The upgrades of AB and UPSB follow recent equity issues by the two banks which have resulted in state bodies - the Ministry of Finance (MOF) and the Uzbekistan Fund for Reconstruction and Development (UFRD) - together holding majority stakes in both banks and their Supervisory Boards now being chaired by the Prime Minister (AB) and Deputy Prime Minister (UPSB). Taking into account the more direct and visible government control of the banks, Fitch considers there to be now less uncertainty about the authorities’ propensity to support the banks in case of need. Asaka remains majority owned by the MOF and UFRD, and all three banks have significant domestic franchises and operate to a large degree as agents of government policy in serving particular sectors of the economy. Taking into account these factors, Fitch now factors similar support expectations into its ratings of the three banks.

Fitch’s view of the probability of support from Uzbek authorities to the banks is constrained by Fitch’s assessment of the sovereign’s own credit profile. At the same time, sovereign resources are considerable relative to the size of the national banking sector, whose liabilities were equal to a moderate estimated 28% of GDP at end-2008 and consisted mainly of deposits of domestic customers and placements by government bodies. In particular, Fitch understands that sovereign foreign currency reserves of around USD9.5bn at end-2008 exceeded external banking liabilities by 8x-10x, with a large majority of banks’ foreign borrowings already guaranteed by the government and/or obtained from international financial institutions. Further movements in the IDRs of AB, Asaka and UPSB will likely be driven by changes in Fitch’s assessment of Uzbekistan’s sovereign credit profile, and Fitch’s view of the ability and propensity of the authorities to support the banks in case of need.

The ’D/E’ Individual rating of AB reflects the bank’s size, which is small by international standards, its high-risk profile given its single-sector concentration (loans to agricultural companies represented 73% of end-5M09 loans), weak profitability and the challenging operating environment. At the same time, the rating considers the bank’s currently manageable loan impairment levels, and limited refinancing and market risk. Upside for the bank’s Individual rating is currently limited, but AB’s stand-alone credit profile could benefit from growth of franchise, a notable improvement in profitability and improvements in the Uzbek operating environment. The planned further equity increase in H209, following that in Q109, will also provide at least short-term support to AB’s currently modest capitalisation. The major risk to which AB is exposed is a failure in any year of the cotton or grain crop, which could result in large credit losses and, possibly, the need for external support, thus causing a downgrade of the Individual rating.

Agrobank was established in 1995 as Pakhta Bank and was reorganised and renamed in Q109. The reorganisation involved the subsequent takeover of the business of the smaller Uzbek bank, Gallabank, which specialised in servicing grain producers. At end-Q109, AB was the fourth-largest bank in the country, holding around 9% of sector assets. AB plays a central role in delivering agricultural credit, mainly to cotton and grain producers, in Uzbekistan.

The ’D/E’ Individual rating of Asaka considers the bank’s rapid loan growth (up 27% in 2008, with a similar trend in 5M09), concentrated balance sheet (both by segment and counterparty), the weak quality of directed lending assets (rescheduled loans and those under litigation accounted for a significant, albeit reduced, 13% of end-2008 loans, with a further 5.7% of loans rescheduled in 5M09), modest profitability and the challenging operating environment. The rating also considers the bank’s adequate capitalisation (Basel I tier 1 and total capital ratios were 28.8% and 31.7%, respectively, at end-2008), which has been further supported by the new large capital injection in Q109, planned to be followed by another in H209. Upside potential for the bank’s Individual rating is currently limited, but Asaka’s stand-alone credit profile could benefit from franchise diversification, a better track record on asset quality, a notable improvement in profitability and a stronger operating environment. Downward pressure could result from further deterioration in loan quality, combined with significant reductions of capital ratios.

Asaka was set up in 1995 (by a decree of the Cabinet of Ministers of Uzbekistan), initially to service the needs of the automobile industry. Since then, the bank’s client base has diversified to include companies from the textile, trade, manufacturing, pharmaceuticals and construction sectors. As at end-Q109, Asaka was the third-largest bank in Uzbekistan, holding nearly 12% of sector assets. The bank serves clients through a broad branch network which covers all 13 regional centres of Uzbekistan.

The ’D/E’ Individual rating of UPSB reflects its small size, high concentrations in the loan portfolio and customer funding, and certain weaknesses in the operating environment. At the same time, the rating considers UPSB’s currently reasonable capital adequacy (Basel I total capital ratio was 16.9% at end-2008). UPSB’s asset quality has been manageable to date, with the largest problem exposure serviced by the state under its guarantee obligation. Upside potential for the bank’s Individual rating is limited, but UPSB’s stand-alone credit profile could benefit from diversification of the bank’s franchise and customer base and improvement in asset quality. Significant credit losses or a marked deterioration in UPSB’s liquidity would exert downward pressure on the Individual rating.

UPSB was established on the basis of a branch of the Soviet Industry and Construction Bank. The bank’s main function is to contribute to the development of local industries by granting long-term loans for capital investment purposes. UPSB’s main clientele includes strategic national corporations from the energy, telecommunication, chemical and transportation industries. At end-Q109, UPSB was the second-largest bank in Uzbekistan, with a market share of 12%.

The Individual rating reflects the standalone strength of a bank while the Support rating reflects the probability of support from a majority shareholder and/or the government.

Rating actions are as follows:

OJSC Agrobank:

Long-term IDR: upgraded to ’B’ from ’B-’; Outlook Stable
Short-term IDR: affirmed at ’B’
Individual rating: affirmed at ’D/E’
Support rating: upgraded to ’4’ from ’5’
Support Rating Floor: revised to ’B’ from ’B-’

Asaka Bank:
Long-term IDR: affirmed at ’B’; Outlook Stable
Short-term IDR: affirmed at ’B’
Individual rating: affirmed at ’D/E’
Support rating: affirmed at ’4’
Support Rating Floor: affirmed at ’B’

Uzpromstoybank:
Long-term IDR: upgraded to ’B’ from ’B-’; Outlook Stable
Short-term IDR: affirmed at ’B’
Individual rating: affirmed at ’D/E’
Support rating: upgraded to ’4’ from ’5’
Support Rating Floor: revised to ’B’ from ’B-’