Uzbek Hamkorbank has good diversity across key business sectors: S&P
Baku, Azerbaijan, July 20
By Fikret Dolukhanov – Trend:
S&P Global Ratings assigned its 'B+' long-term and 'B' short-term issuer credit ratings on Uzbekistan-based JSCB Hamkorbank with the stable outlook, S&P stated in its press release.
With total assets of 5.65 trillion soums (about $700 million) as of May 1, 2018, Hamkorbank is the largest-privately owned bank in Uzbekistan and eighth-largest bank in the country. Serving a broad range of customers, from retail and private entrepreneurs to large corporates, the bank receives about 5.0 percent of the system-wide deposits and provides about 2.8 percent of the system-wide loans.
The bank has a particularly solid country-wide franchise in retail, micro-, and small and medium-sized enterprise (SME) lending, which have been the bank's traditional areas of expertise since its foundation in 1991. With 40 branches and 158 mini-offices, Hamkorbank also has a good geographical footprint across the country.
The bank demonstrates good diversity across key business segments. Currently, about 47 percent of the bank's loan book is provided to private entrepreneurs, farmers, and SMEs; 34 percent goes to loans to large corporates; and 19 percent of the portfolio represents retail business. Hamkorbank's good business diversity gives the bank additional flexibility in managing risks, costs and revenues, and previously helped the bank to withstand competition from larger institutions.
Nevertheless, the bank's relatively small size and market share compared with state-owned banks expose it to the growing competition, in particular in retail and SME lending. The bank's future lending growth of 25 percent-30 percent will remain higher than the system average and is to be particularly aggressive in retail segment, where it may reach 40 percent-50 percent over the next two to three years. The bank's strategic move to retail lending may become a challenge for the management's ability to reach the stated growth targets, while keeping prudent risk management and adequate asset quality.
The bank's current ownership structure, and, in particular, presence of the international financial institutions among shareholders, as a factor supporting the bank's relatively good corporate governance and transparency, which are better than in other Uzbek banks, on average. The International Financial Corporation (IFC) is a shareholder of the bank since 2010 with a stake of 15.3 percent. The Dutch Development Bank (Nederlandse Financierings-Maasthappij voor Ontwikkelingslanden N.V. [FMO]) is another shareholder (since 2014) with a stake of 15.3 percent. Both institutions have been playing an important role in the bank's development and corporate governance.
Hamkorbank has an adequate capital buffer, as reflected in our risk-adjusted capital (RAC) ratio to absorb potential losses and support future growth. As of year-end 2017, the bank's RAC ratio was close to 7.4 percent, and we forecast it will remain above 7.0 percent in the next 12-18 months supported by good capacity to generate capital through earnings. The bank's net interest margin will decline to 9.50 percent-9.75 percent, from 10.6 percent in 2017, due to an expected increase in funding costs and growing competition in retail and SME lending. New loan loss provisions will increase in 2018 to around 0.8 percent of the loan portfolio, reflecting the negative impact of IFRS 9. Operating expenses will rise by 22 percent-25 percent versus 18 percent growth last year due to pass-through effect of the inflation hike in 2017-2018. Despite the expected decline in the net interest margin and accelerated growth in operating expenses, the bank's average return on equity will remain in the 25 percent-27 percent range over the next two years.
Hamakorbank's good asset quality, low credit losses through the cycle, relatively low single-name concentrations, and modest lending in foreign currency support assessment of the bank's risk position. Despite an aggressive growth in the past, Hamkorbank demonstrated good asset quality, with nonperforming loans and credit losses lower than that of peers in the region. As of year-end 2017, loans past-due by more than 90 days represented about 0.5 percent of total loans, while new provisions remained well below 1.0 percent.
The bank demonstrates good asset quality across all business lines with especially low default rate in unsecured retail and micro loans. The bank's good asset quality reflects its prudent risk-management practices, sound expertise in the traditional business areas of micro and SME lending, and advanced scoring models developed with the assistance of the IFC and the FMO. Although not base-case scenario, the expected high growth in retail segment may constrain the bank's asset quality.
The bank's funding profile and liquidity position are comparable with those of other large state-owned banks in the country, and assessment of the bank's funding and liquidity is a neutral rating factor. Funds from individuals and corporates dominate the bank's funding structure, representing 67 percent of the bank's total liabilities as of end-2017. Project funds attracted from the international financial institutions represented the rest of the bank's funding. The bank has been attracting the funds to provide loans to SMEs and private entrepreneurs in various sectors of the economy. These funds are primarily long-term in nature and lengthen average maturity of the bank's funding base.
Hamkorbank has a relatively large share of current accounts in its depositor base (73 percent at year-end 2017). Likewise, the depositor base is relatively concentrated, with the top-20 depositors representing 55 percent of the bank's customer accounts. Although this is similar to Uzbek peers, potential volatility in funding may weigh on the bank's liquidity buffer. As of end-2017, cash and its equivalents covered 35 percent of the bank's liabilities or 85 percent of current customer accounts.
The stable outlook on Hamkorbank reflects view that, over the next 12-18 months, the bank will maintain its notable market positions in SME and retail segment in Uzbekistan, sustainably high profitability, good asset quality, and adequate capital and liquidity buffers.
A negative rating action could be considered if Hamkorbank's asset quality significantly deteriorates, leading to credit losses exceeding those of peers and putting pressure on its profitability and capitalization. A negative rating action may also follow if the bank adopts an aggressive approach to lending growth alongside relaxed underwriting standards and lower-than-expected capital adequacy ratios, i.e. when our RAC ratio falls well below 7.0 percent.
Hamkorbank's creditworthiness is constrained by view of the creditworthiness of Uzbekistan. Therefore, the ratings on the bank are unlikely to be raised over the next 12-18 months unless view on the sovereign's credit quality improves and Hamkorbank demonstrates its ability to sustain competitive pressure and to manage growth while keeping adequate asset quality and capitalization.
Follow the author on Twitter: @FDolukhanov