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

KEY RATING DRIVERS
The banks' 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 VRs consider the challenging operating environment, including difficult business climate, structural weaknesses in the economy, high concentration risk and external pressures. The latter are due to the fall in commodity prices, most notably for oil and cotton, and deterioration of key trading partners, in particular, Russia, to which the country has a large exposure through both workers' remittances and export flows.

The ratings are also constrained by the high transfer and convertibility risks in the economy due to the country's tightly regulated FX market and the banks' modest franchises in the state-dominant banking sector. The latter is more acute for UB, which is rated one notch lower than its peers, given its very small scale, geographical concentration and higher risk credit profile, and its access to better quality clients being weaker than its peers. This was also constrained by past regulatory issues resulting in the withdrawal of its license on foreign currency operations in 2012. However, in June 2015, the Central Bank of Uzbekistan (CBU) returned the bank's license and its foreign currency operations were restored. Following this, Fitch has assigned UB a 'CCC' Long-term foreign currency IDR.

The Stable Outlook on TB and IY reflects Fitch's expectations of further economic growth and government-led investments into major manufacturing sectors, which will support the banks' lending growth and profitability.

Reported problem exposures remain moderate, with impaired loans at below 4% of gross loans at all three banks at end-3Q15 (local GAAP). However, this should be viewed in light of largely unseasoned lending after previous rapid growth, and limitations in local GAAP disclosure. We consider UB's asset quality metrics as weaker than its peers given its large and weakly provisioned (31%) NPLs (loans overdue for more than 90 days) at 15% of gross loans at end-2014 (IFRS). Both IY and TB had NPLs at below 2% on the same date, fully covered by reserves. Concentration risks remain high, particularly at TB and UB, with the 25 largest borrowers accounting for 63% and 72% of loans, respectively, at end-3Q15. IY has a more granular loan book, with the top 25 largest exposures below 25% of total loans.

The capitalisation of all three banks remained stable with Fitch Core Capital ratios at a reasonable 17% at TB, 23% at UB and lower 11% at IY at end-2015. The regulatory capital ratios of all three banks had decreased significantly at end-2015, as the CBU introduced several changes into calculation of capital adequacy ratios (CAR). TB's and UB's total CARs at 16% and 20%, respectively, remained above the regulatory minimum, which was increased to 11.5% from 10.0% in January 2016. These capital cushions provided TB and UB comfortable additional loss absorption capacity of 9% and 20% of gross loans, respectively.

IY's total CAR was 11% at end-2015 and is expected to be below the regulatory minimum level in January 2016. A new UZS10bn capital injection expected in 1H16 should stabilise its capitalisation at about 12%. Fitch understands there will be no regulatory sanctions in relation to the temporary incompliance.

Core funding is from customer deposits (60% of total liabilities at IY, 87% at TB and 95% at UB), which are short term but relatively stable at all three banks. Liquidity cushions were reasonable but should be viewed in light of deposit concentrations (particularly, at TB). At end-3Q15, highly liquid assets net of potential debt repayments were sufficient to cover around 24% of customer deposits at UB, 30% at IY and 46% at TB.

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

RATING SENSITIVITIES
An upgrade of TB and IY would depend on the overall notable improvement in the operating environment. UB's ratings may be upgraded if the bank is able to significantly improve its franchise along with asset quality and tightening of risk policies.

A downgrade could result from significant deterioration in the operating environment resulting in the marked deterioration of asset quality and capitalisation.

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

The rating actions are as follows:

Ipak Yuli Bank
Long-term foreign and local currency IDRs: affirmed at 'B-', Outlook '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'

Trustbank
Long-term foreign and local currency IDRs: affirmed at 'B-', Outlook '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'

Universalbank
Long-term foreign currency IDR: assigned 'CCC'
Long-term local currency IDR: affirmed at 'CCC'
Short-term foreign currency IDR: assigned 'C'
Short-term local currency IDR: affirmed at 'C'
Viability Rating: affirmed at 'ccc'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'NF'