BAKU, Azerbaijan, Aug. 5
By Ilkin Seyfaddini - Trend:
Fitch Ratings has affirmed Joint-Stock Commercial Bank Qishloq Qurilish Bank's (QQB) and Joint Stock Commercial Xalq Bank of Uzbekistan's Long-Term Issuer Default Ratings at 'BB-' with stable outlooks, Trend reports citing the rating agency.
Fitch has also assigned Xalq a Viability Rating of 'b-', reflecting upcoming changes to its business model and balance sheet. It will transfer its unique policy role of accumulating and managing the pension savings accounts of individuals to Uzbek Ministry of Finance within the next three years. Pension distributions will, however, remain at the bank due to its branch network, which is the largest in the country.
“The ability of Uzbekistan to provide support to Xalq and QQB is underpinned by the moderate size of the banking sector relative to the economy (total sector assets were equal to $27 billion at end-1H2020, with a loans/GDP ratio of close to 50 percent), while sovereign international reserves were equal to a notable $31.6 billion at the same date,” the review said.
Fitch has affirmed Xalq's and QQB's sovereign-supported ratings, despite the government's recently published strategy on banking sector reform and privatization of state-owned banks, as we believe that the authorities will maintain a high propensity to support these banks until the state ceases to control them. Fitch believes that the government will likely sell minority stakes in these banks initially, with privatization of controlling stakes being a longer-term process. The Stable Outlooks on Xalq and QQB mirror that on the sovereign ratings.
“The Viability Ratings of Xalq and QQB are heavily influenced by the challenging operating environment in Uzbekistan, potential weaknesses in underwriting standards and risk controls, rapid lending expansion in recent years and still limited commercial franchises, as both banks' business models have been focused on subsidized lending under government programs in recent years,” the review said.
The Viability Ratings also consider a moderate dollarization of loans at these banks (20 percent at Xalq and 16 percent at QQB) relative to the sector average of 48 percent, reasonable asset quality and profitability metrics to date (somewhat better at QQB) and stable capitalization.
The Viability Rating of Xalq of 'b-' is lower than a QQB's 'b', reflecting Fitch's view of somewhat weaker underwriting standards at the former, resulting in weaker asset quality and profitability metrics in recent years.
Upgrades of the Viability Ratings would require a substantial improvement in Uzbekistan's operating environment and strengthening of the banks' commercial franchises and business models.
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