Fitch rates four state-owned Uzbek banks

Finance Materials 27 March 2019 17:46 (UTC +04:00)

Baku, Azerbaijan, March 27

By Fakhri Vakilov – Trend:

Fitch rates four state-owned banks in Uzbekistan (UACB Agrobank, AKB Asaka, UAC Microcreditbank, and UACB Uzpromstroybank) at BB - / Stable outlook, based on an opinion on the likely readiness and ability of the Uzbek authorities to provide banks with support if they need it, Trend reports with reference to the agency.

The agency also rated three private banks: AIKB Ipak Yuli (“B” / “Stable” forecast), CHAB Trustbank (“B” / “Stable” forecast) and PJSCB Universal (“B-” / “Stable” forecast).

Fitch Ratings notes that the outlook for the banking sector of Uzbekistan remains stable, taking into account the results for 2018 which indicate good asset quality and profitability.

However, capitalization and liquidity are low, and there are risks associated with rapid credit growth (51 percent in 2018) and the issuance of loans in foreign currency.

Asset quality is good: impaired loans accounted for only 1.3 percent of gross loans in the sector at the end of 2018, and were fully covered by provisions for loan losses. Currency risk is significant due to the high dollarization of loans in the sector (56 percent at the end of 2018).

Loans issued to smaller companies are usually more exposed to foreign exchange risk, since loans to large state-owned companies, including the largest foreign currency loans in the sector, are guaranteed by the state.

Moreover, even these loans may carry risks for banks, since they can be restructured under a stressful scenario. About $1.7 billion of foreign-denominated loans from state banks (12 percent of loans in the sector) were restructured in 2017 in order to reduce the pressure caused by a sharp weakening of the national currency.

The risks associated with asset quality are also occurring due to the limited transparency of borrowers from small and medium-sized businesses and poor regulation of retail lending, with no limits on the maximum debt burden of borrowers (ratio of payments to income (PTI)) or on foreign currency lending. At the same time, the regulator may introduce additional restrictions if it considers that the risks increase significantly.

The return on average capital in the sector was 13.5 percent in 2018, and the net interest margin was at 4.4 percent, due to the higher interest rates on loans in national currency after the central bank raised the refinancing rate.

Non-interest income was an important source of profitability (46 percent of gross income) at the expense of commissions for the transfer of funds by individuals and transactional services, as well as at the expense of profits from foreign exchange transactions. Operating expenses were generally stable (49 percent of gross income), while impairment charges remained low (less than 2 percent of average loans).

Capitalization in the sector provides a low ability to absorb losses after a weakening in 2018, since retained earnings and capital contributions did not keep pace with the rapid growth in lending.

Rapid credit growth is likely to continue, but capitalization is expected to remain above minimum levels, albeit only slightly. For privately owned banks, growth is likely to be more restrained than state-owned banks, as they rely on generating capital from profits and have less opportunity to support it through capital contributions.

Liquidity in the sector is also under pressure due to credit growth.

Highly liquid assets in the sector declined to 9 percent of total assets at the end of 2018, and the net stable funding indicator stood at 108 percent, which is slightly above the regulatory minimum of 100 percent. The ratio of loans to deposits was high at 239 percent, and the sector relies on substantial funding from the Fund for Reconstruction and Development of Uzbekistan (“FRDU”), which accounts for about 40 percent of total liabilities.

Fitch Ratings expects that the rapid growth of lending will continue, since the volume of lending is still low relative to the size of Uzbekistan’s economy. The growth is due to the fact that state banks direct funding received from the FRDU into strategically important sectors of the economy (oil and gas, mining, transport, agricultural and chemical), which account for about 40 percent of total bank lending. Private Banks generally lend to small and medium-sized enterprises that are not sufficiently covered by loans, carry out microfinance operations and provide loans to retail customers.


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