Fitch Ratings has upgraded the National Bank for Foreign Economic Activity of the Republic of Uzbekistan’s (NBU’s) Viability Rating (VR) to 'b+' from 'b' and affirmed the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at ‘BB-‘. The outlook was assessed as Stable.

The VR upgrade reflects the bank’s dominant position on the local market, stable asset quality and high capitalisation as well as recent changes making for a more commercially-focused business model, improving the bank’s profitability. 

Fitch said that NBU’s ‘bb-‘ Government Support Rating (GSR) and Long-Term IDRs reflect a ‘moderate probability’ of state support. “This view is based on full state ownership, high systemic importance, policy role as the key lender to strategic industries, and the low cost of support relative to the sovereign international reserves,” the rating firm added. 

NBU is the largest bank in Uzbekistan (20% of sector assets at end-2023). It has a particularly strong market position in corporate lending, given its policy mandate for financing strategic industries. 

Said Fitch: “While it has prioritised commercial financing (particularly in retail) under the new strategy, we expect directed lending to state-owned corporates (SOEs) to remain the key part of its business in the medium term.”

It added: “Given NBU's corporate focus, credit risk mainly stems from high industry and borrower concentrations as well as above-sector loan dollarisation (66% of gross loans at end-2023). Risks are mitigated by government guarantees on most directed loans and access to stronger SOEs that have hard-currency revenue or receive direct budget transfers.

“Despite high retail loan growth (50% in both 2022 and 2023), we expect problem loans to mostly originate in the corporate segment in the near term.”

Fitch added that the quality of the bank’s assets was stable in recent years with impaired (Stage 3) loans equalling 4.4% of gross loans at the end of 1H23 while Stage 2 loans made up 14.5%. “Problem loans were almost entirely non-state corporate and SME exposures and were fully reserved. We expect loan quality to remain stable in the near term, with the impaired loans ratio forecast at around 4% by end-2024. Non-loan exposure (27% of total assets at end-1H23) mostly includes sovereign debt and short-term placements with the Central Bank of Uzbekistan and are of good credit quality,” the rating agency said.

Fitch noted that NBU has shown improved profitability in recent years, driven by a shift to higher-margin commercial lending and sustained cost efficiency. 

Despite an expected dip in profit generation between 2024 and 2025, NBU's profitability is projected to remain above historical averages. 

Strong capitalisation, with the Fitch Core Capital (FCC) ratio at 23% of regulatory risk-weighted assets by the end of 2022, is expected to sustainably stay above 20% in 2024-2025. However, NBU's heavy reliance on state and wholesale funding, weak governance, and high dollarisation pose risks, Fitch stated in its report. 

Fitch warned that downgrades to NBU's ratings could occur if there's a sovereign rating downgrade or significant deterioration in asset quality. To achieve an upgrade, NBU needs to improve its operating environment score while maintaining stable asset quality and strong capitalisation. 

Fitch noted that “NBU's £300 million 4.85% senior unsecured Eurobond, maturing in October 2025, includes a change of control covenant, allowing bondholders to redeem the notes at par if the state reduces its stake in the bank below 50%+1 share.”

Fitch rated the notes in line with NBU's 'BB-' Long-Term IDR.