Moody’s rating action is largely based on AAB’s audited financial statements for 2009 and 2010 prepared under IFRS.

Ratings Rationale

According to Moody’s, AAB’s E+ BFSR (which maps to B3 on the long-term scale) and B3 deposit ratings are constrained by the bank’s:

1. short track record of operations, as AAB was incorporated in mid-2009,
2. small, albeit gradually expanding, market share in the context of the Republic of Uzbekistan.

Given AAB’s narrow business scope, the bank’s loan book demonstrates relatively high concentration levels, with the 20 largest credit exposures together accounting for 120% of its Tier 1 capital as of 1 July 2011. AAB’s funding base is also concentrated on a modest number of large corporate clients and 90% of customer funding is represented by current and settlement accounts, which exposes the bank to sudden chunky withdrawals by key customers. Additionally, due to the rapid growth of AAB’s loan portfolio (albeit from a low base), Moody’s expects asset quality to face increased pressure as the loan book matures and becomes more seasoned over time.

Factors underpinning AAB’s ratings include reasonable risk management practices and reportedly low volumes of related-party business. The rating agency also acknowledges good performance of the bank’s loan book to date, as AAB had no non-performing loans in its portfolio at mid-2011.

AAB’s high liquidity cushion, which exceeds 50% of the bank’s total assets, mitigates risks of sudden outflows of large depositors.

Moody’s explained that AAB’s global local currency deposit ratings of B3/Not Prime do not incorporate any element of systemic support given the bank’s limited franchise value and its low importance for the Uzbek banking system as a whole. Nor do AAB’s ratings incorporate any probability of shareholder support to the bank, in case of distress.

According to the rating agency, AAB’s BFSR has limited upside potential at its current level. However, in the longer term, the BFSR might map to a higher long-term scale, as opposed to B3 currently, if the bank were to strengthen its franchise and further diversify its credit exposures, while also reducing concentration and lengthening the maturity of its funding base. In order to achieve higher ratings, all the conditions mentioned above would need to be accompanied by sustainable good asset quality and sound financial fundamentals.

At the same time, AAB’s intrinsic financial strength is exposed to the risks of the bank’s rapid business expansion, especially if we take into account its insufficiently tested business model and unseasoned loan portfolio. Negative pressure could be exerted on the ratings as a result of failure by the bank to maintain – amidst this high pace of growth – good quality of its loan book, sustainable strong financial performance and adequate capital and liquidity cushion. A substantial increase in the volume of related-party business or non-core investments (such as equities or fixed assets) represents another factor that could have an adverse impact on AAB’s ratings.