Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has upgraded JSC National Bank for Foreign Economic Activity of the Republic of Uzbekistan’s (NBU) Viability Rating (VR) to ‘b+’ from ‘b’ and affirmed the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at ‘BB-’ with Stable Outlooks. 

The upgrade of NBU’s VR to ‘b+’, one notch above the operating environment score, is driven by the bank’s superior position in the local market, which is underpinned by an extended record of stable asset quality and high capitalisation through the cycle. It also captures the bank’s recent shift to a more commercially-focused business model, which has resulted in tangible improvements to the bank’s profitability.

NBU’s Long-Term IDRs reflect Fitch’s view of a moderate probability of state support, as reflected by its ‘bb-’ Government Support Rating (GSR). This view is based on full state ownership, high systemic importance, policy role as the key lender to strategic industries, and the low cost of support relative to the sovereign international reserves.

Leading Corporate Franchise, Diversification Strategy: NBU is the largest bank in Uzbekistan (20% of sector assets at end-2023) with a particularly strong market position in corporate lending, given its policy mandate for financing strategic industries. While it has prioritised commercial financing (particularly in retail) under the new strategy, we expect directed lending to state-owned corporates (SOEs) to remain the key part of its business in the medium term.

High Concentrations, Retail Loan Growth: Given NBU’s corporate focus, credit risk mainly stems from high industry and borrower concentrations as well as above-sector loan dollarisation (66% of gross loans at end-2023). Risks are mitigated by government guarantees on most directed loans and access to stronger SOEs that have hard-currency revenue or receive direct budget transfers. Despite high retail loan growth (50% in both 2022 and 2023), we expect problem loans to mostly originate in the corporate segment in the near term.

Stable Asset Quality: Impaired (Stage 3) loans have been stable in recent years and equalled 4.4% of gross loans at end-1H23 while Stage 2 loans made up 14.5%. Problem loans were almost entirely non-state corporate and SME exposures and were fully reserved. We expect loan quality to remain stable in the near term, with the impaired loans ratio forecast at around 4% by end-2024. Non-loan exposure (27% of total assets at end-1H23) mostly includes sovereign debt and short-term placements with the Central Bank of Uzbekistan and are of good credit quality, in our view.

Gradual Improvements in Performance: NBU’s underlying profitability has markedly improved in the last few years due to the shift to higher-margin commercial lending, while maintaining high cost efficiency. This was helped by one-off factors of trading gains in 2022 and low provisioning costs in 1H23. We expect the bank’s profit generation in 2024-2025 to weaken vs 2022-1H23 metrics, but remain above the historical average, with the return on equity forecast in the range of 10%-15%.

Strong Capitalisation: The Fitch Core Capital (FCC) ratio was a high 23% of regulatory risk-weighted assets at end-2022. Despite higher lending growth in 2023, we expect the FCC ratio to remain sustainably above 20% in 2024-2025, helped by strong internal capital generation. NBU has not needed any capital injections from the state over the past few years, and we expect profit retention to continue supporting capital ratios.

High Non-Deposit Funding: NBU remains highly reliant on state and wholesale funding that together made up 84% of total liabilities at end-1H23. We assess the bank’s near-term refinancing risks as limited while its liquidity buffer covered around a quarter of liabilities.

State-Dominated Economy, Structural Weaknesses: Uzbekistan’s economy remains heavily dominated by the state, despite recent market reforms and privatisation plans, resulting in weak governance and generally poor financial transparency. Additional risks stem from high dollarisation and concentrations of the banking sector and reliance on state and external wholesale debt.h