BAKU, Azerbaijan, Aug. 12
By Ilkin Seyfaddini - Trend:
Standard and Poors’ (S&P) Global Ratings said on Aug. 12 that it affirmed its 'BB-/B' long- and short-term issuer credit ratings to Uzbekistan-based Xalq Bank, the outlook is negative, Trend reports citing S&P.
“In our view, Xalq Bank's relatively high market share, holding of the country's largest branch network, and solid franchise in retail and small and midsize enterprise (SME) lending will support the stability and diversity of its business. However, this is balanced by uncertainty with regards to planned transformation of the business model, frequent changes in the management team, and historically poor profitability,” S&P Global Ratings said.
With total assets of 21.8 trillion soum ($2.1 billion) as of July 1, 2020, Xalq Bank is the sixth-largest bank in Uzbekistan, with a market share of 6.9 percent of systemwide assets and 9.6 percent of total customer deposits. Xalq Bank serves 18.5 million retail customers or about 56 percent of Uzbekistan's population through 197 branches. The bank also owns the largest payment system in the country, Uzpaynet, which allows it to access clients' transaction activity and might improve the product offering and risk management.
“S&P Global Ratings think that the bank's profitability and business sustainability will likely improve in the next three years. In particular, the recently announced government plans to take over the Xalq Bank's responsibilities of accumulating and managing pension assets might give the bank more flexibility in managing its asset mix and operating costs and therefore improve its profitability. We also note that the bank's growth in commercial lending with better risk-adjusted return and transformation initiatives may further improve its earning capacity,” stressed S&P.
According to S&P, bank's asset quality will remain worse than peers', reflecting the predominance of unsecured retail and small and medium enterprises loans, which might suffer more from COVID-19 than large corporate customers.
S&P assumes that roughly half of the restructured loans will become problem by year-end 2020, which translates into expected nonperforming assets to total loans of about 11.6 percent, versus for or five percent expected for the system average.
“We expect the bank's lending growth will remain high in 2020 and could reach 50 percent--supported by corporate lending and implementation of state-driven social programs. At the same time, we assume that the bank's cost of risk will increase to three or four percent this year, reflecting deteriorating asset quality and the need to create additional provisions,” S&P said.
S&P Global Ratings expects that the bank's funding profile will gradually change since it will transfer some pension assets to the Ministry of Finance.
“After the transfer, the bank's funding mix will be more similar to other state-owned banks in the country, although funding from government-related entities (GREs) and the government itself will remain the most important funding source. Credit lines from international financial institutions will gradually become another important source of future business growth and will likely represent 30%-35% of the bank's funding mix in the next two-to-three years. We expect the transfer of pension savings will be gradual, over two-to-three years, and therefore will not pressure liquidity,” S&P stated.
S&P Global Ratings expects that the bank's systemic importance will gradually diminish along with the transfer of pension functions to the Ministry of Finance. Although the bank will likely lose its exclusive right to distribute pensions to current retirees, S&P thinks that it will remain the key player along with other banks due to its wide geographical footprint and good brand recognition.
“The negative outlook reflects our view that the bank's capital buffer might come under higher pressure, with our RAC ratio falling below 10 percent. This might be the result of more aggressive lending growth than we currently expect or higher risks affecting borrowers in Uzbekistan because of an extended lockdown. It also reflects the risk of much more significant deterioration of the bank's asset quality due to recently aggressive credit growth and a high share of unseasoned loans,” S&P Global Ratings pointed out.
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