BAKU, Azerbaijan, June 4
By Ilkin Seyfaddini - Trend:
Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Uzbek Industrial and Construction Bank (UIСB, also known as Uzpromstroybank), Joint Stock Commercial Bank Asaka, OJSC Agrobank and Microcreditbank (MCB) at 'BB-', the rating outlook is “Stable”, Trend reports citing a rating agency.
Fitch has also affirmed the banks' Viability Ratings (VR).
Fitch has affirmed the ratings of UICB and Asaka, notwithstanding the recently published medium-term strategy for banking system development, which targets the privatization of these banks by end of 2025. This is because Fitch expects the government will continue to have a very high propensity to support the banks as long as they are state-owned; and the agency's base case is that the government will retain majority ownership in both banks for at least the next three years.
At the same time, Fitch believes both banks will significantly redevelop their business models and improve governance structures prior to privatization.
"We have stopped factoring policy roles into our assessment of support for UICB and Asaka as we expect them to continue their transition to commercial business, which began with transfers of some of their policy loans to the Uzbekistan Fund for Reconstruction and Development (UFRD) in 4Q19," Fitch said.
"The ratings of Agro and MCB factor in their policy roles as agents for state-sponsored subsidized lending to SME and retail clients in rural regions of Uzbekistan. According to the strategy, Agro and MCB will retain their focus on development lending and will remain state-owned," said the report.
The authorities' ability to provide support to banks is strong for the sovereign rating 'BB-', in Fitch's view, given the moderate size of the banking sector relative to the economy, Fitch said.
"Total assets of $29 billion at end-2019 amounted to 38 percent of GDP and were equal to Uzbekistan's international foreign currency reserves. However, our assessment of support ability also factors in concentration in the sector (with state-owned banks accounting for about 85 percent of end-2019 sector assets), high loan dollarization (48 percent) and vulnerability to external shocks, as external finances rely on commodity exports and remittances," said the report.
The VRs of Asaka and UICB are one notch higher due to the banks' stronger corporate franchises, as reflected by higher market shares (both banks accounted for 13 percent of sector assets at end-4M20) and therefore access to better-quality public-sector companies.
"After transferring most of their directed loans to the UFRD in 4Q19 (equal to about a third of each bank's gross loans) Asaka and UICB are now undergoing transformation towards more commercial business models" Fitch said.
"Agro and MCB VRs of 'b-' reflect their exposure to higher-risk lending segments (agriculture, SME and retail borrowers with below-average incomes), mainly in rural areas of Uzbekistan, and weak operating efficiency resulting from expensive country-wide branch networks and significant headcount," said the report.
"All four banks have been rapidly growing in recent years, particularly through loans under state-development programs, which are long term and often issued with grace periods, resulting in largely unseasoned loan books. Foreign currency lending (represented mainly by long-term project financing exposures, particularly high in Asaka and UICB) has been funded mostly with credit lines from international banks and IFIs. Repayments of these facilities are modest in next 12 months as they are linked to schedules of issued foreign currency loans," Fitch said.
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