The IDRs of the three banks are driven by their intrinsic strength, as reflected in their Viability Ratings (VRs). The affirmation of the banks’ ratings factor in the banks’ reasonable performance and stable asset quality metrics (somewhat weaker at UB), partly owing to state support for export-oriented entities and those involved in import replacement, reasonable liquidity and capitalisation. The ratings also reflect structural weaknesses in the Uzbekistan’s economy and the banks’ modest and concentrated franchises in the state-dominated banking sector.

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 6% GDP growth per year in 2018 and 2019) and generally reasonable pre-impairment profit buffers.

Asset quality remains adequate at all three banks with non-performing loans (NPLs; loans overdue more than 90 days) remaining in low single digits at end-3Q17 (IY: 0.2% of loans; TB: 0.4%; UB: 3.1%). However, the ratios should be viewed in line with the banks’ recent rapid growth (40%-53% in 2017) and limitations in the local GAAP disclosures in the case of TB and UB, whose latest IFRS reports are for 2016. Reserves fully covered NPLs at all three banks at end-3Q17. NPL write-offs were negligible at all three banks in 2016-9M17, while reported levels of restructured exposures were also low (below 1% of loans at end-3Q17).

Foreign currency loans were negligible in TB and UB but made up a significant 43% of total loans in IY at end-3Q17. However, IY lends in foreign currency mainly to exporters or other companies with foreign currency revenue, and therefore the sharp Soum depreciation in September 2017 affected only few of IY’s borrowers (1% of total loans), whose loans were later restructured.

Borrower concentration levels are moderate at IY (the top 25 borrowers accounted for 26% of loans at end-3Q17), but remained high in TB and UB (53% and 54%, respectively). Fitch assesses IY’s and TB’s major exposures as moderate risk (mainly working-capital lines to trade and manufacturing companies), while those of UB could be higher-risk due to weaker underwriting standards and limited access to better-quality borrowers.

Pre-impairment profitability was healthy in 2017 (estimated at 10% of average loans at IY and TB, 7% at UB; local GAAP), supported by sound net interest margins of 10%-14%, solid commission income and foreign currency revaluation gains. Impairment charges were about 1% of average loans for all three banks resulting in a reasonable return on average equity (ROAE) of about 30% for IY and TB, and a lower 15% for UB due to higher operating costs.

Capital buffers were reasonable at all three banks with the Fitch Core Capital (FCC) to risk-weighted assets ratios estimated at 12% for IY at end-3Q17 and 19% for UB at end-2016 and with a FCC-to-total assets ratio of 11% at TB at end-2016. Regulatory capital ratios were tighter at IY and TB with the Tier 1 capital ratios at 9.9% and 10.7% at end-2017, respectively (9.5% minimum), while UB’s Tier 1 ratio was higher at 12.8%. Fitch estimates all three banks’ Tier 1 ratios should improve by 370bps (IY), 440bps (TB) and 270bps (UB) after 2017’s profit auditing. Moreover, IY’s and UB’s shareholders are considering new equity injections in 2018.

TB and UB are almost fully funded by customer accounts at 97% and 87% of total liabilities, respectively. This share is lower at 60% at IY as about 30% of its liabilities is funding from international financial institutions; the latter’s maturity schedule is comfortable and linked to loan repayments. Depositor concentrations are high at TB (the largest 20 deposits accounted for 56% of total customer funding at end-3Q17) while IY’s and UB’s deposits are more granular (28% and 21% respectively).

Liquidity is reasonable, as banks keep solid buffers of liquid assets (cash and equivalents and short-term interbank placements), which equalled to 30%-40% of customer accounts net of near-term debt repayments at end-3Q17. Liquidity in local currency was somewhat tighter, as the banks prefer to maintain long open currency positions and record gains on 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 the banks’ ratings is currently limited, but could arise in case of an overall improvement in the operating environment. UB’s ratings may also be upgraded if the bank diversifies its franchise significantly alongside a tightening of risk policies.

The banks’ ratings could be downgraded in case of significant deterioration in the operating environment or a weakening of asset quality and capital metrics.

Fitch does not anticipate changes to the Support Ratings and SRFs given the banks’ limited systemic importance.

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’
PJSC 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 floor’
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-’