The Outlooks are Stable. Fitch has also affirmed OJSC Agrobank’s Long-term IDRs at ‘B-’ with Stable Outlooks and upgraded the bank’s Viability Rating (VR) to ‘ccc’ from ‘f’.

UzPSB, Asakabank and Microcreditbank’s ‘B’ Long-term local currency IDRs reflect Fitch’s view of potential support from the government of Uzbekistan, if needed, based on the government’s majority direct and indirect ownership and significant policy roles of the banks. Fitch expects the government and state-controlled entities to continue providing new equity and funding to match banks’ growth plans, mainly associated with state-directed and policy lending.

The government’s ability to provide support is underpinned, in Fitch’s view, by the currently only moderate cost of support potentially required given the small size of the banking sector, its low indebtedness and Uzbekistan’s solid external and fiscal finances. However, Fitch’s credit assessment of Uzbekistan remains constrained by the economy’s structural weaknesses, including the difficult business environment and vulnerability to external shocks (see ‘Uzbek Banks: Growing Without External Leverage’ at www.fitchratings.com).

The affirmation of Agrobank’s Long-term local currency IDR at ‘B-’, reflects that since 2010, government capital support has not been sufficient to fully restore the bank’s solvency. However, the bank’s rating positively considers the track record of timely liquidity support by the authorities, regulatory forbearance and gradual contributions to the bank’s capital.

Fitch caps all Uzbek banks’ foreign currency IDRs at ‘B-’ reflecting the high transfer and convertibility risks present in Uzbekistan due to the country’s tightly regulated FX market. Accordingly, Fitch believes that support in foreign currency to state-controlled banks might be provided in some circumstances in a less timely manner compared with that in the local currency.

An upgrade or downgrade of Uzpromstroybank, Asakabank and Microcreditbank’s Long-term local currency IDRs would be possible in case of a strengthening or weakening of Uzbekistan’s credit profile. Agrobank’s Long-term local currency IDR could be upgraded following the potential full restoration of its capital position.

All banks’ Long-term foreign currency IDRs could be upgraded or downgraded as a result of liberalisation or further tightening of Uzbekistan’s FX market regulation.

UzPSB and Asakabank VRs at ‘b-’ reflect Uzbekistan’s difficult operating environment as well as the banks’ poor corporate governance and risk management, limited commercial franchises and weaknesses in credit underwriting and investment policies resulting from the banks’ policy roles. However, liquidity positions and asset quality are currently satisfactory.

The level of reported non-performing (NPLs; more than 90 days overdue) and restructured loans at the two banks remained at single-digit levels relative to gross loans at end-2012. However, unreserved IFRS impaired loans were a material 33% of Fitch core capital (FCC) at UzPSB and 56% of FCC at Asakabank at end-2012.

Significant volumes of foreclosed property, fixed assets and non-banking equity investments at UzPSB and Asakabank on aggregate made up 66% and 53% of the respective banks’ FCC at end-2012. Fitch believes that divesting the non-banking equities would require the underlying assets to start performing better than previously.

At end-2012, the FCC/weighted risks ratio was a moderate 11% at UzPSB (after being supported by low risk weights on 70% of gross loans covered by government guarantees) and a more solid 17% at Asakabank. However, capitalisation may come under pressure as a result of both banks’ playing an increasingly important role in the government’s industrial development programme if new loans are not matched by guarantees or new equity. Profitability is moderate as a result of tight margins on the banks’ policy lending.

Liquidity profiles benefit from stable funding sources, including the funds of the government, state agents (mostly Uzbekistan’s Fund for Reconstruction and Development), state-controlled companies and state-guaranteed long-term foreign funding, which on aggregate accounted for 77% and 61% of UzPSB’s and Asakabank’s total funding, respectively, at end-2012.

The liquidity cushion at end-2012 was considerably stronger at UzPSB, albeit due to pre-funding for anticipated projects during 2013. Both banks seek to mitigate FX conversion risks (mainly arising with respect to trade finance operations with clients) by taking 100% cash collateral in foreign currencies and placing this liquidity with investment-grade foreign banks.

Fitch has assigned Microcreditbank a VR as the agency now considers the bank’s commercial franchise to have become more material relative to the bank’s overall profile. The VR reflects the bank’s credit exposure to the high risk agriculture and small business sectors, and still limited franchise and track record. However, the VR also considers currently satisfactory asset quality and capital ratios, the latter consistently higher than at peers.

