Banking

Brief market overview. The Uzbekistan’s financial system is dominated by banks, which control over 95% of sector assets. In total 28 banks operate in the country, incl. 3 fully state owned banks, 8 private banks, 5 banks with foreign capital. The government continues to be heavily involved in strategically important sectors, including the banking sector. This is implemented through capital injection or providing banks with low-cost project finance facilities, like government guarantees, deposits, etc. According to statistics, the government provides about 20% of all deposits, second only to corporate deposits amounting to 40%. Also, it recently approved injection of US$500m to 9 banks capital.

Banking regulation. The country’s central bank strictly supervises 2nd tier banks by introducing higher requirements than internationally adopted. As rapid lending growth poses risks to the sector, the country’s bank regulator has begun to tighten the statutory capital requirements for banks. In 2016 bank capital growth exceeded 20% year-over-year and capital adequacy ratio was 3 times more than required by Basel Standards. Also, banking system liquidity ratio stayed around 64%, which is 2 times above of Basel Standards. The central bank plans to introduce Basel III gradually but in full by 2019. For example, new minimum capital ratios will be fully phased in by January 2019.

At the moment 2nd tier banks are undergoing stress-tests with several scenarios of economic development, incl. ongoing currency liberalization as important factor for banks sustainability. According to the Fitch Rating, “most of the Uzbek banks rated by the agency are resilient to depreciation of the Uzbek soum... Fitch believes that direct foreign-currency (FC) risks are low, as all Fitch-rated Uzbek banks have long or fully closed FC positions… The banks' short-term foreign debt repayments are small (below 5% of total liabilities in 2017) and linked to loan repayment”. Fitch also stressed that the Uzbek banking system is moderately dollarized. Foreign-currency denominated loans are about 40% of total loans. These loans are mainly issued to large state-owned, strategically important companies. Excluding country’s largest bank, NBU, the proportion of foreign-currency denominated loans for the rest of the system is around 20%. Foreign currency-denominated deposits account for approximately 30% of the total, and to a large extent are represented by deposits of local companies.

In view of Fitch Rating, “the state's ability to provide support in FC is solid as reflected by large sovereign FC reserves of about USD25 billion at end-2016, equal to about 2x the banking sector's total FC liabilities, or 11x its external debt”.

Besides these measures, Uzbek government recently created Price Stabilization Fund for US$100m to cope inflation, enhance credibility to Uzbek soum and domestic banks.

Risks in the system. Banks’ bad loans share remains as low as 3.5%-4.0%. In the long term rapid loan growth may lead to asset quality deterioration if operating environment will become less favorable against time when a loan was issued.

Another risk for the country banks’ asset quality is large single-borrower concentrations. Corporate borrowers are around 80% of the large/medium banks' total gross loans. On average, a bank's 20 largest outstanding loans account for more than 200% of its capital. However, the proportion of retail loans is gradually growing, helping mitigate this concentration risk.

We expect the banking system will grow at higher pace than the economy on average as demand for consumer, mortgage, other type loans and finance instruments has not yet been met.