The reported loan quality metrics of Uzpromstroybank (UzPSB), Asaka Bank (Asaka) and OJSC Agrobank (Agrobank) have been stable with non-performing loans (NPLs, 90 days overdue) at below 3% (fully covered by reserves) at end-2014, while Microcreditbank’s (MCB) rose to 14% at end-2014 from 4% at end-2013 (all unreserved, 48% of Fitch core capital) due to financial difficulties in a number of agricultural companies.

Despite low NPLs, Agrobank’s asset quality remains weakened by unreserved problematic receivables (9% of total assets or about 70% of IFRS equity), which were recorded on the balance sheet as a result of the 2010 asset embezzlement by former employees.

Foreign currency lending is significant at about 60% on average in reviewed banks, reflecting high deposit dollarisation. This poses asset quality risks in case of sharp foreign exchange movements; Uzbekistan has not devalued the currency recently, unlike some other CIS countries.

Reported profitability is moderate at Asaka (ROAE at 12.2% in 2014), modest at UzPSB (6.4%), weak at Agrobank (1.7%) and MCB (0.2%), reflecting the significant share of state-directed operations and rather weak operating efficiency (particularly at MCB). UzPSB and Asaka benefit from lower funding costs due to mostly government funding, stronger asset quality/lower impairment charges and greater efficiencies of scale compared with the smaller Agrobank and MCB.

Capitalisation is strong at UzPSB (FCC/ risk-weighted assets ratio of 19.1% at end-2014), moderate at Asaka (16.2%), satisfactory at MCB (12.9%, adjusted for unreserved NPLs), and weak at Agrobank (3%, adjusting for unreserved problematic receivables). Banks are required by recent regulations to grow capital by at least 20% annually until end-2015. As internal capital generation at the state banks is moderate and lags growth, state banks are getting regular capital contributions from the government in order to comply with regulatory capital requirements.

Liquidity is comfortable due to solid buffers (liquid assets of over 15% at UzPSB, Asaka and Agrobank and a somewhat tighter 9.2% at MCB at end-1H15), as well as potential state support. UzPSB is the only bank with meaningful borrowings from international financial institutions (17% of total liabilities), although near-term repayments are small (around 1% of total liabilities in 2H15-2016).

Foreign currency liquidity was moderate at end-1H15. In Fitch’s view, extraordinary support in foreign currency may be less available given conversion limitations and a rigidly managed foreign-currency exchange rate in Uzbekistan. Due to this reason the banks’ foreign currency Issuer Default Ratings (IDRs) are one notch lower than their local currency IDRs.