Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings affirmed its ‘B+/B’ long- and short-term issuer credit ratings on Uzbekistan-based Ipoteka Bank. The outlook remains stable.

“The affirmation reflects our view that over the next 12-18 months Ipoteka Bank will maintain its solid market position and good asset quality, and will continue playing an important role for Uzbekistan’s economy by providing financing to a number of government-related entities (GREs) and by implementing government-led projects in the construction and mortgage sectors. We also think that Ipoteka Bank may gradually improve some characteristics of its risk profile by increasing diversity and reducing dollarization of its loan portfolio, and will continue to benefit from ongoing government support in the form of funding and state guarantees,” the agency said.

“In 2018, Ipoteka Bank increased its loan portfolio by 64% by financing a government housing program and expanding its business with small and midsize enterprises (SME). Despite rapid asset growth, the bank maintains relatively good asset quality indicators, with a cost of risk of close to 0.7% and Stage 3 loans making up only about 1.7% of total loans. The bank also made progress in reducing single-name concentrations in its loan book, with top-20 loans representing about 55% of total loans at year-end 2018 versus 65% a year earlier. Meanwhile, loans denominated in foreign currency reduced to 39%, which is significantly below the system average of 57%,” S&P Global Ratings underlined.

S&P Global Ratings expects that Ipoteka Bank will continue gradually improving the granularity of its loan book in the next one to two years, as the bank expands its mortgage business and SME lending. “In particular, we expect that the share of mortgage loans will increase to 20%-25% of its loan book in the next two years, while the share of top-20 loans reduce to 40%-45%, which is better than the system average, but remains high in an international context. We also expect that lending growth will likely slow down close to the system average (35%-40%) on the back of a lower share of directed lending. That said, we note that over the past five years, Ipoteka Bank demonstrated superior credit loss experience and better asset quality than other large state-owned banks. We, therefore, believe that further improvement in risk profile characteristics and maintaining good asset quality may support the bank’s credit profile in the medium term,” it added.

In the first quarter of 2019, the bank received US$50 million of capital support from the Uzbek Fund for Reconstruction and Development (UFRD) to finance development of the country’s fishery sector. Although the capital support boosted the bank’s capitalization, we expect that the bank’s capital position will remain neutral to its ratings. This reflects our forecast risk-adjusted capital (RAC) ratio of about 5.2%-5.4% in the next 12-18 months. “We expect the bank’s earnings capacity will likely improve, with the return on average equity increasing to 20%-25% in the next two years from 13.0% for 2018. This reflects the bank’s improving net interest margin and operating efficiency, and contained credit losses. However, we also expect that the bank will pay dividends of about Uzbekistani sum (UZS) 100 billion-150 billion ($12 million-$20 million) annually in 2019-2020, and that there will be no new capital injections by the government,” S&P Global Ratings noted.

“We expect the bank’s funding profile will remain stable, with a predominant share of funds provided by various government structures as well as state and public organizations. As of year-end 2018, funds from UFRD, Uzbek Ministry of Finance, and other state organizations represented another 46% of the bank’s liabilities. In our view, this highlights the bank’s involvement in various government-led projects and its dependence on ongoing funding from the government. We think that the bank’s liquidity management will remain prudent, with sufficient liquidity sources to meet payments. As of April 1, 2019, cash balances, short-term placements with the Uzbek central bank, and government securities covered about 6.0% of liabilities, which is a sufficient liquidity buffer taking into account the large share of project-related funds in the bank’s liabilities,” the agency said.

“The stable outlook on Ipoteka Bank reflects our view that the bank’s close ties with the government, along with its involvement in a number of state-sponsored programs, and capital provided by the government to date, would support the bank’s credit profile at the current level without material changes in the next 12-18 months,” S&P Global Ratings said.

“We could revise the outlook to positive in the next 12-18 months if Ipoteka Bank moderated credit growth to no higher than the system average, further reduced the single-name concentrations in its loan portfolio, and continued to demonstrate superior credit losses and better asset quality than peers. Prudent capital and liquidity management is also necessary for us to consider a positive outlook,” the agency noted.

“We could revise the outlook to negative or lower our ratings if the bank expands significantly more than we currently expect, with growth not supported by additional capital from the government, leading the RAC ratio to fall below 3.0% or regulatory capital adequacy ratios to drop below the minimum regulatory requirements. Similarly, we could consider a negative rating action if the bank’s high asset growth puts pressure on its risk profile and liquidity position,” it added.