OREANDA-NEWS. Fitch Ratings has upgraded the Long-Term Foreign-Currency Issuer Default Ratings (IDRs) of Uzbek Industrial and Construction Bank Joint-Stock Commercial Bank (Uzpromstroybank; UPSB), Asaka Bank, OJSC Agrobank and Microcreditbank's (MCB) to 'B' from 'B-'. The Outlooks are Stable. The agency has also upgraded the Viability Ratings (VRs) of UPSB and Asaka to 'b' from 'b-', and of Agrobank to 'b-' from 'ccc', and affirmed MCB's VR at 'b-'. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS

IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORS

The upgrades of the four banks' Long-Term Foreign-Currency IDRs and upward revision of their Support Rating Floors (SRFs) to 'B', and the level of their Local-Currency IDRs, reflect Fitch's revised view that the state's propensity to provide support in foreign and local currencies would be broadly similar. This view is based on: 1) the banks' extended record of sufficient access to foreign currency to service their obligations; 2) the moderate potential cost of any future foreign-currency support - given only limited foreign-currency debt in the cases of Asaka, Agrobank and MCB, and state guarantees already covering a significant part of UPSB's external funding; and (3) the state's ongoing solid ability to provide support in foreign currency, with sovereign foreign-currency reserves of around USD24bn at end-2015 equal to about 2x the banking sector's total foreign-currency liabilities or 11x its external debt.

Fitch had previously capped the four banks' foreign-currency IDRs at 'B-' because we feel that FX market regulation in Uzbekistan could have constrained the banks' ability to always access foreign currency in a timely manner to service their obligations. Regulation of the FX market in Uzbekistan has not changed significantly since the last rating review. However, for the reasons stated above, Fitch no longer believes that this represents a sufficient impediment to the banks accessing foreign currency to warrant a differentiation in their local - and foreign-currency ratings.

The four banks' IDRs, Support Ratings and SRFs continue to be underpinned by potential support from the Uzbek authorities. In Fitch's view, the authorities would have a high propensity to provide support, if needed, because of the state's majority ownership; the banks' systemic importance (to a lesser extent in the case of MCB); tight supervision of their activities; and their policy roles. However, the likelihood of support is constrained by weaknesses in the sovereign credit profile, which are in turn driven by the economy's structural weaknesses - including the difficult business environment and vulnerability to external shocks.

The upgrade of Agrobank's Long-Term Local-Currency IDR to 'B' from 'B-' reflects the record of capital support provided by government to replenish the bank's capitalisation after alleged fraud-related losses in 2010.

Government plans to attract new foreign investors for all four banks through sales of minority stakes, which will result in the state's ownership declining by a moderate extent. However, we feel the state is likely to retain majority stakes and operational control in the banks, and its propensity to support them should therefore remain strong.

VIABILITY RATINGS

The upgrades of UPSB's and Asaka's VRs to 'b' from 'b-' reflect their extended record of reasonable performance and asset quality. This also reflects access to higher-quality borrowers, with some exposures also being covered by state guarantees, and their stable funding - of which a significant part is provided by the state or state-related entities. The upgrade of Agrobank's VR to 'b-' from 'ccc' reflects improvements in its solvency resulting from the recapitalisation programme executed by government.

However, all four banks' VRs continue to reflect Uzbekistan's difficult operating environment, the banks' limited commercial franchises, high concentrations in their balance sheets, and potential deficiencies in underwriting policies leading to high credit and operational risks.

UPSB and Asaka had low NPLs of below 2% (fully covered by reserves) at end-2015, thanks to their focus on the export-oriented energy and auto industries and a high share of state-owned borrowers (UPSB - 87% of loans, Asaka - 37%) with some larger exposures also being guaranteed by the state. Agrobank also has low NPLs, but its asset quality remains weakened by unreserved problematic receivables (8% of total assets), which resulted from 2010 fraud, and significant non-core/foreclosed assets. MCB's NPL ratio was a high 10% at end-2015 due to financial difficulties in a number of agricultural companies. These loans are not reserved, as MCB expects to recover most of them, but the auditors challenged management's recovery assumptions and issued a qualified opinion. A mitigating factor is that the bank has sufficient capital to reserve these loans and remain compliant with regulatory capital ratios.

