Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has affirmed Uzbekistan-based Microcreditbank’s (MCB) Long-Term Issuer Default Ratings (IDRs) at ‘BB-’ with a Stable Outlook and Viability Rating (VR) at ‘b-’.

MCB’s Long-Term IDRs are equalised with Uzbekistan’s sovereign rating (BB-/Stable) at this rating level to reflect Fitch’s view of a moderate probability of government support, as expressed by its Government Support Rating (GSR) of ‘bb-’. The bank’s VR reflects its small franchise in a weak operating environment, involvement in subsidised lending, limited profitability, moderate capitalisation, and considerable reliance on wholesale borrowings.

In Fitch’s view, the Uzbek authorities would have a high propensity to support MCB, in case of need, given its state ownership, special status as the agent bank for subsidised social lending, the low cost of potential support relative to the sovereign’s international reserves, and support record.

Uzbekistan’s economy remains heavily dominated by the state, despite recent market reforms and privatisation plans, resulting in weak governance and generally poor financial transparency. Additional risks stem from high dollarisation and concentrations of the banking sector and reliance on state and wholesale debt.

MCB is a small bank in the concentrated Uzbek banking system, making up 3% of sector assets and loans as of 1 June 2024. MCB provides state-subsidised SME and retail loans (end-1Q24: 35% of gross loans), but also develops the commercial segment.

After rapid growth over 2020-2022, the loan book grew by only 6% in 2023 and contracted by 2% in 3M24. The agency expects loan expansion to be moderate at 15% in 2024, with retail lending the major contributor. Combined with weak underwriting standards and provisioning policies, high loan growth in previous years weighs on MCB’s risk profile. At end-1Q24, loan dollarisation was large at 26%, but below the sector average of 44%.

MCB’s impaired loans rose to 16% of gross loans at end-2023 (end-2022: 12%), due to deterioration in the bank’s corporate and SME book. Stage 2 loans added another 25%. The total reserve coverage of impaired exposures was only 44% at end-2023, lower than the sector average. The agency expects the impaired loans ratio to remain high in 2024-2025, which may force MCB to create additional provisions.

MCB’s profitability has historically been limited, with operating profit below 1% of risk-weighted assets. In 2023, the bank reported a net loss at 13% of average equity, due to higher funding costs, impairment charges and cost base. Fitch believes credit losses will continue to weigh on MCB’s performance in 2024-2025.

MCB’s Fitch Core Capital ratio reduced to 17.6% at end-2023 (end-2022: 20.5%), due to net losses. The bank receives regular capital contributions from the government to support its policy lending. New capital injections totaled 3.1 trillion soums in 2019-2023, and the agency expects additional 2 trillion soums contributions until end-2024. Given the expected weak performance, MCB will continue to rely on ordinary support from the state.

MCB’s market borrowings were notable at 38% of total liabilities under local GAAP at end-1Q24. These were mostly long-term loans from international financial institutions, while interbank deposits were a sizeable 11% of total liabilities on the same date. Cheap state funding accounted for another 38%. MCB’s liquidity buffer was a limited 11% of total assets and covered just 0.8x short-term external debt repayments at end-1Q24, which heightens the bank’s refinancing risk.