OREANDA-NEWS. November 30, 2015.  Fitch Ratings says in a new report that the outlook for Uzbekistan's banking sector remains stable, supported by strong state-led investment and still high domestic consumption. However, lower commodity prices, most notably for oil and cotton, a slowdown in major CIS trading partners and a drop in remittances from Russia may put pressure on Uzbekistan's economy.

Banks' reported asset quality is adequate with impaired loans averaging a moderate 4.7% of total loans and reserve coverage at a comfortable 90% at end-2014 (the last date at which most banks produced IFRS accounts). Fitch expects asset quality metrics at end-2015 to be broadly in line with end-2014, given the so far limited impact on Uzbekistan's operating environment of negative external trends. Foreign currency lending is at a significant 49% of total loans, although positively most borrowers have FX revenues, while the sector's currency position is matched by FX denominated funding amounting to 49% of total liabilities.

Reported capitalisation has been stable (with an equity/assets ratio of 10.1% and an equity/loans ratio of 15.4% at end-2014), due to regular capital injections from the state. According to Fitch estimates, the available capital buffer is sufficient to increase loan impairment reserves by 9% on average, which in most cases would be sufficient to withstand a moderate stress. However, this should be viewed against the sector's recent rapid loan growth and only modest internal capital generation (return on average equity of 12% in 2014). Banks' capital positions in 2015 have been supported by equity contributions from the government and reduced loan growth.

The sector's funding is dominated by (mostly corporate) customer accounts (60% of end-2014 total liabilities), which are predominantly short-term, but fairly stable. Long-term funding sources are mostly represented by deposits of the Uzbekistan Fund for Reconstruction and Development (UFRD, 17% of sector liabilities) and external foreign borrowings (12% of sector liabilities), mainly attracted by government-supported project finance programmes. Liquidity risk is mitigated by a generally high share of liquid assets (above 20% at end-2014) and a comfortable loans-to-deposits (including state-dedicated funds) ratio of 94% at end-2014. Liquidity buffers have remained adequate in 2015, supported by the limited refinancing needs of the sector and sticky customer accounts.

The full report is available at www.fitchratings.com or by clicking on the link above.