BAKU, Azerbaijan, Aug. 31
By Fakhri Vakilov – Trend:
S&P Global Ratings downgraded the long-term credit rating of Uzbek National Bank from BB- to B + and affirmed the short-term rating of B; the forecast is “Stable”, Trend reports citing S&P agency.
“We expect that the quality of Halyk Bank's assets will gradually improve after a serious deterioration at the beginning of this year, but will remain substantially lower than that of comparable banks,” the agency notes.
The volume of the bank's problem loans increased from 2.8 percent as of the end of 2020 to 24 percent of the total loan portfolio.
As of August 1, 2021, this indicator significantly exceeds the average level in the banking system - 6-7 percent as of the same date.
However, in comparison with the situation in other Uzbek banks, which also showed a gradual increase in problem loans in recent months, S&P additionally highlight the following reasons explaining these dynamics:
• A higher share of lending to small and medium-sized enterprises (SMEs) and retail lending, while a significant number of clients receiving loans under special government social support programs are characterized by weaker creditworthiness;
• low underwriting standards, insufficiently effective risk control systems, and aggressive lending growth rates last year – 62 percent versus 31 percent on average in the banking sector;
• a stricter management approach to a debt restructuring that prevented clients from recovering their financial position after the 2020 quarantine measures.
While S&P expects a gradual improvement in the bank's asset quality in the coming months, due to favorable macroeconomic conditions, the agency also believes that the share of distressed assets is likely to consistently exceed 10 percent based on the financial statements at the end of 2021 compiled in accordance with IFRS, and will remain significantly higher than comparable banks.
S&P also expects the coverage ratio of problem loans with provisions to decrease from 42 percent at the end of 2020 to 25-30 percent.
National Bank is likely to maintain strong capital ratios thanks to financial support from the government, slow lending rates, and good profit-generating ability.
According to S&P forecasts, the bank's risk-adjusted capital (RAC) ratio is likely to remain above 10 percent in the next 12-18 months.
Finally, S&P believes that the bank's profit-generating ability has improved, with a net interest margin of almost 8 percent to absorb additional loan loss provisions this year. The agency expects the bank's cost of risk to rise from 2.6 percent in 2020 to 3.5 percent in 2021.
As of August 1, 2021, the capital adequacy ratio of the National Bank was 14.1 percent versus the minimum allowed by the regulator of 13 percent, but the risk of violating regulatory capital adequacy requirements is low due to potential government support and lower business growth rates.
The bank is likely to maintain stable funding and liquidity ratios.
The Stable Outlook on National Bank's ratings reflects S&P’s view that despite a significant increase in problem assets and credit losses in 2021, the bank is likely to prevent further deterioration in credit metrics due to sufficient capital and liquidity reserves, stable funding, and government support.
S&P may take a negative rating action against the Bank in the next 12 months if the bank's capitalization indicators deteriorate significantly, and its capital adequacy ratio is below the regulatory minimum or is close to this level, or if the RAC ratio decreases to below than 10 percent and asset quality will remain low.
The negative rating action may also be due to a significant outflow of funds from depositors and foreign creditors, which will put pressure on the bank's liquidity. The continuing problems with asset quality, leading to a decrease in customer confidence and inability to develop business, and thus to a deterioration in the bank's market position, may also lead to negative rating action.
On the other hand, S&P can take positive rating action in the next 12-18 months if the bank's management manages to reduce the volume of problem loans and improve the approach to risk management, bringing the volume of problem assets closer to the average indicators of the banking system, provided that the bank maintains strong capitalization indicators, as evidenced by the maintenance of the RAC ratio at a level consistently above 10 percent.
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