KDBUz’s local currency IDRs and VR of ‘B’ are underpinned by the bank’s intrinsic creditworthiness and reflect its liquid and low-risk balance sheet relative to domestic peers, with a majority of assets being placed with foreign and state-owned banks, as well as its sound capitalisation and performance indicators. However, the VR also considers the bank’s limited franchise (especially lending) and risks of operating in a high-risk environment. KDBUz’s merger with its sister bank RBS NB Uzbekistan (RBSUz) in Q113 has not significantly altered KDBUz’s credit profile, given RBSUz’s broadly similar size, balance sheet structure and key credit metrics.

KDBUz’s local currency IDRs also reflect potential support from the bank’s majority shareholder, Korea Development Bank (KDB; AA-/Stable), a 100%-state-owned Korean Bank. Fitch classifies KDBUz as a subsidiary of ‘limited importance’ for KDB, given KDBUz’s small size, and the still limited overall contribution of foreign subsidiaries to KDB’s results.

KDB will likely continue to have a rather high propensity to support KDBUz, given its regional importance for the parent (the only financial asset in Central Asia), common branding, high level of operational and management integration, the support track record to date and the currently strong political and economic relations between South Korea and Uzbekistan. However, the Long-term local currency IDR is capped at the ‘B’ level by Fitch’s view of Uzbek country risks. At the same time KDBUz’s Long-term foreign currency IDR, like those of all other Fitch-rated Uzbek banks, is constrained at ‘B-’ by Uzbekistan’s high transfer and convertibility risks stemming from a tightly regulated FX market. The Support Rating is capped at ‘5’, as conversion restrictions could also impede KDBUz’s ability to utilise shareholder support to service its foreign currency obligations.

The bank mainly focuses on trade finance business, such as letters of credit, guarantees and currency conversion operations for foreign-owned and domestic medium and larger companies, while its lending appetite is limited. Reflecting this cash and accounts due from high-rated foreign banks, state-owned banks and the Central Bank of Uzbekistan constitute the most part of KDBUz’s assets (95% of total at end-7M13). KDBUz’s loan book is small (3.2% of total assets at end-7M13), highly concentrated (with 25 largest exposures accounting for 91% of total) but with zero non-performing loans (NPLs, more than 90 days overdue).

KDBUz’s sizeable cash balances provide a comfortable liquidity cushion, even in light of the bank’s short-term and highly concentrated customer funding. Liquid assets covered around 76% of customer accounts at end-7M13, and there are no wholesale borrowings.

Return on equity (ROE) is healthy at 22%, supported by low funding cost of only 0.2% (due to a predominant share of current accounts in liabilities), moderate operating expenses, absence of impairment charges and significant fee and commission income relating to off-Balance Sheet operations (68% of revenues in 7M13).

At end-7M13, KDBUz reported 28.7% total regulatory capital adequacy ratio (CAR), which was sufficient to cover up to 1.8x of its gross loans without breaching the regulatory 10% minimum.

KDBUz’s Long-term local currency IDR could be upgraded or downgraded should Fitch’s view of Uzbek country risks change. The Long-term foreign currency IDR and Support Rating are unlikely to be upgraded unless the conversion restrictions are lifted.

Upward potential for KDBUz’s VR is currently limited given the bank’s limited franchise and the high-risk operating environment.

The rating actions are as follows:

- 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’