Tashkent, Uzbekistan (UzDaily.com) -- S&P Global Ratings had affirmed its ‘BB-/B’ long- and short-term issuer credit ratings on National Bank for Foreign Economic Activity of the Republic of Uzbekistan (NBU). The outlook remains stable.

The affirmation reflects our expectation that the bank will remain the largest financial institution in Uzbekistan, maintaining its dominance in government-related and commercial lending, as well as in systemwide customer deposits.

The agency said it expects that NBU’s capitalization will materially improve, and forecast our risk-adjusted capital (RAC) ratio at close to 10% at year-end 2021, a significant increase from 5.8% at year-end 2018. We also estimate that the bank’s regulatory capital adequacy ratio will increase to about 30% by year-end 2019. This improvement will come through the recently initiated reform of state-owned banks, which will see NBU transfer about 26% of its existing loan portfolio to Uzbekistan Reconstruction and Development Fund (UFRD). The bank will also receive about $680 million in common equity through the conversion of some of UFRD’s deposits into capital. Furthermore, it will convert government-related entity loans of $680 million that remain on its balance sheet to local currency with higher interest rates.

“We think that the transfer of loans and conversion of the remaining loans into local currency will reduce dollarization and single-name concentration in the bank’s loan portfolio. In particular, we expect the share of loans in foreign currency will decline to 57% from 83% as of Oct. 1, 2019,” the agency said.

“We forecast that lending growth will slow, but remain significant at 25%-30% per year in 2020-2021. In our view, commercial lending will become the key spur of credit growth and may increase by 40%-50% annually, since the bank will utilize its capital buffer to further strengthen its commercial banking franchise. Although we expect that the share of commercial lending will increase, state-related business will remain an important part of the bank’s business model and represent about 50% of the loan portfolio over the next two years. Nevertheless, increasing commercial lending and higher interest rates on the remaining state-related loans will improve the bank’s earnings capacity and business sustainability. We expect that the bank’s problem assets will gradually increase to 2.0%-2.2% in 2020-2021 from 1.6% as of year-end 2018,” it added.

Like other large state-owned Uzbek banks, NBU will lose access to cheap and long-term funding at UFRD. We expect that funds attracted from international financial institutions (IFIs) and other banks will represent about half the bank’s funding base. We note that major IFI funds are long-term project resources attracted to support a particular development activity of the bank. We, therefore, expect that the bank’s funding base will remain stable. In our view, the bank’s funding base is similar to that of other large state-owned banks in terms of stability and diversity.

Based on the bank’s increasing capitalization, we now assess the stand-along credit profile (SACP) at ‘bb’. However, we think that the bank’s creditworthiness is closely linked to the situation in the Uzbek economy where it operates and to the creditworthiness of the government. We therefore cap the long-term rating at the level of the sovereign credit rating. Materially higher problem assets and credit losses than we currently expect could mean we revise the SACP downward, but are unlikely to put pressure on the ratings.

We believe the bank will remain closely linked to the government and continue playing an important role in implementing the economic policies of the state. We think that the government will continue to control the bank’s strategy. In addition, unlike for other large state-owned banks, we do not expect even partial privatization of NBU in the next three-to-five years.

The stable outlook on NBU reflects our view that ongoing state support over the next 12 months largely balances high economic and industry risks in Uzbekistan’s banking sector.

We are unlikely to raise the ratings over the next 12 months unless our view of the sovereign’s creditworthiness improves.

We could downgrade NBU over the next 12 months if the sovereign’s creditworthiness deteriorates materially.