Azerbaijan, Baku, July 12 / Trend /
Standard & Poor's Ratings Services had lowered its long-term counterparty credit rating on Uzbekistan-based Kapitalbank to 'B-' from 'B'. The outlook is stable, Standard & Poor's said today.
At the same time, the agency affirmed our 'C' short-term counterparty credit rating on the bank.
"The rating actions reflect our view that Kapitalbank's capital position is unlikely to improve as we previously expected. Earnings generation is likely to continue lagging asset growth, gradually eroding the capital base. In our opinion, the bank's current capital buffer may be insufficient to absorb potential risks associated with anticipated annual lending growth of 30%-35%, especially if the share of riskier retail loans increases," the statement said.
On Dec. 31, 2012, our risk-adjusted capital (RAC) ratio for Kapitalbank decreased to a low 2.1% (before adjustments), and we do not expect any improvement in 2013. We have therefore revised our assessment of Kapitalbank's capital to "very weak" from "weak", as our criteria define these terms. Our assessment reflects the bank's very low capitalization and constrained loss absorption capacity. In our opinion it's very unlikely that the RAC ratio will exceed 3% over the next 12-18 months, which is the minimum to support a rating-neutral assessment of "weak" capital.
"Although Kapitalbank demonstrates adequate core business performance, we believe capitalization will remain a key rating constraint that will likely suppress business growth over the next two years. We project that the bank's RAC ratio, before adjustments for diversification, will remain within the 2%-2.5% range over the next 12-18 months. This calculation factors in a planned Tier 1 capital increase of Uzbek sum 4 billion (about $2 million) in 2013 and a partial disposal of equity investments, which currently weighs on our assessment of the bank's capital. Nevertheless, Kapitalbank's anticipated level of capitalization is subject to adequate performance of its loan portfolio, as any increase in risk could put additional pressure on capital," the agency said.
The agency believes that in the medium term Kapitalbank's sound and still expanding franchise and client base may improve its business position. Kapitalbank is one of the leading agencies offering money transfers in Uzbekistan, with a market share of about 25%.
"The agency notes that in Uzbekistan's still-developing financial and banking market, money transfer services play an essential role in the monetary system, representing 5%-7% of the country's GDP. Kapitalbank is also the leader in retail foreign currency deposits, serving about 1.7 million depositors. We view these factors as key strengths that contribute to revenues and the stability of the client base," the statement said.
The ratings on Kapitalbank reflect the 'b+' anchor we use for financial institutions operating in Uzbekistan. The anchor is our starting point in assigning an issuer credit rating. The ratings also reflect the bank's "moderate" business position, "very weak" capital and earnings, "adequate" risk position, "average" funding, and "adequate" liquidity. The bank's stand-alone credit profile is 'b-'.
The stable outlook reflects our view that over the next two years Kapitalbank's core business performance and sound market positions in Uzbekistan should balance its persistently weak capital, which makes it vulnerable to credit shocks and threatens its ability to sustain its business model, the statement said.
"Standard & Poor's could lower the ratings if the bank's already very weak RAC ratio (before adjustments) were to decrease below 2% as a result of insufficient self-sustained capital generation to match asset growth, or higher-than-expected losses that hampered profit generation. In such a scenario, we would regard Kapitalbank as being at high risk of solvency issues. Despite Kapitalbank's short-term deposit base, we expect it to maintain good liquidity cushions. Inability to do so could also put pressure on the ratings," the statement said.
Standard & Poor's could raise the ratings if Kapitalbank were to demonstrate material and sustainable improvements in its capitalization, such that its RAC ratio (before adjustments) rose well above 3%. In our view, this would require a change in the bank's currently very aggressive capital management. If the bank were able to gain momentum and successfully strengthen its business position it may also lead to positive rating action.