OREANDA-NEWS. Fitch Ratings has affirmed Ipak Yuli Bank (IY) and PJSEB Trustbank's (TB) Long-term foreign currency Issuer Default Ratings (IDRs) at 'B-' with a Stable Outlook and Universalbank's (UB) Long-term local currency IDR at 'CCC'. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

These banks' Long-term IDRs are driven by their standalone strength, as reflected in their Viability Ratings (VR) of 'b-' for IY and TB and 'ccc' for UB. The affirmation of these banks' ratings reflects limited changes in the banks' standalone credit profiles since their previous review in February 2014.

The VRs consider their challenging operating environment, including the difficult business climate, structural weaknesses in the economy, high concentration risk and external pressures due to the significant weakening of commodity markets and deterioration in key trading partners (in particular, Russia).

The ratings are also constrained by the high transfer and convertibility risks present in the economy due to the country's tightly regulated FX market, and the banks' generally limited franchises. The latter is more acute for UB, which is consequently rated one notch lower than its peers, given geographical concentration and relatively short track record of operations as well as past regulatory problems (UB's licence on foreign currency operations was revoked in July 2012).

The Stable Outlooks on IY and TB's ratings reflect Fitch's expectations for continued economic growth, backed by government spending on industrial development, and solid domestic consumption to support bank lending and profitability in 2015.

Reported asset quality metrics remain reasonable across the board, with impaired loans at below 3.6% at all banks at end-3Q14. At the same time, loan books are yet to season after rapid growth in 2014 (up by 63%, 50% and 23% for IY, TB and UB, respectively, albeit from a relatively low base). Top 25 exposures/gross loans ratios are high at 57%-61% at TB and UB and a more moderate 28% at IY. Fitch's review of the largest exposures did not reveal major asset quality issues at IY and TB, while, in Fitch's view, nearly a third of the largest exposures at UB were of high-risk and weakly provisioned, also reflecting the bank's limited presence in the mid-sized corporate segment.

The banks currently available capital buffers would enable them to absorb some extra losses: at end-3Q14, Fitch estimated that the banks could increase loan impairment reserves up to 12% at IY, 18% at TB and 33% at UB without breaching minimum regulatory capital limits. In addition, solid pre-impairment profitability, underpinned by a high non-interest income, mostly fees (in the range of 52%-61% of gross revenues in 2014) provides additional loss absorption capacity. UB's weaker-than-peers' operating efficiency (cost/income ratio of 72% in 2014) reflects its limited scale.

The banks' liquidity positions vary significantly. IY and TB's highly liquid assets net of potential debt repayments comfortably covered around 32% and 47%, respectively, of customer accounts at end-3Q14. TB's more ample liquidity should be viewed in light of the high concentration of deposit funding, mostly due to related parties, the Uzbek Commodities Exchange and its affiliates, which accounted for about half of the bank's total liabilities at end-3Q14. UB's liquidity cushion was small covering just 9% of its customer accounts.

These banks' Support Rating Floors (SRFs) of 'No Floor' and their '5' Support Ratings reflect their limited systemic importance and rendering of extraordinary support from Uzbek authorities is unlikely. The ability of the banks' private shareholders to provide support cannot be reliably assessed and, therefore this support is not factored into the ratings.

RATING SENSITIVITIES
An upgrade of IY and TB's IDRs and VRs would require a general improvement in the operating environment. An upgrade of UB would require notable growth and diversification of its franchise as well as significant strengthening of its liquidity position. Profitability improvement, while maintaining adequate asset quality and capitalization, would also be rating positive.

A downgrade could occur in the case of a deterioration of the operating environment, significantly increased pressure on capital as a result of any marked deterioration of the credit quality and/or major liquidity shortfalls (e.g. in case of withdrawals by key customers).

Fitch does not anticipate changes to the Support Ratings and SRFs of these banks given their limited systemic importance.

The rating actions are as follows:

IY
Long-term foreign and local currency IDRs: affirmed at 'B-', Outlooks Stable
Short-term foreign and local currency IDR: affirmed at 'B'
Viability Rating: affirmed at 'b-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'NF'

TB
Long-term foreign and local currency IDRs: affirmed at 'B-', Outlooks Stable
Short-term foreign and local currency IDRs: affirmed at 'B'
Viability Rating: affirmed at 'b-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'NF'

UB
Long-Term local currency IDR: affirmed at 'CCC'
Short-Term local currency IDR: affirmed at 'C'
Viability Rating: affirmed at 'ccc'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'NF'