The sharp devaluation of the soums will have only a moderate capital impact on Uzbek banks rated by Fitch Ratings, primarily thanks to the sizeable US dollar-denominated capital and long FX positions at banks with significant foreign-currency denominated lending.

Among the seven Fitch-rated banks in Uzbekistan, JSC Uzbek Industrial and Construction Bank (UPSB), JSC Bank Asaka (Asaka) and Ipak Yuli Bank’s (IY) loan books are the most dollarised (about 79%, 59% and 25%, respectively), while loan dollarisation at OJSC Agrobank (Agro), JSC Microcreditbank (MCB), PJSC Trustbank (TB) and JSC Universal Bank (UB) is below 1%.

However, UPSB and Asaka benefit from around 40% of their end-7M17 equity being dollar-denominated and a low 20% risk-weighting on significant portions of their FX loan books, due to state guarantees, partially offsetting the devaluation impact.

All seven banks have long FX positions (UPSB about 20% of end-7M17 equity, Asaka 27%, Agro 1%, MCB 6%, IY 17%, TB 9%, UB 7%) and should have booked translation gains as a result.

UPSB’s total regulatory capital adequacy ratio (CAR) of 13.5% at end-7M17 may have moderately declined to around 12.8% as a result of devaluation, but should still be above the 12.5% required minimum. Asaka’s total CAR was 10.9% at end-7M17, below the regulatory minimum, but should have returned to being sufficient (around 13%) on the currency devaluation with a significant translation gain and inflation of its US dollar-denominated portion of equity. Both banks’ capital positions will strengthen by end-9M17 when capital injections, already made, are booked.

IY’s CAR (12.7% at end-7M17) may have dipped to around 12% but the bank expects to address the shortfall by raising new capital in the next couple of months. We expect IY will receive regulatory forbearance in the meantime. Agro, which has been intermittently in breach of the regulatory minimum in the last year (7.4% at end-7M17), already receives regulatory forbearance, although it should also become compliant by end-9M17 after a planned capital injection.

MCB, TB and UB’s total CARs were 17.7%, 14.3% and 15.6%, respectively, at end-7M17 and should not have been significantly affected by the devaluation.

Among banks with the most dollarised loan books, indirect FX risks are limited at UPSB and Asaka as their foreign-currency exposures are predominantly to hedged borrowers, while IY appears to be more vulnerable.

State banks (UPSB, Asaka, MCB and Agro) benefit from continuous capital support from the state, including from the Fund for Reconstruction and Development, and Ministry of Finance, which has administered recapitalisation programmes of USD500 million and UZS1.2 trillion, respectively, for state banks (Fitch-rated and others) this year. These amounts are already disbursed and will be booked shortly. The larger US dollar-denominated injection is to strengthen state banks’ natural hedge against potential further soums depreciation.

The Central Bank of Uzbekistan devalued the soums by 52% against the US dollar (to 8,100 soums per US dollar from 4,210 previously) on Monday as part of the liberalisation of the country’s foreign-exchange market. The exchange rate will now be defined weekly, as an average of exchange rates recorded on the Uzbek Republican currency exchange during the previous week.