Tashkent, Uzbekistan, May 11
By Demir Azizov– Trend:
Fitch Ratings international ratings agency said in a report published on its website that most of the Uzbek banks it rates are resilient to depreciation of the Uzbek soum, which is possible over the medium term as the country’s authorities plan to liberalize the foreign exchange market and relax regulation of conversion operations.
However, a few banks are vulnerable to large falls of the soum, the agency reported.
Fitch estimates that Uzbek Industrial and Construction Bank (UPSB) JSCB, Microcreditbank JSCB, Trustbank PJSEB and Universal Bank PJSCB could withstand depreciation of 50 percent without breaching regulatory capital limits, while Asaka SJSCB and Ipak Yuli JSCIB could withstand a fall of 20 percent but may need extra capital or forbearance in the event of larger falls.
The agency said that Agrobank OJSC already breaches minimum ratios.
“We believe that direct foreign currency (FC) risks are low, as all Fitch-rated Uzbek banks have long or fully closed FC positions,” Fitch said in its report. “However, free conversion of local currency could lead to increased deposit dollarization, leaving banks exposed to short FC positions. Banks might then have to issue more FC loans to close their FC positions, as financial hedging instruments are not widely available in Uzbekistan. However, this could increase asset-quality risks, as borrowers may not have currency hedges.”
“Depreciation of the soum would hit banks' capitalization through inflation of FC-denominated assets, but we believe the impact would be moderate,” reads the report. “Devaluation could also undermine the quality of FC loans, which are high at UPSB (82 percent of loans at end-1Q17) and Asaka (54 percent), and significant at Ipak Yuli (25 percent). Most of UPSB's FC exposures are to borrowers with FC revenues, which limits the risks to asset quality from currency falls, but FC exposures at Asaka and Ipak Yuli are more vulnerable.”
Reported FC borrowing other than customer accounts is high at UPSB (73 percent of total liabilities), moderate at Asaka and Ipak Yuli (31 percent and 19 percent, respectively), and low in all other banks, according to the report.
“The banks' short-term foreign debt repayments are small (below 5 percent of total liabilities in 2017) and linked to loan repayments,” said the report. “FC liquidity is moderate at UPSB (17 percent of total FC borrowings) and Asaka (33 percent), and strong at Ipak Yuli (68 percent).”
“In our view, the state's ability to provide support in FC is solid as reflected by large sovereign FC reserves of about $25 billion at end-2016, equal to about 2x the banking sector's total FC liabilities, or 11x its external debt,” the report said. “State guarantees already cover a significant part of external FC funding at UPSB and Asaka.”