“We classify the banking sector of the Republic of Uzbekistan (not rated) in group ‘8’ under our Banking Industry Country Risk Assessment (BICRA) methodology. This reflects an economic risk score of ‘7’ and an industry risk score of ‘9’”, the agency said.

“BICRA groups summarize our view of the risks that a bank operating in a particular country and banking industry faces relative to those in other banking industries. They range from group 1 (the lowest risk) to group 10 (the highest risk). Other countries in group ‘8’ are Argentina, Azerbaijan, Bolivia, Georgia, Hungary, Kazakhstan, Lebanon, Nigeria, Paraguay, Slovenia, Sri Lanka, and Tunisia,” the press release of the agency noted.

“We use our BICRA economic risk and industry risk scores to determine a bank’s anchor, the starting point in assigning an issuer credit rating to a bank under our bank criteria. The anchor for a commercial bank operating only in Uzbekistan is ‘b+’”, the statement said.

MAJOR FACTORS
Strengths:

• Uzbekistan has strong fiscal and external surpluses, supported by good economic growth prospects.

• Economic imbalances are limited owing to the closed and state-controlled economy.

• The banking sector’s funding base is generally stable, essentially comprising customer deposits and development funds.

Weaknesses:

• The economy bears very high credit risk, given the population’s relatively low wealth relative to peers, as well as relaxed underwriting standards and vulnerability of the legal system.

• The institutional framework and governance are weak, and transparency is lacking.

• Competition is distorted because of the government’s tight control of the economy and the influence it exerts over the banking system.

“Uzbekistan has infrastructure deficiencies and relatively low wealth, with GDP per capita we estimate at about $2,000 in 2014 and gross national income per capita of $5,350 at purchasing power parity in 2013 according to World Bank estimates. We think disposable income per capita might be higher, however, given the country’s sizable shadow economy.

“In our opinion, decision-making process for the economic policy of the state is highly centralized, which undermines government policy predictability. This is further aggravated by the country’s limited monetary policy flexibility, given the de facto multiple exchange rate regime and the private sector’s restricted access to foreign currency exchange.

“Uzbekistan has come through the recent global downturn relatively unscathed thanks to its limited integration into global financial markets, high commodity prices for key exports, and the government’s stimulus program. However, we view the high vulnerability of the country’s economic performance to terms-of-trade fluctuations in the export-oriented commodities sector--especially natural gas, metals (mainly gold), and cotton--as a weakness,” Standard & Poor’s added.

“The government tightly controls the economy and banking system. The centralized and state-controlled nature of the economy reduces external volatility and limits the build-up of asset price bubbles, in sectors such as real estate,” Standard & Poor’s added.

“Although leverage in the corporate and household sectors is low, we believe low wealth levels, relaxed underwriting practices, and vulnerability of the legal system result in potentially very high credit risk for the banking sector. We note however, that nonperforming loans remained below 1% in 2013,” the agency said.

“The regulatory and supervisory framework in Uzbekistan is still being developed, which imposes only limited market discipline. In addition, even though we have witnessed some initiatives by the Central Bank of Uzbekistan to improve disclosure, governance, and transparency, we currently we view these steps as very limited. State-owned banks dominate the system, with a market share of almost 80% in terms of assets and a high level of directed lending, which distorts competition and affects private banks’ creditworthiness. In addition, the government uses most state-owned banks to provide financial support to key economic sectors, which puts pressure on their margins,” Standard & Poor’s said in the press release.

“Our opinion of system wide funding reflects the high share of total loans funded by customer deposits. Systemwide net external funding represents a moderate 14% of total loans, which has mostly been raised by the two largest state-owned banks. The shallow and relatively illiquid domestic debt capital market and lack of sufficient access to long-term or international funding resources is a negative factor.

“We classify the Uzbek government as "supportive" of the domestic banking system. The government tightly controls the system and has a track record of extraordinary support to banks during times of stress.

“We view the trend for Uzbekistan’s economic risk as stable despite upcoming parliamentary and presidential elections and high credit growth in the economy. We expect Uzbekistan to maintain a strong fiscal and external position with limited economic imbalances, while the current political and economic systems remain unchanged. Credit risk remains structurally very high owing to Uzbekistan’s relatively low economic development, with GDP per capita of about $2,000 in 2014 and gross national income per capita of about $5,340 at purchasing power parity in 2013, and a weak payment culture and vulnerability of the legal system,” the agency underlined.

“We assess the trend for Uzbekistan’s industry risk as stable. Positive changes in the areas of transparency and data quality could lead us to revise the institutional framework score. We consider that the dominance of state-related banks in the system may hamper competition in the banking sector. The funding profiles of Uzbek banks are largely stable, supported by the growth of government funding and corporate deposits. However, we see decreasing growth in retail deposits and deterioration in banks’ capitalization ratios due to rapid asset growth,” Standard & Poor’s concluded.