Tashkent, Uzbekistan (UzDaily.com) -- Uzbekistan’s imminent clean-up of the largest state-owned banks’ balance sheets - part of an effort to liberalise the local economy and the financial sector - support Fitch Ratings’ near-term view of the authorities’ willingness to provide support to state banks if needed, which underpins their Issuer Default Ratings, Fitch Ratings said.

This view reflects the banks’ state ownership, their systemic importance, the solid record of support provided to them in recent years and their role in lending to state-owned enterprises. Fitch would only revise its view in the event of significant changes to one or more of these factors, particularly privatisation of the controlling stakes, or if Uzbekistan developed a bank resolution framework.

Under the government’s plans, announced in October and set to be completed by the end of this year, large underperforming legacy loans will be transferred from the largest state banks to the country’s sovereign wealth fund, the Fund for Reconstruction and Development of Uzbekistan (FRDU). Some of the banks’ debt financing from the fund will be converted to equity. This should initially strengthen the banks’ capital buffers by reducing their problem loans and increasing their equity, although we expect the buffers to decrease as banks use them to support loan growth.

Fitch Ratings does not expect a material improvement in the banks’ asset quality due to the transfer of loans to FRDU because the problem loans being transferred were already guaranteed by the state and not reported as impaired. In fact, the banks’ impaired loan ratios will deteriorate to some extent because the transfers will reduce the denominator (gross loans) while not affecting the numerator (loans reported as impaired). Nonetheless we estimate that ratios will remain below 5%, based on our analysis of IFRS disclosures.

The government’s initiative indicates a commitment to put Uzbekistan’s banking system on a more commercial footing and limit policy lending whereby banks channel state funds to state-owned enterprises. About 40% of the banking sector’s total lending is by state banks channelling funding from the FRDU to strategically important sectors (such as oil & gas, and the chemical and energy sectors).

The long-term credit implications of any shift in state banks’ business models away from state funding and policy lending are uncertain and would depend on the banks’ strategies and underwriting practices. Privatisations of several state-owned banks (the government has officially announced plans in respect to Asia Alliance Bank, Aloqa Bank, Turonbank, Asaka Bank, Ipoteka Bank and Uzbek Industrial and Construction Bank) will include the sale of minority stakes to foreign investors (including the EBRD and IFC). Such sales could have positive implications for these banks’ corporate governance practices and risk controls.

Fitch Ratings rates seven state-owned banks in Uzbekistan (OJSC Agrobank, Joint Stock Commercial Bank Asaka, Microcreditbank, Uzbek Industrial and Construction Bank Joint-Stock Commercial Bank, Ipoteka-Bank, Qishloq Qurilish Bank and Xalq Bank). They are all ‘BB-’/Stable, based on our view of the Uzbek authorities’ likely willingness and ability to provide support if needed.