S&P Global Ratings revised its outlook on Uzbekistan-based Xalq Banki from negative to positive, affirming its 'B/B' long- and short-term issuer credit ratings. This revision reflects the expected substantial capital support from the Uzbekistan government in 2024, which is anticipated to stabilize the bank's capitalization and support its creditworthiness over the next 12 months.
Government Support and Capitalization
S&P Global Ratings expects Xalq Banki to receive notable capital injections from the government, staggered through 2025. This support is forecasted to strengthen the bank's risk-adjusted capital (RAC) ratio, projected to rise to 11.5%-12.5% over the next 12-18 months from 6.8% at the end of 2023. Provided the bank maintains its current growth strategy, the RAC ratio is expected to remain above 10% over the next two years.
Operational Improvements and Social Role
Xalq Banki has made big strides in recovering its legacy problem loans, posting positive financial results in 2023 after experiencing losses from 2020 to 2022. The bank's efficiency indicators have improved, bringing its cost-to-income ratio closer to peer averages. As of year-end 2023, this ratio was 57%, down from 63% in 2021. Xalq Banki is also focusing on increasing its retail and SME lending, which accounted for about 61% of total loans by the end of 2023, up from 47% a year earlier.
Xalq Banki continues to perform a critical social role in Uzbekistan by distributing pensions and providing loans under state-supported programs. The bank is expected to maintain its market position and expand its commercial lending book, with a particular focus on loans to retail clients and SMEs.
Asset Quality and Financial Performance
The bank's asset quality has shown improvement, with management focusing on recovering legacy problem loans and generating healthier new business. Problem loans accounted for 23.5% of total loans at the end of 2023, compared to an estimated 7.2% average for the Uzbek banking sector. Despite this improvement, a substantial reduction in legacy problem loans will take time, and profitability and asset quality indicators are expected to remain under pressure over the next two years. Problem loans are anticipated to decrease to 18%-22% of total loans, with credit costs normalizing toward 3%, higher than the forecasted 1.8%-2.0% for the Uzbek banking sector.
Future Outlook
The positive outlook from S&P Global Ratings indicates confidence that the government's capital support will enhance Xalq Banki's capitalization and creditworthiness. The bank's financial performance and business activity are expected to improve, with a continued focus on reducing legacy problem loans. Xalq Banki's unique role in distributing pensions underscores its importance to the government, which is likely to continue providing necessary support.
S&P Global Ratings may consider raising Xalq Banki's ratings if the bank can reduce its nonperforming loans ratio closer to the system average and improve its capital management. Conversely, the outlook could be revised to stable if the bank's balance sheet does not improve as expected, including asset quality metrics and capital injection capabilities.
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