TASHKENT

S&P Global Ratings lowered its long-term rating on Uzbekistan’s Khalq Bank to ‘B+’ from ‘BB-’ and affirmed the short-term rating at ‘B’. The outlook is Stable.

“We anticipate Khalq Bank’s asset quality will gradually improve after the dramatic hit earlier this year, but that it will remain materially weaker than that of peers,” the agency said in a report.

Khalq Bank’s problem loans, which include loans in unsatisfactory, doubtful, and loss categories–under the treatment of the Central Bank of Uzbekistan–increased to 24 percent of its loan portfolio as of August 1, 2021, from 2.8 percent at the end of 2020.

The share of the problem loans significantly exceeds that of the system average, which S&P estimates at 6-7 percent at the same date.

S&P said that the bank was undertaking several steps to improve its asset quality, including strengthening customers’ payment discipline, various restructuring programs, and collection of the defaulted debt and collateral.

“Although we expect that the bank’s asset quality will gradually improve in the coming months, not least because of the favourable macroeconomic environment, we expect that the share of problem assets will likely substantially exceed 10 percent under International Financial Reporting Standards at the end of 2021 and will remain materially higher than that of peers,” S&P said.

The agency said it had expected deterioration of the provisioning coverage ratios with specific provisions covering nonperforming assets (NPAs) reducing to 25-30 percent from 42 percent at the end of 2020.

The bank will likely preserve a solid capital position, thanks to capital support from the government, slow lending growth, and good earning capacity, S&P added.

The agency said it expected the bank’s risk-adjusted capital (RAC) ratio to remain above 10 percent in the next 12-18 months.

S&P said it took into account the bank’s significantly slower lending growth this year at 11 percent compared to 62 percent last year as Khalq Bank virtually stopped new lending on August 1, 2021.

In August, Khalq Bank received 200 billion soums of capital support from the government, as well as 80 billion soums of support through capitalisation of earlier paid taxes.

“We understand that the government might provide the bank with another tranche of capital later this year, although the amount and timing of this potential support is uncertain,” S&P said.

“Finally, we think that the bank’s improved earnings capacity with a net interest margin closer to 8 percent may protect the bank against substantial provisions it might need to create this year.”

The agency said that the bank would likely maintain its stable funding profile and liquidity position as it remained an important financial institution for the government.

“The Stable outlook on Khalq Bank reflects our view that, despite the substantial increase of problem assets and credit losses in 2021, the bank will likely preserve its credit profile from further deterioration thanks to a sufficient capital and liquidity buffer, stable funding, and government support,” S&P said.