The ratings on Samarkand Bank reflect its anchor of b+, its weak business position, very 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 S&P’s bank criteria, the Banking Industry Country Risk Assessment economic risk and industry risk scores is used to determine a bank’s anchor, the starting point in assigning an issuer credit rating. S&P’s 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 dependant, 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 Samarkand Bank’s business position to be weak reflecting its marginal market position, weak business diversity and narrow customer base. The recently revised business strategy and changed management team have yet to demonstrate the bank’s ability to successfully grow a diversified clientele base and business profile. The bank’s total assets comprised Uzbek sum (UZS) 52 billion ($28 million) as of Feb. 29, 2012 and the bank had a low 0.1% market share in Uzbekistan’s banking system assets.

The bank’s customer franchise is fairly small, as illustrated by the fact that the top 20 borrowers accounted for about 90% of the bank’s loan book as of March 1, 2012. At the same date three customers represented about a one-half of the bank’s deposit base. It conducts its banking operations from its head office in Samarkand, while an administrative office is located in the capital city Tashkent. The bank’s strategy is to be active in small and midsized enterprises (SME) and retail lending in its home and neighbouring regions.

S&P’s very strong assessment of capital and earnings is a positive rating factor for a bank with a b+ anchor. This mainly reflects Samarkand Bank’s very strong capitalization. However, the bank’s only moderate earnings-generating capacity tempers this strength. S&P anticipate that expansion will gradually erode Samarkand Bank’s currently good capital cushion. However, S&P’s projected risk-adjusted capital (RAC) ratio before adjustments for diversification will likely exceed 15% for the next 18-24 months. S&P’s RAC projections incorporate annual asset growth of about 35% and a UZS8 billion capital increase planned for 2012.

S&P assess Samarkand Bank’s risk position as weak. This reflects the bank’s high single-name concentrations, including those to related parties, and accumulated problem assets inherited from the previous management. At year-end 2011, about 30% of the gross loan portfolio was attributed to related parties, albeit under market conditions. S&P do not expect concentrations to decrease significantly over the medium term, but they understand that the management is keen to improve lending diversification and asset quality. At year-end 2011, loans determined to be impaired due to financial performance and debt-servicing deterioration comprised 7.2%, down from 11% the prior year. S&P expect asset quality to improve gradually throughout 2012 as the bank’s loan book benefits from widening clientele and business diversity.

S&P consider Samarkand Bank’s funding to be below average. On April 1, 2012, customer deposits composed a fairly high 93% of total liabilities, exacerbating the bank’s sensitivity to customer sentiment. They consider the bank’s liquidity position to be adequate. Cash and cash equivalents accounted for about 20% of total assets on March 1, 2012. However, this cushion may deteriorate rapidly if the loan book expands quickly.

The ratings reflect Samarkand Bank’s SACP and do not include any notches for extraordinary parental support, which we consider uncertain. S&P deem the bank to be of low systemic importance in Uzbekistan, given its relatively small balance sheet and its limited clientele, and accordingly do not add any uplift for extraordinary government support.

Outlook

The positive outlook on Samarkand Bank reflects S&P’s expectations that the bank’s business position and earnings capacity will gradually improve when it receives a foreign exchange license, which is expected in 2012. In their view, this will help diversify the bank’s clientele. In addition S&P anticipate that the bank will maintain its adequate liquidity and at least strong capitalization over at least the next 18-24 months. They also expect that the recently revised strategy might help the bank move away from excessive lending concentrations, including those to related parties, although in the longer term.

S&P could raise the ratings if the bank succeeds in improving its business diversity and revenue base, while continuing to gradually improve its risk management and operational capacity and maintaining capitalization at acceptable levels.

S&P could revise the outlook to stable if we see no material improvements in the bank’s business development and risk position in the near future, or if the bank fails to realize its strategy of improving business and risk diversification and market positions. S&P could consider a negative rating action if the bank’s RAC ratio were to fall below 10%.