OREANDA-NEWS. Fitch Ratings has affirmed four state-controlled Uzbek banks' Long-term foreign currency Issuer Default Ratings (IDRs) at 'B-' with Stable Outlooks. The affected banks are Uzpromstroybank (UzPSB), Asakabank (Asaka), OJSC Agrobank (Agrobank) and Microcreditbank (MCB). A full list of rating actions is available at the end of this commentary.

KEY RATING DRIVERS

IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORS
The state's support propensity for the banks is underpinned by the government's majority ownership of the banks, the banks' involvement in state-run investment programmes, the significant volumes of state-directed lending and sizeable market shares in the case of UzPSB and Asaka. The government's ability to provide support is currently also solid, considering the moderate size of the banking sector. However, Fitch's credit assessment of Uzbekistan remains constrained by the economy's structural weaknesses. Uzbekistan's economy is vulnerable to external shocks, as exports are commodities-driven and concentrated on a few countries and external finances are heavily supported by remittances.

Fitch considers that decision-making process on currency conversion operations in Uzbek economy is rather opaque and the right of conversion of local currency into foreign currencies is granted on a case-by-case basis. In Fitch's view, therefore, support in foreign currency for state-controlled banks may be provided in some circumstances in a less timely manner compared with that in the local currency. Accordingly, Fitch caps all Uzbek banks' foreign currency IDRs at 'B-', reflecting the high transfer and convertibility risks present in Uzbekistan.

UzPSB's, Asaka's and MCB's Long-term local currency IDRs at 'B' reflect the strong track record of both liquidity and capital support from the Uzbekistan authorities. Agrobank's Long-term local currency IDR at 'B-' reflects insufficient capital support provided to date by the government after alleged asset embezzlement in 2010. However, the bank's rating positively considers the track record of timely liquidity support by the authorities, regulatory forbearance and gradual contributions to the bank's capital.

VIABILITY RATINGS
The affirmation of UzPSB's, Asaka's and MCB's Viability Ratings (VRs) at 'b-' and Agrobank's at 'ccc' reflects limited changes to the banks' credit profiles, which remain susceptible to Uzbekistan's difficult operating environment. The banks' VRs also factor in the banks' limited commercial franchises, corporate governance weaknesses and potential deficiencies in credit underwriting policies leading to operational risk.

Reported loan book quality was stable at UzPSB, Asaka and Agrobank with NPLs of below 3% (fully covered by reserves) in 2014, but worsened rather significantly at MCB, as its NPLs rose to 14% at end-2014 from 4% at end-2013 (all unreserved, 48% of Fitch core capital, FCC). However, Agrobank's asset quality remains weakened by unreserved problematic receivables (9% of total assets), which were recorded on the balance sheet as a result of the 2010 fraud.

Capitalisation is moderate at UzPSB (FCC/ risk-weighted assets ratio of 14.1% at end-2014) and Asaka (16.2%), satisfactory at MCB (FCC/total assets of 12.9%, adjusted for unreserved NPLs) and weak at Agrobank (3%, adjusting for unreserved problematic receivable). The government's decree requires banks to grow capital by at least 20% annually until end-2015, and as profitability is modest, they expect this would be met by capital contributions from the state (this was also the case in 2014). Agrobank expects its recapitalisation to be in excess of its expansion pace, so its adjusted FCC ratio may improve to a more adequate 8%, creating positive pressure on its 'ccc' VR.

Profitability is moderate at Asaka (ROAE of 12%), modest at Agrobank (7%) and UzPSB (6%) and weak at MCB (0.2%), reflecting the mostly state-directed nature of banks' operations and rather weak operating efficiency (particularly at MCB).

Funding is generally concentrated, but sticky. High loan-to-deposit ratio of 283% at UzPSB reflects significant dedicated state funding for specific programmes financed by the bank and higher international funding (17% of end-2014 liabilities). MCB's loan-to-deposit ratio is also high at 189%, reflecting its reliance on the interbank market. Despite customer funding being mostly short-term, Fitch expects them to have limited volatility given the past experience of steady growth. UzPSB's foreign debt repayments are small (less than 2% of liabilities in 2015) and linked to loan repayments. Liquidity risk is also mitigated by the banks' adequate liquid assets of around 10-15% of total assets at end-1H15.

RATING SENSITIVITIES

IDRS, SUPPORT RATINGS, SUPPORT RATING FLOORS
A change of UzPSB's, Asaka's and MCB's Long-term local currency IDRs could result from a strengthening/weakening of the sovereign's credit profile. Agrobank's Long-term local currency IDR could be upgraded if the government replenishes the bank's capital.

A revision of the Support Rating Floor and upgrade of the Support Rating and Long-term foreign currency IDRs would be contingent on the liberalisation of foreign currency regulations.

VRs
An upgrade of the VRs of UzPSB, Asaka and MCB could result from improvements in Uzbekistan's operating environment. Agrobank's VR could be upgraded to 'b-' if its capitalisation improves.

Downward pressure on the VR could arise from deterioration of the banks' asset quality if this is not offset by equity injections.

The rating actions are as follows:

UzPSB
Long-term foreign currency IDR affirmed at '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 affirmed at '5'
Support Rating Floor affirmed at 'B-'

Asaka
Long-term foreign currency IDR affirmed at '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 affirmed at '5'
Support Rating Floor affirmed at 'B-'

MCB
Long-term foreign currency IDR affirmed at '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 affirmed at '5'
Support Rating Floor affirmed at 'B-'

Agrobank
Long-term foreign currency IDR affirmed at '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 'ccc'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'B-'