Fitch Ratings upgraded the Viability Rating (VR) of the National Bank of Uzbekistan (NBU) for Foreign Economic Activity to 'b+' from 'b'. Concurrently, the agency affirmed the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB-' with Stable Outlooks. The elevation of NBU's VR to 'b+' is primarily attributed to its dominant market presence in Uzbekistan, underscored by a consistent record of stable asset quality and robust capitalisation across financial cycles.
Additionally, Fitch acknowledges the bank's strategic pivot towards a more commercially oriented business model, which notably enhanced profitability metrics.
NBU's affirmed Long-Term IDRs mirror Fitch's assessment of a moderate likelihood of governmental support, should it be required. This assessment is grounded in the bank's full state ownership, significant systemic role, and its strategic function in financing key industrial sectors within Uzbekistan. The perceived low cost of potential support with the state's international reserves further bolsters this view.
Analytical highlights
- Market leadership and strategy: As Uzbekistan's largest banking institution, holding 20% of sector assets as of the end of 2023, NBU maintains a strong foothold in corporate lending. Despite a shift towards more commercial financing, state-owned enterprise (SOE) lending is anticipated to remain a substantial portion of NBU's portfolio.
- Credit risk considerations: The bank's corporate lending focus introduces significant credit risks, primarily due to high sector and borrower concentration and a 66% loan dollarisation rate as of the end of 2023. These risks are somewhat mitigated by government guarantees and the bank's access to robust SOEs.
- Asset quality: The bank has maintained stable impaired loan ratios over recent years, with Stage 3 loans at 4.4% and Stage 2 loans at 14.5% of gross loans by the end of the first half of 2023. The quality of non-loan assets, largely comprised of sovereign debt and placements with the Central Bank of Uzbekistan, is deemed satisfactory.
- Performance trends: NBU has shown significant improvements in profitability, attributed to a focus on higher-margin commercial lending and efficiency gains. Although a decline from the peak performance of 2022 and the first half of 2023 is expected, profitability is forecasted to remain above historical averages.
- Capital strength: The bank's Fitch Core Capital ratio stood at a healthy 23% at the end of 2022. With sustained strong internal capital generation, this ratio is expected to remain well above 20% through 2024-2025 without necessitating state capital injections.
- Funding profile: The bank's reliance on state and wholesale funding, constituting 84% of total liabilities as of mid-2023, is noted. However, the near-term refinancing risk is deemed limited, with a solid liquidity buffer in place.
The Uzbek economy's state dominance, despite ongoing market reforms, introduces certain systemic risks, including governance challenges and financial transparency issues. The banking sector's high dollarisation and dependency on state and external debt are additional factors under consideration.
Rating sensitivities
A downgrade of Uzbekistan's sovereign rating or diminished state support capacity could negatively impact NBU's ratings. A significant asset quality deterioration resulting in a sustained drop of the FCC ratio below 15% could also trigger a downgrade, although this scenario is currently viewed as unlikely.
An upgrade of the Uzbek sovereign rating could lead to positive adjustments in NBU's ratings. Further VR upgrades would necessitate an improvement in the operating environment score and sustained enhancements in the bank's asset quality, capitalisation, and risk profile.
Fitch also addresses NBU's $300 mn 4.85% senior unsecured Eurobond, due in October 2025, aligning its rating with the bank's 'BB-' Long-Term IDR. The bond's terms include a change-of-control covenant, protecting bondholders in the event of a significant state divestment.
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