Tashkent, Uzbekistan (UzDaily.com) -- On 19 July 2018, S&P Global Ratings assigned its ‘B+’ long-term and ‘B’ short-term issuer credit ratings on Uzbekistan-based JSCB Hamkorbank. The outlook is stable.

With total assets of Uzbekistani sum (UZS) 5.65 trillion (about US$700 million) as of May 1, 2018, Hamkorbank is the largest-privately owned bank in Uzbekistan and eighth-largest bank in the country.

“Serving a broad range of customers, from retail and private entrepreneurs to large corporates, the bank receives about 5.0% of the system-wide deposits and provides about 2.8% of the system-wide loans. We note that the bank has a particularly solid country-wide franchise in retail, micro-, and small and medium-sized enterprise (SME) lending, which have been the bank’s traditional areas of expertise since its foundation in 1991. With 40 branches and 158 mini-offices, Hamkorbank also has a good geographical footprint across the country,” the agency said in a statement.

“In our view, the bank demonstrates good diversity across key business segments. Currently, about 47% of the bank’s loan book is provided to private entrepreneurs, farmers, and SMEs; 34% goes to loans to large corporates; and 19% of the portfolio represents retail business. We think that Hamkorbank’s good business diversity gives the bank additional flexibility in managing risks, costs and revenues, and previously helped the bank to withstand competition from larger institutions,” S&P said.

“Nevertheless, we think that the bank’s relatively small size and market share compared with state-owned banks expose it to the growing competition, in particular in retail and SME lending. We also note that the bank’s future lending growth of 25%-30% will remain higher than the system average and is to be particularly aggressive in retail segment, where it may reach 40%-50% over the next two to three years. We think that the bank’s strategic move to retail lending may become a challenge for the management’s ability to reach the stated growth targets, while keeping prudent risk management and adequate asset quality,” the agency underlined.

“We view the bank’s current ownership structure, and, in particular, presence of the international financial institutions among shareholders, as a factor supporting the bank’s relatively good corporate governance and transparency, which, in our opinion, are better than in other Uzbek banks, on average. The International Financial Corporation (IFC) is a shareholder of the bank since 2010 with a stake of 15.3%. The Dutch Development Bank (Nederlandse Financierings-Maasthappij voor Ontwikkelingslanden N.V. [FMO]) is another shareholder (since 2014) with a stake of 15.3%. Both institutions have been playing an important role in the bank’s development and corporate governance,” the statement reads.

“We think that Hamkorbank has an adequate capital buffer, as reflected in our risk-adjusted capital (RAC) ratio to absorb potential losses and support future growth. As of year-end 2017, the bank’s RAC ratio was close to 7.4%, and we forecast it will remain above 7.0% in the next 12-18 months supported by good capacity to generate capital through earnings. We expect that the bank’s net interest margin will decline to 9.50%-9.75%, from 10.6% in 2017, due to an expected increase in funding costs and growing competition in retail and SME lending. We forecast that new loan loss provisions will increase in 2018 to around 0.8% of the loan portfolio, reflecting the negative impact of IFRS 9. Operating expenses will rise by 22%-25% versus 18% growth last year due to pass-through effect of the inflation hike in 2017-2018. Despite the expected decline in the net interest margin and accelerated growth in operating expenses, we expect that the bank’s average return on equity will remain in the 25%-27% range over the next two years” he said.

“Hamakorbank’s good asset quality, low credit losses through the cycle, relatively low single-name concentrations, and modest lending in foreign currency support our adequate assessment of the bank’s risk position. We note that despite an aggressive growth in the past, Hamkorbank demonstrated good asset quality, with nonperforming loans and credit losses lower than that of peers in the region. As of year-end 2017, loans past-due by more than 90 days represented about 0.5% of total loans, while new provisions remained well below 1.0%,” the agency said.

The agency said that the bank demonstrates good asset quality across all business lines with especially low default rate in unsecured retail and micro loans. In our view, the bank’s good asset quality reflects its prudent 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 and the FMO. Although not our base-case scenario, we do not exclude that the expected high growth in retail segment may constrain the bank’s asset quality.

“In our view, the bank’s funding profile and liquidity position are comparable with those of other large state-owned banks in the country, and our assessment of the bank’s funding and liquidity is a neutral rating factor. Funds from individuals and corporates dominate the bank’s funding structure, representing 67% of the bank’s total liabilities as of end-2017. Project funds attracted from the international financial institutions represented the rest of the bank’s funding. The bank has been attracting the funds to provide loans to SMEs and private entrepreneurs in various sectors of the economy. We note that these funds are primarily long-term in nature and lengthen average maturity of the bank’s funding base,” the agency said.

“Hamkorbank has a relatively large share of current accounts in its depositor base (73% at year-end 2017). Likewise, the depositor base is relatively concentrated, with the top-20 depositors representing 55% of the bank’s customer accounts. Although this is similar to Uzbek peers, we note that potential volatility in funding may weigh on the bank’s liquidity buffer. As of end-2017, cash and its equivalents covered 35% of the bank’s liabilities or 85% of current customer accounts,” the S&P underlined.

“The stable outlook on Hamkorbank reflects our view that, over the next 12-18 months, the bank will maintain its notable market positions in SME and retail segment in Uzbekistan, sustainably high profitability, good asset quality, and adequate capital and liquidity buffers,” the agency said.

“We could consider a negative rating action if Hamkorbank’s asset quality significantly deteriorates, leading to credit losses exceeding those of peers and putting pressure on its profitability and capitalization. A negative rating action may also follow if the bank adopts an aggressive approach to lending growth alongside relaxed underwriting standards and lower-than-expected capital adequacy ratios, i.e. when our RAC ratio falls well below 7.0%,” it added.

“Hamkorbank’s creditworthiness is constrained by our view of the creditworthiness of Uzbekistan. Therefore, we are unlikely to raise the ratings on the bank over the next 12-18 months unless our view on the sovereign’s credit quality improves and Hamkorbank demonstrates its ability to sustain competitive pressure and to manage growth while keeping adequate asset quality and capitalization,” the agency said.