Uzbekistan-Based Turkiston Bank Ratings Lowered to ‘CCC+/C’

Tashkent, Uzbekistan ( -- S&P Global Ratings said today that it had lowered its long- and short-term issuer credit ratings on Turkiston Bank to ‘CCC+/C’ from ‘B-/B’. The outlook is negative.

The agency said: “The downgrade reflects our view that, despite recent capital increases to meet the minimum required capital amount by Jan. 1, 2019, the bank experienced such a rapid loan growth at the expense of liquidity that now significant downside pressure is coming from maintenance of lower liquidity cushions than previously observed, which leaves the bank more vulnerable to unexpected funding pressure. We also think that its capital position weakened despite the shareholders’ capital because of its very aggressive loan growth and the purchase of a significant amount of fixed assets.

Turkiston Bank received Uzbekistani sum (UZS) 63 billion worth of capital injections in 2018, and this equity support enabled it to meet the regulatory requirement for the minimum amount of authorized capital. Thus, we understand that the bank reported share capital of UZS101 billion on Nov. 22, 2018, to meet the requirements of the presidential decree for all banks that set a minimum requirement of UZS100 billion starting from Jan. 1, 2019,”.

“However, since the beginning of 2018, Turkiston Bank has also aggressively expanded its loan book, and recently made a material investment in illiquid fixed assets. These management actions have noticeably erased the benefits of the capital strengthening measures and weigh on the bank’s liquidity profile and capital position, in our view. The purchase of fixed assets in particular resulted in almost 40% of the bank’s capital being immobilized on Nov. 22, 2018, which limits the ability of the capital to absorb potential losses and exposes the capital to the risk of changes in property value that might impact the actual amount of capital,” the agency said.

“In addition to the aggressive reduction in liquid assets, the bank has increased its reliance on potentially volatile and more confidence-sensitive short-term wholesale funds since the liberalization of the sum in September 2017. Thus, short-term interbank funding formed 34% of total liabilities on Nov. 22, 2018. This further impairs the bank’s capacity to meet unexpected funding outflows, in our view. Turkiston Bank’s stable funding ratio was 78% and net broad liquid assets-to-short-term customer deposits ratio was negative 39% on the same date, compared with 97% and negative 4%, respectively, at year-end 2017. Both ratios are worse in comparison with other rated peers, and indicate significant deficiencies in the bank’s asset and liability management, in our view,” S&P Global Ratings said in its statement.

“We understand that the bank’s management intends to restore the liquidity profile and reduce reliance on interbank funding. However, we see risks that during the time it will take to restore funding and improve the liquidity profile, the bank remains vulnerable to unexpected funding pressure, which is a common threat for small financial institutions in Uzbekistan,” it underlined.

“The negative outlook reflects our concerns that, over the next 12 months, the bank will remain vulnerable to liquidity stress in case of unexpected funding pressures if it fails to increase its liquidity cushion and materially reduce its reliance on short-term wholesale funding resources,” the agency said.

“We could lower the ratings over the next 12 months if Turkiston Bank experiences sharp unexpected funding and liquidity pressures in the absence of shareholders’ support, with visible risk of and scenarios of default. We could also lower the ratings if deterioration of asset quality not supported by shareholder capital injections results in the bank’s being at risk of failing to comply with the capital requirements,” it said. 

“We could consider a revision of the outlook to stable if Turkiston Bank is able to restore materially and sustainably its liquidity position with, in particular, a S&P Global Ratings-adjusted ratio of broad liquid assets to short-term wholesale funding above 100%. However, we consider this scenario as remote currently,” S&P Global Ratings said.

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