Fitch predicts rise of asset-quality risks in Uzbek banking sector

Finance Materials 8 October 2021 15:22 (UTC +04:00)

BAKU, Azerbaijan, Oct. 8

By Fakhri Vakilov – Trend:

The Uzbek banking sector faces increasing asset-quality risks due to rapid lending growth, high balance-sheet dollarization and an increased reliance on external funding, Trend reports citing Fitch Ratings report.

Uzbek banks have a significant proportion of unseasoned exposures as a result of lending growth as well as loan moratoriums granted in 2020 to alleviate pressure on borrowers caused by the pandemic.

The sector’s longer-term performance will depend on asset-quality trends, operating environment stability and how successfully the state-owned banks targeted for privatization can shift from directed lending to a more commercial focus.

The sector’s asset-quality risks mainly stem from rapid loan growth at most state-owned banks in recent years and a high share of foreign-currency loans, particularly at larger banks. In addition, material amounts of loans are still being issued under government development programs that require banks to target issuance volumes, in some cases resulting in relaxation of underwriting standards.

Uzbek banks often provide long grace periods of up to three years on loans, especially in cases where financing was used to set up businesses or expand production.

“Asset-quality metrics weakened in 2020 and we expect further deterioration in 2021-2022. The banks’ pre-impairment profit provides only a limited buffer against a potential increase in loan impairment charges, given thin net interest margins”, Fitch reported.

Impaired loans increased at most banks in 2020, except for Asaka bank.

“Although Fitch-rated banks’ impaired loans ratios were below 10 percent at end-2020, we do not believe this fully captures the asset-quality picture. However, according to our discussions with rated banks, most of the exposures that underwent pandemic-related restructuring had returned to their payment schedules by end-1H21, which suggests that the pandemic has had a limited impact on asset-quality metrics,” Fitch states.

Fitch considers most Uzbek banks’ capitalization as only moderate in view of increasing asset-quality risks, limited pre-impairment profit and a high desire for loan growth.

State-owned Uzbek banks have financed recent loan expansion mainly with state funding or external funding from international financial institutions and development banks.

This reflects the moderate level of customer deposits in the local banking system. Refinancing needs are modest in the medium term as maturities of external facilities are mostly linked to funded loans, and most banks have sufficient liquidity to service external liabilities in 4Q21-2022.

However, long-term repayments will depend on the performance of loan books and state-owned banks could face foreign-currency liquidity gaps if there is asset-quality deterioration.


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