Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings revised its outlook on Uzbekistan-based Hamkorbank JSCB to positive from negative and affirmed its ‘B+/B’ long and short-term issuer credit ratings.

The agency anticipated that Hamkorbank’s creditworthiness may strengthen thanks to continuing improvement of its capital position with our forecast risk-adjusted capital (RAC) ratio sustainably higher than 10%.

In 2020, the bank’s capital adequacy measured by our RAC ratio improved to 10% from 9.2% on the back of sustainably strong financial performance and conservative capital management. Last year, Hamkorbank outperformed our previous expectations, demonstrating better profitability and only modest asset quality deterioration. In particular, the bank’s return on average equity was close to 27.5% thanks to the increase of its net interest margin (NIM) close to 10%, coupled with improved operating efficiency and despite increased cost-of-risk (COR) to 147 basis points (bps) from 24bps a year earlier. At the same time, the bank’s nonperforming assets increased to 7.0%, which was worse than the system average of 3.0%-4.0%, but much better than our earlier expectations of 13.0%-15.0%.

Although the bank’s RAC ratio might fall below 10% in 2021-2022 due to high lending growth, a reduced NIM, and growing operating expenditure, we see a chance that the bank’s RAC ratio may instead strengthen further. 

S&P Global Ratings noted, in particular, that higher risk weights the central bank applies to retail and corporate loans with high interest rates might require the bank to keep more capital for such loans to maintain its capital adequacy ratio (CAR) at a comfortable level. The agency expects Hamkorbank’s management will maintain its CAR at around 15% through 2021 against the 13% regulatory minimum. We believe that stricter regulation might slow the bank’s annual lending growth to below 30%, supporting the RAC ratio. S&P Global Ratings also thinks that the bank might be successful in counterbalancing potential pressure on lending rates by repricing its funding and protecting its NIM and profitability. Sustainably strong profitability in previous years with annual return on average equity (ROAE) at 25% or greater since 2013 and no expected common dividends distribution, support potential favorable dynamics of the bank’s capital buffer in coming years.

S&P Global Ratings expected that the bank’s asset quality will likely stabilize with stage 3 loans reducing to 4.7% in 2021 and 4.3% in 2022, which is close to our systemwide expectations. 

The agency noted that in first-half 2021 the bank’s ratio of nonperforming loans (NPLs) under local standards reduced to 2.4% from 3.5% as of year-end 2020, versus NPL growth in the system to 5.6% on June 30, 2021, from 2.1% at year-end 2020. We also note that most of the customers in the restructured portfolio, representing about 23% of the total loans as of mid-year 2021, service their debt well according to the new schedule. S&P Global Ratings does not expect a new significant influx of problem loans from the restructured portfolio and believe that the COR will gradually reduce to 1.0%-1.2% over 2021-2022. As of year-end 2020, the bank’s provisioning coverage ratio was about 31% versus 70%-80% average for other banks in the system. That said, we think that a very low provisioning coverage ratio is a weakness of the bank’s risk profile and may lead to higher provisioning needs and profitability pressure in the future.

In view of S&P Global Ratings, the bank’s sound and stable franchise in small and midsize enterprises and retail lending, sizable customer base, and diverse lending mix will support its business position. 

S&P Global Ratings viewed that the presence of international financial institutions among shareholders underpins the bank’s relatively good corporate governance and transparency, which we consider to be generally better than for other Uzbek banks.

The positive outlook on Hamkorbank reflects our view that the bank’s creditworthiness may strengthen in the next 12-18 months thanks to potentially stronger capital adequacy with forecast RAC ratio being sustainably above 10%. The positive outlook also reflects our expectations that the bank will continue to actively grow its business with a focus on retail and micro lending and demonstrate solid profitability with ROAE sustainably exceeding 20%. Finally, we believe that the bank’s asset quality will gradually improve with a reducing share of problem assets and the COR remaining under 1.2%.

S&P Global Ratings could raise our rating on Hamkorbank if its RAC ratio exceeds and remains sustainably above 10% in the next 12-18 months, supported by the bank’s solid profitability and capital generation capacity, and if its capital adequacy ratio remains at least 100bps above the regulatory threshold. An upgrade would be possible only if we saw further improvement of the bank’s asset quality with a share of problem assets closer to our system average assumptions and new loan loss provisions not exceeding those of domestic peers.

The agency could revise the outlook to stable if the bank’s forecast capital buffer came under pressure from high asset growth and lower profitability jeopardized by higher than expected credit losses. Significant deterioration of capital adequacy ratios with a buffer of lower than 100bps above the regulatory threshold might prompt us to consider a negative rating action.