Fitch publishes new outlook for Uzbekistan's National Bank for Foreign Economic Activity

Finance Materials 20 August 2020 17:59 (UTC +04:00)
Fitch publishes new outlook for Uzbekistan's National Bank for Foreign Economic Activity

BAKU, Azerbaijan, Aug. 20

By Ilkin Seyfaddini - Trend:

Fitch Ratings has assigned National Bank for Foreign Economic Activity of the Republic of Uzbekistan (NBU) ratings, including a Long-Term Issuer Default Rating (IDR) of 'BB-' with a Stable Outlook, Trend reports citing Agency.

Fitch stressed that NBU was not included in the list of state banks that the government targets to privatize by end-2025, according to the medium-term strategy for banking system development published in 2Q2020.

Under state ownership, Fitch believes that NBU will retain its important policy role while expanding its retail- and corporate-banking franchises.

In Fitch's view, the authorities have a moderate ability to provide support to NBU as measured by the sovereign's rating of 'BB-'. The banking system's total assets of $29 billion at end-2019 amounted to 38 percent of GDP and were equal to Uzbekistan's international foreign-currency reserves.

Fitch’s assessment of support ability also considers Uzbekistan's highly concentrated banking sector (with state-owned banks accounting for about 85 percent of end-2019 sector assets), the sector's high loan dollarization (48 percent) and the liability structure of the banking system, with a high reliance on external funding.

“The 'b' VR of NBU reflects its strong franchise, adequate asset quality and healthy capitalization that is supported by equity injections from the state. The rating also captures high balance-sheet dollarization, rapid growth in recent years, which has resulted in a largely unseasoned loan book, a high reliance on funding from foreign banks and international financial institutions (IFIs) and modest core profitability,” Fitch said.

Notwithstanding the fallout from the COVID-19 outbreak, Fitch forecasts that the Uzbek economy will continue to grow in 2020 (1.6 percent according to our June forecast) and accelerate to 6.8 percent in 2021.

As part of measures to mitigate the economic impact of the pandemic, the Central Bank of Uzbekistan has recommended that banks (including NBU) provide payment holidays to retail borrowers and individual entrepreneurs for up to six months, which will result in an increase in accrued but not received interest and greater volumes of loans of untested quality.

“Asset quality remained stable in 1H2020 based on management accounts. NBU has been growing rapidly in recent years, particularly in policy lending, executing its role of a state agent. Most development loans were provided to state-owned or -related companies, resulting in reported high exposure to related parties (56 percent of loans at end-2019). They were mostly in foreign currency, leading to high loan-book dollarization of 60 percent,” Fitch stressed.

Fitch views NBU's loan book as largely unseasoned. Policy loans are typically long-term and often issued with grace periods. At the same time, asset-quality risks are partially mitigated by state guarantees on some of NBU's largest exposures. Fitch estimates around 45 percent of NBU's total gross loans at end-2019 were state-guaranteed.

Profitability is moderate with operating profit-to-risk-weighted assets (RWAs) at 1.7 percent in 2019. Net interest margin is under pressure from NBU's low-margin policy lending, but improved to 3.4 percent in 2019 from 2.7 percent in 2018 due to a shift into commercial and retail lending. Loan impairment charges consumed a moderate 21 percent of pre-impairment profit in 2019, but profitability was weighed down by modest margins, as reflected in a nine percent return on equity.

Fitch views NBU's funding profile as structurally weak due to a high reliance on borrowing from international banking groups and IFIs. External funding accounted for 53 percent of NBU's non-equity funding at end 1H2020, with state funding making up another 12 percent.

The maturity schedule of the bank's borrowings is mostly aligned with long-term loan repayments (about 70 percent of NBU's total borrowings mature after more than two years from end 1H2020). However, short-term foreign-currency borrowings were still material, with around 5.1 trillion soum ($496,1 million) being due within 12 months at end 1H2020, equal to 86 percent of liquid assets at the same date.


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