Fitch Ratings-Moscow/London-18 February 2014: Fitch Ratings has published Ipak Yuli Bank's (IY) Long-term foreign currency Issuer Default Rating (IDR) of 'B-'. Fitch has also affirmed KDB Bank Uzbekistan (KDBUz) and POJSEB Trustbank's (TB) Long-term foreign currency IDRs at 'B-' and Universalbank's (UB) Long-term local currency IDR at 'CCC'. At the same time, the agency has withdrawn KDBUz's ratings, as the bank has chosen to stop participating in the rating process. Therefore, Fitch will no longer have sufficient information to maintain the ratings. Accordingly, Fitch will no longer provide ratings or analytical coverage for KDBUz.
A full list of rating actions is at the end of this commentary.
KEY RATING DRIVERS - ALL BANKS' IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOORS (SRFS)
The affirmations reflect Fitch's assessment of persistent weaknesses in the Uzbekistan operating environment, in particular high transfer and convertibility risks presented in the economy due to the country's tightly regulated FX market, and the banks' generally limited franchises (more acute for UB, which is consequently rated one notch lower than its peers).
IY's, TB's and UB's Long-term IDRs are driven by their intrinsic creditworthiness, as reflected in their Viability Ratings (VR).
IY's, TB's and UB's SRFs of 'No Floor' and their '5' Support Ratings reflect their relatively limited scale of operations rendering extraordinary support from Uzbek authorities unlikely. The ability of the banks' private shareholders to provide support cannot be reliably assessed and, therefore this support is not factored into the ratings.
KEY RATING DRIVERS AND SENSITIVITIES - IY
IY's 'b-' VR reflects its reasonable asset quality metrics, solid performance and currently sufficient liquidity and capital buffers. On the negative side, the VR also takes into account the bank's quite narrow franchise and some weaknesses of the operating environment.
IY reported impaired loans at moderate 3% of the end-2013 loan book, which were fully covered by impairment reserves. Based on the analysis of largest exposures, Fitch does not have concerns about these. Nevertheless, should asset quality deteriorate, IY's capitalisation (regulatory capital adequacy ratio (CAR) of 16% at end-2013) would allow it to increase loan provision up to about 15% of gross loans before breaching minimum regulatory capital requirements. Credit risks are further mitigated by solid profitability (local GAAP operating ROAE of 28% in 2013). Liquidity is reasonable with available stock of liquid assets covering about 39% of customer funding at end-2013.
In 2Q13 Asian Development Bank (ADB; AAA/Stable) acquired a 13.6% stake in IY. Fitch believes this may be moderately positive for the bank's corporate governance, but does not factor support from ADB into the bank's ratings.
KEY RATING DRIVERS AND SENSITIVITES: TB
TB's ratings are pressured by a risky operating environment, as well as high reliance on cheap funding from its related party, the Uzbek Commodities Exchange (UCE) and its affiliates, which accounted for about half of the bank's total liabilities at end-11M13. At the same date, TB's liquid assets (net of potential debt repayments) covered around 33% of its customer accounts, mitigating withdrawal risk to an extent.
TB's ratings also account for its rapid loan growth (by 1.8x in 2013), which means current solid reported asset quality (zero reported NPLs) may deteriorate somewhat as the loans season. TB's profitability metrics have historically been strong, with ROAA and ROAE for 2013 of 3.4% and 29.2%, respectively. Capitalisation is healthy (regulatory CAR was 17.7% at end-2013) allowing the bank to reserve up to 21% of its gross loans without breaching the regulatory minimum of 10%.
KEY RATING DRIVERS AND SENSITIVITES: UB
UB's ratings are mainly constrained by its small franchise (total assets of only USD32m at end-2013) resulting in high concentrations on both sides of the balance sheet and low operating efficiency (cost/income ratio of 77% for 2013). The ratings also account for the bank's potential asset quality relapses (UB reported 22% impaired loans in its 2012 IFRS FS; 2013 local GAAP accounts show a positive trend but the sustainability is questionable), relatively short track record of operations and past regulatory problems (UB's licence on foreign currency operations was revoked in July 2012) limiting its fee generation.
Positively, UB's credit profile benefits from the bank's currently sufficient liquidity (covering around 32% of the bank's customer accounts at end-2013) and high regulatory CAR of 31.3% at end-2013, which is sufficient to reserve up to 50% of gross loans.
RATING SENSITIVITIES: IY, TB, UB
An upgrade of IY and TB's Long-term foreign currency IDRs and VRs would require a general improvement in the operating environment. An upgrade of UB would require significant growth of its franchise, greater diversification and profitability improvement, while maintaining adequate asset quality, liquidity and capitalization.
A downgrade could occur in case of deterioration of operating environment, significantly increased pressure on capital as a result of marked deterioration of the credit quality and/or major liquidity shortfalls (eg. in case of withdrawals by key customers).
Fitch does not anticipate changes to the Support Ratings and SRFs of these banks given their moderate systemic importance.
The rating actions are as follows:
Long-term foreign currency IDR: published at 'B-', Outlook Stable
Short-term foreign currency IDR: published at 'B'
Long-term local currency IDR: published at 'B-', Outlook StableShort-term local currency IDR: published at 'B'
Viability Rating: published at 'b-'
Support Rating: published at '5'
Support Rating Floor: published at 'NF'
Long-term foreign currency IDR: affirmed at 'B-', Outlook Stable
Short-term foreign currency IDR: affirmed at 'B'Long-term local currency IDR: affirmed at 'B-', Outlook Stable
Short-term local currency IDR: affirmed at 'B'
Viability Rating: affirmed at 'b-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'NF'
Long-Term local currency IDR: affirmed at 'CCC'
Short-Term local currency IDR: affirmed at 'C'
Viability Rating: affirmed at 'ccc'
Support Rating: Affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'