Standard & Poor’s BICRA rankings reflect our assessment of the strengths and weaknesses of a country’s banking system, compared with those of other countries, on a scale ranging from Group 1 (the strongest) to Group 10 (the weakest). Other countries in Group 9 include Kazakhstan, Georgia, Belarus, Nigeria, Costa Rica, Guatemala, Lebanon, and Vietnam. Uzbekistan ranks ahead Ukraine, Bolivia, Cambodia, Dominican Republic, Venezuela, and Ecuador in Group 10, and behind, for example, Russia, Egypt, Indonesia, Serbia, Tunisia, Jordan, and Argentina in Group 8.

“The placement of Uzbekistan in Group 9 reflects our view of the significant risks facing the Uzbek banking system, which we understand is characterized by state ownership, a short track record, a low level of credit penetration, a weak bank franchise, high single-name concentrations, undeveloped risk-management practices, and the economy’s dependence on commodity exports,” Standard & Poor’s said.

Standard & Poor’s noted: “We believe these vulnerabilities are partly mitigated by the relative immunity of Uzbekistan’s financial system to the impact of the global crisis, due to the country’s predominantly closed economy, absence of conventional financial markets, and low penetration of foreign capital. Other positive factors, in our opinion, are the system’s capitalization and the government’s protective stance toward the banking system”.

“The government provides capital, funding, and business flows to state banks, which dominate the market. We believe that Uzbekistan’s bank regulators tightly control the banks. However, the banking industry is quite vulnerable to potential credit quality deterioration after several years of very rapid growth.

“We are of the opinion that the distinguishing feature of Uzbekistan’s banking sector is high state dominance and interference. In our view, this attribute is likely to restrict competition and market-driven pricing. The sector is dominated by eight state-controlled banks, which together account for more than 80% of assets and capital in the system. The single largest bank, National Bank For Foreign Economic Activity Of The Republic Of Uzbekistan (B/Stable/B), controls about 30% of the lending and deposit market. Taking this into account, we are of the opinion that the share of the 21 private banks in the system is rather small and fragmented,” Standard & Poor’s underlined.

Standard & Poor’s noted: “We have observed that Uzbekistan’s economy grew steadily, at about 7%-8%, in 2009, and lending expansion continued at more than 30% within the first half of 2009. Nevertheless, we regard banking penetration in Uzbekistan as one of the lowest in the Commonwealth of Independent States, with loan penetration at only 17% of GDP at year-end 2008. Nonperforming loans were a low and stable 3% of total loans in 2008 and 2009. However, these decent asset quality indicators may appear unsustainable in the longer run, in our opinion. Most portfolios remain untested, possible asset quality problems are masked by high lending growth, and the sector in Uzbekistan has embraced a quick write-off policy.”

“The system’s capitalization is adequate, in our view. The regulatory capitalization ratio stood at 23% on 30 June 2009, bolstering banks’ resistance to negative trends and encouraging further expansion,” the company said.

Standard & Poor’s key analytical measure reflects the contingent liability of a banking system relative to sovereign risk. It is an estimate of the incidence of gross problematic assets (GPAs) in a reasonable worst-case scenario of economic recession, expressed as a percentage of domestic credit to the private sector and nonfinancial public enterprises. We have estimated the GPAs for Uzbekistan’s financial system to be in the 35%-50% range (on par with Azerbaijan, Belarus, Russia, Kazakhstan, Argentina, Bolivia, and Indonesia).

In terms of state support to the banking sector, Standard & Poor’s classifies Uzbek regulators as "interventionist" and not "support uncertain" or "supportive" based on our methodology. Standard & Poor’s believes that the government is highly likely to intervene directly and rescue failing strategically important banks, based on:

• The state’s close involvement in the banking system through high direct ownership;
• The extensive regulation of the sector;
• A history of support to state-owed banks; and
• The state’s adequate capacity to support banks in a distress scenario, through liquidity or capital injections.