Tashkent, Uzbekistan, Jan. 16
By Demir Azizov- Trend:
Standard & Poor's Ratings Services assigned its 'B+/B' long- and short-term counterparty credit ratings to Uzbekistan-based KDB Bank Uzbekistan JSC. The outlook is stable, S&P said.
The ratings on KDB Bank Uzbekistan incorporate the structurally elevated economic and industry risks that S&P factors into our 'b+' anchor, or starting point for assigning a long-term rating to a bank operating in Uzbekistan, the statement says.
Standard & Poor's bases its ratings on KDB Bank Uzbekistan on the bank's "moderate" business position, "adequate" capital and earnings, "adequate" risk position, "average" funding, and "adequate" liquidity, as our criteria define these terms.
"S&P assesses the bank's stand-alone credit profile (SACP) at 'b+'," the statement says.
"S&P's long-term rating on the bank could be three notches higher than the SACP under S&P's criteria, reflecting our view of its status as a "strategically important" subsidiary of Korea Development Bank. However, the long-term rating on KDB Bank Uzbekistan is constrained by S&P's assessment of Uzbekistan's creditworthiness."
As a result of its integration with RBS NB Uzbekistan, KDB Bank Uzbekistan's total assets doubled in 2013, and it became Uzbekistan's largest commercial bank with foreign investments. However, the bank is still a midsize bank with a market share of about 3.8% and ranks eighth out of 26 domestic banks in terms of total assets.
S&P bases assessment of capital and earnings as "adequate" on our forecast risk-adjusted capital (RAC) ratio of 9% for KDB Bank Uzbekistan for the next two years. S&P bases RAC ratio on our view of the bank's low risk profile on its loan book representing just 5% of total assets, in addition to its limited growth appetite in 2015-2016.
Overall, S&P assumes no major change in the bank's balance sheet structure or risk profile during the observed rating period. S&P believes that internal capital generation is strong and should remain at 16.5% annually in 2015-2016, with estimated return on equity of 15% over the same period.
The bank's other primary long-run focus is the gradual doubling of the loan portfolio share, which formed only 5% of its total assets on Nov. 30, 2014.
S&P believes that internal capital generation is strong and should remain at 16.5% annually in 2015-2016, with estimated return on equity of 15% over the same period.
Therefore, credit risks linked to lending activities--typically very high in Uzbekistan--are limited in KDB Bank Uzbekistan's case.
S&P views positively the bank's asset exposures to interbank placements that are geographically well diversified, although we regard single-name concentrations in these placements as high. The top-20 interbank exposures amounted to approximately 93% of the total due from other banks on Nov. 30, 2014. Lastly, the bank's focus on settlement services and trade finance exposes it to limited asset risks.
S&P regards KDB Bank Uzbekistan's funding as "average." The bank's stable funding ratio is several times higher than the 124% average for its peers.
S&P views the bank's funding needs as limited owing to the loan portfolio's small size and the overall short-term nature of assets. The bank's funding profile--with customer demand accounts forming about 80% of total liabilities on Nov. 30, 2014--is justified for its current business model, in our view. However, the funding profile limits KDB Bank Uzbekistan's asset diversification and loan portfolio growth and potentially increases funding volatility. Single-name concentrations are high, with the top-20 depositors representing 73% of total liabilities.
Liquidity is "adequate," in S&P's view, with the bank's liquid assets covering approximately 100% of short-term customer deposits.
S&P considers KDB Bank Uzbekistan to be a "strategically important" subsidiary of its majority owner Korea Development Bank. S&P think KDB Bank Uzbekistan is unlikely to be sold in the long term. The bank is important to Korea Development Bank's long-term strategy and supports strong ties between the Uzbek and South Korean governments, in S&P's opinion. Moreover, the parent has indicated it considers its subsidiary in Uzbekistan as a platform for expansion opportunities into other Central Asian countries and has a track record of support to its overseas subsidiaries, including KDB Bank Uzbekistan.
The stable outlook on KDB Bank Uzbekistan reflects S&P's view that the bank will follow its conservative strategy, focusing on serving corporate clients. Simultaneously, S&P anticipates that the bank will preserve its market share and maintain its risk profile at current levels, which are lower than for domestic peers.
S&P could consider a negative rating action on KDB Bank Uzbekistan if it fails to continue expanding its customer franchise because it cannot sustainably face stiff competition from state-owned banks.
A positive rating action on KDB Bank Uzbekistan is remote at this stage, unless S&P's assessment of Uzbekistan's creditworthiness improves.
In December 2010, the Korea Development Bank (KDB) purchased a share of British bank The Royal Bank of Scotland (RBS) in the Royal Bank of Scotland Uzbekistan (RBS Uzbekistan) at a rate of 82.35 percent.
In December 2012 during general meetings, the shareholders of UzKDB Bank and RBS Uzbekistan approved the banks' merger agreement, the act of transmission on the integration of the two banks, as well as made a decision on renaming the UzKDB Bank CJSC to KDB Bank Uzbekistan.
In March 2013, the Central Bank of Uzbekistan reissued the licence to carry out the banking operations for the Uzbek-Korean JSC UzKDB Bank, in connection with the merger with CJSC Royal Bank of Scotland Uzbekistan MB, as well as renaming JSC UzKDB Bank to CJSC KDB Bank Uzbekistan. KDB carries out the management of the bank.
As a result of the merger of UzKDB Bank and RBS Uzbekistan, the largest bank to date with the participation of foreign capital was created in Uzbekistan.