RPT-Fitch: Uzbek Banks Demonstrate Stable Growth in Domestically-Funded System
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July 12 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings says in a newly-published sector report that Uzbekistan's banks have demonstrated stable growth rates (albeit from a quite low base), relying mostly on domestic savings. Sector performance is supported by consistently strong economic growth resulting from favourable export markets and the sovereign's currently strong fiscal position that underpins the largely centralised economy. At the same time, the banks' credit profiles remain undermined by significant directed lending and investments, constraints on currency conversion and cash operations, weak corporate governance and heightened credit risks from the poor transparency of SME borrowers.
Uzbekistan's GDP continued to register strong growth, close to 8% in 2012, supported by commodity export revenues, foreign remittances (largely from Russia) and the government's large investments programme. At end-2012, the sovereign balance sheet remained strong, with government debt an estimated 8.6% of GDP, a fiscal surplus of 4.7% of GDP and a positive current account balance of 2.7% of GDP. Accumulated foreign currency reserves estimated by the IMF were close to USD18bn (40% of GDP). However, the economy is vulnerable to external commodity shocks as well as to potential deterioration in its major trading partners (Russia, China and Kazakhstan). Moreover, institutional reforms remain dormant, and there is no visible progress in improvement of the currently difficult business climate.
Growth rates in the banking sector have moderated to 16%-20% (inflation-adjusted) in 2011-2012 and are likely to remain in this range during 2013. This, together with still low credit penetration (the loans/GDP ratio was 23% at end-2012), partly alleviates pressure on asset quality. The proportion of impaired loans in the sector portfolio has been diluted by new lending to an estimated 8.3% at end-2012 from 11.9% at end-2011. That said, asset quality metrics remain highly cyclical, and there could be notable downside risks in case of an economic slowdown.
Liquidity risks in the system are mitigated by its conservative asset structure and predominately domestic funding base. Almost three quarters of non-equity funding comprised customer accounts (mostly corporate) and facilities provided by the Uzbekistan Fund for Reconstruction and Development (UFRD). The ratio of loans to these two stable funding sources was comfortably below 90% at end-2012. The role of UFRD in banking sector funding may rise as its charter capital is set to reach USD15bn by 2015, a volume comparable with the current size of the banking sector.
External borrowings remain below 10% of the sector liabilities, and they are largely provided by international development institutions for government-assisted project finance transactions, which typically benefit from faster foreign currency conversion. Off-balance sheet foreign currency liabilities (letters of credit), which may experience longer conversion time, were estimated at USD2bn at end-2012.
Capitalisation has been declining from the previous conservative levels, but remained adequate at end-2012 with equity/assets at an estimated 11% and equity/loans at 19%. The quality of capital is somewhat undermined by investments in non-core/non-financial assets, although overall these remained manageable. According to Fitch estimates, the available capital and impairment reserves combined provided maximum loss absorption capacity at 12% of the sector loan book at end-2012, indicating only low resilience of the system to stress scenarios. Internal capital generation remained low, at about 10% of average equity, which is incommensurate with the asset growth rates and signals sector dependence on regular equity injections.
The foreign-currency IDRs of Fitch-rated banks in Uzbekistan remained constrained at the 'B-' level, which captures restrictions in foreign exchange regulation. State-owned banks' local currency Long-term IDRs are a notch higher, at 'B', reflecting the greater probability of state support in UZS, and these ratings are likely to move in tandem with Fitch's assessment of the sovereign credit profile. The potential for upgrades of banks' Viability Ratings (which are also mostly at 'b-') is currently limited, while downward pressure could arise from a deterioration in banks' asset quality (particularly in case of economic slowdown), losses from operational risks or increases in non-core assets, if not offset by fresh equity injections.
Link to Fitch Ratings' Report: Uzbek Banks: Growing Without External Leverage
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