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

“The affirmation reflects our view that Turon Bank’s solid capital buffer will be sufficient to meet it’s growth targets and to maintain adequate capitalization. We further believe that although the bank’s lending growth will remain high, it will gradually slow in 2019-2020 to closer to the systemwide average,” the agency noted.

In 2018, Turon Bank’s loan portfolio increased by 142% compared with a systemwide average of 51%. Implementation of government-led infrastructure projects and new lending to the agriculture and food processing sectors were key factors behind this significant growth. In particular, last year the bank started financing a large-scale infrastructure project to upgrade Uzbekistan’s hydropower capacity. The government chose Turon Bank as the project’s key financing bank in 2017, and has provided it with a substantial capital support totaling Uzbekistani sum (UZS) 715 billion ($88 million) over the past two years. We expect Turon Bank will provide about UZS1,100 billion ($130 million) of new financing in 2019-2020 to the hydropower sector. We also expect that the bank will continue to actively expand its lending business by increasing its number of small and mid-size corporate clients in the agriculture sector. We expect that the bank will provide about USZ400 billion-USZ450 billion (about $53 million) of new lending to the projects in the agriculture sector in the next two years by unlocking development funds from international financial institutions (IFIs).

“In our view, the bank’s RAC ratio will deteriorate to 8.3-8.5% by year-end 2020 from 12.5% at year-end 2018. This mainly reflects expected high lending growth, averaging 45% in 2019-2020, and the bank’s modest profitability. We note that all projects in the hydropower and agriculture sectors have a very low net interest margin, which will drag on the bank’s earnings capacity. We do not incorporate potential government support in our RAC forecast, and instead assume a 50% dividend payout ratio. However, the payout ratio could be be lower, depending on the government’s decision,” the agency underlined.

“We note that, over the past two years, Turon Bank has maintained good asset quality and the inflow of new problem assets has been low, despite rapid lending growth. In 2018, the bank’s cost-of-risk was close to 1.0%, while its absolute amount of nonperforming assets (NPAs) reduced by 40%, representing about 0.6% of the loan book. We note that although loans provided to hydropower projects are denominated in foreign currency, the government guarantees the debt, mitigating credit risks for the bank. However, we think that very high lending growth in agriculture will potentially result in higher credit losses and increase of problem loan volume in the mid-term, taking into account that most of the loans are denominated in U.S. dollars. We incorporate this risk in our assessment of the bank’s risk position, which constrains the rating,” S&P Global Ratings said.

“We think that the bank’s funding profile and funding and liquidity metrics are close to the system average. The bank’s funding structure is rapidly changing, with an increasing share of funds coming from IFIs. The share of these resources in the bank’s funding mix increased to 40% at year-end 2018 versus 20% a year ago, with the bank providing most of its lending via these funds. We tend to view these funds as stable because of their long-term project nature,” the agency underlined.

“We think that the bank adequately manages its liquidity. The bank’s net broad liquid assets represents about 51% of its short-term customer deposits, which seems prudent and close to the level of peers. We view the bank as a government-related entity (GRE), taking into account its very strong link with the government. However, we think that there is only a moderately high likelihood of receiving extraordinary government support. This is because we think that the bank’s role for the government is limited considering the bank’s small market share and small scale of implemented projects compared with other government-related banks, which could easily undertake these projects if needed. Therefore, we do not include any uplift for potential government support in the ratings,” S&P Global Ratings added.

The stable outlook reflects our expectation that Turon Bank will likely preserve its adequate capitalization in the next 12-18 months, despite high lending growth resulting from projects in the hydropower and agricultural sectors.

“While unlikely, we may lower the ratings on Turon Bank if its stand-alone credit profile significantly deteriorates to ‘ccc+’ or lower, raising concerns over the bank’s ability to meet its financial obligations when due. This may happen, for example, if the bank’s liquidity buffer declines materially because of aggressive asset growth and unexpected depositor outflows,” the agency noted.

“We may raise the ratings in the next 12-18 months if the bank maintains its RAC ratio above 7.0% and preserves good asset quality, with problem loans and cost of risk not exceeding those of system average. A positive rating action is also subject to a slowdown in the bank’s aggressive lending growth to closer to the system average,” the statement of the agency said.