However, the banks’ credit profiles are undermined by constraints on currency conversion operations, directed lending, weak corporate governance and heightened credit risks from the limited financial transparency of most Uzbek corporates.

GDP growth in Uzbekistan was 8% in 2013, supported by the government’s industrial development spending. The sovereign balance sheet remains strong with low government debt at 8.7% of GDP, a fiscal surplus of 1.2% of GDP and a positive current account balance of 1.7% of GDP. However, the economy is vulnerable to external shocks, with exports being commodities-driven and concentrated on a few countries, and external finances supported by significant remittances from Russia. Moreover, institutional reforms are slow with limited improvement of the currently difficult business climate.

Bank lending continues to grow at a rapid pace (28% in 2013) on the back of strong economic growth and low credit penetration (loans/GDP ratio of 22% at end-2013). The share of impaired loans, based on IFRS accounts, was a moderate 8% at end-2013, with the ratio benefiting from growing loan portfolios. However, unreserved impaired loans were a material 22.5% of sector equity at end-2013. Foreign currency lending was a significant 40% of total loans, although positively most borrowers have FX revenues, while the sector’s currency position is balanced by FX denominated funding amounting to 39% of total liabilities.

The sector is mostly deposit-funded (65% of end-2013 liabilities) with a comfortable 80% loans-to-deposits ratio at end-2013. Customer finding is predominantly short-term, although fairly stable. Liquidity risk is also mitigated by a generally high share of liquid assets (about 25% at end-2013). However, long-term funding sources are scarce, being limited to deposits of the Uzbekistan Fund for Reconstruction and Development (UFRD, 16% of sector liabilities) and external foreign borrowings (below 10% of sector liabilities), mainly attracted under government-supported project finance programmes.

Reported capitalisation, while declining, remained reasonable at end-2013 with an equity/assets ratio of 9.6% and an equity/loans ratio of 15.4%. According to Fitch estimates, the available capital buffer would be sufficient to increase reserves by about 11% of loans on average, enough to fully reserve existing NPLs. However, this should be viewed in the context of the sector’s rapid growth and only modest profitability (return on average assets of 1.2% in 2013); the latter was due to low-margin directed lending in state banks and private players lacking scale. The government’s decree requires banks to grow capital by at least 20% annually until 2015, and rated state banks, which are anticipating some capital contributions from the government, are expected to comply.