Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings took the following actions on the Uzbekistan-based banks it rates:

In our view, the economic and financial consequences of the coronavirus outbreak will have a negative impact on Uzbekistan's economy and test the resilience of its banks.

We have revised down our 2020 base-case GDP growth forecast for Uzbekistan. We now expect the economy to grow by only 1% (down from 5.5% previously [see "Sovereign Risk Indicators," April 24, 2020]), reflecting the hit to domestic and external demand from COVID-19 containment measures. We believe that Uzbekistan's economy will absorb the current shocks and will likely return to growth at 5% on average in 2021-2022. At the same time, the downside risks in our base-case forecast remain. What the spread of the coronavirus means for economic outcomes remains unclear and could be worse than we currently assume. The speed of the recovery will also depend on policy measures to cushion the blow and limit economic dislocation and to support the economy and households.

S&P Global Ratings expects Uzbek banks' profits to drop due to weakening asset quality and slowing credit growth. We think that the Uzbekistani sum (UZS) 45 trillion (approximately US$4.4 billion; about 9% of GDP) support package announced by Uzbekistan's government will partially alleviate the stress on the economy and households. We note that this slowdown is the first for Uzbekistan's banks since the country opened its economy in 2017 and follows a very rapid growth in loan portfolios across the system.

We believe that Uzbek banks' credit losses will therefore increase significantly in 2020-2021 to 3%-4% in 2020, from 1.6% in 2019 and NPLs will rise to 4%-5% in 2020, 3%-4% in 2021, and 2%-3% in 2022.

Consequences for Uzbekistan's economy could be worse that we expect now, so downside risks remain firmly in place and the impact on the banking sector could be even more negative.

Therefore have revised our assessment of the risk trend for Uzbekistan's banking system to negative from stable. This reflects the implications of the upcoming slowdown.

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Hamkorbank JCSB

We revised our outlook on Hamkorbank to stable from positive because we no longer see a positive ration action as likely in the next 12 months, as we did with our previous positive outlook.

We think that the adverse economic conditions in Uzbekistan in 2020 will lead to material deterioration of Hamkorbank's asset quality and higher credit losses compared with previous years. We expect Hamkorbank will restructure about 11.0% of its loan portfolio, including loans with interest and principle payments deferred until October 2020. We think that roughly half of the restructured loans will become problematic by year-end 2020 and we therefore expect that the bank's share of NPLs will likely increase to 8.4% from 4.0% as of year-end 2019. In our view, the bank's asset quality will be weaker than the system average due to its high exposure to small and midsize enterprises (SMEs), private entrepreneurs, and retail customers, which will all be more greatly affected by the lockdown and slower economic growth than large corporations. We also note that some unresolved legacy problem loans will remain a burden for the bank's asset quality. We therefore view the bank's risk position as a weakness for the rating.

At the same time, we think that the bank's high earnings capacity will enable it to absorb a higher cost of risk, which will in our opinion increase to 3.2% in 2020 and remain elevated in 2021. We also think that the bank's sufficient capital buffer will protect its credit profile from deterioration in the current economic conditions. We expect that positive profitability and slower credit growth will support the bank's capital adequacy with the risk-adjusted capital (RAC) ratio remaining sustainably above 8.0% over the next two years. We also expect that the bank will maintain a buffer of at least 200 basis points (bps) above the capital regulatory minimum.

In our view, the bank's sound and stable franchise in SME and retail lending, sizable customer base, and diversified lending mix will support its business position, which we no longer see as a negative rating factor. We also believe that the bank's good earning capacity supports its business sustainability over the cycle, thanks to high net interest margin and good operating efficiency.

Hamkorbank has adequate liquidity. As of March 1, 2020, the bank's liquid assets represented about 24.0% of its total assets. At 47% of the bank's total liabilities, Hamkorbank has the highest share of funds borrowed from international financial institutions (IFIs) among Uzbek banks we rate. We cannot exclude that the bank may breach covenants on asset quality for some of the funds this year. Nevertheless, we expect that most of the IFIs will provide a waiver to the bank and will not withdraw their funds. In our base-case scenario, we therefore do not expect material pressure on the bank's liquidity.

Outlook

The stable outlook on Hamkorbank reflects our view that the bank's strong earnings power and solid capital buffer will enable it absorb new credit losses stemming from weaker asset quality without material pressure on its credit profile. We also believe that the bank's high market share in SME and consumer finance and its diversified lending mix will support the stability of its business position.

