Fitch Rates UzKDB Bank 'B-'; Outlook Stable
November 1, 2012 Fitch Ratings
Fitch Ratings-London/Moscow-01 November 2012: Fitch Ratings has assigned Uzbekistan-based UzKDB Bank a Long-term foreign currency Issuer Default Rating (IDR) of 'B-', a Long-term local currency IDR of 'B' and a Viability Rating (VR) of 'b'. The Long-term IDRs have Stable Outlooks. A full list of rating actions is at the end of this comment.
RATING ACTION RATIONALE: IDRs, VIABILITY RATING, SUPPORT RATING
UzKDB's local currency IDRs and VR reflect its currently very low leverage, sizable loss absorption capacity, ample liquidity and reasonable internal capital generation. In Fitch's view, UzKDB's planned merger with CJSC RBS NB Uzbekistan is unlikely to significantly alter its credit profile, given the latter's broadly similar balance sheet structure and reasonable asset quality.
UzKDB's local currency IDRs are underpinned by potential support from the bank's majority shareholder, Korea Development Bank (KDB; 'AA-'/Stable), a 100%-state-owned Korean Bank. However, the Long-term local currency IDR is capped at the 'B' level as a result of Fitch's view of Uzbek country risks.
In Fitch's view, KDB would likely have quite a high propensity to support UzKDB given the banks' common branding, KDB's involvement in UzKDB's development, the support track record to date, and the currently good political and economic relations between Korea and Uzbekistan. At the same time, Fitch classifies UzKDB as a subsidiary of 'limited importance' for KDB, given its small size, and the still limited overall importance of foreign subsidiaries for KDB's operations.
UzKDB's foreign currency Long-term IDR is constrained at the 'B-' level by potential restrictions on foreign currency conversion operations in Uzbekistan. As a result of these potential restrictions, Fitch currently caps the foreign currency Long-term IDRs of all Uzbek banks at 'B-'. The Support Rating is capped at '5', as conversion restrictions could also impede UzKDB's ability to utilise shareholder support to service its foreign currency obligations.
RATING DRIVERS: VIABILITY RATING AND LOCAL CURRENCY IDRs
At end-8M12, UzKDB's loan book accounted for just 10% of assets, with approximately half the balance sheet comprising cash and placements with the Central Bank of Uzbekistan. This balance sheet composition reflects limited attractive lending opportunities to date, and also the bank's focus on off-balance sheet trade-related business, which is currently approximately twice the size of the loan book.
At end-8M12, UzKDB's statutory capital adequacy ratio was a comfortable 29%, although risk concentrations are high as a result of the bank servicing mainly larger customers. The largest 25 loan exposures comprise almost the entire loan portfolio, an amount also approximately equal to the bank's Fitch core capital. Most exposures have reasonable collateral coverage. At end-3M12, UzKDB reported zero NPLs (loans more than 90 days overdue), which seems to correspond to the underlying performance of the portfolio.
UzKDB's performance is supported by low-cost corporate funding (predominantly current and settlement accounts), moderate operating expenses and low/negative impairment charges. These factors offset low balance sheet leverage. From 2008 to 2011, the bank reported an average net interest margin of 15% and return on average equity of 22%.
UzKDB's sizeable cash balances provide a comfortable liquidity cushion, even in light of the bank's short-term customer funding. Liquid assets covered 77% of customer accounts at end-8M12, and there are no wholesale borrowings.
UzKDB's Long-term local currency IDR could be upgraded or downgraded if Fitch's view of Uzbek country risks changes. An upgrade of the Long-term foreign currency IDR and Support Rating would require a liberalisation of foreign exchange regulations.
Upside potential for the VR is low given the high-risk operating environment and UzKDB's limited franchise. Large credit losses could result in a downgrade of the VR.
The rating actions are as follows:
Long-term foreign currency IDR: assigned 'B-'; Outlook Stable
Short-term foreign currency IDR: assigned 'B'
Long-term local currency IDR: assigned 'B'; Outlook Stable
Short-term local currency IDR: assigned 'B'
Viability Rating: assigned 'b'
Support Rating: assigned '5'
Company — UzKDB Bank
Full nameUzKDB Bank