Uzbekistan's banking sector reforms, initiated in 2020 to transition state-owned banks towards more commercially viable models, have garnered attention and commendation from global rating agency Fitch Ratings. However, despite tangible progress, the reforms face challenges and potential delays due to deep-rooted structural issues and emerging risks.
Fitch Ratings, in its recent conference held in Tashkent, acknowledged the strides made by Uzbekistan's state-owned banks in embracing commercial operations, a pivotal aspect of the comprehensive reform strategy introduced in May 2020. The reforms primarily aim at privatizing most state-owned banks, reducing reliance on directed lending, and fostering a more competitive banking landscape. The ultimate goal is to increase the share of non-state banks in sector assets to 60% by the end of 2025, up from 32% in 2023.
Central to the reforms is the privatization drive, with authorities eyeing the sale of at least three banks to foreign strategic investors by 2025. Ipoteka Bank (BB-/Stable), Uzbekistan's fifth-largest bank, saw a shift as Hungary-based OTP Bank acquired a controlling stake. However, the timelines for the sale of two other major banks, Uzbek Industrial and Construction Bank, and Asakabank (both ‘BB-’/Stable), have been pushed back to end-2024 and end-2025, respectively, with further delays looming.
The prolonged timeline for these sales can be attributed to the banks' ongoing transformation efforts, particularly in diversifying their business models away from low-margin corporate lending. Prospects for successful sales could brighten if international financial institutions such as the European Bank for Reconstruction and Development or the International Finance Corporation become minority shareholders, signaling readiness for potential investors.
Despite progress, challenges persist in asset quality. Impaired loans in the sector, according to Fitch Ratings, exceeded 10% of total loans in 2023, with expectations of further deterioration as banks address legacy issues. State-owned policy banks, involved in higher-risk subsidized development lending, are particularly vulnerable.
Another emerging concern is the rapid expansion of retail lending, which doubled as a proportion of sector loans from 2018 to 2023. Fitch foresees a potential decline in retail loan quality, especially in riskier segments like unsecured cash and car loans. Regulatory measures introduced by the Central Bank of Uzbekistan aim to temper these risks, though their full impact may take time to materialize.
Looking ahead, Uzbek banks' profitability is expected to improve, driven by an increased focus on higher-margin retail lending. However, bottom-line performance will hinge largely on managing the cost of risk. State capital injections, crucial for supporting banks, have become more selective, with policy banks receiving priority. Despite these improvements, challenges remain in funding profiles and liquidity buffers, particularly for state-owned banks reliant on state and wholesale funds.
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