Fitch Ratings has today assigned Uzbekistan-based Pakhta Bank (PB) ratings of Long-term Issuer Default (IDR) ’B-’ (B minus) with Stable Outlook, Short-term IDR ’B’, Individual ’D/E’, Support ’5’ and Support Rating Floor ’B-’ (B minus).

PB’s Long- and Short-term IDRs and Support ratings are underpinned by the potential support from the Uzbek authorities. Given PB’s role in the Republic’s economy as a financial agent of the state, particularly for agriculture projects, PB’s close ties with the authorities and state-controlled industry associations, which are also the bank’s shareholders, and the recent decision of the state to acquire a direct stake in the bank, in Fitch’s view, there would be a high propensity of the authorities to support PB, in case of need. However, in light of the Uzbek sovereign’s own credit profile, this support cannot be relied upon.

Improvement or deterioration in Uzbekistan’s sovereign risk profile could generate upward or downward pressure, respectively, on PB’s ratings. A deepening of the relationship between the Uzbek authorities and PB, especially if the Ministry of Finance (MoF) ultimately consolidates majority ownership of the bank, could result in Fitch revising upwards its view of the propensity of the authorities to provide support and therefore generate rating upside.

The Individual rating reflects the bank’s size, which is small by international standards, its high and concentrated risk profile given its business focus on the agriculture sector, low profitability and certain weaknesses in the operating environment. At the same time, the rating considers the currently low levels of loan impairment and market risk.

Upside for the Individual rating is currently limited, but PB’s stand-alone credit profile could benefit from further diversification and growth of franchise, a notable improvement in profitability and improvements in the Uzbek operating environment. The large planned equity increase in which the MoF is to participate will also provide at least short-term support to PB’s currently moderate capitalisation. The major risk to which PB is exposed is a failure in any year of the cotton crop, which could result in large credit losses and possibly the need for external support, thus causing a downgrade of the Individual rating.

PB was established in 1995 on the basis of the state-owned UzAgroPromBank, headquartered in Tashkent, Uzbekistan. At end-H107, PB was the fourth-largest bank in the country, holding around 7% of sector assets and 8% of retail deposits, in an industry dominated by state-owned banks. PB has fragmented ownership, but the state, via the MoF, is expected to take a direct blocking stake following a new share issue in H207; in addition, state-controlled (cotton and chemical) associations currently hold together around 28% of PB’s capital. The bank is serving SMEs and individuals through 186 branches and 665 mini-offices located nationwide, and financing of agriculture sector companies (mainly cotton and grain producers) remains the core of the bank’s franchise.