Uzbekistan's banking sector is benefiting from robust all-round growth in the economy, which is set to continue over the medium term.
The economy has accelerated over the past few years posting 8-9% growth, despite the global financial crisis. The International Monetary Fund (IMF) expects growth to pull back to 7% this year and 6.5%, still higher than regional GDP increases of around 6%.
The IMF may have underestimated growth prospects, as the country's GDP grew by 8% in the first half of the year, according to government estimates.
The Asian Development Bank has unveiled much higher growth estimates of 7.5% and 8% in 2013 and 2014, respectively.
Uzbekistan has 29 commercial banks, including three state-run, nine private and four institutions with foreign investment.
The sector's total assets grew 30.2% last year to 35.7 trillion soum (1 USD =2,107 soum), with loans soaring 30.5% and capital rising 24.3%.
The banks have continued their growth, rising nearly 4% in the first half of the year with loans rising 4.4% during the period. Aggregate bank capital rose 1.6%.
"The key driver of the outlook, which has remained stable since August 2010, is the country's robust economic growth, providing favorable operating conditions for the country's banks," said Moody's Ratings Services in a new report on August 8, 2013.
"Other key drivers include healthy profits and a slight improvement in asset quality, as well as stable liquidity that benefits from growing customer deposits, continued channeling of government financing through the largest banking institutions and limited reliance on wholesale funding," added the report.
FOREIGN INVESTMENT
Foreign investment in the country also shot up 13.2% in the first half of the year to USD 1.15 billion, according to government data. Last year, the government reported foreign investment of USD 2.5 billion, driven by oil and gas, petrochemicals and automobile manufacturing.
The government's drive to pour funds into the economy under the five-year USD 47.3 billion Industrial Modernization and Infrastructure Development Program is expected to be financed via external and domestic sourcing, apart from the Fund For Reconstruction and Development (FRD).
Some of the funds are being directed to USD 4 billion Surgill Natural Gas Chemicals project and another USD 4 billion facility to liquefy natural gas in the Kashkadarya region.
These developments are improving the credit environment in the country.
Moody's forecasts a 20% annual lending growth which ﹣ together with more prudent provisioning policies ﹣ will push the Uzbek system's total capital adequacy ratio (CAR) down to a still acceptable 12.3% over the next 12 to 18 months, from the 16.7% average reported by rated Uzbek banks at the end of 2012.
"However, the rating agency estimates that in order to preserve the current total CAR in line with loan growth, the Uzbek banking sector will need to raise an additional USD 650 million of fresh capital between 2013 and 2014," it reports.
STRUCTURAL WEAKNESS
The improved outlook masks structural weakness in Uzbekistan's banking system, such as poor corporate governance, lax credit underwriting standards, the banks' high exposures to single borrowers and single industries, as well as their significant reliance on large corporate depositors, notes Moody's.
"Other weaknesses include a somewhat high level of problem loans and banks' rapid lending growth, which necessitates regular capital increases."
However, the government has restrained itself from fresh capital injections and instead is focusing on stricter regulatory controls, which bodes well for the sector. The banks would also do well to increase loan provisions to ensure profitability is not impacted.
"The proportion of impaired loans in the sector portfolio has been diluted by new lending to an estimated 8.3% at the end of 2012 from 11.9% at the end of 2011," according to Fitch Ratings Agency. "That said, asset quality metrics remain highly cyclical and there could be notable downside risks in the case of an economic slowdown."
Bank supervision has improved with most institutions now audited by international agencies, but state-owned banks still control 70% of the sector.
"There has been increasing competition in the sector and major state-owned banks are undergoing internal restructuring and transformation," said European Bank for Reconstruction and Development. "The state support programs now target specific sectors, with control over use of funds performed by the relevant line ministries and specialized agencies."
In July, Commercial Agrobank raised its capital by nearly 75% to meet rising demand. In addition, the Central Bank of Uzbekistan also maintained the refinancing rate at 12%. The bank had cut its rate from 14% to the current level two years ago and a continued lower rate has ensured stability.
EXTERNAL FACTORS
While the economic outlook is strong, external factors could dampen the country's business sentiment.
"The economy is vulnerable to external commodity shocks as well as to potential deterioration in its major trading partners (Russia, China and Kazakhstan)," said Fitch. "Moreover, institutional reforms remain dormant and there is no visible progress in improvement of the currently difficult business climate."
"Asset quality has improved slightly in the Uzbek banking system over the past 12 months and we expect the average level of problem loans in the sector to remain stable over the outlook period, hovering below 10% of total gross loans, testament to the growing economy," explained Olga Ulyanova, a Moody's vice president senior analyst.
© alifarabia.com 2013
