Fitch Affirms Four Uzbek State-Owned Banks at 'B-'; Outlook Stable

Tue Jul 29, 2014 12:18pm EDT

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(The following statement was released by the rating agency) MOSCOW/LONDON, July 29 (Fitch) Fitch Ratings has affirmed Uzpromstroybank (UzPSB), Asakabank, OJSC Agrobank and Microcreditbank's Long-term foreign currency Issuer Default Ratings (IDRs) at 'B-'. The Outlooks are Stable. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS -IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORS The affirmation reflects Fitch's view that the banks are likely to receive support from the Uzbekistan authorities in case of need. Support propensity stems from the government's majority ownership of the banks, their involvement in state programmes, the significant volumes of state-directed lending and sizeable market shares. The government's ability to provide assistance is currently also solid, considering the rather small size of the banking sector. However, the sovereign credit profile remains constrained by the economy's structural weaknesses, including the difficult business environment, high concentration and vulnerability to external shocks (see ' Uzbekistan Banks: Stable Outlook but Structural Weaknesses Remain' at www.fitchratings.com). UzPSB, Asakabank and Microcreditbank's 'B' Long-term local currency IDRs reflect the strong track record of both liquidity and capital support, while Agrobank's is one notch lower at 'B-' due to insufficient capital provided by the government after alleged asset embezzlement in 2010, although the bank still received liquidity support and regulatory forbearance. Fitch also considers that support in foreign currency may be provided in a less timely manner compared with that in local currency in light of existing convertibility regulations. Therefore all four banks' Long-term foreign currency IDRs are constrained at 'B-'. KEY RATING DRIVERS - VIABILITY RATINGS The affirmation of UzPSB, Asakabank and Microcreditbank's Viability Ratings (VRs) at 'b-' and Agrobank's at 'ccc' reflects the limited changes in the banks' standalone credit profiles since their last review in August 2013. Asset quality is reasonable in all banks with NPLs below 4% at UzPSB and Microcreditbank, and somewhat higher at Asakabank (13%) and Agrobank (7%). UzPSB fully covered its NPLs, while the three other banks' coverage was below 55%. Funding is generally concentrated, but sticky. High loan-to-deposit ratios of over 200% at UzPSB and Microcreditbank reflect significant dedicated state funding for specific programmes financed by the banks and a somewhat higher reliance on the interbank market in the case of Microcreditbank. Liquidity risk is also mitigated by a high share of liquid assets of over 20% (a tighter 10% at Microcreditbank). Refinancing risk is low as the banks have minimal wholesale/external obligations. Capitalisaiton is healthy at Microcreditbank (Fitch Core capital (FCC)/ risk-weighted assets ratio of 33% at end-2013) even considering unreserved NPLs (7% of equity), and moderate at UzPSB (12%) and Asakabank (17%; undermined by unreserved NPLs equalling high 34% of equity). Agrobank's low capitalisation (5% FCC ratio adjusted for the unreserved receivable, which appeared on the balance sheet as a result of the 2010 fraud) is a major weakness and the main reason for a lower 'ccc' VR. Profitability is modest with ROAE being at about 12% at UzPSB and Asakabank (and weaker at Microcreditbank and Agrobank) reflecting the mostly directed nature of banks operations and rather weak operating efficiency. Therefore the banks would rely on the government's capital injections in order to comply with the regulator's requirements to grow capital by at least 20% annually. In addition, all the banks' VRs also factor in commercial franchise limitations, some weaknesses of the operating environment as well as weak corporate governance and potential deficiencies in internal controls, which give rise to significant operational risks. RATING SENSITIVITIES - IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORS A change of UzPSB's, Asakabank's and Microcreditbank's Long-term local currency IDRs would be possible in case of a strengthening/weakening of the sovereign's credit profile. Agrobank's Long-term local currency IDR could be upgraded if the government replenishes its capital. A revision of the Support Rating Floor and upgrade of the Support Rating and foreign currency IDRs would require liberalisation of foreign currency regulations. RATING SENSITIVITIES - VRS Downward pressure on the VR could arise from deterioration of the banks' asset quality, particularly as a result of market stress, realisation of operational risks or continuing build-up of non-core assets on their balance sheets, if this is not offset by equity injections. Potential for an upgrade of the VRs is currently limited. Agrobank's VR could be upgraded to 'b-' if its capitalisation improves. The rating actions are as follows: UzPSB Long-term foreign currency IDR affirmed at 'B-'; Outlook Stable Short-term foreign currency IDR affirmed at 'B' Long-term local currency IDR affirmed at 'B'; Outlook Stable Short-term local currency IDR affirmed at 'B' Viability Rating affirmed at 'b-' Support Rating affirmed at '5' Support Rating Floor affirmed at 'B-' Asakabank Long-term foreign currency IDR affirmed at 'B-'; Outlook Stable Short-term foreign currency IDR affirmed at 'B' Long-term local currency IDR affirmed at 'B'; Outlook Stable Short-term local currency IDR affirmed at 'B' Viability Rating affirmed at 'b-' Support Rating affirmed at '5' Support Rating Floor affirmed at 'B-' Microcreditbank Long-term foreign currency IDR affirmed at 'B-'; Outlook Stable Short-term foreign currency IDR affirmed at 'B' Long-term local currency IDR affirmed at 'B'; Outlook Stable Short-term local currency IDR affirmed at 'B' Viability Rating affirmed at 'b-' Support Rating affirmed at '5' Support Rating Floor affirmed at 'B-' Agrobank Long-term foreign currency IDR affirmed at 'B-'; Outlook Stable Short-term foreign currency IDR affirmed at 'B' Long-term local currency IDR affirmed at 'B-'; Outlook Stable Short-term local currency IDR affirmed at 'B' Viability Rating affirmed at 'ccc' Support Rating affirmed at '5' Support Rating Floor affirmed at 'B-' Contact: Primary Analyst (UzPSB, Asakabank and Microcreditbank) Sergey Popov Associate Director +7 495 956 9981 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Primary Analyst (Agrobank) Roman Kornev Director +7 495 956 7016 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst (UzPSB) Roman Kornev Director +7 495 956 7016 Secondary Analyst (Asakabank, Microcreditbank and Agrobank) Maria Kuraeva Analyst +7 495 956 5575 Committee Chairperson Olga Ignatieva Senior Director +7 495 956 6906 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com; Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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