Downside scenario.   We could take a negative rating action if in the next 12 months the bank's liquidity position comes under pressure due to withdrawal of IFIs' funding or customers' deposits. Materially weaker asset quality than we currently expect with higher credit losses may also lead us to consider a negative rating action. Although unlikely, significant pressure on the bank's capital adequacy, with its CAR falling below 100bps to the regulatory threshold may also lead to rating pressure.

Upside scenario.   We think a positive rating action is unlikely over the next 12 months. Nevertheless, we could consider it in the medium term if the bank improves its asset quality closer to the system average and maintains its good earning capacity, adequate capital, and liquidity buffer.

Orient-Finans Bank

We revised our outlook on Orient Finance Bank (OFB) to stable from positive because we no longer view a positive ration action as likely in the next 12 months, as we did with our previous positive outlook.

We believe that OFB will experience a 3%-4% cost of risk in 2020-2021, in line with sector average. We believe that OFB has substantial capital buffers, underpinned by good profits, to absorb losses. We estimate our RAC ratio for OFB at 13.6% at end-2019 and we expect it to remain above 10% in the coming two years. We believe that OFB has lower loan dollarization than peers, with loans in foreign currency (FX) at only 36% of gross loans, versus about 48% for the system on average. This somewhat protects the bank's performance from devaluation of the sum.

We also note that OFB has access to large corporate customers and is involved in financing high-profile projects initiated by the Cabinet of Ministers, despite its relatively small market share and in contrast to other small and midsize banks in Uzbekistan.

OFB has adequate liquidity. As of March 1, 2020, the bank's liquid assets represented about 27.7% of its total assets, in line with local peers. We have not seen any unusual funding volatility over the past several months.

Outlook

The stable outlook reflects our view that OFB's solid capital buffer and earnings capacity will be sufficient to support its credit standing over the next 12-18 months amid the worsening economic conditions and COVID-19 outbreak. The outlook also reflects our expectation that the bank's liquidity position will remain adequate over the same period.

Upside scenario.   We could take a positive rating action in the next 12 months if OFB proves its resilience to the adverse operating environment, continuing to show relatively low credit losses and a low share of NPLs versus peers, while maintaining stable capitalization and profitability metrics.

Downside scenario.   A significant decline in capitalization, either via higher-than-expected growth in exposures or large dividend distributions, could also lead us to revise outlook to negative or even to lower the rating.

Kapitalbank

We affirmed the ratings and maintained our stable outlook on Kapitalbank because we have seen Kapitalbank's capitalization improve, supported by an injection from the shareholder and several subordinated debt tranches it has issued. Besides, we note that the bank's new management team is adhering to a more prudent capital policy than what we observed previously, along with an expressed intention to attract more capital to underpin its planned growth.

Kapitalbank's capital buffer has furthermore increased materially, with its regulatory capital adequacy ratio at 15.6% on March 1, 2020, from 13.7% on March 1, 2019. This was thanks to a UZS50 billion capital injection by the shareholders, several subordinated debt instruments totaling UZS70 billion that the bank managed to issue in 2019, relatively low exposure growth in 2019, and full profit retention. Simultaneously, our RAC ratio, estimated under local generally accepted accounting principles (GAAP), increased to 6.7% as of end-2019, versus 5.6% a year earlier. As a result, we now assess the bank's capital and earnings as moderate.

We forecast that our RAC ratio will be 6.5%-6.7% in the next 12-18 months, based on the following assumptions:

Lending growth at around 10% in 2020, accelerating to 25%-30% in 2021, with a gradual shift toward retail loans.

The net interest margin at 6.0%-6.2%, based on our assumption of intensifying competition for high-quality borrowers in the SME and retail segments.

Net commissions to drop by 5% in 2020, reflecting the general trend of lowering commissions, combined with the effects of the lockdown, rebounding to a 5% growth in 2021.

Regulatory capital adequacy above 14%.

Credit costs at about 3.0%-3.5% in 2020-2021, in line with our sector expectations, affected by COVID-19.

Return on average equity at 9%-10%, pressured by increased credit costs and shrinking margins.

No dividends in the next 12-18 months.

According to Kapitalbank's estimates, the amount of loans subject for restructuring that have been hit by COVID-19 outbreak is about 10% of gross loans (about UZS300 billion), which is in line with our sector assumptions. Although in our base case we think the bank's current capital is sufficient to absorb the expected losses, we understand there might be additional pressure on the bank's asset quality metrics if the economy slows further. Moreover, Kapitalbank's high share of FX lending (49% of total loans as of March 1, 2020), potentially exposes it to additional risks if the sum depreciates.

