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RAEX-Europe: Uzbekistan's banking sector to continue rapid growth

7 November 2019

Uzbekistan's government has launched a cooperation agreement with international financial institutions in order to transform state-owned banks and increase effectiveness and this is a positive signal for investors, Trend reports citing RAEX-Europe credit rating agency's report.

Uzbekistan's current blast score ratio (BSR) score reflects the high concentration of the banking sector, excessive dollarization and underdeveloped capital markets against the backdrop of elevated inflation and weak national currency, reads the message.

"Banks' assets surged significantly in Uzbekistan. Ongoing reforms to liberalize the sector, along with the intensification of investment activity, resulted in the acceleration of domestic lending. We expect the credit boom to continue in 2020, but further growth depends on the authorities' plans in regard to the scale of directed lending," the rating agency said.

RAEX report indicates that capital adequacy in Uzbekistan remains appropriate. Despite the rapid growth of risk-weighted assets, the capitalization ratios have stayed above the minimum regulatory requirements, and the state support of large banks inspires confidence in maintaining stability over time.

"Active expansion of loan portfolios exceeded forecasts. At the same time, the risks of dollarization and concentration on large borrowers persist, however the level of reported non-performing loans remains low," read the message.

RAEX stated that profitability remains high and efficiency of banking sector has improved in Uzbekistan. Due to the growth of interest income and the expansion of the interest margin, the banking sector increased its profit by 70 percent in 2018.

"We expect further growth in profitability," the agency said.

Uzbekistan's funding structure has changed. The share of borrowed funds from Uzbekistan's Fund for Reconstruction and Development and financial institutions in the liabilities has exceeded the share of deposits, which remains the main source of funding only for non-state banks. Although the volume of liquid assets has decreased, banks comply with regulator's liquidity requirements

"We consider the banking sector's continuing rapid growth, as domestic credit volume is still low relative to the size of the Uzbek economy. However, we expect that directed lending on preferential terms will gradually decline as the Fund's funding for state-owned banks will be reduced, which is likely to be more reoriented to raising resources in the domestic and foreign capital markets and loans from foreign financial institutions," RAEX stated.

RAEX anticipates that Uzbekistan's structure of the market will remain stable, without a significant increase in the number of new players, including foreign ones, due to the still conservative policy of the regulator and the authorities, as well as heightened concentration on the market. Moreover, the cooperation of state-owned banks with international financial institutions will be broadened with the possible subsequent privatization of minority shares.

In general, in the medium term, RAEX expects that the banking sector will demonstrate financial stability and reliable profitability and capital adequacy metrics.