It is no secret that the Uzbek banking sector has been in sleep mode for the last 25 years. The banks were mostly established along sectoral lines to solve specific funding matters and they were focused on two key issues: channelling state funds into the sectors that they have been created for and collecting physical cash.

But since Uzbek President Shavkat Mirziyoyev launched the Uzbekistan 2.0 reforms the transformation and reform of the banking sector has become a key initiative that is probably the most advanced of all the current reform efforts.

The banking landscape is starting to change drastically. Banks have been freed from their sectoral focus and are now permitted to do classic banking business with any client they like. And following the introduction of the free convertibility of the som last year, starting with liberalising bank accounts and allowing FX deposits, that has also removed the need to focus on physical cash collection.

Foreign banks have started entering the market on commercial terms, not just to meet political goals. TBC of Georgia has been the most active and will soon receiving a banking licence. Tenge Bank (a subsidiary of Kazakhstan’s market leader, Halyk Bank) has opened a fully operation office in Tashkent and is thinking about expanding its operations to Samarkand. Turkey’s Ziraat bank bought out the shares of its partner Agrobank in a joint venture, which has become a fully owned subsidiary. And several smaller banks have partial financial investors such as IFC and ResponsAbility in Hamkorbank and Asian Development Bank (ADB) in Ipak Yuli Bank.

Political will to transform

The main driver of the changes is Mirziyoyev's reform “dream team” consisting of Mamarizo Nurmuratov, the chairman of the Central Bank of Uzbekistan, and Timur Ishmetov, the UK-educated Minister of Finance, who are leading the bank reform effort from the government side, and Jamshid Kuchkarov, who has just moved from Minister of Finance position to head the Ministry of Economy and Poverty Reduction.

For the first time in the history of Uzbek banking, the regulator is chasing the banks, asking for ideas on how to cut red tape. The Ministry of Finance is pushing the banks to be more commercial and that is forcing the banks to transform as well as seek equity partners.

Unlike Russia, where the market share moved from foreign and private banks to state-owned banks over the last two decades, or in Kazakhstan, where banks have consolidated around certain groups, Uzbekistan is moving in a different direction.

Currently the state banks control 90% of the banking sector assets. But the government wants to privatise all the state banks, except for four key strategic banks: the National Bank for Foreign Economic Activities (100% owned by the state); Xalq Banki (100%); Agro Bank (94.5%) and Mikrokredit Bank (84.5%).

As the banking needs scale, the focus is on the largest players in the market. Below is an outline of the leading players on the Uzbek banking market.

• JSMB Ipoteka Bank

(Moody’s: B1/B2 Stable, S&P: BB-/B Stable, Fitch: BB-/B Stable

The transformation process started in 2015 when the International Finance Corporation started to work with Ipoteka Bank. The scope of the advisory work covers 16 workstreams, including corporate governance, risk, credit, IT, business, strategy, operations, etc.

The bank was originally established to channel state funds into social mortgages in the cities. It also has an exposure to mining sector in the country. Ipoteka is one of the strongest banks for financing international trade. It has one of the largest branch networks in the country with 700 cash offices. According to government plans, it will issue a $300mn Eurobond in the second half of this year. A government decree has been signed on obtaining a $35mn convertible loan from IFC in 2020. The bank is listed on the Tashkent Stock Exchange.

• Sanoat Qurilish Bank

(SQB, formerly Promstroybank). S&P: BB-, Stable, Fitch: BB-, Stable

SQB is the second-largest – and the oldest – bank in Uzbekistan; it’s a corporate bank with clients in oil & gas, telecoms and other sectors. The Soviet legacy meant that each sector of the economy had its own bank, and as a result SQB was able to inherit a strong share of the market; around 16-18% of all loans and deposits. It issued a $300mn inaugural Eurobond at the end of last year, making it the first ever Uzbek bank to issue Eurobonds after the sovereign’s inaugural issue at the beginning of last year. SQB is being transformed with the help of IFC and other companies with focus on corporate governance, risk, operations, HR and business. It aims to become the first Uzbek “green bank,” due to its large industrial clientele in oil and gas, power generation and the chemical industries in Uzbekistan.

• National Bank for Foreign Economic Activities (NBU)

Moody’s: B1/B2, Stable, S&P: BB-/B Stable

The largest bank in Uzbekistan that historically has been focused on international trade. In preparation for a Eurobond issue, its legal status has been changed from State Unitary Enterprise owned by the Cabinet of Ministers and to be incorporated as a joint stock bank, 100% owned by the Ministry of Finance. The bank plans to issue $300mn in Eurobonds within the next six months. This is one of four banks that will remain in 100% state ownership. However, this does not mean that the bank will not undergo transformation. No large-scale plan for the bank has been announced but it is already undergoing radical changes internally. The bank will continue playing a development bank role in the economy and will be servicing the large state infrastructure projects as well as working with the largest state-owned enterprises (SOEs). On basic statistical numbers it remains responsible for around the quarter of all banking assets, loan portfolio and capital of the banking sector.

• Joint Stock Asaka Bank

Moody’s: B1/B2 Stable, Fitch BB-/B stable

Initially established as a bank to support the newly established auto industry in Uzbekistan and taking its name from a town of Asaka in Andijan Province (where Daewoo Corp. of South Korea established its car manufacturing plant), it is also one of the banks that will be privatised by the government. Although, it has not announced any large-scale transformation work, the European Bank for Reconstruction and Development (EBRD) stated that it was reviewing investment opportunities into this bank, which will lead to a transformation. It is the number three bank in Uzbekistan on a lot of metrics. The government has not revealed any plans for Asaka Bank to tap the international bond markets this year.

There are several other banks to watch, although there no imminent plans to tap the debt capital markets for this second tier for the time being.

• Other banks to watch

Sawada Group of Japan is reportedly in talks with the government on the privatisation of Asia Alliance Bank (assets ranking 18 with assets of UZS2.3tn). The bank is smaller but well run and focused on corporate banking business.

Xalq Banki, historically the Savings Bank of Uzbekistan, now under the capable leadership of Farkhod Salomov, a repatriate who has been the executive vice-president at US Bankcorp in risk management, who is currently working on transforming this number six player in the market.

AgroBank is also undergoing a transformation process in Uzbekistan. Kammuna Irisbekova leads this fast changing and retail focused bank. It has been focused historically on the communications market and now is taking advantage of its links to the hi-tech communications market to establish its leadership in digital banking.

Fiezullah Saidov is the CEO of Uzbekistan Equity Fund and a banking sector consultant for the IFC. He can be contacted here.