risk-management practices, sound expertise in the traditional business areas of micro and SME lending, and advanced scoring models developed with the assistance of the IFC.

Over the past year, the bank has progressed significantly in reducing concentrations of its depositor base and lengthening its term structure, which was part of the bank’s previous strategic initiatives. Growing retail deposits (+100% for 2018-2019) and reducing large balances from corporate customers helped to achieve these goals. At end-2018, the top-20 depositors represented 35% (versus 55% in 2017), and time deposits represented 67% of the bank’s depositor base (versus 39%). Long-term project funds attracted from IFIs, which represents about 41% of total liabilities as of Sept. 1, 2019, are still an important source of SME and retail lending and uphold the bank’s funding base. The bank’s key funding and liquidity metrics remain broadly comparable with peers’.

We now consider Hamkorbank a systemically important financial institution for Uzbekistan. This stems from its large share in the system-wide retail deposits and material position on the market of unsecured retail lending. As of mid-year 2019, the bank served about three million retail customers and approximately 45,000 private corporates in the country, positioning the bank in the top-3 largest banks in the country by client base. We believe that there is a moderate likelihood that Hamkorbank would receive extraordinary government support if needed. This does not lead to any uplift to the ratings on the bank since the bank’s credit quality is already very close that of the sovereign.

The positive outlook on Hamkorbank indicates the possibility of an upgrade in the coming 12 months. This is based on our view that the bank’s creditworthiness may improve if it continues to demonstrate high profitability and to be a leader in commercial banking, while keeping adequate capital buffers and asset quality.

A positive rating action in the next 12 months would hinge on the bank continuing to increase its business volumes in SME and retail banking, as per its strategy. This would support the bank’s margin and profitability and allow it to withstand intensifying competition from the state-owned banks. Sustainably high earnings capacity, exceeding that of peers’ and supporting the bank’s capital position, may also prompt us to upgrade the bank. A positive rating action is only possible, however, if the bank maintains prudent risk and capital management, with local capital regulatory ratio remaining sustainably above 14% and with credit losses no higher than those of peers with a similar business mix.

We could consider a negative rating action if we saw the bank pursue a more aggressive capital policy that dropped our forecast RAC ratio to below 7% or with a buffer to minimum regulatory threshold remaining sustainably below 100 basis points, which could jeopardize compliance with the regulatory ratio. We could also consider a downgrade if we saw Hamkorbank demonstrate higher-than-expected lending growth with credit losses and problem assets exceeding those of peers.