Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has published a presentation focusing on the challenges facing Uzbek banks in the current operating environment.

State banks made up 85% of sector assets at end-2020. Under the new banking sector development strategy, the government is targeting privatisation of seven banks by end-2025. These banks should significantly transform their business models with assistance from international financial institutions (IFIs), that may become minority shareholders prior to sales of controlling stakes, aiming to improve profitability, corporate governance and investor attractiveness. If the seven banks are successfully privatised, the state banks’ share of sector assets would decrease to 35%.

The sector average impaired loans ratio increased to 2.1% at end-2020 from 1.5% at end-2019. Banks continued their fast growth in 2020 despite the pandemic outbreak, and we expect nominal lending growth of more than 30% in 2021. Banks have been actively growing long-term financing in recent years. The bulk of new corporate loans was issued with grace periods for investments purposes and are not amortising yet, which together with payment holidays provided to some borrowers in 2020, mean that asset quality is largely untested at most banks. Impairment risks also stem from high 50% sector loan dollarisation at end-2020.

Foreign currency lending has been funded mostly with credit lines from foreign banks and IFIs, resulting in high external borrowings (estimated at 37% of Fitch-selected banks’ liabilities at end-10M20); funding from the state made up an additional 30% of liabilities. The repayment of external borrowings will be manageable for most banks in 2021-2022, as maturities are linked to schedules of financed loans, which are still in grace periods. Longer-term repayments will depend on asset quality performance as most banks keep modest liquidity cushions, as reflected by a high 235% loans to deposits ratio at end-2020.