S&P: National Bank of Uzbekistan to continue playing noticeable role in domestic economy

S&P: National Bank of Uzbekistan to continue playing noticeable role in domestic economy

Baku, Azerbaijan, July 30

By Fikret Dolukhanov – Trend:

S&P Global Ratings affirmed its ‘B+/B’ long- and short-term issuer credit ratings on National Bank for Foreign Economic Activity of the Republic of Uzbekistan (NBU), with the outlook remaining stable, S&P stated.

The affirmation reflects S&P’s view that despite expectation that the bank’s capital buffer will be eroded, NBU will continue to play a noticeable role in the domestic economy while benefiting from ongoing state support and a stable funding base. NBU is a government agency that allocates centralized resources to strategic sectors of the economy. As such, it is designed to grant long-term loans for capital investment purposes. S&P believes that its leading position and business stability are well entrenched and unlikely to diminish over the 12-18 month rating horizon.

S&P understands that over the next 12-18 months, NBU will target relatively aggressive organic assets growth, which will likely pressure the bank’s capital, in our view. S&P are therefore revising their capital and earnings assessment to weak from moderate, which, however, is still neutral for the rating. The projected loan portfolio growth is 20-30 percent in 2018 and 40-50 percent in 2019. This expansion could be fuelled by both foreign and local government funding sources.

At this stage, S&P does not know the government’s exact plans to finance the growth with new capital injections and does not incorporate any capital increase into their forecast. However, S&P will revise their base-case assumptions if a potential capital injection is announced. S&P therefore forecasts that NBU’s risk-adjusted capital (RAC) ratio will likely reduce to 3-4 percent over the next 12 months, down from 5.8 percent at year-end 2017.

While S&P does see potential for a rise in credit risk due to NBU’s high growth rates, S&P believes the government would continue providing direct or indirect support to partly mitigate risks. Given NBU’s role as a government agency, S&P also acknowledges that high expansion pace might be reasonable due to the still-limited size of the banking sector compared to the domestic economy, as well as the emerging nature of Uzbekistan, and investors’ interest.

Additional pressure on capital comes from potential credit losses, which might arise from the large amount of foreign currency loans (around 83 percent of the total as of March 31, 2018. The risks are increasingly relevant after exchange regime liberalization on Sept. 5, 2017.

Following this event, the government approved the optional restructuring of loans to some strategically important foreign currency borrowers, postponing interest payments for about one year. S&P understands that many of those decided to take advantage of this opportunity and accepted the option. However, all interests continue accruing on the bank’s accounts and as a result, the NBU’s ratio of interest received to interest accrued reduced to 70 percent for 2017, against 100 percent for 2016. Such reduction does not reflect similar deterioration of the actual loan book quality in S&P’s view.

NBU is also permitted to postpone payments to the government on the funding, which finances respective loans to strategically important foreign currency borrowers at the terms mirroring those used for above-mentioned foreign currency loans restructuring. This state initiative is designed to preserve the stability of the Uzbek economy and S&P considers it as a form of government support. S&P understands that the normalization of payments on respected projects will gradually start in 2019.

Overall, S&P believes that NBU’s potentially problematic exposures (individually impaired, restructured loans, and loans overdue but not impaired) are adequately provisioned at the moment and form around 4 percent of total loans. S&P expect this ratio to remain broadly unchanged over the next 12 months.

The stable outlook on NBU reflects S&P Global Ratings’ view of the balance between the continuous expected state support over the next 12 months and the challenges related to high economic and industry risk for banks operating in Uzbekistan.

S&P Global Ratings considers state-owned banks’ creditworthiness to be closely linked to that of Uzbekistan (not rated). Therefore, the agency is unlikely to raise the ratings on NBU over the next 12 months unless S&P Global Ratings’ view of the sovereign’s creditworthiness improves. The agency views an upgrade driven by improvements in bank-specific factors as unlikely over the next year.

S&P could downgrade NBU over the next 12 months to reflect heightened economic and industry risk, for example caused by a deterioration of the sovereign’s creditworthiness. A material weakening of NBU’s currently adequate asset quality, along with deteriorating capitalization (with S&P’s projected RAC ratio declining to below 3 percent) would put pressure on the bank’s ‘bb-’ stand-alone credit profile. However, S&P considers a downgrade to be unlikely over the next 12 months.

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Follow the author on Twitter: @FDolukhanov

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