Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings today revised its outlook on Uzpromstroybank to stable from negative and affirmed the 'BB-/B' long- and short-term ratings.

“We anticipate that Uzpromstroybank’s key asset quality metrics will gradually improve and not materially deviate from the systemwide average by year-end 2021,” the agency said.

S&P Global Ratings thinks that rapid macroeconomic recovery in Uzbekistan, with expected GDP growth of about 4.8% in 2021 and 5.2% in 2022, will likely support borrowers’ capacity to service their debt and allow the bank to reduce problem assets in the coming months. “We note that in first-half 2021 the bank materially reduced the share of Stage 2 loans (under the International Financial Reporting Standards [IFRS] classification) to 10.1% of total loans from 29.3% at year-end 2020. This was due to improved payment discipline at some large state-related entities and commercial borrowers' gradual recovery after pandemic-related stress. Although the reduction of nonperforming assets (NPAs) was slower, with Stage 3 loans reducing to 6.2% of total loans from 6.7%, we understand that some of the largest problem borrowers have already recovered their financial position and fully returned to normal debt servicing in third-quarter 2021. Therefore, we forecast NPAs under IFRS of 4.5%-5.0% at year-end 2021, which is in line with our systemwide projections. Notably, Uzpromstroybank already demonstrates better asset quality than some other large state-owned banks under local reporting standards, with problem assets at 3.6% versus the 5.8% system average on Oct. 1, 2021,” S&P Global Ratings noted.

The bank will maintain an adequate capital position because risks of high additional provisions or aggressive lending growth have diminished.

S&P Global Ratings forecasts that Uzpromstroybank’s risk-adjusted capital (RAC) ratio will remain at 8.2%-8.3% by year-end 2023, compared with 8.7% at year-end 2020. We think that the bank’s profitability will also recover with a return on average equity of about 15% in 2021-2022 versus 1.8% in 2020, supported by slowly increasing net interest margins and relatively low credit loss provisions, which will unlikely exceed 100 bps of the loan portfolio. The expected reduction in CoR reflects the gradual improvement of the bank’s asset quality and its quite conservative provisioning in 2020, when its CoR was close to 3.4%. Although, Uzpromstroybank’s coverage of problem loans under IFRS is still relatively low (just 35% as of mid-year 2021) compared with that of international peers, it remains in line with other large Uzbekistani banks and we don’t think the provisioning policy will change in the coming years. S&P Global Ratings notes that, under the bank's new strategy to 2023, management has reduced its appetite for lending growth, which is likely to remain close to 10% over the forecast horizon versus 30%-40% organic growth in previous years. In addition, we expect that the bank will not pay dividends this year but resume distributing 50% of its net income starting 2022. 

The bank will maintain its solid business position and strong ties with the government in the next two years, despite preparing for privatization in 2024.

Although the bank will prioritize development in the small and midsize enterprise and consumer finance segment by year-end 2023, S&P Global Ratings expects that business with large corporate customers, including strategically important government-related entities, will remain core to its business model. Furthermore, we expect the bank will remain important for the government and maintain close ties with it in coming two-to-three years despite its privatization goal by year-end 2024.

The stable outlook on Uzpromstroybank reflects our view that its adequate capital buffers, improving asset quality, and solid business position in Uzbekistan will support the credit profile in the coming 12 months.

S&P Global Ratings could take a negative rating action in the next 12 months if, contrary to our expectations, the bank’s asset quality deteriorates and remains sustainably worse than that of domestic peers.

A positive rating action is unlikely over the next 12 months because it would require a similar rating action on the sovereign, together with further improvement of the bank's stand-alone credit profile.