Fitch Ratings has issued a note highlighting “tangible” progress in the past four years in the reform of Uzbekistan's state-owned banks towards more commercially-driven business models.

“However, further improvements may take longer due to the sector’s deep-seated structural weaknesses and new risks,” the rating firm advised.
It added: “The key pillar of the reforms is the privatisation of most state-owned banks following a business-model change to move away from directed lending and to develop commercial operations. Uzbekistan’s authorities aim to sell at least three banks to foreign strategic investors by end-2025.

“This would increase non-state banks’ share of sector assets to 60% (end-2023: 32%). The reforms also include an overhaul of banks’ corporate governance and risk-management frameworks, and improvements in prudential regulation.”

Since the banking reforms were announced in May 2020, the authorities have sold the controlling stake at Ipoteka Bank (BB-/Stable), Uzbekistan’s fifth-largest bank, to Hungary-based OTP Bank, Fitch noted. However, the deadlines for selling two other large banks, Uzbek Industrial and Construction Bank, and Asakabank (both rated ‘BB-’/Stable), were recently postponed to end-2024 and end-2025, respectively, said Fitch, adding that it saw further delays as likely.

“The two banks are still working on their business-model transformation, and remain significantly reliant on low-margin corporate lending, despite efforts to diversify. Sales prospects could improve if international financial institutions, such as the European Bank for Reconstruction and Development [EBRD], or the International Finance Corporation [IFC], become minority shareholders, as this could signal to potential investors that pre-sale preparation is largely complete,” the rating agency said.

Asset quality, said Fitch, would remain key to its assessment of Uzbek banks’ intrinsic creditworthiness in the near term.

“We estimate that sector impaired loans (Stage 3 loans under IFRS 9) increased to over 10% of total loans in 2023, and we expect a further increase this year as banks continue to recognise legacy problems. We view state-owned policy banks as the most vulnerable given their participation in higher-risk subsidised development lending,” it added.
Fitch also assessed the rapid growth of retail lending at Uzbek banks in recent years. It could, the agency cautioned, lead to additional risks in the medium term.

“Retail exposures doubled as a proportion of sector loans over 2018–2023, reaching 32% at end-2023, and we expect retail loan quality to deteriorate in 2024 and 2025, particularly in riskier segments, such as unsecured cash and car loans, which have accounted for the majority of the recent retail loan growth,” said Fitch.

“Recent regulatory restrictions introduced by the Central Bank of Uzbekistan should mitigate the risks of overheating in retail lending, but it will take time for the measures to take full effect,” it concluded.
Fitch also summarised: “Uzbek banks’ underlying profitability should improve in the medium term due to the increased focus on higher-margin retail lending, but bottom-line performance will be largely driven by the cost of risk.

“State capital support has become more selective since the start of the banking reforms, with policy banks receiving the bulk of new Tier 1 capital injections. We assess state-owned banks’ funding profiles as weak given their high reliance on state and wholesale funds (including from international financial institutions), and their limited liquidity buffers.”