Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings said that it affirmed its ‘B-/B’ long- and short-term issuer credit ratings on Uzbekistan-based Ravnaq-bank. The outlook is stable.

Ravnaq-bank reduced lending growth significantly to about 24% in the first 10 months of 2019, from 87% a year earlier. We expect the bank to maintain future growth at about these levels. This growth slowdown coupled with an equity injection of Uzbek sum (UZS) 77 billion (about $8 million) in late 2018 led to stronger projected capitalization than we envisaged previously. We currently expect the bank’s capitalization will remain strong, with our risk-adjusted capital (RAC) ratio at 11%-13% in the next 12-18 months. For this forecast, we assume:

• Lending growth of 25% per annum in 2020-2021.
• No changes in the loan book’s composition, with 70% corporate and 30% retail.
• A net interest margin of around 10% in 2019, lowering to 9% by end-2021, since we anticipate intensifying competition in the sector.
• A rise in credit losses to 1.7%-1.8% in 2019-2021, mostly reflecting the potential for deterioration of the unseasoned retail portfolio.
• Capital growth of UZS10 billion annually via retained profits, the amount exceeding this sum to be distributed as dividends.
• Return on equity of around 9.5% in 2019 and 9.5%-10% in 2020-2021, mostly supported by increasing net interest income.

The sizable capital injection also enabled the bank to meet the regulatory minimum requirement for authorized capital of UZS100 billion, effective Jan. 1, 2019. As of that date, Ravnaq-bank’s reported share capital totalled exactly that amount. As a result, the bank’s common equity nearly tripled, and our RAC ratio before concentration adjustments peaked at 17.4% at end-2018 versus 6.7% a year earlier.

That said, despite the notable capital increase, Ravnaq-bank is still smaller than peers. Its credit standing still faces risks in our view: capital sustainability is weak, earnings capacity remains limited, and performance has historically been volatile. Besides this, we take into account the bank’s relatively aggressive liquidity management compared with its closest peers’.

Despite the bank’s moderation of growth we still regard accelerated loan portfolio growth from a low base in the recent past as the key source of credit risk. This is underlined by an increase in problem loans in 2019, mainly related to large corporate borrowers. We believe the risk of asset quality volatility will persist in the medium term, considering the bank’s still developing risk management practices and increase in retail loans.

We observe that Ravnaq-bank’s funding and liquidity management has become somewhat more aggressive over the past 18 months, and this constrains our ratings. The bank plans to reduce the share of term deposits to about 40% of liabilities over the next two years from 64% as of Nov. 1, 2019, and substitute them with current accounts as part of its strategy to reduce funding costs.

In our view, Ravnaq-bank’s current liquidity buffers are sufficient to service its needs. We estimate that broad liquid assets covered short-term wholesale funding by about 3x as of Nov. 1, 2019. We note, however, that the bank’s liquidity buffers and metrics exhibit some volatility during times of large deposit in- and outflows.

The stable outlook reflects our view that Ravnaq-bank’s increased capital buffers and the owners’ commitment to support the bank if necessary, mitigate risks related to the bank’s relatively aggressive liquidity policy, concentrated deposit base, and business expansion in the challenging operating environment over the next 12-18 months.

We could consider a negative rating action over the next 12-18 months if we see further deterioration of the bank’s funding and liquidity profile, leading to our view that Ravnaq is vulnerable and dependent upon favorable business, financial, and economic conditions to meet its financial commitments. Significant asset quality deterioration could also result in a negative rating action.

An upgrade is remote in our view, and would hinge upon a visible improvement of the sustainability of the current business model and strengthening of the bank’s funding and liquidity profiles. In addition, the bank would need to provide more transparent disclosure of asset quality in line with International Financial Reporting Standard No. 9.