Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has affirmed National Bank for Foreign Economic Activity of the Republic of Uzbekistan’s (NBU) Long-Term Issuer Default Ratings (IDRs) at ‘BB-’ with Stable Outlooks and Viability Rating (VR) at ‘b’.

The affirmation of NBU’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.

NBU was not included in the list of state banks that the government targets to privatise by end-2025, according to the medium-term strategy for banking system development published in 2020. Fitch believes that NBU will retain its important policy role while expanding its retail- and corporate-banking franchises.

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 NBU’s ratings reflects that on the sovereign.

NBU’s senior unsecured debt rating is aligned with the bank’s Long-Term IDRs.

The affirmation of NBU’ VRs at ‘b’ reflects its strong franchise, adequate asset quality and healthy capitalisation, which is supported by equity injections from the state. The rating also captures high balance-sheet dollarisation, rapid growth in recent years, which has resulted in a largely unseasoned loan book, a high reliance on funding from foreign banks and international financial institutions (IFIs) and modest core profitability.

Loans in the bottom three regulatory categories (a proxy for impaired loans) accounted for a moderate 3.2% at end-2020 and were 68% provisioned. The bank provided payment holidays to about 7% of gross loans in 2020. Fast loan book growth in the recent years (5x times in 2017-2020) was driven by long-term policy lending (50%-60% of total loans at end-2020), often with grace periods. This resulted in an unseasoned loan book and largely untested asset quality at NBU. Most development loans were provided to state-owned or state-related companies, resulting in high exposure to related parties (58% of gross loans at end-1H20). Asset-quality risks are mitigated by state guarantees on some of NBU’s largest exposures (around 42% of total gross loans at end-2020).

Profitability is moderate, with operating profit-to-risk-weighted assets (RWA) at 2% in 2020 (local GAAP data). The net interest margin is under pressure from NBU’s low-margin policy lending, but improved to 4% in 2020 due to expansion in commercial lending. Loan impairment charges consumed 47% of pre-impairment profit in 2020, so the return on equity was a moderate 7%.

The Fitch-estimated Fitch core capital/regulatory RWA ratio was a good 18% at end-2020, down from 20% at end-2019, as lending growth exceeded internal capital generation. The bank’s regulatory capital ratios were also high, with a Tier 1 capital ratio of 22% and a total capital adequacy ratio of 26% at end-2020, providing a comfortable cushion over regulatory minimum requirements (10% and 13%, respectively).

Fitch views NBU’s funding profile as structurally weak due to high reliance on borrowing from international banking groups and IFIs, as reflected by a loans/deposits ratio of 3.5x at end-1Q21. External funding accounted for 56% of NBU’s non-equity funding at end-1Q21, with state funding making up another 20%. The maturity schedule of borrowings is mostly aligned with long-term loan repayments (66% of NBU’s total external borrowings mature after more than two years from end-1Q21). However, short-term FC borrowings were still material, with about UZS4.1 trillion (about USD400 million) due within 12 months at end-1Q21 - equal to 50% of liquid assets at the same date.