Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings raised its long-term issuer credit ratings to ‘BB-’ from ‘B+’ on two Uzbekistan-based banks: Uzpromstroybank and Ipoteka Bank JSCM. The outlooks are stable.

At the same time, the agency affirmed our ‘B’ short-term issuer credit rating on both banks.

The upgrades follow the President of Uzbekistan’s signing of a decree on Oct. 9, 2019, "on priority measures to strengthen financial stability of the banking sector of the Republic of Uzbekistan." The decree includes measures to provide substantial capital support to a number of large state-owned banks involved in the financing of strategic industries in the country. A portion of funds provided by the Uzbekistan Fund for Reconstruction and Development (UFRD) to state-owned banks are to be converted into the bank’s capital. In addition, the banks will transfer to UFRD a substantial portion of loans earlier provided to government-related entities (GREs). The asset transfer and conversion of UFRD loans into equity is set to be finalized by year-end 2019.

S&P Global Ratings thinks these measures will substantially improve capitalization of the largest state-owned banks. The expected transfer of low-margin loans denominated in foreign currency will markedly reduce dollarization and single-name concentrations in the banks’ loan portfolios. It will also reduce risk-weighted assets and provide material relief to banks’ capital adequacy ratios. Furthermore, the measures may slow loan growth because banks will no longer channel funds from UFRD, a significant driver of credit growth in the past.

Uzpromstroybank

S&P Global Ratings expects that Uzpromstroybank’s capitalization will materially improve and forecast our risk-adjusted capital (RAC) ratio at about 9.75% at year-end 2021, a substantial increase from 6.9% as of year-end 2019. The bank’s share capital will almost double after $261.1 million of UFRD’s loans are converted into equity. The bank will also transfer almost 33% of its gross loan portfolio to UFRD. We estimate that the bank’s regulatory capital adequacy ratio will increase to 27.0% by year-end 2019 from the current 13.4%. “We believe that the bank’s earnings capacity will improve, thanks to a much higher share of commercial lending in its loan portfolio and the expected net-interest-margin increase on the remaining loans to GREs,” the agency said.

“In our view, these measures will also reduce dollarization and single-name concentration in the bank’s loan portfolio. In particular, we expect the share of its top-20 borrowers will reduce to 51% (2.10x capital) from 70% (7.25x capital) as of Oct. 1, 2019. The share of loans in foreign currency will also decline to 54% from 78%. We expect the bank’s asset quality will remain broadly unchanged following the announced measure, with Stage 3 loans remaining at 2.1%-2.6% of total loans in the next 12 months,” it added.

S&P Global Ratings said: “We forecast that lending growth will slow, but remain significant at about 30% per year in 2020-2021. In our view, commercial lending will become the key driver of credit growth and may increase by 50%-60% annually, since the bank will utilize its capital buffer to strengthen its commercial banking franchise.”

“Although Uzpromstroybank’s total assets will decline, we expect the bank will remain at least the third largest in Uzbekistan by total assets and loans. The bank will likely further increase its already solid franchise in corporate lending. We also believe that, despite smaller lending volumes to large GREs, the bank will remain important for the government. This reflects our view that it will maintain a significant volume of government business, including lending and settlement services to large GREs and subsidized mortgages and lending to other industries supported by the government. We also believe that the bank’s link with the government will remain strong over the next two years, taking into account the government’s more than 90% stake in its capital,” the agency underlined.

“We have removed the rating on Uzpromstroybank from CreditWatch positive, where we had placed it on July 30, 2019,” it added.

“The stable outlook on Uzpromstroybank reflects our view that the expected capital increase and transfer of low-margin assets to UFRD, as well as the bank’s continuing involvement in a number of state-sponsored projects, would support its credit profile at the current level,” S&P Global Ratings said.

The agency could take a negative rating action in the next 12 months if rapid growth of corporate and retail lending is constraining asset quality. This would include a higher-than-forecast increase in problem assets and credit losses.

A positive rating action is unlikely over the next 12 months because it would require a similar rating action on the sovereign, together with further improvement of the bank’s stand-alone credit profile.

Ipoteka Bank

“We expect Ipoteka Bank’s capitalization will strengthen, with our RAC ratio forecast at 8.7% by year-end 2021, up from 5.5% at year-end 2019. The bank’s share capital will increase by $142.6 million after its UFRD loans are converted into equity, and it will transfer about 16% of its gross loan portfolio to UFRD. Ipoteka Bank’s regulatory capital adequacy ratio will likely increase to 23% by year-end 2019 from 14.0%. We believe that the bank’s earnings capacity will gradually improve over the next two years, thanks to a higher share of commercial lending in its loan portfolio,” S&P Global Ratings said.

“Because of these measures, we expect dollarization and single-name concentrations in the bank’s loan portfolio will decline, and remain stronger than other state-owned banks’. In particular, we expect that the share of the bank’s top-20 borrowers will reduce to 43% (2.4x capital) from 52% (5.4x capital) as of Oct. 1, 2019. The share of loans in foreign currency will also decline to 27% from 40%. In addition, we expect asset quality will remain broadly unchanged, with Stage 3 loans remaining at 2.0%-2.5% of total loans in the next 12 months,” the agency noted.

S&P Global Ratings forecasts lending growth will slow to 15%-20% per year because loans to large GREs will no longer spur growth. However, growth in commercial lending may remain high at 40%-50%, representing a challenge for managing asset quality.

“Despite the decline in total assets, we expect Ipoteka Bank will remain the fourth-largest bank in Uzbekistan by total assets and loans. The bank will likely continue expanding its already solid franchise in mortgage lending and the small and midsize enterprise sector. We also believe that, despite smaller lending volumes to large GREs, the bank will remain important for the government. This reflects our view that the bank will retain a substantial volume of government-led business. In particular, we think it will remain the leader in subsidized mortgage loans and continue providing loans and settlement services to its largest borrower from the mining sector. We also believe the bank’s link with the government will remain strong over the next two years, taking into account the government’s more than 90% stake,” S&P Global Ratings said.

The stable outlook on Ipoteka Bank reflects view of S&P Global Ratings that the expected capital support from the government by year-end 2019, the bank’s continuing involvement in some state-sponsored programs, and its stable asset quality would support its credit profile over the next 12-18 months.

S&P Global Ratings could revise the outlook to negative or lower our ratings if the bank expands significantly more than we currently expect, with our RAC ratio falling below 7.0%, or regulatory capital adequacy ratios dropping below the minimum regulatory requirements. Similarly, we could consider a negative rating action if we see risks to the bank’s asset quality or liquidity position stemming from high lending growth.

The agency thinks that a positive rating action is unlikely over the next 12 months because it would require a similar rating action on the sovereign, together with further improvement of the bank’s stand-alone credit profile.