The sector outlook for Uzbek banks remains stable after 2018 results confirmed solid asset quality and profitability Fitch Ratings says. However, capitalization and liquidity are modest, and there are risks from rapid loan growth (51% in 2018) and foreign-currency (FC) lending.
Asset quality is solid, with impaired loans at only 1.3% of gross sector loans at end-2018 and fully covered by loan loss allowances. Foreign-exchange (FX) risk is significant given the sector’s high loan dollarization (56% at end-2018). Loans to smaller companies are typically more exposed to FX risk because loans to large state-owned companies, which include the sector’s largest FC exposures, are guaranteed by the state. However, even these loans can involve a risk for banks, as they may be restructured in an extreme scenario. About USD1.7 billion of state banks’ FC-denominated exposures (12% of sector loans) were restructured in 2017 to alleviate pressure from sharp local-currency depreciation after the peg to the US dollar was removed.
Asset-quality risks also stem from the limited transparency of SME borrowers and weak regulation of retail lending, with no limits on maximum payment-to-income ratios or FC lending. However, the regulator could impose more restrictions if it believes risk is rising significantly, Fitch Ratings said in a statement.
The sector’s return on average equity was 13.5% in 2018 (2017: 12.7%), with a 4.4% net interest margin helped by higher interest rates on local-currency loans after the central bank raised the refinancing rate. Non-interest income was an important contributor to profitability (46% of gross revenue), driven by commissions from remittances and transaction services, and by FX gains. Operating expenses were broadly stable (49% of gross revenue), while impairment charges remained low (below 2% of average loans), the agency noted.
The sector’s capitalisation provides modest loss absorption capacity, having weakened in 2018 as retained earnings and capital injections did not keep pace with rapid loan growth.
Fast loan growth is likely to continue but we expect capitalisation to stay above minimum levels, albeit only marginally. Privately owned banks are likely to be more constrained than state banks as they rely on internal capital generation, with less scope for injections to support capital.
Sector liquidity is also under pressure from loan growth. Highly liquid assets fell to 9% of total assets at end-2018 from 23% at end-2017, and the net stable funding ratio (NSFR) was 108%, marginally above the 100% regulatory minimum. The loans/deposits ratio was high at 239%, and the sector relies on significant funding from the Uzbekistan Fund for Reconstruction and Development (UFRD), which accounts for about 40% of total liabilities.
“We expect fast loan growth to continue as lending is still modest relative to the size of Uzbekistan’s economy. Growth is driven by state banks channelling funding from the UFRD to strategically important sectors (oil and gas, mining, transportation, agriculture and the chemical industry), which account for about 40% of the banking sector’s total lending. Privately owned banks mostly lend to underpenetrated SMEs, micro and retail customers,” Fitch Ratings said.
“We rate four state-owned banks in Uzbekistan (OJSC Agrobank, Joint Stock Commercial Bank Asaka, Microcreditbank and Uzbek Industrial and Construction Bank Joint-Stock Commercial Bank), all at ‘BB-’/Stable based on our view of the Uzbek authorities’ likely willingness and ability to provide support in the event that the banks need it. We rate three privately owned banks: Joint Stock Innovation Commercial Bank Ipak Yuli (B/Stable), Private Joint Stock Bank Trustbank (B/Stable) and Joint Stock Commercial Bank Universal Bank (B-/Stable),” the agency concluded.