The ratings on Orient Finans Bank reflect our view of the bank's "weak" business position, "weak" capital and earnings, "moderate" risk position, "average" funding, and "adequate" liquidity, as our criteria define these terms. The stand-alone credit profile (SACP) is 'ccc+'.

“We assess Orient Finans Bank's business position as "weak" due to its lack of track record given its short operational history, limited customer base, and lack of business diversity. The bank is in an early development phase and possesses all the embedded weaknesses of a young, small, privately-owned financial institution in the predominantly government-owned Uzbek banking system. With total assets of about Uzbek sum (UZS) 143.3 billion (about US$77 million) at 31 March 2012, it has a negligible market share below 1% of the total system's assets and a very small customer base. This currently results in significant balance sheet concentrations. At the same time, we note that Orient Finans Bank demonstrates positive development dynamics driven by its experienced management team of bankers who previously worked for some of Uzbekistan's largest banks, and by shareholders' ambitions for the bank”, the agency said.

“We believe that currently the development of the bank's business strategy and the dynamism of its customer base rely heavily on the owners' and managers' business contacts. This dependence is likely to continue until the bank develops a stronger brand and franchise”, it added.

“We assess Orient Finans Bank's capital and earnings as "weak", reflected in the projected risk-adjusted capital ratio before adjustments for concentration and diversification in the 4%-5% range over the next 12-24 months. Our projection incorporates our expectation that Orient Finans Bank doubles its loan portfolio for the next two years without additional external capital injections from the shareholders. Orient Finans Bank is one of a few newly created banks with a license for foreign currency operations. Despite its short operating history it has already become one of the largest banks in Uzbekistan by volume of currency conversion operations. The bank performed quite well in 2011, showing a high return on equity of 25%. This was mainly because of income from currency conversion transactions.

“We view Orient Finans Bank's risk position as "moderate". Our assessment balances the bank's aggressive growth targets and very high single-name concentrations in the loan book, including those to related parties, against currently good asset quality metrics and better customer knowledge compared with peers. As of year-end 2011, the bank's top-20 borrowers accounted for 94% of total loans or 3x adjusted total equity. Positively, at year-end 2011 the bank had no overdue or restructured loans. Good asset quality is mainly supported by the bank's unseasoned loan portfolio and good knowledge of and relationships with its borrowers. However, we expect problem assets to naturally surface as the loan portfolio expands to include less-relationship-driven customers, and as the portfolio matures. We believe that rapid growth masks asset quality problems, which may materialize when the bank's asset growth stabilizes. At the same time we note that the bank's top management has good customer knowledge and banking experience compared with some other small Uzbek banks”, the agency said.

“We assess Orient Finans Bank's funding profile as "average" and liquidity as "adequate". The bank has one of the lowest loan-to-deposit ratios in the system (54% as of Dec. 31, 2011) and zero dependence on market and interbank funding. Its funding base is undiversified and limited with the top-20 depositors accounting for 43% of its total deposit base as of year-end 2011, albeit in line with the sector average. Funding concentrations are already incorporated into our ratings on Uzbek banks via our BICRA assessment.

“Orient Finans Bank had an adequate liquidity cushion as of year-end 2011. Cash and cash equivalents together with short-term (less than 30 days) interbank placements accounted for 64% of bank assets. However, 45% of these liquid assets are funds in Uzbek sum, which are blocked at the central bank's accounts for conversion into foreign currency. We believe Orient Finans Bank maintains a sizable liquidity buffer, as currency conversion operations is one of the main income sources for the bank”, the Standard and Poor’s noted.

“Orient Finans Bank's ultimate beneficiaries are several private individuals. The issuer credit rating does not include any notches for extraordinary parental support, which we view as uncertain as we are unable to ascertain the financial capability of the shareholders to support the bank, if required. We consider the bank to be of "low" systemic importance due to its share in the total system's retail deposits being below 1%. Thus we do not give any uplift to the rating for extraordinary government support.

“The stable outlook balances our expectations that the bank will continue to develop and grow its franchise and gradually diversify its customer base, with our expectation of pressured capitalization and potential asset quality deterioration due to the seasoning of the loan portfolio”, the agency underlined.

The agency said: “We could lower the ratings if the bank's currently adequate liquidity position were to materially deteriorate or if rapid growth were to erode capitalization such that our risk-adjusted capital ratio fell below 3% (before adjustments)”.

“We could raise the ratings if capitalization were to strengthen through either capital injections or through sufficient internal capital generation that raised our RAC ratio before adjustments for concentrations and diversification above 7%. We could also raise the ratings if the bank were to substantially strengthen its franchise, focusing more on credit-related revenues (which could result in us revising our assessment of the bank's business position to "moderate" from "weak"), while keeping capitalization, asset quality, and liquidity metrics at least at current levels”, it concluded.