The state’s ability to provide support is underpinned by Uzbekistan economy’s resilience to the regional downturn and moderately reduced political risks following a smooth political transition. The Uzbek economy, however, remains vulnerable to external shocks, as exports are commodities-driven and concentrated on a few countries, and external finances are heavily supported by remittances.

The banks have reported stable asset quality. UPSB and Asaka had low NPLs of below 2% (fully covered by reserves) at end-2015, due to their focus on the export-oriented energy and auto industries and a high share of state-owned borrowers, with some larger exposures also being guaranteed by the state. Agrobank also has low NPLs, but its asset quality remains weakened by unreserved problematic receivables (8% of total assets), which resulted from an alleged fraud case in 2010, and significant non-core/foreclosed assets. MCB’s NPL ratio was a high 10% at end-2015 but decreased at end-3Q16 to an adequate 2% as borrowers’ financial performance recovered.

Capitalisation is strong at UPSB (Fitch Core Capital (FCC)/risk-weighted assets ratio of 16.8% at end-2015), moderate at Asaka (FCC/total assets of 10.3%) and MCB (FCC/ risk-weighted assets ratio of 13.6%, adjusted for unreserved NPLs), and weak at Agrobank (5.1%, adjusted for unreserved problematic receivables). Agrobank received a UZS50bn equity injection (equal to 2% of end-2015 risk-weighted assets (RWAs)) from the government in 1H16, which should improve the bank’s FCC ratio to a more adequate 6.3% at end-2016 - given only moderate expected lending growth of 13% during the year.

Internal capital generation is reasonable at UPSB and Asaka (ROAE of 10% and 12%, respectively), and weak at Agrobank (2%) and MCB (1%), reflecting the mostly state-directed nature of banks’ operations and rather weak operating efficiency (particularly at Agrobank and MCB).

Liquidity is comfortable at UPSB and Asaka due to solid buffers (at end-1H16, liquid assets net of near-term repayments were about 30% and 36% of customer deposits at UPSB and Asaka, respectively), and somewhat tighter at Agrobank and MCB, as these two banks have high reliance on short-term inter-bank placements.

The banks’ funding is sourced mainly from customer deposits, and government and quasi-government entities. Depositor concentrations are high at UPSB and Asaka, while Agrobank’s and MCB’s deposits are more granular. Fitch expects customer funding to demonstrate limited volatility - in light of steady previous growth - in spite of the deposits being mostly short-term. UPSB is the only bank with meaningful borrowings from international financial institutions (19% of liabilities). However, UPSB’s near-term foreign debt repayments are small (below 2% of total liabilities in 2H16-2017) and linked to loan repayments.

The four banks’ IDRs, Support Ratings and Support Rating Floors continue to be underpinned by potential support from the Uzbek authorities. In Fitch’s view, the authorities would have a high propensity to provide support, if needed, because of the state’s majority ownership; the banks’ systemic importance (to a lesser extent at MCB); tight supervision of their activities; and their policy roles. Fitch believes the propensity of the state to provide support in local and foreign currency would be broadly similar, as the amount of foreign currency debt is limited at Asaka, Agro and MCB, while a significant part of UPSB’s external funding is already covered by state guarantees.