Other key drivers include Uzbek banks’ robust earnings which generate capital to fund some of their loan growth. In addition, Moody’s leading asset-quality indicators suggest stable trends for problem loans.

Uzbekistan has achieved a decade of annual growth exceeding 6%, with the International Monetary Fund (IMF) forecasting real GDP growth of 7.0% in 2014. The rating agency highlights that economic growth has been much less volatile than in some other members of the Commonwealth of Independent States (CIS), as Uzbekistan’s commodity exports are relatively diversified, and the government uses export revenues to fund public spending.

Moody’s notes positively the stability of commodity prices (cotton, natural gas and wheat) that represent the rating agency’s leading indicators for asset quality in Uzbekistan, and based on historical correlations, capital-investment trends also bode well for asset quality. The rating agency expects the average ratio of problem loans to total gross loans to remain in the range of 6%-7% in the next 12 to 18 months. However, loan-loss reserves (as per IFRS) set aside by Uzbek banks have historically covered only around 50% of problem loans, which Moody’s regards as insufficient.

Under Moody’s central scenario assuming more prudent provisioning charges and 20% loan growth, rated banks’ Basel I capital adequacy ratio (CAR) would fall to 11.6% during the next 12-18 months, from the rating agency’s estimate of 13.9% as of year-end 2013. While this outcome would still result in an acceptable level of capital, Moody’s believes that in order to preserve the current statutory total CAR levels in line with loan growth, rated banks would need -- in aggregate -- to raise an additional $250 million of new capital in 2014-15.

Over the 12-18 month outlook period, Uzbek banks will be exposed to risks associated with rapid loan growth that will, in turn, reduce capital buffers in the system. In addition, Uzbekistan’s banking system is vulnerable to structural weaknesses such as underdeveloped corporate governance and a high degree of state intervention in banks’ business activities and pricing policies. Uzbek banks also have high borrower concentrations, and short-term corporate deposits account for the majority of customer funding.

Uzbek banks’ operating profits are among the highest in the CIS aided by robust fees and commissions which contribute close to 40% of operating revenues. Over the outlook horizon, Moody’s expects Uzbek banks’ profitability to remain stable thanks to continued strong economic growth, with return on average assets remaining around 1.5% and return on average equity in the range of 13% to 15%.

Moody’s expects Uzbek banks’ liquidity to remain stable over the outlook horizon. Liquid assets, mostly cash held at the central bank, accounted for more than 30% of total assets as of the end of 2013. The high loan-to-deposit ratio, at 140% as of the end of 2013, reflects the composition of funding in the system; corporate and retail deposits only comprised about 60% of Uzbek banks’ non-equity funding as at year-end 2013, while stable financing from the Uzbek government amounted to about 20% and funding from international financial institutions around 10%.

Any uplift to Uzbek banks’ ratings from systemic support is limited, reflecting the government’s history of providing support that is not always full and timely and tends to be biased towards liquidity assistance. If support to banks’ capital is required, the government often opts for regulatory forbearance.