In the opinion of S&P, Uzbekistan-based Ravnaq-bank has a weak business position, strong capital and earnings, a weak risk position, below average funding, and adequate liquidity. They are assigning their CCC long-term and C short-term counterparty credit ratings to Ravnaq-bank. The positive outlook reflects potential improvement in Ravnaq-bank’s commercial franchise since the ban on active operations was lifted in November 2012 and once resumption of retail deposit collection starts in February 2013, while maintaining strong capitalization.

Rationale

The ratings reflect the b+ anchor for a bank operating primarily in Uzbekistan, as well as Ravnaq-bank’s weak business position, strong capital and earnings, weak risk position, below average funding, and adequate liquidity, as our criteria define these terms. The stand-alone credit profile (SACP) is ccc.

Under their bank criteria, S&P use the Banking Industry Country Risk Assessment economic risk and industry risk scores to determine a bank’s anchor, the starting point in assigning an issuer credit rating. their anchor for a commercial bank operating only in Uzbekistan is b+.

The economic risk score for Uzbekistan is 7. Uzbekistan’s economy is predominantly state owned, undiversified, and commodity dependent, with high political risks and an unfavourable investment climate. But a low degree of financial intermediation, relatively low levels of corporate and personal indebtedness in both private and public sectors, and limited cross-border borrowing help shelter the country’s small banking industry somewhat from the global external shocks.

The industry risk score for Uzbekistan is 9. The Uzbek banking industry is undermined by very weak institutional and legal frameworks, limited transparency and disclosure, a lack of business and funding diversification, and dominance of state-owned banks, which distort domestic competition.

S&P consider Ravnaq-bank’s business position to be weak, reflecting its marginal market position, weak business diversity, and narrow customer base. With total assets of Uzbek sum 18 bln ($9.3 mln) as of Oct. 1, 2012, the bank is small in an Uzbek context with a market share of less than 1% in terms of banking system assets. The client base consists of about 450 customers, which is evidence of low granularity and diversified exposures.

S&P understand that the bank is ultimately controlled a group of interrelated individuals, who seems committed to the development of the bank. They also expect the new, experienced management team to contribute to the revival of Ravnaq-bank’s franchise following the lift of a ban on lending and other placements in November 2012. Starting in February 2013, we expect the bank to be able to once again collect retail deposits, which should help diversify the liabilities structure and provide funds for pursuing business growth opportunities.

S&P believe that Ravnaq-bank’s status as a small privately-owned institution with low systemic importance and the start-up nature of its business model expose the bank in a more acute way to business risks.

S&P’s assessment of Ravnaq-bank’s capital and earnings is strong, which is a positive rating factor for a bank with a ‘b+’ anchor. They anticipate that the bank’s currently good capital cushion (risk-adjusted capital (RAC) stood at 15.9% as of year-end 2011) will gradually be eroded by expansion. However, S&P project that the RAC ratio before adjustments for diversification will likely be 14%-16% by year-end 2013. Their RAC projections incorporate annual asset growth of about 50% for 2013 and over 100% for 2014, in line with Ravnaq-bank’s strategy. We also expect no dividend payouts and regular capital injections sufficient to keep growth of the capital base under local regulations at 20% per year as per the Central Bank’s decree. S&P assume, that the bank will indeed continue to be dependent on the owners’ support to grow its equity base, as its earnings generation is insufficient to match growth in risk assets.

S&P assess Ravnaq-bank’s risk position as weak, which reflects high concentrations on the balance sheet, untested risk management systems, and high operational risks. Despite the expected rapid increase in lending, S&P expect that loan book concentrations will remain high, with the top 20 names representing over 80% of the loan portfolio over the next 12-18 months. Related-party lending constituted 15% of the loan portfolio as of Sept. 30, 2012, and this should persist, as well.

S&P assess Ravnaq-bank’s funding profile as below average. This is primarily because of high single-name concentrations on the liability side, given that the top 20 depositors represent 72% of total deposits. They also note that the relationships with some depositors are thanks to their relationships with the controlling shareholders of the bank, adding to concentration.

Ravnaq-bank’s liquidity is adequate, in S&P’q view. Cash and cash equivalents accounted for 11% of the bank’s total assets as of Dec. 31, 2011, fully covering wholesale funding. S&P note, however, that these ratios may deteriorate rapidly if the loan book expands quickly.

Outlook

The positive outlook on Ravnaq-bank reflects S&P’s view that the bank is likely to improve its business position in the next 12-18 months since the ban on active operations was lifted in November 2012 and after retail deposit collection starts in February 2013. Obtaining a foreign currency license may also materially support the bank’s earning capacity. In addition, S&P expect the bank to maintain strong capitalization and adequate liquidity.

S&P might consider raising the rating if the bank improves its business diversity and quality of its revenue base, while continuing to gradually advance its risk management and operational capacity. They assume business expansion will not substantially deteriorate the strong capitalization.

S&P could consider a negative rating action if they saw no material improvements in the bank’s business development in the near future. This could happen if the bank failed to realize its strategy of expanding its geographic coverage, customer base, and range of products and services, or did not obtain a foreign currency license. An additional source of pressure on the bank’s creditworthiness could come from a decline in liquidity or solvency, with the bank’s RAC ratio falling below 10%.

Related Criteria and Research

• Banking Industry Country Risk Assessment Methodology and Assumptions, Nov. 9, 2011
• Banks: Rating Methodology and Assumptions, Nov. 9, 2011
• Bank Capital Methodology and Assumptions, Dec. 6, 2010