Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has affirmed Joint Stock Commercial Khalq Bank of Uzbekistan’s (Khalq Bank) Long-Term Issuer Default Ratings (IDRs) at ‘BB-’. The Outlooks are Stable. Fitch has upgraded the bank’s Viability Rating (VR) to ‘b-’ from ‘ccc+’. 

The upgrade of the Viability Rating (VR) to ‘b-’ from ‘ccc+’ reflects an improvement in capital ratios due to a large planned capital injection from the state, and recovered profitability.

Khalq Bank’s Long-Term IDRs are equalised with the sovereign rating (BB-/Stable) at this rating level to reflect Fitch’s view of a moderate probability of support from the Uzbek government, as reflected by the bank’s Government Support Rating (GSR) of ‘bb-’. The Stable Outlook on the ratings reflects that on the sovereign.

Khalq Bank’s VR reflects the bank’s asset quality risks captured by high impaired loans ratio and modest profitability. Moreover, the bank’s policy role as a social lending agent, as well as existing legacy problems, will continue to weigh on Khalq Bank’s VR in the near term.

The Uzbek authorities would have a high propensity to support Khalq Bank, in Fitch’s view, given its strategic state ownership, its status as the government’s agent bank for subsidised social lending and pension distribution, the low cost of potential support relative to sovereign international reserves, and support record.

Khalq Bank will receive a huge capital injection in 2024 (3.9 trillion soums or 11% of risk-weighted assets (RWA) at end-2023), according to the presidential decree of April 2024. Given the expected RWA growth and without dividend payments, the agency believes the bank’s Fitch Core Capital ratio will likely exceed 18% at end-2024 (end-2023: 9%). The bank has already received around 7 trillion soums of capital since 2019, including 315 billion soums in 2023.

Khalq Bank became profitable in 2023 due to notably lower loan impairment charges (2023: 2% of average gross loans), while pre-impairment profit remained modest at 5% of average gross loans. The agency expects that the bank will be profitable in the near term. However, its operational performance will be mostly affected by asset quality risks and associated provisioning needs.

Impaired (Stage 3 under IFRS 9) loans represented a significant 22% of gross loans at end-2023 (end-2022: 27%) and were 84% covered by reserves. Most of Khalq Bank’s impaired loans sit in the corporate loan book (39% of gross loans) and among the largest borrowers. However, concentrations are moderate (the 25 largest groups of borrowers represent only 17% of loan book). Fitch Ratings expects that corporate impaired exposures will continue to weigh on Khalq Bank’s asset quality metrics, with the impaired loans ratio remaining above 15% in 2024-2025.

Khalq Bank’s involvement in subsidised development lending directed by the government, with rapid lending growth in previous years, resulted in substantial asset-quality risks. However, loan dollarisation (16% at end-1Q24) is below sector-average (44%) and the shift towards a higher share of commercial lending should support loan quality. Given capital constraints and provisioning needs, loan growth has decreased (2023: 13%) and Fitch Ratings expects it to be fairly stable in the near term.

State-related funds (38% of total liabilities at end-1Q24) and non-state deposits (36%) dominate Khalq Bank’s funding, while wholesale borrowings are moderate (end-1Q24: 16%). The bank’s liquidity cushion (18% of total assets at end-1Q24) covered a sizeable 58% of non-state customer accounts.

Khalq Bank is Uzbekistan’s sixth-largest bank, making up around 6% of sector assets and loans at end-1Q24. It is one of several state-owned banks responsible for subsidised lending under government development programmes, with a focus on family entrepreneurship loans in Uzbekistan’s rural areas, Khalq Bankis the only bank in Uzbekistan involved in the distribution of state pensions.

Uzbekistan’s economy remains heavily dominated by the state, despite recent market reforms and privatisation plans, resulting in weak governance and generally poor financial transparency. Additional risks stem from high dollarisation and concentrations of the banking sector and reliance on state and external wholesale debt.