Fitch has also downgraded the bank's Long-term local currency IDR to 'B-' from 'B'. The agency has removed the IDRs from Rating Watch Negative (RWN), where they were placed on 31 October 2011.

Agrobank's IDRs reflect Fitch's view of the probability that support would be forthcoming from the Uzbek authoriities if needed. This view takes into account the evidence of recent regulatory forbearance, the track record of equity injections, Agrobank's significant systemic importance as the fourth-largest bank by assets in the country, and its policy role as a lender to the agricultural sector.

At the same time, the downgrade of the Long-term local currency IDR to 'B-' from 'B' reflects the fact that support made available to date by the state authorities, combined with a further planned equity injection, is unlikely, in Fitch's view, to be sufficient to fully restore the bank's solvency.

The affirmation of the VR at 'f' reflects Fitch's view that the bank has not yet regained its solvency following losses resulting from the alleged fraudulent activities of its former employees, discovered in 2011.

Agrobank received about UZS11bn of new capital from the state in 2011 and UZS41bn in H112. Taking into account its UZS9bn local GAAP net profit in H112, the bank's Fitch core capital (FCC) should improve but remain negative at end-2012 due to the necessary impairment adjustment relating to the UZS249bn claims against the former employees. The bank expects to recover this amount by taking ownership of property allegedly acquired following the fraud. However, an immaterial proportion has actually been repossessed to date, and Agrobank's auditors made a qualification to the bank's 2011 IFRS accounts with respect to these assets.

Management previously expected that the state would make a further UZS74bn equity injection during 2012, but the deadline has slipped several times. Should the expected capital contribution be made in Q412, Agrobank's FCC could turn modestly positive but Fitch estimates that the FCC/risk-weighted assets ratio would likely still be in the low single-digit percentage range.

At end-7M12, Agrobank's liquid assets totalled a moderate UZS173bn, or 17% of customer deposits, according to its statutory accounts. However, some of these assets could be encumbered in currency conversion operations for clients and, hence, unavailable for Agrobank's general liquidity needs. Furthermore, the bank has been in breach of some covenants on its third-party wholesale debt. On balance, deposits have been stable to date and the wholesale debt was a manageable 5% of liabilities at end-7M12 and has not been accelerated to date.

The IDRs and Support Rating Floor could be downgraded further should the bank's weak solvency translate into liquidity problems without sufficient and timely state support being made available.

The Long-term local currency IDR could be upgraded back to 'B' if a recapitalisation of the bank restores its solvency. A strengthening of the bank's capital position, as a result of equity injections and/or recovery of problem receivables, could also result in an upgrade of the VR.

The potential for any upgrade of the Long-term foreign currency IDR and Support Rating Floor is constrained by Uzbekistan's foreign currency transfer and convertibility risks, as a result of which Fitch caps the Long-term foreign currency IDRs of all Uzbek banks at 'B-'.

The rating actions are as follows:

Long-term foreign currency IDR: affirmed at 'B-'; Outlook Stable; off RWN
Short-term foreign currency IDR: affirmed at 'B'; off RWN Long-term local currency IDR: downgraded to 'B-' from 'B'; Outlook Stable; off RWN
Short-term local currency IDR: affirmed at 'B'; off RWN Viability Rating: affirmed at 'f'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'B-'; off RWN