Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings said that large capital buffers will help state- and foreign-owned banks in Uzbekistan mitigate the effects of increasing economic risks caused by the expected recession in the key trading partners and COVID-19 outbreak. Therefore, we believe there will be no immediate impact on rated state- and foreign-owned banks’ creditworthiness.

“While we revised our outlooks on several domestic privately owned banks, our view of National Bank For Foreign Economic Activity Of The Republic Of Uzbekistan (BB-/Stable/B), Uzpromstroybank (BB-/Stable/B), Ipoteka Bank JSCM (BB-/Stable/B) and Turon Bank (B/Stable/B) is unchanged. Likewise, we have not changed our assessment of the credit profile of KDB Bank Uzbekistan JSC (BB-/Stable/B),” the agency.

S&P Global Ratings thinks that lower economic growth and a weaker external environment will put pressure on Uzbekistani banks’ earnings and asset quality.

The company expects, in particular, that the systemwide problem assets will jump to 4.0%-5.0% in 2020 from 1.6% in 2019, and new credit losses will increase to 3.0%-4.0% of the loan portfolio. Nevertheless, we think that credit profiles of largest rated state-owned banks will be resilient to the economic shock for the following reasons:

Solid capital buffers will support the largest banks’ credit ratings. As of year-end 2019, NBU, Uzpromstroybank and Ipoteka Bank demonstrated high capitalization with our risk-adjusted capital ratio exceeding 10.0%. On the same date, their buffers were more than 700 basis points above the minimum capital regulatory ratio (13.0%). Capitalization of the largest state-owned banks materially improved last year, after the government converted some Uzbek Fund for Reconstruction and Developments’ (UFRD) deposits into the banks’ capital and transferred a significant number of loans provided to SOEs to UFRD. (For more information, see "Uzbekistan-Based Uzpromstroybank And Ipoteka Bank JSCM Upgraded To ‘BB-’ On Government Support; Outlooks Stable," published Oct. 25, 2019; and "National Bank For Foreign Economic Activity Of The Republic Of Uzbekistan ‘BB-/B’ Ratings Affirmed; Outlook Stable," published Dec. 23, 2019.)

The hit on asset quality will likely be softer than that for some private banks. This is because the state-related banks have higher exposure to state-owned enterprises (SOEs) and subsidized mortgages, and lower exposure to small and midsize enterprises (SMEs) and private entrepreneurs compared with private banks. We think that SOEs suffering from this crisis, for example, those operating in transport sector, will benefit from the government support if needed. At the same time, subsidized mortgages will bring fewer credit losses than private entrepreneur and unsecured retail loans.

Funding profiles will be stable, supported by material share of deposits placed by SOEs and government bodies.

“In our view, strong capital buffers, predominance of low-risk liquid assets, and potential extraordinary support from the parent, Korea Development Bank, will support credit ratings on KDB Bank Uzbekistan. Moreover, we think that the bank will continue to demonstrate the lowest credit losses among peers thanks to a very conservative approach to borrower selection in previous years,” S&P Global Ratings added.

“We think that the ratings on Turon will remain supported by adequate capital buffer and ongoing support from the government, which guarantees about 25% of its loan portfolio. At the same time, the rating level is closer to that on private banks, rather than to major state-owned banks, due to the bank’s relatively weaker business franchise and higher exposure to SMEs and agricultural sector,” the agency stated.