Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings today affirmed its ‘B-’ long-term issuer credit rating on Uzbekistan-based Ravnaq Bank (Ravnaq). The outlook remains negative. 

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

Ravnaq’s low profitability and provisioning needs undermine its capitalization.  

“We anticipate the bank will face pressure from substantial loan loss provisions, stemming from its low loan book quality and earnings, which are insufficient to cover expected losses. As a result, we project Ravnaq will be loss-making in 2021, and our risk-adjusted capital (RAC) ratio will decline to 8.0%-8.1%. We have therefore revised our capital and earnings assessment to adequate from strong. The bank’s profits will remain volatile due to its small size, low operating efficiency, and potential further losses related to the pandemic,” the agency said. 

Ravnaq was hit harder by the COVID-19 pandemic than most of its domestic peers but problem loans are gradually decreasing.  

Over the past year, the bank had to restructure a substantial part of its loan book, mainly driven by pandemic-related factors. This increased pressure on credit losses and limited its business growth prospects. Problem loans peaked at 37% of gross loans at Sept. 1, 2021, well-above the 6% average for the system. That said, we note the gradual recovery of the loan book, driven by the return of some problem borrowers to normal payment schedules and limited new problem loans this year. Therefore, we expect Ravnaq’s problem loans to decline to about 14%-16% of total loans in the next 18 months, which is still higher than for most peers. The bank’s significant concentrations, with its 20 largest loans comprising 64% of total loans at Oct. 1, 2021, exacerbate the risks of sharp loan book deterioration. 

Ravnaq’s current liquidity buffers are sufficient to service its needs, however, further delays in loan repayments could disrupt the liquidity position. 

So far this year the bank’s liquidity position has been somewhat volatile, related to both unexpected delays in inflows from loan repayments and its opportunistic liquidity policy. The liquidity buffer stabilized in November 2021, following several large problem loan repayments and new corporate deposits. At Nov. 1, 2021, liquid assets comprised about 13% of total assets and covered 32% of short-term liabilities, providing some cushion for potential outflows. Negatively, we note relatively aggressive liquidity management over the past few years, when the bank operated with regulatory liquidity ratios close to minimum levels to optimize funding costs. In our view, any further disruption in the flow of loan repayments might undermine the bank’s liquidity position. Therefore, we have revised the liquidity score to moderate from adequate.

The negative outlook reflects the bank’s still high amount of problem loans, low earnings, and high loan concentrations. In addition, it incorporates downside risks to the bank’s liquidity position.

“We could lower the rating over the next six-to-12 months if we see further asset quality deterioration or the liquidity buffer weakens, for instance via unexpected high deposit outflows,” the agency said.

An upgrade is a remote possibility, in our view. However, we might revise the outlook to stable if Ravnaq’s asset quality strengthens and it maintains sufficient liquidity buffers with no rise in deposit volatility.