Fitch Ratings has affirmed Joint-Stock Commercial Mortgage Bank Ipoteka-Bank's (Ipoteka) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB-' with Stable Outlooks.

The bank's Viability Rating (VR) has been affirmed at 'b'. A full list of rating actions is below.

Key Rating Drivers

Ipoteka's Long-Term IDRs are based on potential support from its parent bank, OTP Bank Plc (OTP), as captured by its 'bb-' Shareholder Support Rating (SSR). This view reflects OTP's majority ownership, high reputational risks for OTP from a subsidiary's default, and the low cost of support for the parent.

The bank's 'b' VR reflects recovering profitability, modest capitalisation, high potentially impaired loans and reliance on wholesale funding. These weaknesses are balanced by improving governance quality and lower-than-average risk appetite and dollarisation.

IDRs Capped by Country Ceiling: The bank's SSR and Long-Term Foreign-Currency IDR are constrained by Uzbekistan's 'BB-' Country Ceiling, which captures transfer and convertibility risks and the risk that the subsidiary may not be able to benefit from parent support to service its own foreign-currency obligations.

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 reliance on state and external wholesale debt.

Main Mortgage Bank, Commercial Focus: Ipoteka is the fifth-largest bank in Uzbekistan, with leading positions in mortgage lending (end-2023: 25% of sector mortgages). The bank develops its commercial lending, although legacy subsidised exposures made up a sizeable 29% of gross loans at end-2023. We expect improvements in governance quality and strategy execution under OTP's umbrella, which should bolster the bank's business profile in the medium term.

Strengthening Risk-Management Framework: Post-acquisition, Ipoteka has started aligning its risk-management framework with OTP's. We believe this should improve provisioning and the quality of new loans in the medium term, making the bank less exposed to seasoning risks. The bank's FX-adjusted loan book growth was a modest 11% in 2023 (sector average: 16%) and we expect it to remain subdued in 2024, due to modest capital buffer. Loan dollarisation (end-2023: 28%) remained well below the sector average of 45%.

High Impaired Loans; Good Coverage: Ipoteka's impaired loans increased to 10.1% of gross loans at end-1H23 (end-2022: 9.2%), while Stage 2 loans doubled in size (end-1H23: 19% of gross loans). This was driven by the corporate and SME loan book seasoning and the adoption of OTP's stricter loan classification criteria. The latter resulted in higher reserve coverage ratio 114% at end-1H23 (end-2022: 74%). We estimate the impaired loans ratio could have increased further to about 19% by end-2023, before reducing moderately in 2024, due to recoveries and loan growth.

Provisioning Costs Drive Losses: The bank reported a UZS586 billion (equivalent of USD51 million or 10% of opening equity) net loss in 1H23, driven by very high loan impairment charges (9.1% of average gross loans; annualised) and we expect the loss to have further widened in 2H23. However, we expect Ipoteka to recognise most of provisioning costs in 2023, leading to a rebound of performance in 2024, underpinned by its healthy margins.

Injection Supports Capitalisation: Ipoteka's Fitch Core Capital (FCC) ratio reduced to 14.1% at end-1H23 (end-2022: 16.6%), reflecting net loss. We estimate the bank's capital buffer could have depleted further in 2H23, despite a UZS845 billion capital contribution by OTP in 4Q23. We expect Ipoteka's capitalisation to improve in 2024, supported by full profit retention and the planned conversion of International Finance Corporation's USD35 million loan into the bank's common equity.

State Funding Prevails; Reasonable Liquidity: State-related funds (including deposits and loans for financing subsidised mortgages) remains the core source post privatisation, comprising 45% of total liabilities at end-2023. Market borrowings added another 27%. The liquidity buffer was adequate (end-2023: 12% of total assets) and covered non-state deposits by 60%, while the bank can rely on OTP to obtain liquidity, if needed.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Ipoteka's support-driven IDRs could be downgraded following a downgrade of Uzbekistan's Country Ceiling or if Fitch's assessment of OTP's ability or propensity to provide support to the subsidiary substantially weakens.

The VR could be downgraded on further deterioration of the bank's asset quality, leading to the continued loss-making performance and the FCC ratio being sustainably below 10%. Pressure on capitalisation from rapid lending growth and aggressive dividend payments could also be credit negative, although Fitch does not consider this as baseline scenario.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

The IDRs could be upgraded if the Country Ceiling was upgraded, provided Fitch's view that ability or propensity of OTP to provide support to the subsidiary remains the same or improves.

An upgrade of the bank's VR would require notable improvements in the Uzbek operating environment, along with a continued reduction in the bank's legacy asset-quality risks. The bank's VR could also be upgraded, following the sustainable record of superior asset quality and recovery of profitability to above historical average, amid strengthening of capitalisation.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Ipoteka's senior unsecured debt rating is in line with the bank's 'BB-' Long-Term Foreign-Currency IDR.

The bank has issued a five-year US dollar-denominated Eurobond and a three-year soum-denominated Eurobond. Both issue ratings are anchored to Ipoteka's Long-Term Foreign-Currency IDR, as all settlements are in US dollars. For the soum-denominated issue, settlements are in US dollars at the exchange rate set by the Central Bank of Uzbekistan on each settlement date. The notes' ratings are in line with Ipoteka's Long-Term Foreign-Currency IDR, as they represent unconditional, senior unsecured obligations of the bank, which rank pari passu with its other senior unsecured obligations.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

The bank's long-term debt rating is sensitive to changes to its Long-Term IDRs.

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

Ipoteka's IDRs are driven by potential support from OTP.

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.

(C) 2024 Electronic News Publishing, source ENP Newswire