Ongoing robust economic expansion and strong government support will help the Uzbek banking system navigate challenges thrown up by the accelerating depreciation of the local currency, the soum, says Moody’s Investors Service “Uzbekistan Banks: State support and robust economic growth offset challenges stemming from accelerated soum depreciation”.
“Strong domestic investment and government spending, as well as increased household consumption on the back of rising wages, pensions and overseas remittances continue to benefit Uzbek banks and offset the impact of local currency weakness,” Petr Paklin, Assistant Vice President and Analyst at Moody’s, said.
While foreign-currency risk is one of the key challenges for the country’s banking sector, these risks are concentrated in the National Bank of Uzbekistan (NBU; LT LC deposit rating B1 stable/LT FC deposit rating B2 stable, BCA b2), which accounts for a quarter of banking sector assets. That said, risks are offset by the fact that more than half of its borrowers are either state-controlled or systemically important entities, and state guarantees cover more than half of its loan book.
Uzbek banks’ loan quality will improve over the next 12-18 months with the problem loan ratio declining steadily to 2-2.5% of gross loans from 2.7% at the end of 2016. At the same time, banks’ loan book will grow by around 40% in 2017-18 compared to 25% in previous years, largely due to revaluation of foreign-currency (FX) assets.
Challenges include high single-name concentration, with the 20 largest borrowers accounting for more than 200% of equity among rated Uzbek banks on average. Accelerated soum depreciation inflates credit risk of unhedged FX borrowers, which are usually large state-owned enterprises and can count on support from the government in case of need.
Uzbek banks’ capital buffers and earnings are sufficient to absorb forecast credit losses. The system-wide Tier 1 ratio is 13.0%, providing a sufficient loss-absorbing capital cushion against asset quality stress. Material capital injections this year from the country’s Ministry of Finance (around 500 billion soums) and the Fund for Reconstruction and Development of Uzbekistan (US$500 million) will offset growth in risk-weighted asset (such as unsecured loans) in 2017-18.