Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of three Uzbekistan-based private 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.

The banks' Long-Term IDRs are based on their intrinsic creditworthiness, as reflected in their Viability Ratings (VRs). The affirmations and Stable Outlooks reflect Fitch's view that these will withstand pressure from the pandemic and resulting asset quality deterioration given good pre-impairment profitability cushions and reasonable capital buffers. UB's VR is one notch lower, reflecting lower profitability, some corporate governance concerns (a potentially high related party lending) and underwriting standards weaknesses.

Impaired loans (stage 3) ratios were flat at all three banks in 9M20 However, 40% to 50% of loans were on credit holidays (the regime recommended by the government to support borrowers in the pandemic) in 2Q20-3Q20. Banks continued accruing interest on loans during credit holidays adding it to principal, which resulted in an uptick of accrued but not received interest. Credit holidays ended on 1 October 2020 and according to the management of all three banks, the vast majority of exposures were performing in 4Q20.

We expect some of these exposures will need restructuring in 2021, which together with a high dollarisation (especially in case of IY) and high lending growth in recent years puts pressure of banks' asset quality.

IY

The impaired loans ratio increased to 5.3% at end-9M20 from 5% at end-2019 and impaired loans  coverage by total provisions was moderate 62%, reflecting management's expectation that hard collateral underpins recoveries. Loans on credit holidays made up 49% of total gross loans at end-3Q20, this was particularly high 94% in retail. Most exposures returned to schedule in October, but management expects up to 10% of these exposures to need restructuring or become overdue in 2021, leading to an uptick in impaired loans ratio.

Accrued, but not received interest increased to 2.2% at end-9M20 from 1% at end-2019. Asset quality pressure could also stem from high lending growth (47% in 2019 and 25% in 9M20) and high 44% loan book dollarisation at end-9M20.

The bank's pre-impairment profitability is strong, due to its focus on SME and retail lending and good operating efficiency, reflected by the cost-income ratio of 41% in 9M20. The annualised pre-impairment profit to average gross loans ratio was 9.5% in 9M20, providing a reasonable ability to absorb a potential increase in loan impairment charges (LIC) without a significant pressure on capital. The annualised return on equity was good 24% in 9M20.

IY's capitalisation improved as Triodis and KfW acquired minority stakes for USD25 million in August2020. We estimate the Fitch Core Capital (FCC) to regulatory risk-weighted assets ratio was a good 18% at end-3Q20, while the regulatory Tier 1 ratio was 14%, reasonably above the 10% required minimum.

Funding from international financial institutions and foreign banks (including that structured through the Ministry of Finance) made up a high 50% of IY's funding at end-9M20. These facilities were  attracted for specific projects under a general SME development programmes. Most external borrowings are long term with about UZS0.8 trillion (USD83 million equivalent) maturing in two years as of end-9M20. Liquid assets cushion (cash, sovereign bonds and placements with banks) was UZS1.2 trillion at same date, covering 1.5x of external repayments for next 24 months.

TB

Loans on credit holidays made up 43% of gross loans by end-3Q20, but only 1% of these exposures became overdue in October. Impaired loans ratio was a low 1.4% at end-1H20, unchanged since  end-2019. However, Stage 2 loans made up a further 13% at same date (up from 3% at end-2019). We expect conversion of Stage 2 loans into impaired to pressure TB's asset quality metrics in 2021.

Positively, asset quality risks are moderately mitigated by below-market loan dollarisation (11% at end-10M20 compared with the 49% sector average), modest loan concentration and the short-term nature of the loan book, as the bank is focusing mainly on working capital lending to trading companies. In addition, net loans made up only 50% of total assets, while non-loan assets mostly comprise lower risk liquid assets.

In our view, TB will be able to comfortably absorb a potential increase in LICs without a pressure on capital ratios due to its high pre-impairment profitability (11% of average gross loans in 1H20, annualised). TB's profitability is underpinned by a good net interest margin, which improved to 17% in 6M20 (2019: 14%) due to its focus on higher-yielding unsecured retail loans in recent years and cheap related party funding. Operating efficiency is also good, with a cost-to-income ratio below 40% in 2018-1H20.

Thanks to strong internal capital generation and lower-risk asset structure, the bank's capitalisation is adequate considering asset quality risks. The FCC to regulatory risk-weighted assets ratio was 22% at end-3Q20, the regulatory Tier 1 and Total capital ratios were 14% and 19% at end-10M20, respectively, reasonably above the regulatory minimums (10% and 13%, respectively). We estimate the bank would be able to book an additional 8% LIC before capital ratios fall to required minimums.

The bank is mainly funded by stable related-party current accounts (55% of total liabilities at end-1H20) and other customer deposits (a further 38%). Wholesale debt is low and the cushion of liquid assets is adequate, covering almost 50% of customer accounts at end-1H20.

UB

The reported impaired loans ratio was low 1.4% at end-1H20, while loans on credit holidays made up 44% of total balance at end-3Q20. According to management, only 1% of loans on credit holidays became overdue in October. We believe Stage 2 loans may increase to 15%-20% by end-2020 from a low 3% at end-2019. Potential pressure also stems from the long-term nature of UB's loan book, as a large part of the bank's loan exposures are still on grace periods and some of them may become impaired upon seasoning. Loan book dollarisation was a moderate 24% at end-10M20.

We believe the bank will be able to withstand a moderate increase in cost of risk helped by a reasonable cushion of pre-impairment profit (7.6% of average gross loans in 10M20, annualised). High interest rates on retail loans support the net interest margin at an adequate 9%. However, despite improvements in operating efficiency, the cost-to-income ratio is still higher than peers (52% in 10M20). LICs were low in 10M20 (about 1% of average gross loans, annualised) but we expect a material increase in 2021 as asset quality deteriorates.

Loan growth significantly exceeded internal capital generation in the recent years, which resulted in weak capitalisation, with the regulatory Tier 1 and total capital ratios of 10.4% and 13.3% at end-10M20, just above the regulatory minimums. The bank's shareholders expect to provide a new capital injection in 1Q21, which should improve capital ratios by 200bp-300bp by Fitch's estimates. 

UB is mainly funded by short-term and price-sensitive deposits (76% of end-10M20 liabilities) which results in a high cost of funding (about 10% in 10M20). The bank has no foreign debt and short-term wholesale repayment needs are low. Liquid assets made up 14% of total assets at end-10M20 and, net of planned debt repayments, in the next 12 months, covered a modest 11% of deposits.