Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has affirmed Joint Stock Commercial Mortgage Bank Ipoteka-Bank’s (Ipoteka) Long-Term Issuer Default Ratings (IDRs) at ‘BB-’ with Stable Outlooks. The agency has also affirmed the bank’s Viability Rating (VR) at ‘b’.

Ipoteka’s IDRs reflect Fitch’s view of a moderate probability of support from the government of Uzbekistan in case of need, as reflected by the bank’s Support Rating (SR) of ‘3’ and Support Rating Floors (SRF) of ‘BB-’. This view is based on the bank’s majority state ownership, moderate systemic importance, current role in the government’s economic and social policy, the low cost of potential support relative to sovereign international reserves and a record of capital and liquidity support from the state.

Ipoteka was included in the list of banks to be privatised in the medium term. Our affirmation of the IDRs reflects our expectation that the government will continue to support state-owned banks as long as they remain in majority state ownership. In a scenario where a foreign investor with a rating above Uzbekistan’s sovereign rating (BB-/Stable) acquires a controlling stake in Ipoteka there would be no implications for the bank’s ratings. In this case Fitch’s assessment of shareholder ability to support Ipoteka would be unlikely to weaken, and the bank’s IDR would not be downgraded as a result of privatisation.

The authorities’ ability to provide support is underpinned by the moderate size of the banking sector relative to the economy (total assets at 63% of GDP at end-2020) and large international reserves (USD35 billion at end-2020). However, our assessment of support ability also factors in high concentrations in the banking sector (with state-owned banks accounting for 85% of end-1Q21 sector assets), high loan dollarisation (50% at end-1Q21), a high share of external funding in the banking sector and vulnerability to external shocks in a volatile operating environment, as government finances are sensitive to commodity exports and remittances.

The Stable Outlook on the bank’s IDRs mirrors that on the sovereign.

The affirmation of Ipoteka’s ‘b’ VR captures Fitch’s assessment of the challenging operating environment in Uzbekistan, high lending growth in recent years, which was supported by equity injections from the state, largely untested asset quality, high balance-sheet dollarisation and increased dependence on external foreign-currency funding. The rating also considers the bank’s notable franchise in SME and mortgage lending, an adequate capital cushion and moderate profitability. Credit risk stems mainly from Ipoteka’s loan book, which accounted for 75% of total assets at end-2020. Impaired loans (Stage 3 under IFRS 9) accounted for 5.9% of gross loans at end-2020, up from 3.5% at end-2019, with the majority concentrated within the SME portfolio (37% of gross loans at end-2020). Coverage of impaired loans by total loan loss allowances was a reasonable 80% at the same date. Significant loan dollarisation (31% at end-2020) is also factored into Fitch’s assessment of assetquality risks, although it is lower than that of most other state-owned banks in Uzbekistan.

Retail portfolio (40% of gross loans at end-2020) is mainly represented by secured mortgage loans (34% of gross loans), originated under government-support programmes. Unsecured consumer lending is only developing and constituted 43% of Ipoteka’s Fitch Core Capital (FCC) at end-2020. 

Profitability has been moderate at Ipoteka in recent years, with operating profit/regulatory riskweighted assets (RWAs) at 1.9% in 2020 (2019: 2.6%). Profitability was supported by moderate net interest margins (6% in 2020) and stable fee and commission income (21% of operating income). Preimpairment profitability was a reasonable 5% of average loans, while cost of risk was 2.7% in 2020, resulting in an adequate return on average equity of 10.6%.

Capital buffer is adequate at Ipoteka, with FCC at 15.2% of its regulatory RWAs at end-2020. Regulatory capital ratios were comfortably above the required minimum levels, with the Tier 1 and Total capital ratios standing at 13.2% and 17%, respectively, at end-2020, compared with the regulatory minimums of 10% and 13%. Fitch expects capital ratios to decrease moderately in the medium term if the bank’s active growth is not supported by new equity injections.

Wholesale funding was equal to 65% of total liabilities at end-2020, driving the loans-to-deposits ratio to a high 277%. This mainly comprised long-term facilities from the government (37% of end-2020 liabilities) and international financial institutions (17%). A debut USD300 million bond issued in November 2020 represented 11% of the bank’s liabilities at the same date. Customer accounts (32% of total liabilities) were highly concentrated, as placements of regional budgets and state-related companies accounted for a high 55% of the total at end-2020.

The cushion of liquid assets was moderate at Ipoteka, with end-2020 cash and short-term interbank placements at UZS5.1 trillion (about USD500 million) or 1.3x its wholesale debt maturing in 2021. Liquid assets exceeded short-term wholesale debt repayments at 13% of customer accounts at end-2020. Ipoteka’s liquidity cushion further improved in 2Q21 after an UZS785 billion Eurobond issue.