Moody's: Stable operating environment and asset quality support Uzbek banks

Moody's Investors Service's outlook for Uzbekistan's banking system remains stable, unchanged since 2010, reflecting banks' stable problem loan trends and solid earnings, although capital buffers require regular external injections to match rapid loan growth. The rating agency notes that Uzbek banks are also affected by structural weaknesses and high borrower concentrations.

Moody's report, entitled "Banking System Outlook: Uzbekistan" is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.

Uzbekistan's small but relatively resilient and diversified economy helps to support local banks' operations, says Moody's. The International Monetary Fund forecasts that Uzbekistan's real GDP will expand 6.2% this year. Growth has been much less volatile than in some other Commonwealth of Independent States countries, as Uzbekistan's commodity exports are relatively diversified, and the government uses export revenues to fund public spending, says Moody's.

Leading asset quality indicators - including global prices on Uzbekistan's main export commodities and capital investment - suggest stable trends for problem loans, although rapid loan growth will likely reduce capital buffers in the system, according to the rating agency.

Moody's expects that the average ratio of problem loans to total gross loans will not exceed 6-7% in the next 12 to 18 months. However, loan-loss reserves have historically covered only around 50%-60% of problem loans. 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 13.0% over the next 12-18 months, from 17.4% reported as of year-end 2014. Therefore, for the Uzbek banks to preserve their current robust capital buffers in line with the loan growth, external capital injections would be needed.

According to Moody's, Uzbek banks' solid earnings generate capital to fund some of their loan growth, at around 20-25% annually over the past three years. The rating agency expects Uzbek banks' profitability to remain stable in the next 12-18 months, with return on average assets (ROAA) of around 1.5% and return on average equity (ROAE) in the range of 13% to 15%, similar to the past several years. At the same time, Moody's says that should provisioning charges increase due to the seasoning of banks' rapidly augmented loan portfolios or against the backdrop of an economic slowdown, this may erode the sector's currently sound profits.

Moreover, Uzbekistan's banking system continues to display 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 their customer funding mostly consists of short-term corporate deposits.

Moody's notes that the government's capacity to provide support to systemically important institutions remains solid, although government support tends to be directed more towards liquidity assistance while capital support from the government to systemically important institutions has not always been timely and sufficient, in Moody's opinion.