Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has affirmed Uzbekistan-based Joint Stock Commercial Bank Universal Bank’s (UB) Long-Term Issuer Default Ratings (IDRs) at ‘B-’ with a Stable Outlook.

Fitch has withdrawn UB’s Support Rating and Support Rating Floor as they are no longer relevant to the agency’s coverage following the publication of our updated Bank Rating Criteria on 12 November 2021. In line with the updated Criteria, we have assigned UB a Government Support Rating (GSR) of ‘No Support’.

The IDRs of UB are driven by its standalone credit profile, as captured by its ‘b-’ Viability Rating (VR). The VR reflects UB’s small franchise, high loan growth in unsecured retail and SME segments, some corporate governance risks (potentially high related-party lending) and still developing underwriting standards and risk controls.

The GSR of ‘No Support’ factors in UB’s low market shares in the highly concentrated Uzbek banking sector (below 1% of system assets at end-3Q21) and thus limited systemic importance. Support from the bank’s private shareholders cannot be reliably assessed and is therefore not factored into the ratings.

The Fitch-estimated impaired loans ratio (loans in three lowest statutory quality brackets) increased to 2.8% of gross loans in 3Q21 from near zero at end-2020, reflecting the bank’s loan book seasoning. We believe this trend will continue, due to rapid lending expansion in recent years, provision of lengthy grace periods on a material portion of loans and aftermath of payment holidays in 2020. Thus we expect further loan-quality deterioration in 4Q21-2022 although in our base-case scenario its impaired loans ratio should remain in single digits.

Positively, UB’s loan book’s dollarisation is lower than at peer banks (25% at end-3Q21 compared with the 50% sector average) and its loan growth moderated in 2020-3Q21. In addition, a share of liquid non-loan assets increased to a high 32% of total assets at end-3Q21 and these typically carry a lower credit risk.

Due to limited operating efficiency (cost-to-income ratio was about 60% in 2020 and 3Q21), UB’s pre-impairment profit buffer (6.5% of average gross loans in 3Q21, annualised) is only moderate in light of potential further asset-quality deterioration. The cost of risk increased to 5% in 9M21, translating into a weak return on average equity of 4% in 9M21 (all annualised). We expect impairment charges to remain high in 4Q21-2022 as the bank will need to create new provisions given the seasoning of loans, and thus profitability to remain low.

The bank’s regulatory capitalisation is moderate, in our view, with Tier 1 and Total capital ratios equal to 13% and 14% at end-3Q21, respectively, which provides thin headroom over minimum statutory requirements (10% and 13%, respectively). The bank may receive new capital contributions from its shareholders in the medium term but this will mostly be consumed by loan growth, and capital buffers over minimum requirements will remain tight, in our view.

UB is mainly funded by non-state customer accounts (79% of total liabilities at end-3Q21), which are price-sensitive and thus translate into above-market funding costs (10% in 9M21). Funding from the state comprised another 11% of liabilities while wholesale debt is low (2%). The bank improved its liquidity cushion in 9M21, with liquid assets (cash, short-term placements/notes with the Central Bank of Uzbekistan and foreign banks) covering over 40% of non-state customers at end-3Q21.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

UB’s ratings could be downgraded in case of loss-making performance on a pre-impairment basis or a material increase in the cost of risk leading to net losses and breaching of the statutory capital minimums.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of UB’s VR and IDRs would require material improvements in the operating environment of Uzbekistan, coupled with a strengthening of UB’s corporate governance, underwriting standards and risk management so that operating efficiency improves and asset-quality risks moderate, translating into stronger profitability and a higher capital buffer.