Fitch Ratings announced the assignment of Joint-Stock Commercial Aloqabank's (Aloqa) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of 'BB-' with Stable Outlooks, on July 9. Additionally, Aloqa's Viability Rating (VR) has been set at 'b'.
Key Rating Drivers
Government Support: Aloqa's IDRs are equated with the sovereign rating of Uzbekistan (BB-/Stable), reflecting the possibility of government intervention, as indicated by its Government Support Rating (GSR) of 'bb-'. The stable outlook on Aloqa's ratings mirrors that of the sovereign, suggesting confidence in the bank's support from state authorities.
Moderate State Support: Aloqa’s GSR of 'bb-' reflects a moderate probability of government support. This is influenced by the bank's majority state ownership and the relatively low cost of potential support compared to Uzbekistan's sovereign international reserves. Additionally, the history of extraordinary and routine state support for the bank enhances this view.
Exposure to Volatile Environment: Aloqa’s VR of 'b' highlights its exposure to a volatile local operating environment, a limited franchise within the Uzbek banking sector, and vulnerable asset quality with significant concentrations in its loan book. These factors, combined with modest core profitability and narrow capital buffers, contribute to the bank's current VR.
Performance and Challenges
Uzbekistan's economy remains heavily state-dominated despite market reforms and privatization plans. This has led to weak governance and generally poor financial transparency. Additional risks include high dollarization, sector concentration, and reliance on state and external wholesale debt.
Aloqa is the 11th-largest bank in Uzbekistan and the seventh-largest state-owned bank, representing only 3% of sector assets as of the first quarter of 2024. The bank focuses primarily on corporate lending and is predominantly funded by corporate customer accounts. There are plans to expand its retail loan book in the near term.
The bank's asset quality shows vulnerability. The impaired loans ratio improved to 6% at the end of 2023, down from 10% in 2022. However, a significant portion of Stage 2 loans (18% at end-2023, up from 10% at end-2022) poses ongoing risks. Fitch expects the impaired loans ratio to reach 10% in the near term due to the seasoning of the loan book following rapid growth in 2021.
Aloqa's core performance remains modest. Its net interest margin is stable at 6%, but high operational costs due to an extensive branch network weigh down its operating performance. In 2023, the operating profit was 1.4% of risk-weighted assets, with expectations of remaining below 2% in the coming years. The bank’s return on average equity was 19% in 2023, partly due to one-off gains.
Aloqa's Fitch Core Capital (FCC) ratio was 13.5% at the end of 2023, bolstered by a capital injection from a minority shareholder. However, adjusted for full coverage of impaired loans, the FCC ratio would drop to 10.7%. Fitch anticipates faster loan growth than internal capital generation will reduce the FCC ratio below 13% by 2025 unless offset by further capital injections.
Stable Funding and Liquidity
Aloqa’s funding is stable, with non-state deposits making up 52% of total liabilities and state-related funds contributing 22%. Wholesale borrowings remain modest. The bank’s liquidity cushion, accounting for 18% of total assets, covers a moderate 34% of non-state customer accounts.
Rating Sensitivities
Negative Triggers: A downgrade of Uzbekistan’s sovereign IDR would lead to a downgrade of Aloqa's IDRs. The VR could also be downgraded if the FCC ratio falls below 10% due to a sharp deterioration in asset quality, loss-making performance, or increased lending growth. Deterioration of liquidity buffers or an increase in refinancing risk could also negatively impact the VR.
Positive Triggers: An upgrade of Uzbekistan’s sovereign rating could lead to an upgrade of Aloqa’s IDRs, especially if there is a positive reassessment of the bank’s systemic importance. Improvements in the Uzbek operating environment, coupled with sustained healthy asset quality, profitability, and capitalization, could also trigger an upgrade of the VR.
Aloqa’s governance structure is influenced by significant state involvement, which, along with delays in publishing IFRS accounts, impacts the bank’s credit profile. These factors are captured in the bank’s ESG Relevance Scores, which affect the overall rating.
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