At end-July 2013, 45% of the bank’s gross loans reportedly relating to state-directed seasonal agricultural loans and 22% relating to business and social micro loans extended on non-market terms. These exposures were funded with special-purpose government deposits and equity. Long-term loans on commercial terms were mainly funded with short-term local bank loans and on-demand customer deposits, resulting in a material maturity mismatch.

Microcredit’s FCC/weighted risks was still approximately 20% at end-July 2013, notwithstanding the seasonal peak in lending. Reported NPLs were below 1%, although in Fitch’s view the loan book is quite unseasoned. Performance is weak, as quite high margins are offset by weak efficiency, reflecting the large branch network and small scale of operations.

The upgrade of Agrobank’s VR reflects its somewhat improved capital position and liquidity.

As a result of additional equity contributions in H113 from the state and state-controlled companies, Agrobank’s FCC, net of an UZS250bn unreserved receivable from former employees, improved to around 4% of risk-weighted assets from a negative number at end-2012. The receivable relates to the misappropriation of funds in 2010, and the absence of a reserve against this exposure results in the auditors’ opinion in the bank’s financial statements being qualified.

Capital continues to be burdened by non-banking equity investments (58% of adjusted FCC at end-July 2013), and unreserved NPLs and other IFRS impaired loans (50%). However, Agrobank’s ‘ccc’ VR also factors in Fitch’s expectation of further capital improvement and the fact that reported loan impairment remains low despite a slump in international prices for cotton (the main sector of Agrobank’s borrowers) in recent years.

The adjusted FCC ratio could further grow (potentially close to 8%) by end-2013 as a result of an anticipated UZS13bn equity injection from a state-affiliated company during H213 and a reduction of short-term seasonal loans to the agricultural sector (about 40% of gross loans at peak level at end-July 2013).

Agrobank’s liquidity is currently reasonable given the high proportion of funding from the government and state-controlled agricultural companies (60% of total liabilities at end-July 2013), the comfortable level of liquid assets, the bank’s improving retail funding position and the track record of liquidity support from state-controlled banks.

Liquid assets (including sizeable FX cash and bank placements) were equal to 22% of third-party deposits at end-July 2013, with only a negligible proportion of customer funds being denominated in foreign currency. Liquidity should also somewhat benefit from seasonal loan repayments closer to year end, although this would ultimately be used to repay the related government funding.

Upgrades of the VRs of UzPSB, Asakabank and Microcreditbank would require Uzbekistan’s business environment to substantially improve, and a higher proportion of non-policy related business in the banks’ operations. Agrobank’s VR could be upgraded to ‘b-’ as a result of the full restoration of its capital base.

Downward pressure on the banks’ VRs could arise from a marked deterioration of asset quality, if this was not offset by equity injections.

The rating actions are as follows:

UzPSB
Long-term foreign currency IDR affirmed at ‘B-’; Outlook Stable
Short-term foreign currency IDR affirmed at ‘B’
Long-term local currency IDR affirmed at ‘B’; Outlook Stable
Short-term local currency IDR affirmed at ‘B’
Viability Rating affirmed at ‘b-’
Support Rating affirmed at ‘5’
Support Rating Floor affirmed at ‘B-’

Asakabank
Long-term foreign currency IDR affirmed at ‘B-’; Outlook Stable
Short-term foreign currency IDR affirmed at ‘B’
Long-term local currency IDR affirmed at ‘B’; Outlook Stable
Short-term local currency IDR affirmed at ‘B’
Viability Rating affirmed at ‘b-’
Support Rating affirmed at ‘5’
Support Rating Floor affirmed at ‘B-’

Microcreditbank
Long-term foreign currency IDR affirmed at ‘B-’; Outlook Stable
Short-term foreign currency IDR affirmed at ‘B’
Long-term local currency IDR affirmed at ‘B’; Outlook Stable
Short-term local currency IDR affirmed at ‘B’
Viability Rating assigned at ‘b-’
Support Rating affirmed at ‘5’
Support Rating Floor affirmed at ‘B-’

Agrobank
Long-term foreign currency IDR affirmed at ‘B-’; Outlook
Stable
Short-term foreign currency IDR affirmed at ‘B’
Long-term local currency IDR affirmed at ‘B-’; Outlook Stable
Short-term local currency IDR affirmed at ‘B’
Viability Rating upgraded to ‘ccc’ from ‘f’
Support Rating affirmed at ‘5’
Support Rating Floor affirmed at ‘B-’