Fitch Ratings has assigned Uzbekistan-based Joint Stock Commercial Bank “TBC BANK” (TBCU) Long-Term Issuer Default Ratings (IDRs) of ‘BB-‘ with Stable Outlooks and a Viability Rating (VR) of ‘b’. A full list of rating actions is below.
KEY RATING DRIVERS
TBCU’s Long-Term IDRs, as captured by the Shareholder Support Rating (SSR) of ‘bb-‘, reflect potential ultimate support from Georgia-based TBC BANK JSC (TBC, BB/Stable), which is the core bank within TBC BANK Group PLC, TBCU’s controlling shareholder. In our view, any potential extraordinary support would ultimately be sourced from TBC. TBCU’s ‘b’ VR reflects its reasonable risk profile and asset quality and good capitalisation. It also considers the bank’s still developing and untested business model and a limited record of profitable operations.
Shareholder Support Considerations: The SSR is one notch below TBC’s Long-Term IDR, reflecting TBCU’s moderate role within the broader TBC group and considerable management independence. The bank contributed 9% of the group’s total revenue and 5% of net profit in 2023, although we expect it to increase further in the medium term.
State-Dominated Economy, Structural Weaknesses: Uzbekistan’s economy remains heavily dominated by the state, despite recent market reforms and privatisation plans, resulting in weak governance and generally poor financial transparency. Additional risks stem from high dollarisation and concentrations of the banking sector and its reliance on state funding and external debt.
Small Digital Bank, Retail Focus: TBCU was established in 2020 as a digital bank to focus solely on retail operations, predominantly unsecured cash lending (95% of gross loans at end-1Q24). It is controlled by TBC Bank Group PLC, with EBRD and IFC holding minority stakes. While TBCU currently makes up only about 1% of sector assets and loans, it has established a stronger position in the retail segment (2.8% at end-1Q24), which we expect the bank to gradually improve further.
Fast Loan Growth, Prudent Underwriting: Since its operations began, TBCU has been growing its loan book rapidly (2023: 148%). We expect this above-sector growth to continue into 2024-2025 as the bank continues to expand its business in the higher-risk unsecured retail segment. However, we assess TBCU’s underwriting standards as reasonably conservative for the domestic market as the bank issues granular loans denominated in local currency.
Low Reported Impairments, High Reserves: Impaired loans ratio equalled a limited 2.2% at end-2023, where we forecast it will remain in 2024-2025 due to write-offs and expected high lending growth. Problem exposures were fully provisioned for, which further reduces asset-quality risks.
Breakeven Achieved, Performance to Improve: TBCU was loss-making during the first three years of its operations due to high operating costs related to establishing its business operations. In 2023, the bank reported its first annual net profit, with a return on average equity of 7%. High margins and economies of scale should boost TBCU’s profitability in 2024-2025, although it will remain moderate in our base case due to still substantial operating expenses.
Capital Injections from Shareholders: The bank has relied on annual capital contributions from its shareholders to support its lending growth and comply with prudential requirements. While we expect TBCU to receive additional large-scale capital injections in 2024-2025, its Fitch Core Capital (FCC) ratio will moderate to 13%-14% during this period from 15% at end-2023 in our base case.
Deposit-Funded, Increasing Wholesale Debt: TBCU is largely funded by granular, albeit pricey, retail deposits (86% of end-2023 total liabilities). However, the bank has recently started to attract wholesale debt, including from the parent group, and we expect the share of external borrowings to increase in the medium term. The bank’s liquidity position is modest, with total liquid assets covering around a quarter of customer deposits at end-2023.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
TBCU’s SSR and Long-Term IDRs would be downgraded following a downgrade of TBC’s IDRs. A downgrade could also take place if we take the view that TBCU’s role for the group has weakened, leading to a wider notching between the two banks’ ratings. A lower Country Ceiling (currently at ‘BB-‘) would also result in a downgrade of the ratings. However, Fitch currently views none of these scenarios as likely.
The VR could be downgraded from sharply lower capitalisation, with the FCC ratio dropping below 10%. This could be, for example, due to a material weakening of asset quality resulting in losses, or due to rapid lending growth not offset by timely capital injections from the shareholders.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of TBCU’s SSR and Long-Term IDRs would require both an upgrade of TBC’s ratings and an upward revision in Uzbekistan’s Country Ceiling. We could also upgrade TBCU’s IDRs and equalise them with those of TBC in case we assess that the former’s role for the group has strengthened, leading to a higher support propensity. However, it is not currently expected by Fitch and would also require a higher Country Ceiling.
Upgrade prospects for the bank’s VR are currently limited and would require a material improvement of the bank’s still narrow franchise coupled with an extended record of high profitability and capitalisation.
DATE OF RELEVANT COMMITTEE
24 May 2024
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
TBCU’s Long-Term IDRs reflect potential ultimate support from TBC.
ESG CONSIDERATIONS
The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch’s ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
