Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings revised its outlook on Uzbekistan-based Orient Finans Bank (OFB) to positive from stable. The ‘B-’ long-term and ‘B’ short-term issuer credit ratings were affirmed.

The positive outlook reflects that OFB’s improved capitalization supports the bank’s overall creditworthiness. “In our opinion, however, the bank’s aggressive asset growth over the past three years, high loan concentrations, and overall weaker-than-international-peers’ risk management system could hinder the bank’s risk profile and, in particular, the credit quality of the loan book,” the agency reported.

“We consider the bank’s capitalization to be adequate, supported by strong profitability, in line with tighter regulatory capital requirements. Support also stems from the expected decrease in the bank’s growth appetite, which leads us to forecasted substantially lower loan growth compared with levels over the past three years. Adequate loss absorption capacity--also reflects our recent assessment of lower economic risks for banks in Uzbekistan. This is thanks to the modest economic imbalances, in our view. Uzbekistan has been more involved in increasing lending than its regional peers, and Uzbekistani banks have lower exposure to the real estate market and mortgage lending as a percentage of systemwide loans, alongside underdeveloped commercial real estate and equity markets, in our view,” the agency said.

S&P Global Ratings expects OFB’s RAC ratio to be within the 9%-10% range over the next 18 months (8.2% on Dec. 31, 2017). Besides lower risk weights due to the lower economic risk, the agency’s RAC forecast reflects the following assumptions:

• Loan book growth in 2018 estimated at about 20% and annual 40%-45% in 2019-2020 (relative to the almost fivefold increase in the loan book between end-2015 and end-2017);
• No external capital injections;
• Annual cost of risk to have increased to approximately 1% in 2018, followed by a 1.5% rise in 2019-2020; and
• Capitalization supported by strong internal capital generation and no dividends.

OFB plans to maintain a local capital adequacy ratio (CAR) at above 15% over the next 18 months, compared with the minimum 13% in 2019-2020 (16.0% as of the beginning of December 2018 versus the 12.5% minimum). As per local regulation, only 50% of earned income of the year can be reflected as regulatory capital until an auditor confirms the current year’s earnings; if total income taken into account, OFB’s CAR would be 18.5% as of the beginning of December 2018.

“At the same time, we see high risks related to previously very aggressive loan growth, high loan concentrations, and relatively weak (in an international context) risk management systems. In our view, this might result in an accumulation of problem loans and a pronounced increase in credit costs while the loan portfolio seasons. In addition, a high--approximately 45%--share of loans denominated in foreign currency represents an additional risk should the exchange rate unexpectedly weaken. This risk is somewhat mitigated by some of these exposures being to government-related entities and our expectation that the government will support many of those if needed. Also, some exposures are extended to exporters with revenues in hard currency, which also mitigates the currency risk. These issues, reflected in weak risk position, currently constrain the ratings on the bank,” the agency added.

“The positive outlook indicates the potential for an upgrade over the next 12 months if there is strong evidence that OFB can maintain adequate capitalization, while the seasoning of the loan book does not lead to a material deterioration of the quality of the loan book and provisions, and credit losses do not increase markedly above our current expectations. Any positive rating action would also hinge on further lending growth that does not compromise the bank’s business position or the stability of its funding base or liquidity position,” it noted.

The agency could take a negative rating action if it saw asset quality deterioration beyond the market average levels and significantly above our current projections that would affect the bank’s business stability and/or capitalization. A material weakness in the funding profile or liquidity position could also lead to a downgrade.