UB’s IDRs reflect its modest and geographically concentrated franchise, high concentrations on both sides of the balance sheet, low operating efficiency, potential for related-party transactions and relatively short track record of operations. The bank was founded in 2001, and remains one of the smallest (25th of 30) domestic banks by assets (end-4M13: USD30.5m).

The ratings also continue to take into account limitations in UB’s credit profile following the revocation of the bank’s licence on foreign currency operations in July 2012. As a result of this, UB experienced significant deposit outflow (around UZS8bn) in H212, which led to visible slowdown of the bank’s growth (5% in 2012 versus 38% in 2011) and to some pressure on its performance. Liquidity risks were muted by end-1M13 as the bank had accumulated a solid liquidity buffer (equal to 31% of its customer accounts), although the funding base remains undermined by high depositor concentrations (with the top 20 accounting for 64% of the total).

UB’s asset quality metrics have worsened, reflecting the challenges of SME lending and some weaknesses in Uzbekistan’s operating environment. Non-performing loans (90+ days overdue) rose to 6.4% at end-2012 (from 2.8% at end-2011) and loans overdue from 30 to 90 days comprised an additional 15.3% of the portfolio. Increased credit impairment charges cut UB’s return on average assets to a low 0.6% during 2012, while impairment reserves were still only 3.8% of loans at end-2012. However, unreserved credit risks were largely mitigated by the bank’s solid reported capitalisation (32% regulatory capital ratio at end-2012), which was sufficient to fully absorb problems in the bank’s loan book.

Upward potential for UB’s ratings is currently limited, although further development of the bank’s franchise will be credit positive. Downward rating pressure could arise from resumed deposit outflow or further worsening of UB’s asset quality if not offset by sufficient equity injections.

The rating actions are as follows:

Long-Term local currency IDR: affirmed at ‘CCC’
Short-Term local currency IDR: affirmed at ‘C’
Viability Rating: affirmed at ‘ccc’
Support Rating: Affirmed at ‘5’
Support Rating Floor: affirmed at ‘No Floor’