S&P affirms Uzbekistan-based Turon Bank's rating at 'B-/B'

S&P affirms Uzbekistan-based Turon Bank's rating at 'B-/B'

Baku, Azerbaijan, July 26

By Elena Kosolapova – Trend:

S&P Global Ratings affirmed its 'B-/B' long- and short-term counterparty credit ratings on Uzbekistan-based Turon Bank, the rating agency said in a message. The outlook remains stable.

The affirmation follows Turon Bank's removal in June 2017 by the Uzbek government from a list of entities to be privatized. As such, S&P thinks that strategic uncertainty related to expected changes in the bank's ownership has been largely resolved at this time and that the bank will continue developing as a state-owned bank in the medium term.

The rating agency noted that, since the beginning of 2017, the government has provided Turon Bank about 78 billion Uzbek soums (about $19.5 million) of capital support and increased its stake in the bank to about 81 percent from 63 percent. As a result, S&P now considers the bank to be a government-related entity.

The rating agency believes there is a strong link between the bank and the government, mainly reflecting the government’s major stake in the bank’s capital and its view that the bank will remain in state ownership in the medium term.

Nevertheless, S&P thinks that the bank still has a limited importance for the government, mainly due to its small market share and modest involvement in state-related projects. This leads S&P to anticipate only a moderate likelihood that the government would provide extraordinary support to the bank if needed.

S&P noted that this year's capital injection from the government has materially improved Turon Bank’s capitalization.

However, the rating agency now expects that the bank will demonstrate much higher asset growth than before, which will likely be close to 30-35 percent in 2017-2018 compared with a 15 percent average for the past four years. S&P also thinks that the bank's earning capacity will remain low, mainly due to poor operating efficiency.

The rating agency believes that the bank will not be able to support its growth through internal capital generation alone and will face eroding capitalization levels if it is unable to receive further capital injections from the government.

S&P now forecasts that the bank's risk-adjusted capital (RAC) ratio will be in the 4.8-5.8 percent range, as adjusted for the bank’s negative earnings buffer. Although this reflects an improvement from 4.2 percent at year-end 2016, S&P still assesses the bank's capital and earnings as weak.

The stable outlook reflects the opinion that the capital support Turon Bank received from the government in 2017 and its likely greater involvement in government-related projects will help to preserve the bank’s credit profile.

S&P could take a negative rating action if it saws that its forecast RAC ratio drops below 3 percent, for example, due to materially-higher-than-expected lending growth. Unexpected substantial losses coming from the bank’s equity investments or high credit losses, which lead to pronounced capital erosion, may also prompt the rating agency to lower its ratings on the bank.

A positive rating action is remote at this stage. However, rating upside could stem from an improvement in the loan book's credit quality and the borrowers' payment culture. These supportive factors could lead the rating agency to view the bank's risk position more positively, provided other risks remain adequately managed.

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