Tashkent, Uzbekistan (UzDaily.com) -- Following a recent review of the Banking Industry Country Risk Assessment (BICRA) for Uzbekistan, S&P Global Ratings revised its economic risk assessment to ‘7’ from ‘8’. The agency has revised its BICRA score for Uzbekistan to group ‘8’ from group ‘9’. The ratings on 12 rated banks in the country remain unchanged.

The Uzbekistani government’s strong fiscal and external positions support the ‘BB-/B’ long- and short-term foreign and local currency sovereign credit ratings on the country. These strengths predominately arise from the government’s large asset position, which, together with relatively low government debt, gives Uzbekistan additional flexibility to manage potential stresses in the economy and provide support to state-owned enterprises or the banking sector, if necessary.

The economy remains in an expansionary phase with projected real economic growth of 5.0%, on average, through 2021.

“Nevertheless, we view economic imbalances as currently modest. We think that the lower imbalances compared with regional peers such as Kazakhstan and Russia reflect the Uzbekistani government’s much higher involvement in increasing lending, the banks’ lower exposure to the real estate market, much lower mortgage lending as a percentage of systemwide loans, and underdeveloped commercial real estate and equity markets. We have also noted very modest real price increases for residential real estate in the country over the past four years, stemming from widespread state-led construction, undeveloped mortgage lending, and low housing affordability. Consequently, we currently see limited risk of asset bubbles elsewhere in the economy. We have therefore revised our economic risk assessment for Uzbekistan to ‘7’ from ‘8’ and we now classify the banking sector of the country in group ‘8’ under our BICRA, together with Russia, Georgia, Armenia, and Argentina,” the agency said.

“At the same time, we note that for the first 11 months of 2018, nominal lending growth in the country was close to 45% and we expect it will average of 35%-40% over the next two years. We acknowledge that the government is the main driver of this increased lending, and that high inflation exacerbates this. We do not rule out that this lending could lead to higher credit losses or the build-up of problem assets in the banking system, considering the still-high credit risks in the economy. This mainly reflects very low levels of household income, relaxed underwriting standards, the slow and inefficient judiciary system, and relatively weak payment culture,” S&P Global Ratings added.

“We also think that high single-name concentrations, the relatively high share of loans denominated in foreign currency (close to 56% on average), and high share of directed lending in the system increase credit risks for banks. We expect that reported nonperforming loans will increase to 1.8%-2.3% in 2019-2020 from the currently very low level of 1.3% as the economy becomes more market-oriented. We also estimate that the share of problem loans (including restructured loans) has increased over the past two years and is now close to 10%. This is due to the massive restructuring of foreign-currency denominated loans in 2017 after the sharp devaluation of the Uzbekistani soums”, S&P Global Ratings said.

“We think that industry risks for banks operating in Uzbekistan are high. This mainly reflects high intervention by the government in state-owned banks’ decision-making processes, the regulator’s selective approach to supervision, and a complex, competitive landscape dominated by state-owned banks; government-controlled banks have a market share of close to 84% of systemwide total assets. In our view, the predominance of state-owned banks and high share of directed lending in the economy distort competition and the commercial nature of banking business in Uzbekistan. Customer deposits dominate the bank’s funding structure, representing about 70%-80% of banks’ liabilities over the past three years. The majority of the banks’ customer accounts are from corporate customers--including project-based funds from the Uzbekistan Fund for Reconstruction and Development--and they have been stable over the past five years,” the agency said.

“In our view, economic and industry risks for banks operating in Uzbekistan remain high, despite the lower risk of economic imbalances. Therefore, the ratings and outlooks on Uzbekistan’s local banks remain unaffected by our revision of Uzbekistan’s economic risk and BICRA group assessment,” the S&P Global Ratings said.