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

We believe that COVID-19’s effects remain manageable for the Uzbek economy. Support packages from the Uzbekistan government somewhat helped to alleviate stress on the economy and households. Uzbekistan GDP continued expanded in real terms in 2020 at 1.6%, and believe that growth will accelerate in 2021-2022 to about 5.0%.

The banking sector was resilient despite COVID-19’s effect. Credit costs and nonperforming loans (NPLs), while increased versus 2019, did not lead to banking sector running losses. While the average return on equity (ROE) for the Uzbek banking system declined to 10.0% in 2020 from 12.5% in 2019, return on assets improved to 2.2% from 1.92%.

The consequences of economic deceleration for Uzbekistan banks proved to be better than we expected. Therefore we have revised our assessment of the economic risk trend for Uzbekistan’s banking system to stable from negative.

We expect that the nominal lending growth will remain high and accelerate in 2021-2022 to 30% from 27% in 2020, reflecting overall improvements in economic prospects. We believe that credit costs will be about 2%, improved from 2.6% for 2020, but still higher than the average for 2016-2019 at 1.6%. We expect NPLs to gradually increase to slightly above 2%, a level observed in 2020, and stay flat in 2022-2023.

S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Orient Finans Bank

We upgraded Orient Finans Bank (OFB) to ‘B+’ from ‘B’ based on bank’s sustainable performance in terms of cost of risk and NPLs amid the pandemic, combined with prudent capital management. As a result, we now believe the bank’s risk position is moderate.

In our base-case scenario, OFB will have a 2% cost of risk in 2021-2022, in line with the sector average. We continue to believe that the bank has substantial capital buffers, underpinned by good profits, to absorb losses.

We estimate our risk-adjusted capital (RAC) ratio for OFB at about 13.0% over the next 12-18 months. We believe that the bank has lower loan dollarization than peers’, with loans in foreign currency (FX) at only 37% of gross loans, versus about 49% for the system average. This somewhat protects the bank’s performance from devaluation of the sum.

While not owned by the government, 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. The projects have generally good credit quality. However, this leads to relatively high single-name concentration versus peers.

OFB has adequate liquidity. As of March 1, 2021, the bank’s liquid assets represented about 21.5% of its total assets, above local peers. We have not seen 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 support its credit standing over the next 12-18 months. The outlook also reflects our expectation that the bank’s liquidity position will remain adequate in that time.

Upside scenario.   We believe that a positive rating action in the next 12-18 months is unlikely. Beyond then, we could take a positive rating action if OFB continues to show a track record of lower credit losses and lower share of NPLs compared with that of peers, while maintaining stable capitalization and profitability metrics.

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

Davr-Bank

We upgraded Davr-Bank to ‘B’ from ‘B-’ because we believe that the bank’s performance over 2020 and in the next few years would be at least at the sector average in terms of cost of risk and NPLs. Therefore, we now believe Davr-Bank’s risk position is adequate.

We believe the bank will experience a 2% cost of risk in 2021-2022, in line with the sector average. We believe Davr-Bank has substantial capital buffers, underpinned by good profitability, to absorb losses. Given the bank’s planned growth, we forecast that, over the next 12-18 months, the RAC ratio will remain close to, but not sustainably above, 10%.

Davr-Bank’s credit standing benefits from lower single-name concentrations in the loan book than local peers’. Also, the bank has lower dollarization than peers’, with foreign-currency loans at around 24% of gross loans, versus about 49% 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, 2021, the bank’s liquid assets represented about 17% of total assets. About 25% of liabilities are long-term funds from international financial institutions (IFIs), obtained to finance lending to SMEs and entrepreneurs. 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 support the bank’s expected loan growth of 30%-35% in the next two years. The outlook also reflects our expectation that the bank’s liquidity position will remain adequate, with banks maintaining access to funding from IFIs.

Upside scenario.   We believe that a positive rating action in the next 12-18 months is unlikely. Beyond then, we could take a positive rating action if Davr-Bank commits to raising and increases its capitalization metrics, with the RAC ratio sustainably above 10%, either through lower growth or additional capital injections. A positive rating action would hinge on the bank’s funding and liquidity remaining adequate with no dependency on short-term funding.

Downside scenario.   We could revise the outlook to negative if Davr-Bank’s asset quality deteriorated beyond our assumptions, which would result in higher impairment charges. Furthermore, a negative rating action is possible if lending growth that is above expectations results in weaker capitalization, In addition, we would revise our outlook to negative if the bank faced unexpected funding outflows.

Kapitalbank

We revised our outlook on Kapitalbank to positive from stable to reflect the bank’s efforts to improve financial results in a highly competitive market through revenue diversity and operating efficiency enhancement. This was combined with leveraging bank’s settlement and transactional business, in both corporate and retail segments, focus on secured retail lending, and continued prudent capital management. As a result, the bank has expanded its loan book by around 50% in 2020 and demonstrated ROE above 17% over the past two years, historical highs for Kapitalbank. This was despite the pressure on margins from high competition and downward trend on market rates.

We view positively that so far, the pandemic’s impact on the bank was less severe than assumed. In particular, Kapitalbank did not face massive nonpayments in 2020 unlike some peers, while COVID-19-related restructurings amounted to only 2% of gross loans. Moreover, the majority of these restructurings is serviced and hence these loans are not classified as problematic ones. Simultaneously, credit costs under Uzbekistani GAAP constituted 1.5% of the average loan book for 2020, compared with the 2.6% system-average. For 2021, we expect credit losses to rise to around 2.3% on lending growth.

Over the past two years, the bank’s capitalization was supported by an Uzbekistani som (UZS) 50 billion capital injection from shareholders, preferred stock issuance for UZS75 billion, and several subordinated debt instruments. This resulted in our RAC ratio remaining at 6.9% at end-2020 vs 7.0% a year earlier, despite high growth in 2020.

Deposits form the vast majority of Kapitalbank’s funding base, at around 97% at March 1, 2021. The bank enjoys an established deposit franchise in the country, comparable with that of much larger players. Its market share in terms of retail deposits was about 11% on Feb. 1, 2021, which is comparable with that of large state-owned banks.

In our view, Kapitalbank has an adequate liquidity buffer, with broad liquid assets covering short-term wholesale funding by 3.5x or more over the past five years, and net broad liquid assets covering short-term customer deposits by 42% as of Jan. 1, 2021.

Outlook

The positive outlook reflects S&P Global Ratings’ view that Kapitalbank’s creditworthiness may improve over the next 12-18 months. This could happen if the bank continues posting sustainable bottom-line results and increasing business volumes in line with strategy, while preserving its capital buffer and asset quality.

Upside scenario.  An upgrade in the next 12-18 months would hinge on Kapitalbank increasing business volumes in SME and retail lending, as per its strategy, and demonstrate sustainable profits. This would enhance revenue diversification and support margins and profitability, allowing the bank to withstand stiff competition from large private and state-owned banks. An upgrade is only possible if the bank maintains prudent risk and capital management, with local capital regulatory ratio remaining 100 bps above the 13% minimum requirement and with credit losses no higher than those of peers with a similar business mix.

Downside scenario.  An negative rating action is possible if Kapitalbank’s capital becomes volatile, with our RAC ratio dropping below 5% and regulatory capital ratios falling to their minimal values. This could happen following substantial asset quality deterioration, leading to elevated credit losses, or in the absence of a fresh capital injection to support greater-than-expected lending growth.