The recent sale of a controlling stake in Uzbek state-owned Ipoteka-Bank to Hungary's OTP Bank has the potential to revive investor interest in the Uzbek banking sector. However, Fitch Ratings suggests that the privatization of other major state-owned banks may face delays and could take longer than anticipated by the government. The successful completion of business model transformations will be crucial for the prospects of these banks, a sentiment echoed by international financial institutions (IFIs) set to acquire minority stakes.
OTP Bank announced on June 13 that it had acquired 73.7% of Ipoteka-Bank's common shares from the Uzbek government, with plans to acquire the remaining stake within the next three years. This sale marks the first significant transaction under the government's medium-term reform plan to privatize all state-owned banks by the end of 2025, removing their policy role. The reform's objective is to increase the proportion of sector assets held by non-state banks to at least 60%, up from the current level of approximately 30%.
The privatization of two other major banks, Asakabank and Uzbek Industrial and Construction Bank, is scheduled for this year. However, Fitch Ratings believes that these sales could face delays due to ongoing business model transformations that are being carried out with the assistance of IFIs, notably the International Finance Corporation and the European Bank for Reconstruction and Development. These transformations aim to shift the banks' focus from directed corporate lending to commercial business, particularly in the small and medium-sized enterprise (SME) and retail segments. Despite progress, state-owned banks still have a significant corporate focus with substantial exposure to the public sector, leaving them vulnerable to specific sectors and borrowers. Many loans are still offered at below-market rates, which impacts the banks' profitability.
Uzbekistan's banking sector holds potential appeal to foreign investors due to its considerable growth prospects, especially in retail lending. Retail loans accounted for only 11% of the country's GDP at the end of 2022, which is lower than in other regional markets. However, structural weaknesses continue to hinder the operating environment for Uzbek banks. These weaknesses include a highly dollarized economy, limited financial transparency in the corporate sector, state dominance in key industries, and limited deposit funding. Addressing these weaknesses will be crucial to attracting potential investors to enter the market.
The sale prospects for the two banks slated for privatization this year are expected to improve once the IFIs convert their loans to equity in these banks. By becoming minority shareholders, the IFIs will signal to investors that they are satisfied with the progress of the banks' business model transformations. However, Fitch Ratings anticipates that this conversion process may extend until mid-2024, indicating that the privatizations are unlikely to be completed until at least the end of next year.
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