Tashkent, Uzbekistan (UzDaily.com) - S&P Global Ratings today placed its ‘B+’ long-term issuer credit rating on Uzbekistan-based Uzpromstroybank on CreditWatch with positive implications.

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

“We think that there is a high likelihood that in the next two to three months Uzpromstroybank will receive about US$250 million-US$300 million (about Uzbekistani sum [UZS]2.15 trillion-UZS2.60 trillion) of capital support from its key shareholder, UFRD. If received, this capital injection could almost double the bank’s share capital and substantially strengthen its capital adequacy ratios,” the agency said.

“We note that with a regulatory ratio of 13.12%, versus a minimum of 13.00% as of July 1, 2019, the bank was at risk of breaching its regulatory threshold. In our view, unless the bank receives capital support from the government it will continue to operate with a buffer of less than 100 basis points (bps) above the regulatory minimum, which currently causes its regulatory capital position to be weak. However, the capital support would provide it with a substantial cushion of more than 500 bps above the minimum. Moreover, our risk-adjusted capital (RAC) ratio may improve to the 8.6%-9.0% range in the next 12-18 months, which compares with its RAC ratio of 6.9% as of year-end 2018,” S&P Global Ratings said.

“We consider Uzpromstroybank to be a government-related entity (GRE) with a moderately high likelihood of support. Although the bank is included in the list of GREs that will be privatized, we do not think its link with the government will weaken in the next two to three years because the government will maintain control of the bank and the privatization process will be gradual. We note that Uzpromstroybank already received government capital support in previous years, including UZS748 billion in 2017 to address the effects of devaluation and UZS725 billion in 2018-2019 to implement several government programs,” the statement reads.

“In 2018, the bank initiated a massive transformation of its business model aimed at improving its profitability, strengthening its franchise in commercial banking, and preparing for privatization. The bank will prioritize expanding its corporate lending to small and midsize enterprises from the manufacturing, textile, and building materials industries as well as its retail lending to salary clients of GRE customers. If the bank receives the anticipated capital injections, its loan portfolio will increase by about 20%-30% in the next two years, which compared with the system average of about 40%-45%, because the growth in state-related business will not exceed 10%-20%. At the same time, the growth of the commercial business will likely be very high in the 50%-60% range, representing a challenge for the bank to manage its asset quality, which--so far--remains close to the system average. As of year-end 2018, loans classified in Stage 3 under International Financial Reporting Standard (IFRS) 9 represented about 2.0% of the Uzpromstroybank’s gross portfolio. As of the same date, its share of the restructured loans was about 7.1%, which is higher than at some other state-owned banks. Nevertheless, we note that more than 90% of the restructured loans are to state-related enterprises, which may benefit from government support. We expect that its share of restructured loans will gradually decline in the next one to two years,” the statement reads.

“We expect that funding from the government and international financial institutions (IFIs), which we treat as stable funding sources, will continue to dominate the bank’s funding mix. As of year-end 2018, state-related funds, including those from UFRD, the Ministry of Finance, and state-owned enterprises, comprised close to 60% of the bank’s total liabilities, while funding from IFIs accounted for another 25%. The potential growth of customer deposits will improve the diversity of the bank’s funding profile. We expect the bank will maintain a prudent liquidity buffer with its liquidity covering no less than 30% of its customer deposits,” S&P Global Ratings noted.

“We expect to resolve the CreditWatch once we receive confirmation of the bank’s potential capital increase and gain more clarity on the amount and timing of the increase, which we expect will likely occur in the next 90 days,” the agency underlined.

“We could raise our long-term issuer credit rating on Uzpromstroybank if the government agrees to increase its common shareholders equity by providing capital support, which would help the bank keep its RAC ratio above 7.0% over the next 12-18 months,” the statement reads.

“Alternatively, we could affirm our ratings on Uzpromstroybank if the government does not agree to inject capital, or if the amount of the capital support is materially lower than expected,” S&P Global Ratings concluded.