Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has affirmed Joint-Stock Commercial Bank Agrobank’s (Agro) Long-Term Issuer Default Ratings (IDRs) at ‘BB-’ with Stable Outlooks and Viability Rating (VR) at ‘b-’.

The affirmation of Agro’s IDRs reflects Fitch’s view of a moderate probability of support from the government of Uzbekistan in case of need, as reflected by the bank’s Support Rating (SR) of ‘3’ and Support Rating Floor (SRF) of ‘BB-’. This view is based on majority state ownership, significant systemic importance, important roles in government economic and social policy, the low cost of potential support relative to the sovereign international reserves and a record of capital and liquidity support.

Agro was not included in the list of state banks that the government targets privatising by end-2025, according to the medium-term strategy for banking system development published in 2020. Agro will retain its role as the government’s agent for state-sponsored subsidised lending to SMEs and retail clients in rural regions with a particular focus on the agriculture sector.

The authorities’ ability to provide support is underpinned by the moderate size of the banking sector relative to the economy (total assets were 63% of GDP at end-2020) and large international reserves (USD35 billion at end-2020). However, our assessment of support ability also factors in high concentrations in the banking sector (with state-owned banks accounting for 85% of end-1Q21 sector assets), high loan dollarisation (50% at end-1Q21), a high share of external funding in the banking sector and vulnerability to external shocks in a volatile operating environment, as government finances are sensitive to commodity exports and remittances.

The Stable Outlook on the bank’s IDR reflects that on the sovereign.

The affirmation of Agro’s VRs at ‘b-’ reflects exposure to high-risk lending (agriculture, SME and retail borrowers with below-average income), mainly in rural areas of Uzbekistan and long-term development lending, resulting in potentially vulnerable asset quality. The VR also considers weak operating efficiency resulting from an expensive country-wide branch network, and modest profitability.

Loans from the three lowest categories in local GAAP (a proxy for impaired loans) made up only 1.8% of the total at end-1Q21. Impaired loans were 99%, adequately covered by total loan reserves. Asset quality risks stem from the bank’s exposure to the agricultural sector and long-term development lending.

The bank has been growing rapidly in recent years, particularly in long-term policy lending, executing its role a as state agent. Loans in foreign currency made up 25% of the total at end-2020. Fitch estimates the bank provided payment holidays on about 50% of its loans in 2Q20-3Q20. The majority of these exposures returned back to schedule in 4Q20-1Q21, while about 7% of loans were either restructured, or payment holidays were prolonged. We believe some of the exposures may become impaired in the medium term.

Agro’s profitability is modest, as reflected in a 1% operating profit to risk-weighted assets ratio in 2020 (local GAAP). Net interest margin was moderate 5.4%, but high operating expenses (cost-to-income ratio of 64%) and impairment charges (consumed 48% of pre-impairment profit), resulted in a low return on average equity of 5% in 2020. Pre-impairment profit to average gross loans ratio was 2.2%, providing the bank with only modest ability to cover a potential uptick in impairment charges through income.

To support Agro’s development role and lending growth, the state injected UZS4.7 trillion of equity in 2016-2020. The estimated Fitch Core Capital to regulatory risk-weighted assets ratio was 16% at end-1Q21. The reported regulatory Tier 1 ratio was 15.5% and the total capital ratio was 16.3%, both reasonably above the regulatory minimums at 10% and 13%, respectively.

Non-state deposits made up only 20% of Agro’s funding at end-1Q21. Funding from the state (borrowings and deposits) was 55% of total at the same date and the remaining 25% was long-term external lines from IFIs and international banks. External borrowings were attracted to finance long-term foreign currency project finance loans and commercial business generally. Fitch estimates the next 12 months’ repayments of external funding were around UZS2.3 trillion (equivalent of USD217 million or about 9% of total funds) at end-1Q21. Agro’s liquidity cushion was UZS2.7 trillion at the same date, covering the next 12 months’ repayments by 117%.