The ratings on Turon Bank reflect its 'b+' anchor, as well as our view of the bank's "moderate" 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 is 'b-'.

“Our assessment of Turon Bank's business position as "moderate" balances its well-established franchise in the energy and water industries against a lack of product and customer diversity. Turon Bank was previously the bank of the Ministry of Agriculture and Water Management. Now privately owned, Turon Bank still serves agricultural farms, reclamation enterprises, water power plants, and associated industries. We understand that it aims to shift its specialization from a limited number of industries to a more universal banking model. However, given that the state-owned Uzbek banks, which dominate the system, have their own industry specialization, we consider that Turon Bank may find it difficult to sustainably attract creditworthy clients in other industries. The bank has a moderate but sustainable market share of about 2% of Uzbekistan's banking system assets. As of Aug. 1, 2012, the bank's assets totaled Uzbek sum (UZS) 514 billion (about $270 million) under local accounting standards,” the agency said.

“Our assessment of Turon Bank's capital and earnings as "weak" mainly reflects the bank's projected Standard & Poor's risk-adjusted capital (RAC) ratio before adjustments for diversification and concentrations of 3%-4% over the next 12-18 months. At Aug. 1, 2012, Turon Bank’s regulatory capital ratio was 10.3%, just 30 basis points (bps) above the legal minimum for the banking license. As a result, we are concerned about the bank's compliance with regulatory capital requirements. We understand that management is aiming for a regulatory capital ratio of about 11%. We consider this tight capital policy to be aggressive for a bank that operates in a high-risk environment. Turon Bank's earnings capacity is in line with domestic peers, but suffers from systemwide drawbacks. We consider that the bank is unable to generate sufficient profits to support rapid asset growth, as demonstrated by its net interest margin of 5.3% and cost-to-income ratio of 83% for 2011. The bank's revenue sources are relatively stable--net interest income, together with fee and commission income, accounted for more than 90% of operating revenues in 2011.

“Our assessment of Turon Bank's risk position as "moderate" balances our view of the bank's weaker asset quality compared with domestic peers with lower-than-sector-average single-name loan portfolio concentrations. The bank's nonperforming assets (loans overdue by more than 90 days) made up 22.1% of the loan book at the end of 2011. A large part of these problem loans relates to a number of state-owned enterprises that incurred losses in 2011, but received compensation from the government at the beginning of 2012 when budgetary funds were reallocated. We understand that most of these loans were repaid by August 2012. As a result, nonperforming assets decreased to 5.5% of the total loan portfolio,” Standard & Poor's said.

“We consider the bank's level of problem assets to be above the 2%-3% sector average. Moreover, loan loss provisions only covered 16% of nonperforming assets at year-end 2011, down from 47% at year-end 2010. We attribute this low level of provisioning to overcollateralization of the bank's exposures; nevertheless, we consider this to be an aggressive revenue-recognition practice. On a positive note, Turon Bank has a diversified loan portfolio in the context of Uzbekistan's banking system--the top 20 borrowers account for about 24% of the total loan portfolio at the end of June 2012. Risks other than credit are limited, in our view.

“We assess Turon Bank's funding as "average" and liquidity as "adequate". About 20% of the bank's liabilities come from the government and public organizations, which reflects Turon Bank's longstanding relationships with the state. The bank has an adequate loan-to-deposit ratio of about 90% as of June 30, 2012, but a sizable dependence on interbank borrowings (21% of total liabilities at mid-year 2012). Positively, about half of this is long-term state funding cascaded from the government via larger Uzbek banks to smaller ones to finance development projects. We believe the bank's funding base lacks diversity. The top 20 depositors accounted for 46% of the total depositor base at mid-year 2012. However, because of the bank's relatively high share of long-term state funding compared with other privately owned Uzbek banks, Turon Bank has a less confidence-sensitive funding structure, in our view. The bank maintains an adequate liquidity cushion. Cash and cash equivalents, together with short-term interbank placements, made up a satisfactory 25% of total assets at June 30, 2012. The bank does not have major repayments in 2012 and 2013, other than refinancing its interbank exposures.

“Turon Bank's capital was widely spread among more than 2,000 legal entities (that collectively own 93.83% of the bank's capital) and more than 6000 individuals that hold the remainder at year-end 2011. The state indirectly controls 20% of the bank's capital. However, we consider the shareholders' ability to provide support in times of stress as uncertain and therefore do not include any notches of uplift for parental support into the ratings. We consider Turon Bank to be of "low" systemic importance for the Uzbek banking system, and therefore give no uplift to the ratings on the bank for extraordinary government support,” Standard & Poor's added.

The stable outlook reflects our expectation that the bank will improve its capital position via external capital injections to comply with regulatory requirements with a margin of at least 100 basis points. We also expect the bank to gradually grow and sustain its currently well-established business position and brand recognition, while maintaining an adequate liquidity buffer.

“We could raise the ratings if Turon Bank were to significantly improve its capitalization, either through external or internal sources, achieving a projected RAC ratio before adjustments for diversification above 7%. Even though currently unlikely in our view, we would consider taking a positive rating action if the bank were to substantially improve the diversity of its lending activities and strengthen its asset quality. This could result in us revising our assessment of its risk position upward to "adequate".

“We could lower the ratings if we consider that the bank is not complying with regulatory capital requirements or if its capital base were to deteriorate further, such that our projected RAC ratio before adjustments fell below 3%. This could occur if planned capital injections from owners are insufficient to match asset growth. Any weakening of the bank's liquidity position or further asset quality deterioration, for example, with NPLs remaining substantially above sector average and coverage by reserves substantially below sector average, might also lead to negative rating action,” the agency concluded.