BAKU, Azerbaijan, July 15
By Ilkin Seyfaddini - Trend:
Fitch Ratings has affirmed Uzbekistan-based Ipoteka-Bank’s Long-Term Issuer Default Ratings (IDRs) at ‘BB-’ with Stable Outlook, Trend reports citing a rating agency.
“Ipoteka’s ‘BB-’ Long-Term IDRs are driven by potential support from the Uzbekistan sovereign (BB-/Stable) in case of need. The bank’s Support Rating (SR) of ‘3’ and Support Rating Floor (SRF) of ‘BB-’ consider Uzbekistan’s moderate ability to provide support as well as its high propensity to support Ipoteka based on its majority state ownership, which has a high influence on our assessment, as well as the potential low cost of support for the bank relative to the sovereign’s foreign currency reserves and a track record of support for the country’s public sector banks that dominate the banking sector,” the report said.
Fitch has affirmed Ipoteka’s sovereign supported ratings, despite the recently published medium-term strategy for banking system development, which targets the privatisation of the bank by end-2022. This is because Fitch believes the government will maintain a high propensity to support the bank as long as it is state-owned and controlled; and the agency’s base case is that Ipoteka’s business model transformation prior to full privatisation will take significant time and therefore the sale of a majority stake by end-2022 is uncertain.
In considering the sovereign’s ability to provide support, Fitch assesses positively the moderate size of the banking sector relative to the economy (total assets of $29 billion with a loans/GDP ratio of 50 percent at end-2019), while Uzbekistan’s foreign currency reserves are relatively large at around $29 billion.
"However, support considerations also include the high concentration in the banking sector where state-owned banks represent around 85 percent of sector assets, sector loan dollarisation of close to 48 percent and vulnerability to external shocks given a commodities-based economy whose external finances rely on remittances," Fitch said.
“Ipoteka’s ‘b’ VR is influenced by the challenging operating environment in Uzbekistan, potential deficiencies in underwriting standards, the bank’s still limited commercial franchise, rapid loan growth and high single-name concentrations in the loan book. Fitch views positively plans to transform the bank’s business model and the strengthening of management and governance, prior to privatisation, especially in light of the agreement with the International Financial Corporation (IFC) to acquire a 15 percent stake in Ipoteka,” Fitch said.
According to Fitch, the ratio of impaired loans to gross loans at Ipoteka was a low 1.7 percent at end-2018 (latest available IFRS data), which is a sector feature in Uzbekistan. Non-performing loans (NPLs, loans overdue over 90 days) were equal to an even lower 0.2 percent of gross loans at end-1Q20 in regulatory accounts due to early write-offs of impaired exposures. At the same time, the cost of risk was close to 1 percent in recent years, which indicates reasonable loan book quality to date.
"Our assessment of the bank’s asset quality also considers the unseasoned nature of new lending, especially mortgages, as loan growth has been high in recent years (which is a market feature in Uzbekistan), while the majority of newly issued loans have grace periods on the payment of principal. Dollarization of the loan book is moderate at 25 percent of gross loans at end-1Q20, comparing with the sector average of 48 percent at the same date," said the agency.
“Loans to corporate customers accounted for 70 percent of gross loans at end-2019 and were highly concentrated at the top, with the two largest state-related borrowers accounting for 40 percent of the total. However, the remaining part of corporate loans was much more granular. Ipoteka is planning to gradually decrease the largest exposures to 10 percent of corporate loans by end-2020,” the report said.
Retail loans (a further 30 percent of gross loans) were mainly represented by mortgages, the majority of which (79 percent) were issued under the state-led programmes. Ipoteka began to actively grow in mortgage lending since 2017, so the portfolio is only starting to season as the grace periods on principal are usually three years.
“Ipoteka’s profitability has been affected by subsidised policy lending in recent years. However, the share of these loans was moderate compared with larger state-owned banks, and therefore Ipoteka reported a higher operating profit-to-risk-weighted assets (RWAs) ratio of 2.2 percent in 2018, and a ratio of 3.2 percent in 2019 based on the regulatory accounts. We expect higher loan impairment charges in 2020 due to the negative implications from the coronavirus pandemic and the lockdown in Uzbekistan; and the seasoning loan book, as grace periods on mortgages originated in 2017 expire,” Fitch said.
According to Fitch, capitalization is strong, as the bank has received $288 million of new equity from the state since 2015, and about $143 million in 2019 alone, aimed at supporting Ipoteka’s growth. Current capital buffers (total regulatory capital ratios were 20 percent and 22 percent at end-1Q2020, respectively) over the minimum required levels (10 percent and 13 percent) provide room for further growth at least for the next several years, given Ipoteka’s target of 15 percent loan growth for 2020 and a somewhat higher 20 percent plus in 2021.
“The bank relies on state funding in the form of direct loans and deposits from government and quasi-government institutions, which accounted for 57 percent of total liabilities at end-2019. Non-state customer funding represented another 21 percent of end-2019. Foreign-currency funding provided by international financial institutions (IFIs, 14 percent of liabilities at end-2019) was generally long term with manageable repayments in 2020 equal to $60 million. Repayments to IFIs in the upcoming years are generally reliant on the quality of Ipoteka’s loans,” the report said.
The bank’s liquidity buffer, comprising cash, short-term placements with the Central Bank of Uzbekistan and other banks was 10 percent of end-2019 assets. Net of upcoming wholesale debt repayments, liquid assets were sufficient to cover a moderate 11 percent of customer accounts. Additional liquidity is available from the Central Bank of Uzbekistan under repurchase agreements with sovereign debt securities (one percent of Ipoteka’s assets or another five percent of customer accounts).
Factors that could, individually or collectively, lead to positive rating action/upgrade: Positive rating action on Ipoteka’s support-driven IDRs, SR and SRF could result from a strengthening of the sovereign’s credit profile and would mirror changes to Uzbekistan’s sovereign ratings.
"An upgrade of the VR would require a substantial improvement in Uzbekistan’s operating environment and strengthening of the bank’s commercial franchise and business model," said Fitch.
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