Despite the negative trend of liquidity in the sector, in our view Kapitalbank's liquidity is sufficient, with broad liquid assets covering short-term wholesale funding by 3x or more over the last five years, and net broad liquid assets covering short-term customer deposits by 38% as of Jan. 1, 2020. We have not seen any unusual funding volatility over the last several months. The deposit base is well diversified in the local context, with the 20 largest deposits accounting for about 18% of total deposits on the same date.

Outlook

The stable outlook reflects our view that Kapitalbank's increased capital buffer will support expansion of its lending activities over the next 12-18 months, with our RAC ratio remaining in the 6.5%-6.7% range. The outlook also reflects our expectation that the bank's funding base will remain stable over this period.

Upside scenario.   We could raise the rating in the next 12-18 months if we observe Kapitalbank delivering sustainable bottom-line results commensurate with its adopted strategy and demonstrating prudent capital management, with our RAC ratio sustainably above 7%. An upgrade would be possible only if we see no material deterioration of the bank's loan book. Besides, a positive rating action would hinge on Kapitalbank's ability to overcome the challenging operating conditions the COVID-19 pandemic is fomenting.

Downside scenario.   A negative rating action could follow if the bank's capital becomes volatile, with our RAC ratio dropping below 5% and regulatory capital ratios lowering to their minimal values. This could happen follow substantial asset quality deterioration, leading to elevated credit losses, or greater than expected lending growth that is not supported by a fresh capital injection. A downgrade is also possible if we see pronounced funding and liquidity pressures, which could lead to visible specific default scenarios over the next 12 months.

Davr-Bank

We revised our outlook on Davr-Bank to stable from positive because we see a lower likelihood we would take a positive rating action in the next 12 months than we did with our previous positive outlook.

We think that the deterioration of economic conditions in Uzbekistan triggered by the COVID-19 pandemic and global economic slowdown will lead to increased pressure on the bank's asset quality metrics and to higher credit losses than in previous years.

We believe that Davr-Bank will experience 3%-4% cost of risk in 2020-2021, in line with the sector's average. We believe that Davr-Bank has substantial capital buffers, underpinned by good profitability, to absorb losses. We estimate our RAC ratio for Davr-Bank was 10.6% at end-2019 and we expect it to be about 10% in the coming two years.

We note as positive that Davr-Bank's credit standing benefits from lower single-name concentrations in the loan book than local peers'. We also note that Davr has lower dollarization than peers, with loans in FX at around 25% of gross loans, versus about 48% for the system on average. This protects the bank's performance from potential sum volatility.

Davr-Bank has an adequate liquidity buffer in our view. As of March 1, 2020, the bank's liquid assets represented about 24% of its total assets and covered 29% of total liabilities. We also note that about 25% of the bank's liabilities are long-term funds from IFIs, obtained to finance lending to SMEs and entrepreneurs. We cannot exclude that the bank may breach covenants on asset quality for some of the funds this year. Nevertheless, we expect that most of the IFIs will provide a waiver to the bank and will not withdraw the funds. In our base-case scenario, we therefore do not expect material pressure on the bank's liquidity.

Outlook

The stable outlook reflects our view that Davr-Bank's solid capital buffer and earnings capacity will be sufficient to support the bank's credit standing over the next 12-18 months amid worsening economic conditions and the COVID-19 outbreak. The outlook also reflects our expectation that the bank's liquidity position will remain adequate over the same period.

Upside scenario.   We could take a positive rating action if Davr-Bank proves its resilience to the adverse operating environment, continuing to show relatively low credit losses and a low share of NPLs, compared with that of its peers, while maintaining stable capitalization and profitability metrics. A positive rating action would hinge on the bank's funding and liquidity remaining adequate.

Downside scenario.   We would revise the outlook to negative if Davr-Bank's asset quality deteriorated beyond our current assumptions, hit by the effects of the COVID-19 pandemic or weakening of underwriting standards, which would result in higher impairment charges. Furthermore, a negative rating action is possible if lending growth results in weaker capitalization, with our RAC ratio dropping below 7%. In addition, we would revise our outlook to negative if the bank's funding and liquidity metrics deteriorate. This could happen if the bank faced unexpected funding outflows.

Ravnaq-bank

We revised our outlook on Ravnaq-bank to negative from stable because of our view that the increased amount of problem loans, triggered by worsening economic conditions, puts increased pressure on the bank's capital buffer and may lead to deterioration of the bank's liquidity position in the next 12 months.

According to Ravnaq-bank's estimates, the share of problem loans (Stage 3 under International Financial Reporting Standard [IFRS] 9) increased significantly in the first quarter of 2020 to about 12% of the loan book, which is the highest level among peers. Depending on the length of the COVID-19 lockdown, this figure might increase further, given the already high level of restructurings in the loan book. We think that such a high amount will require the bank to create significant new loan-loss provisions that could reach 8%-9% of average loans this year. As a result, we expect our RAC ratio on Ravnaq-bank to decrease sharply to 10.3%-10.5% in the next 12 months, versus 14.3% at end-2019.