Concentration risks are high, particularly at UPSB and Asaka, , although some relief is provided by state guarantees for larger exposures. Agrobank and MCB have more granular books but high industry and sector concentrations, which are prone to risks such as commodity (eg cotton) price deterioration. Uzbekistan's structural weaknesses, and the banks' high loan dollarisation in the case of UPSB and Asaka (79% and 49%, respectively), pose additional downside risks for asset-quality metrics. A positive factor is that most of UPSB's and Asaka's borrowers, who have taken foreign-currency loans, are either state-owned/guaranteed or have foreign-currency revenues.

Capitalisation is strong at UPSB (Fitch Core Capital (FCC)/risk-weighted assets ratio of 16.8% at end-2015), moderate at Asaka (FCC/total assets of 10.3%) and MCB (FCC/ risk-weighted assets ratio of 13.6%, adjusted for unreserved NPLs), and weak at Agrobank (5.1%, adjusted for unreserved problematic receivable). Agrobank received UZS50bn in fresh capital injection (equal to 2% of end-2015 risk-weighted assets (RWAs)) from government in 1H16, which should improve the bank's FCC ratio to a more adequate 6.3% at end-2016 - given only moderate expected growth of 13%. Internal capital generation is moderate at UPSB and Asaka (ROAE of 10% and 12%, respectively), and weak at Agrobank (2%) and MCB (1%), reflecting the mostly state-directed nature of banks' operations and rather weak operating efficiency (particularly at Agrobank and MCB).

The banks' funding is sourced mainly from customer deposits, and government and quasi-government entities. Depositor concentrations were high at UPSB and Asaka. Agrobank's and MCB's deposits were more granular. Fitch expects them to have limited volatility - in light of steady previous growth - in spite of the deposits being mostly short term. UPSB is the only bank with meaningful borrowings from international financial institutions (19% of liabilities). However, UPSB's foreign debt repayments are small (below 2% of total liabilities in 2H16-2017) and linked to loan repayments.

Liquidity is comfortable at UPSB and Asaka due to solid buffers (at end-1H16 liquid assets net of near-term repayments were about 30% and 36% of customer deposits at UPSB and Asaka, respectively), and somewhat tighter at Agrobank and MCB, as these two banks have high reliance on short-term inter-bank placements. All four banks hold high FX liquidity buffers sufficient to withstand a substantial reduction in foreign-currency-denominated customer funding.

RATING SENSITIVITIES

IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORS

A change in UPSB's, Asaka's, Agrobank's and MCB's support-driven IDRs could result from a strengthening/weakening of the sovereign's credit profile.

VR

Downward pressure on the VRs could arise from deterioration in the banks' asset quality if this is not offset by equity injections. Upgrades of the VRs could result from improvements in Uzbekistan's operating environment. Upgrades of Agrobank and MCB's VRs could also result from improvements in their performance and a strengthening of their franchises.

The rating actions are as follows:

UPSB

Long-Term Foreign-Currency IDR upgraded to 'B' from 'B-'; Outlook Stable

Short-Term Foreign-Currency IDR affirmed at 'B'

Long-Term Local-Currency IDR affirmed at 'B'; Outlook Stable

Short-Term Local-Currency IDR affirmed at 'B'

Viability Rating upgraded to 'b' from 'b-'

Support Rating upgraded to '4' from '5'

Support Rating Floor revised to 'B' from 'B-'

Asaka

Long-Term Foreign-Currency IDR upgraded to 'B' from 'B-'; Outlook Stable

Short-Term Foreign-Currency IDR affirmed at 'B'

Long-Term Local-Currency IDR affirmed at 'B'; Outlook Stable

Short-Term Local-Currency IDR affirmed at 'B'

Viability Rating upgraded to 'b' from 'b-'

Support Rating upgraded to '4' from '5'

Support Rating Floor revised to 'B' from 'B-'

Agrobank

Long-Term Foreign-Currency IDR upgraded to 'B' from 'B-'; Outlook Stable

Short-Term Foreign-Currency IDR affirmed at 'B'

Long-Term Local-Currency IDR upgraded to 'B' from 'B-'; Outlook Stable

Short-Term Local-Currency IDR affirmed at 'B'

Viability Rating upgraded to 'b-' from 'ccc'

Support Rating upgraded to '4' from '5'

Support Rating Floor revised to 'B' from 'B-'

MCB

Long-Term Foreign-Currency IDR upgraded to 'B' from 'B-'; Outlook Stable

Short-Term Foreign-Currency IDR affirmed at 'B'

Long-Term Local-Currency IDR affirmed at 'B'; Outlook Stable

Short-Term Local-Currency IDR affirmed at 'B'

Viability Rating affirmed at 'b-'

Support Rating upgraded to '4' from '5'

Support Rating Floor revised to 'B' from 'B-'