Uzbek Ravnaq-bank's vulnerability is exacerbated by loan growth - S&P

Uzbek Ravnaq-bank's vulnerability is exacerbated by loan growth - S&P

Baku, Azerbaijan, Dec. 10

By Fikret Dolukhanov – Trend:

S&P Global Ratings today placed its 'CCC+/C' long- and short-term issuer credit ratings on Uzbekistan's Ravnaq-bank on CreditWatch with developing implications, Trend reports citing the rating agency.

The CreditWatch placement reflects S&P’s view that a positive or negative rating action is quite likely over the next few weeks, depending on the bank's compliance with the regulatory requirement on the minimum amount of authorized equity. According to the regulation, banks in Uzbekistan should have share capital of not less than 100 billion soums by Jan. 1, 2019 (equivalent to $12 million as of Dec. 4, 2018). Ravnaq-bank's authorized capital was 84 billion soums on Dec. 4, 2018, and further share capital improvements are pending shareholder injections.

The bank's vulnerability is further exacerbated by forecast aggressive loan growth of 80 percent in 2018, which in the context of tight competition and developing risk management practices, could result in higher-than-expected losses. At the same time, S&P understands that rapid expansion is partly driven by the high-inflation environment and rapidly expanding banking sector. In addition, S&P notes that Ravnaq-bank is growing its exposures from a low base while it has received 61 billion soums of capital injections this year (out of a planned 77 billion soums for 2018).

S&P also views negatively that the bank's loan growth in 2018 put pressure on its liquidity. This leaves Ravnaq-bank potentially vulnerable to unexpected funding volatility, which is the common risk factor for smaller Uzbek banks. Ravnaq-bank's net broad liquid assets to short-term customer deposits declined to a still adequate 20 percent as of Dec. 1, 2018, from 41 percent at year-end 2017.

Finally, the bank is in its early development stage and still relies heavily on its influential owners' ties and relationships, which helps to form and maintain the client base, in our view. S&P‘s rating on Ravnaq-bank continues to reflect belief that the bank is vulnerable and dependent upon future shareholder injections to comply with regulations, as well as on favorable business, financial, and economic conditions to meet its financial commitments.

S&P aims to affirm, raise, or lower our rating on Ravnaq-bank in the next few weeks, depending on the bank's compliance with the requirement to increase its authorized capital to the new minimum requirement of 100 billion soums.

S&P could lower the ratings if the controlling shareholder does not provide sufficient capital support to allow Ravnaq-bank to satisfy the minimum capital requirements, leading to regulatory action that restricts the bank's activities or, in a worst-case scenario, suspends its banking license.

S&P could raise the ratings if Ravnaq-bank is able to comply with the new regulatory capital requirement, provided the bank's creditworthiness does not deteriorate and its business and liquidity positions remain stable.

S&P might affirm, or even raise the ratings, if the regulator is willing to relax the new capital requirement or provide a waiver if a capital injection is expected shortly after the Jan. 1 deadline, and the risk of noncompliance therefore becomes less acute.

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Follow the author on Twitter: @FDolukhanov

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