We note that Ravnaq-bank's single-name concentrations have historically been higher than the sector average, at around 50%-55% of gross loans. In addition, the high approximately 48% share of FX lending in total loans adds to the vulnerability of the bank's performance in case of a sharp depreciation of the sum. Given these factors and the bank's volatile performance track record, we now assess Ravnaq-bank's risk position as weak, from moderate previously.

We have therefore revised Ravnaq-bank's stand-alone credit profile (SACP) to 'b-' from 'b'. We have also removed the negative adjustment notch applied to the issuer credit rating, because we now believe the respective negative factors, including lack of track record of sustainable growth and more aggressive liquidity management, compared with those of 'B' rated banks, are now included in our SACP assessment.

Ravnaq-bank's current liquidity buffers are sufficient to service its needs, with liquid assets comprising about 22% of total assets and covering 29% of total liabilities, providing a cushion for potential outflows. We have not seen any unusual funding volatility over the past several months. Although not the case as of now, we note a relatively aggressive liquidity policy over the past couple of years. Moreover, should the loan book worsen further, the disruption in the flow of loan repayments might undermine the bank's liquidity position, in our view.

Outlook

The negative outlook indicates our view of the deterioration of the bank's loan book quality amid the challenging operating conditions since the COVID-19 outbreak, putting pressure on the bank's credit standing. This is combined with the bank's relatively high loan book concentration and its aggressive liquidity policy over the past few years.

Downside scenario.   We could consider a negative rating action over the next 12-18 months if asset quality deteriorates further and disrupts loan repayments, which would lead us to believe Ravnaq-bank is vulnerable and dependent upon favorable business, financial, and economic conditions to meet its financial commitments. Moreover, a downgrade could follow deterioration of the bank's funding and liquidity profile.

Upside scenario.   An upgrade is a remote possibility, in our view, and would hinge upon a visible improvement of the sustainability of the current business model and strengthening of the bank's asset quality and funding and liquidity profiles. In addition, the bank would need to provide more transparent disclosure of asset quality in line with IFRS 9.

Turkiston Bank

We revised our outlook on Turkiston Bank to negative from stable because we see that the increased amount of problem loans and very high concentration of the loan book, triggered by worsening economic conditions, puts increased pressure on the bank's capital buffer and regulatory ratios, and ultimately may lead to deterioration of the bank's liquidity position in the next 12 months.

According to Turkiston Bank's estimates, less than 1% of its portfolio could fall into delinquency and require provisions, and an additional 2% will have to be restructured in 2020. That said, the loan book is concentrated. The largest 20 loans account for almost 350% of the reported capital base. That level is very high, and above that of similarly rated local peers. We also note that loan book is unseasoned and was formed during the recent period of extremely high growth. Although we expect growth in 2020 will approach systemwide levels, at about 10%, we note that Turkiston Bank's loan book expanded by 108% in 2019 and by 180% in 2018.

FX loans comprised about 43% of total loans, which compares with the system average. But we note that seven of the 10 largest loans are in U.S. dollars, which makes Turkiston Bank vulnerable to rapid FX movements.

Our preliminary calculation for Turkiston Bank's RAC under local GAAP suggests a RAC ratio of 9.13% as of end-2019 and in our base-case scenario, we anticipate that Turkiston Bank's RAC ratio will gradually decline to 7.8%-8% in 2020-2021. The capital adequacy ratio (CAR) is 14.5% as of April 1, 2020, versus the minimal regulatory ratio of 13%.

Turkiston Bank's current liquidity buffers are sufficient to service its needs, with liquid assets comprising around 12% of total assets and 19% from short-term liabilities. We have not seen any unusual funding volatility over the last several months. But we note that the largest 20 deposits accounted for almost 70% of total customer deposits on April 1, 2020, which is greater concentration than among peers and renders Turkiston Bank vulnerable to potential deposit volatility.

Outlook

The negative outlook balances Turkiston Bank's adequate capital levels with moderating growth prospects for 2020 and expected deterioration in performance because of negative effects of economic deceleration and the COVID-19 pandemic.

Downside scenario.   We could consider a negative rating action over the next 12 months if we see deterioration in the bank's funding and liquidity profile, or significant asset-quality deterioration, or if the bank breaches regulatory capital ratios.

Upside scenario.   A positive rating action over the next 12 months is unlikely.