In the H1 2023, Uzbekistan's banking sector navigated through a period of financial stability despite facing slightly tighter financial conditions, the report of the Central Bank of Uzbekistan (CBU) states. The period witnessed stagnant conditions in the money market and significant volatility in the foreign exchange market, contributing to heightened uncertainty in the banking sector. Despite these challenges, key indicators such as capital adequacy and liquidity remained above regulatory minimums.
Rising Debt Burden on the Population
One notable trend observed during this period was the significant increase in the population's debt burden. The retail lending sector experienced a surge, leading to a rise in the population's debt burden on gross and mortgage loans. This surge has resulted in a higher credit-to-GDP ratio over recent years, potentially escalating credit risk, particularly among individuals with lower incomes.
Concerns Over Housing Market Overvaluation
The housing market in Uzbekistan is currently experiencing overvaluation, with market prices significantly outpacing fundamental values. As of H1 2023, housing prices were, on average, 36% higher than their fundamental prices. This overvaluation, coupled with a persistent demand for housing surpassing supply, poses concerns of a potential market correction during economic downturns.
Growing Dependency on Car Loans
Car loan growth has notably outpaced other loan categories in recent years, leading to a higher concentration of car loans and increasing banks' vulnerability to economic shocks. Poor repayment discipline and significant loan losses are potential outcomes during economic downturns or car value depreciation. The surge in car loans is attributed to more lenient lending standards by banks and the growing investment appeal of automobiles.
Resilience Against Shocks
Despite these challenges, Uzbekistan's banking system has demonstrated resilience against shocks under both baseline and adverse scenarios, according to macro stress testing. The total capital adequacy ratio (CAR) remains above the Central Bank's minimum requirements in both scenarios. Even in the adverse scenario, robust net interest and non-interest income are expected to maintain the CAR above the minimum requirement by the end of 2025.
"According to macro stress testing, Uzbekistan's banking system has demonstrated resilience against shocks under both baseline and adverse scenarios. The total capital adequacy ratio (CAR) surpasses the Central Bank's minimum requirements in both scenarios. In the adverse scenario, even in the face of significant loan, equity, and housing losses, alongside an increase in risk-weighted assets (RWA), robust net interest and non-interest income are expected to maintain the CAR above the minimum requirement at 13.6%, by the end of 2025," was said in the report.
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