“The outlook revision reflects our expectation that Kapitalbank’s robust profitability, along with tightening minimum capital requirements in Uzbekistan, should allow the bank to maintain a risk-adjusted capital (RAC) ratio comfortably above 3%,” the agency said.

“Kapitalbank posted a RAC ratio of 4.0% at year-end 2014, owing to a higher-than-expected net interest margin of 5.4% and strong bottom-line results. The RAC ratio was substantially better than our earlier forecast of 2%-3%. We expect the bank’s assets to increase by 25%-27% in 2015-2016, showing visibly lower growth than during the previous two years, while registering a lower net interest margin of about 4% and cost of risk of 2.3%-2.5%. This is because we expect the bank’s collective provisioning requirements to remain high. We do not expect Kapitalbank to pay any dividends or receive any capital injections over the next two years,” Standard & Poor’s underlined.

“We note that the bank’s tempered growth appetite stems partly from the increasing minimum capital requirements in Uzbekistan. The minimum total capital adequacy ratio is set to increase to 11.5% in 2016 from 10%, and continue rising by one percentage point per annum until it reaches 14.5%. In addition, the Central Bank of Uzbekistan plans to implement Basel III in Uzbekistan, which we believe will lead to slower lending growth rates. We believe that during the transition period, Kapitalbank is likely to continue operating within 100 basis points of the minimum requirement,” Standard & Poor’s said in a statement.

“We expect the bank’s RAC ratio to remain above 3% over the next 12 to 18 months, which would allow us to reclassify capital and earnings to "weak" from "very weak," as defined in our criteria. Nevertheless, we believe operating conditions in Uzbekistan limit the predictability of the bank’s ultimate financial performance. We also note that there are substantial risks to our base-case assumptions, which, if they materialize, could put pressure on the bank’s capitalization. These risks include potential volatility in the country’s currency that weighs on loan quality and volume of risk-weighted assets, or higher-than-expected credit losses, given the bank’s highly concentrated lending book,” the agency noted.

“The positive outlook on Kapitalbank indicates that we may raise the ratings over the next 12-18 months if the bank maintains a RAC ratio comfortably higher than 3%, as well as adequate loan portfolio quality. In our opinion, the slowdown of the bank’s growth, along with robust profitability and tightening capital requirements in Uzbekistan, will likely support stronger capitalization over that period,” Standard & Poor’s said.

“We may revise the outlook to stable if Kapitalbank’s capitalization does not improve as we expect, with the RAC ratio falling below 3%. A negative rating action may also follow if we see the bank’s asset quality deteriorating or customer confidence declining,” the agency concluded.