S&P: Uzbekistan-Based Turon Bank Upgraded To 'B' On Material Capital Support; Outlook Stable

S&P Global Ratings said today that it had raised its long-term issuer credit rating on Uzbekistan-based Turon Bank to 'B' from 'B-'. The outlook is stable.

At the same time, we affirmed our 'B' short-term issuer credit rating on the bank.

The upgrade stems from our view that Turon Bank's capitalization has improved materially because of the significant amount of capital provided by the Uzbekistan Fund for Reconstruction and Development (UFRD) and the Ministry of Finance since our last review in July 2017. Last year, Turon Bank received Uzbek sum (UZS) 228 billion (about $28 million) in capital support, of which UFRD provided UZS178 billion. These capital injections enabled Turon Bank to fund an increase in lending to government-led projects and offset the negative impact of the sharp devaluation of the local currency.

According to a presidential decree, Turon Bank received another UZS490 billion from UFRD earlier this month to finance a number of projects in Uzbekistan's hydro-energy sector. After incorporating these injections, we forecast that the bank's risk-adjusted capital ratio will remain above 10% during 2018-2019, despite planned high lending growth over the next two years.

We estimate the bank's loan portfolio growth at 85%-90% in 2018 before decelerating to 30%-35% in 2019. This growth rate is materially higher than our forecast for the sector, which we expect will average 20% over that period. The bank's growth will primarily stem from new loans to support hydro-energy projects. We note that the government will guarantee all such loans, which should mitigate credit risk, in our view. However, the bank is also planning to focus on the agricultural sector, which we view as riskier.

We cannot exclude the possibility that the bank's actual growth may be stronger than we currently anticipate, with a negative impact on asset quality and quicker depletion of its capital buffer. In addition, we consider that the bank's profitability will likely remain weak. We think that, beyond our two-year rating horizon, Turon Bank may be unable to support its rapid expansion without new capital injections from the government. These factors, coupled with challenges associated with the management of such fast growth, which will transform the bank's business profile, constrain our long-term rating at 'B' versus the bank's 'b+' stand-alone credit profile (SACP).

Our ratings continue to reflect the bank's still modest market share, rapidly changing strategy, and limited pricing power. The bank's closer ties with the government, which enable it to increase its client base and revenues, counterbalance these weaknesses.

We see that Turon Bank's ties with the government have become closer over the past year, with the bank being excluded from the privatization list and receiving material capital support from the state. Moreover, the bank is now more involved in implementing government-related projects than one year ago. We therefore do not expect the bank will be privatized over the next three to five years.

Nevertheless, we still think Turon Bank has limited importance for the government since it is smaller than other government-related banks, which might be able to take on a similar role in government projects if needed. This leads us to anticipate a moderately high likelihood that the government would provide extraordinary support to Turon Bank if needed. Given our assessment of the sovereign's creditworthiness, which is based only on publicly available information, our long-term rating on the bank does not include any uplift for potential government support.

In our view, Turon Bank compares well with its domestic peers in terms of funding and liquidity metrics. We note that the bank's funding structure is set to change materially in 2018, since the bank will fund most of the new projects in the energy and agricultural sectors through funds from international financial institutions. However, we understand that the tenors of these new facilities will match those of disbursements, and therefore not result in any significant asset-liability mismatches.

The stable outlook reflects the balance between Turon Bank's improved capitalization and our anticipation of its weaker operating performance than domestic peers, owing to low margins on new business generated over the next 12-18 months.

We may lower the ratings if the bank's actual growth materially exceeds our projections, with a pronounced negative impact on its capitalization and asset quality.

We may raise our ratings if Turon Bank's management showed its ability to manage the ongoing expansion, aligning the bank's overall business profile and creditworthiness with those of domestic peers, without hampering the bank's risk profile and capitalization, all else being equal.
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