Achieving further positive shifts in Uzbekistan's banking sector may take longer due to deep structural deficiencies and new risks in the sector, according to Fitch Ratings.
During a recent conference in Tashkent, the agency noted that since the publication of the comprehensive banking sector reform strategy in May 2020, state-owned banks in the country have made some noticeable progress in shifting towards a more market-oriented approach in their business models.
The reform is based on privatizing the majority of state-owned banks after transforming their business models to shift the focus from directive lending to commercial activities. Uzbek authorities intend to sell at least three banks to foreign strategic investors by the end of 2025, aiming to increase the share of non-state banks in the sector's assets to 60% by the end of 2023 (currently at 32%). This reform also involves revising corporate governance, risk management systems in banks, and improving prudential regulation, as highlighted by Fitch.
Since the announcement of the reform, the country has sold a controlling stake in the fifth-largest bank, "Ipoteka Bank," to Hungary's OTP Bank. However, the sale of two other major banks, "Uzpromstroybank" (SQB) and "Asaka Bank," has been recently postponed until the end of 2024 and 2025, respectively, with further delays likely, according to the agency.
Fitch analysts emphasize that asset quality will remain a key factor influencing the creditworthiness assessment of Uzbek banks in the short term. The organization expects the proportion of impaired loans in the sector to increase further this year as banks recognize problematic loans inherited from previous periods.
State development banks are considered the most vulnerable, given their involvement in high-risk subsidized lending for development purposes, analysts noted. Additionally, the rapid growth of retail lending in recent years could pose additional risks in the medium term. Retail loans doubled as a share of the sector's loans between 2018 and 2023, reaching 32% by the end of last year. It is anticipated that the quality of retail loans will deteriorate in 2024-2025, particularly in riskier segments such as unsecured consumer and auto lending.
Recent regulatory constraints introduced by the Central Bank of Uzbekistan are expected to mitigate overheating risks in the retail lending segment, but analysts believe that it will take time for these measures to yield the desired results.
Profitability of Uzbek banks is projected to improve in the medium term due to an increased focus on high-margin retail lending, with the cost of risk significantly influencing net profit indicators.
Fitch data shows that the government has become more selective in providing capital support to banks since the start of the reforms, with development banks receiving the majority of new capital injections. The agency considers funding profiles of state-owned banks as weak, given their high dependence on government funds and capital market borrowings (including from international financial institutions), as well as limited liquidity reserves.
In a February review, Fitch highlighted that investor sentiment may also be affected by current geopolitical uncertainties in the post-Soviet region, potentially delaying privatization efforts.
In August 2023, the president further postponed the privatization and IPO of shares in "Kishlok Kurilish Bank" (recently transformed into the Business Development Bank), "Asaka Bank," "Alokabank," "Agrobank," and others to a later date. The government's stake in Uzpromstroybank is planned to be reduced below 50% by the end of 2024, although the initial plan was to auction off the entire government stake.
