The May 10 Fitch Ratings report says that most of the Uzbek banks it rates are resilient to depreciation of the Uzbek soum, which is possible over the medium term as the authorities plan to liberalise the foreign-exchange market and relax regulation of conversion operations.

However, a few banks are vulnerable to large falls to the soum. Fitch has assessed Uzbek banks' resilience to depreciation of the soum under different scenarios. We estimate that Uzbek Industrial and Construction Bank Joint-Stock Commercial Bank (UPSB), Microcreditbank, PJSB Trustbank and Universal Bank could withstand depreciation of 50% without breaching regulatory capital limits, while Asaka and Ipak Yuli could withstand a fall of 20% but may need extra capital or forbearance in the event of larger falls. OJSC Agrobank already breaches minimum ratios.

We believe that direct foreign-currency (FC) risks are low, as all Fitch-rated Uzbek banks have long or fully closed FC positions. However, free conversion of local currency could lead to increased deposit dollarisation, leaving banks exposed to short FC positions. Banks might then have to issue more FC loans to close their FC positions, as financial hedging instruments are not widely available in Uzbekistan. However, this could increase asset-quality risks, as borrowers may not have currency hedges.

Depreciation of the soum would hit banks' capitalisation through inflation of FC-denominated assets, but we believe the impact would be moderate. Devaluation could also undermine the quality of FC loans, which are high at UPSB (82% of loans at end-1Q17) and Asaka (54%), and significant at Ipak Yuli (25%). Most of UPSB's FC exposures are to borrowers with FC revenues, which limits the risks to asset quality from currency falls, but FC exposures at Asaka and Ipak Yuli are more vulnerable.

Reported FC borrowing other than customer accounts is high at UPSB (73% of total liabilities), moderate at Asaka and Ipak Yuli (31% and 19%, respectively), and low in all other banks. The banks' short-term foreign debt repayments are small (below 5% of total liabilities in 2017) and linked to loan repayments. FC liquidity is moderate at UPSB (17% of total FC borrowings) and Asaka (33%), and strong at Ipak Yuli (68%).

In our view, the state's ability to provide support in FC is solid as reflected by large sovereign FC reserves of about USD25 billion at end-2016, equal to about 2-times the banking sector's total FC liabilities, or 11 times its external debt. State guarantees already cover a significant part of external FC funding at UPSB and Asaka.