Fitch Ratings reveals a shift in Uzbekistan's state capital support within the banking sector following the government's privatization initiative. This change may prompt a reevaluation of potential state aid for state-owned non-policy banks in the medium term, depending on their ability to address asset-quality risks and bolster their capitalization, Fitch Ratings reports.
Support of the government for the local banks
Uzbek state-owned banks' Long-Term Issuer Default Ratings (IDRs) have traditionally relied on support from the country's authorities (BB-/Stable). Given their majority state ownership, low cost of potential support relative to sovereign reserves, and reputational risks tied to the state, Fitch's state-owned Uzbek bank IDRs mirror the sovereign's ratings.
Fitch considers the established track record of state capital and funding support in its rating analysis. Since 2018, Fitch-rated banks have received over $3.3bn in Tier 1 capital injections, approximately 4% of Uzbekistan's 2022 GDP. The government's capital contributions have been uneven since 2020, with a focus on policy banks that will remain under state ownership, such as Joint-Stock Commercial Bank Agrobank, Joint Stock Commercial Xalq Bank, and Microcreditbank. While JSC National Bank for Foreign Economic Activity is also considered a policy bank, it has not required capital injections in the past three years.
Fitch's speculations on privatization
Banks targeted for privatization received capital injections only when their capital ratios neared regulatory minimum levels, with policy banks receiving faster and pre-emptive support. Fitch believes that privatization may take longer than anticipated by authorities, and the government is likely to continue supporting state-owned banks.
Policy banks received an average of 2% of their risk-weighted assets in capital support between 2020 and 2022, substantially higher than banks marked for privatization, which received 0.6%. Consequently, policy banks maintained higher capital ratios, enhancing their loss-absorption capacity. However, Fitch views the government's support for some banks as limited relative to their capital needs, affecting smaller banks with higher-risk business models and leading to downgrades in Viability Ratings for weaker state-owned banks.
Fitch will assess banks' policy roles, systemic importance, and state support records to differentiate support-driven ratings. Delays in capital support to non-policy banks may result in negative rating actions for smaller non-policy banks. The agency will closely monitor state support over the next 12-24 months.
This shift in state capital allocation highlights the importance of ensuring adequate support for all banks, especially those facing higher risks, to maintain financial stability within Uzbekistan's banking sector.
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