The upgrades of the banks’ ratings mainly reflect their extended records of reasonable performance and asset quality, partly owing to Uzbekistan’s stable economic environment, which has been resilient amid the regional downturn. However, the ratings still factor in structural weaknesses in the economy, the country’s tightly regulated FX market and the banks’ modest and fairly concentrated franchises in the state-dominated banking sector. Franchise limitations are more acute for UB, which is rated one notch lower than its peers given its very small scale, concentrated balance sheet and somewhat higher risk-appetite.

The Stable Outlooks reflect Fitch’s view that the banks’ credit profiles are unlikely to deteriorate significantly in the near term, supported by continued economic growth in Uzbekistan (Fitch forecasts 7% in 2017) and generally reasonable capital or pre-impairment profitability buffers.

Asset quality remains adequate in all three banks, with non-performing loans (NPLs, 90 days overdue) staying in low single digits at end-3Q16 (IY: 1.3% of loans; TB: nil; UB: 3%). However, this should be viewed in light of rapid loan book growth (33%-55% for 2016) and limitations in local GAAP disclosure in the case of UB (whose latest IFRS accounts are for 2015). NPL reserve coverage was strong in IY (3x by total reserves, 30% by specific reserves) and moderate in UB (50% both by total and specific reserves), while TB’s reserves were 4% of gross loans. Beyond that, comfortable additional loss absorption capacity is available from the banks’ capital cushions and pre-impairment operating profits (IY: 9% of average loans, TB: 15%, and UB: 9% based on annualised 9M16 results).

Borrower concentration levels are moderate in IY (the top 25 borrowers accounted for 21% of loans at end-3Q16), but high in TB (50%) and UB (57%). Fitch assesses IY’s and TB’s largest exposures as moderate risk working-capital loans to manufacturing companies, while UB’s are somewhat higher-risk due to weaker underwriting and limited access to higher-quality borrowers.

Foreign-currency (FC) lending is moderate at IY (21% of loans) and low at TB and UB (1% and 0% of loans). Additional risk stems from FC letters of credit covered by local-currency deposits (11% of Fitch Core Capital (FCC) at IY and 8% of FCC at TB), although according to management most FC loans and letters of credit were issued to exporters who have access to FC. Banks keep moderate long FC positions (below 15% of equity), which mitigates FC risks. Official exchange-rate depreciation has been moderate recently (13% in 2016, 14% in 2015), but the potential shift to a more flexible FX regime may trigger a sharper devaluation.

Capital buffers were moderate relative to the banks’ risk profiles. FCC ratios were 13% at IY at end-3Q16, 17% at TB at end-1H16, and 25% at UB at end-2015. The end-2016 regulatory total capital ratio was rather tight at IY (12.9%; regulatory minimum 12.5% from January 2017), but should improve by about 0.4 pps after planned subordinated debt injections. Ratios were more adequate at TB (15.5%) and UB (19.1%).

The banks’ funding was sourced mainly from customer deposits (79% of total liabilities at IY, 98% at TB and UB), which are short term, but have been broadly stable at all three banks. Depositor concentrations are high at TB (the largest 20 deposits accounting for 67% of total customer funding at end-3Q16) while IY’s and UB’s deposits are more granular (31 and 43% respectively). IY is the only bank with meaningful borrowings from international financial institutions (16% of liabilities), but foreign debt repayments are manageable (3% of total liabilities in 2017) and linked to loan repayments.

Liquidity profiles were reasonable at all banks due to solid buffers (at end-2016 liquid assets, net of near-term repayments, were in the range of 30%-50% of customer deposits at all three banks). All three banks hold large FC liquidity buffers sufficient to withstand substantial (above 50%) reductions in FC-denominated customer funding.

The banks’ Support Rating Floors of ‘No Floor’ and their ‘5’ Support Ratings reflect thei banks’ limited systemic importance and Fitch’s view that extraordinary support from the Uzbek authorities is therefore unlikely. The ability of the banks’ shareholders to provide support cannot be reliably assessed and therefore this support is not factored into the ratings.

Upside for the banks’ ratings is currently limited, but could arise in case of an overall improvement in the operating environment. UB’s ratings may be also upgraded if the bank diversifies its franchise significantly along with a tightening of risk policies.

The banks’ ratings could be downgraded in case of significant deterioration in the operating environment or a weakening of asset quality and capital metrics.

Fitch does not anticipate changes to the Support Ratings and SRFs given the banks’ limited systemic importance.

The rating actions are as follows:

Ipak Yuli Bank
Long-Term Foreign and Local Currency IDRs upgraded to ‘B’ from ‘B-’; Outlook Stable
Short-Term Foreign and Local Currency IDRs affirmed at ‘B’
Viability Rating upgraded to ‘b’ from ‘b-’
Support Rating affirmed at ‘5’
Support Rating Floor affirmed at ‘No Floor’

Trustbank
Long-Term Foreign and Local Currency IDRs upgraded to ‘B’ from ‘B-’; Outlook Stable
Short-Term Foreign and Local Currency IDRs affirmed at ‘B’
Viability Rating upgraded to ‘b’ from ‘b-’
Support Rating affirmed at ‘5’
Support Rating Floor affirmed at ‘No Floor’

Universalbank
Long-Term Foreign and Local Currency IDRs upgraded to ‘B-’ from ‘CCC’; Outlook Stable
Short-Term Foreign and Local Currency IDRs upgraded to ‘B’ from ‘C’
Viability Rating upgraded to ‘b-’ from ‘ccc’
Support Rating affirmed at ‘5’
Support Rating Floor affirmed at ‘No Floor’