Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of three private Uzbek banks, Joint Stock Innovation Commercial Bank Ipak Yuli (IY) and PJSB Trustbank (TB) at ‘B’ and of JSCB Universal Bank (UB) at ‘B-’. The Outlooks are Stable. A full list of rating actions is at the end of this rating action commentary.

The IDRs of the three banks are driven by their intrinsic strength as reflected in their VRs. The VRs of IY and TB are one-notch higher than UB’s, reflecting their reasonable and stable asset quality and profitability metrics, moderate capitalisation and stable funding profiles. UB’s VR reflects bank’s higher risk appetite, reflected in looser underwriting standards, higher concentration in the loan book and weaker profitability. The ratings also reflect the three banks’ modest franchises in a state-dominated banking sector.

The ratings continue to be constrained by Uzbekistan’s difficult operating environment, reflected in low national income (GDP per capita at USD1,300 in 2018), high dollarisation rates (sector foreign currency loans were 55% of the total at end-3Q18) and high concentration of the banking sector with state-owned banks accounting for 83% of total assets.

The Stable Outlooks reflect Fitch’s expectations that the banks’ credit profiles are unlikely to deteriorate significantly in the medium term, supported by continuing economic growth in Uzbekistan (Fitch forecasts a 4.9% GDP growth in 2019 and a slightly higher 5.3% in 2020) and generally reasonable pre-impairment profit buffers.

Asset quality was reasonable at all three banks, with the non-performing loans (NPLs, loans overdue over 90 days) equal to less than 1% of gross loans at end-1H18 at IY and TB, and zero at UB at end-2017 (latest available IFRS report). NPLs were fully covered by loan loss allowances (LLA) at IY and TB. There were several borrowers who defaulted at UB in 2018 (2% of gross end-2017 loans), but the bank managed to recover the majority of the exposures, while LLAs were sufficient to absorb these losses in full. Restructured exposures were also immaterial at all three banks.

Concentration of loans was moderate at IY, with the 25-largest borrowers accounting for 27% of gross loans at end-1H18. TB and UB reported higher concentrations at 39% and 44%, respectively, at the same date. Dollarisation of loans was significant at IY, with foreign currency exposures constituting 44% of gross loans at end-1H18. Positively, the bank has established reasonable underwriting standards and risk controls to mitigate the risk of significant exchange rate movements, which proved effective during the recent local currency (soum) depreciation in 2017. Lending in foreign currency was a moderate 17% at UB and a low 8% at TB at end-3Q18.

Profitability is a rating strength at IY and TB. Annualised operating profit-to-risk-weighted assets (RWAs) was a strong 5.9% and 6.9% respectively at the two banks in 6M18, supported by reasonable net interest margins (11% and 13%, respectively), high share of non-interest income in gross revenue (46% and 38%, respectively) and moderate operating expenses (47% and 48% of gross revenue respectively). Impairment charges were also moderate at 21% and 20% of pre-impairment profit, respectively, in 6M18.

UB’s weaker operating profit (1.2% of RWAs in 9M18 according to local GAAP) was compromised by high operating expenses (70% of gross revenue), resulting from poor economies of scale. Impairment charges were a high 41% at UB in 9M18 due to the bank’s weaker earnings and higher risk appetite.

Capitalisation was moderate at all three banks, with Fitch Core Capital (FCC)-to-RWAs equalling to 14% at IY at end-1H18, 16% at TB at the same date and 15% at UB at end-2017 (latest available IFRS report). Regulatory capitalisation was somewhat tighter, with the Tier 1 capital ratios being at 12% at IY, 11% at TB, and at 13% at UB at end-3Q18. New capital injections received in 2018 by IY (15% of end-2017 equity) were aimed at offsetting growth and devaluation effects, while new equity received by UB (3x of end-2017 equity) was to address regulatory changes. TB’s capitalisation was supported solely by internal capital generation.

Funding was mainly sourced from customer accounts at all three banks, which represented 97% of total liabilities at TB and UB, and a lower 66% at IY at end-1H18. IY was the only bank with a notable share of funding from international financial institutions (IFIs), which comprised 32% of bank’s total liabilities at end-1H18. Maturity of funding from IFIs is rather long-term and manageable for the bank, while IY may also refinance maturing debt.

Liquidity buffers were comfortable at all three banks, with liquid assets (cash and short-term interbank placements) sufficient to repay 32% of total customer funding at IY at end-1H18 (net of wholesale debt repayments within the next 18 months), 36% at TB and 21% at UB. Liquidity in local currency is somewhat tighter, as the banks prefer to keep liquid assets in foreign currencies and record gains from the soum depreciation. However, banks can attract short-term soum funding from the Central Bank of Uzbekistan (collateralised with deposits in foreign currency).

The banks’ Support Rating Floors of ‘No Floor’ and ‘5’ Support Ratings reflect the banks’ limited systemic importance and Fitch’s view that extraordinary support from the Uzbek authorities is therefore unlikely. The ability of the banks’ shareholders to provide support cannot be reliably assessed and therefore this support is not factored into the ratings.

Upside for IY and TB is currently limited, but could result from an overall improvement in Uzbekistan’s operating environment, along with the banks maintaining reasonable and stable financial profile metrics. Upside for UB could stem from notable improvements in the bank’s franchise and risk policies and procedures, resulting in stronger asset quality and profitability metrics, while maintaining adequate capitalisation.

The ratings of all three banks could be downgraded if asset quality metrics deteriorate significantly, leading to weak profitability and capital erosion.

Fitch does not anticipate changes in the Support Ratings and Support Rating Floors due to limited systemic importance of these three banks.

Ipak Yuli Bank

Long-Term Foreign and Local Currency IDRs affirmed at ‘B’; Outlook Stable

Short-Term Foreign and Local Currency IDRs affirmed at ‘B’

Support Rating affirmed at ‘5’

Support Rating Floor affirmed at ‘No floor’

Viability Rating affirmed at ‘b’

Trustbank

Long-Term Foreign and Local Currency IDRs affirmed at ‘B’; Outlook Stable

Short-Term Foreign and Local Currency IDRs affirmed at ‘B’

Support Rating affirmed at ‘5’

Support Rating Floor affirmed at ‘No fl

Viability Rating affirmed at ‘b’

Universal Bank

Long-Term Foreign and Local Currency IDRs affirmed at ‘B-’; Outlook Stable

Short-Term Foreign and Local Currency IDRs affirmed at ‘B’

Support Rating affirmed at ‘5’

Support Rating Floor affirmed at ‘No floor’

Viability Rating affirmed at ‘b-’