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10 Aug 2009
Moscow, August 10, 2009 -- Moody's has changed its fundamental credit outlook for the Uzbek
banking system to negative from stable, reflecting the rating agency's
concerns about the intrinsic weakness of the domestic banking sector coupled
with the deteriorating global economic conditions, which are starting
to affect the local economy, says Moody's Investors Service
in its new Banking System Outlook on Uzbekistan.
Moody's negative outlook for the Uzbek banking system expresses
the rating agency's view on the likely future direction of fundamental
credit conditions in the industry over the next 12 to 18 months.
It does not represent a projection of rating upgrades versus downgrades.
"The negative outlook for the Uzbek banking system reflects our
view that the sector remains constrained by the structural weakness of
the national economy, the banks' still underdeveloped corporate
governance and risk management practices and the volatile operating environment.
Domestic banks are suffering from the global economic turbulence,
but only to a limited extent, as the degree of the Uzbek banking
system's integration into the global economy is limited,"
says Olga Ulyanova, Moody's lead analyst for the Uzbek banking
Moody's estimates that the average level of problem loans will rise
to 10%-15% of total loans by the end of 2009 and
that some recurring income sources will shrink notably, which will
in turn exert pressure on local banks' bottom-line profitability
and capital levels. That said, the government has provided
support to several state-owned and private banks, which means
that the system as a whole is fairly resilient, including under
the rating agency's worse-than-expected scenario.
The national banking system has benefited from the relatively low extent
of Uzbekistan's integration into the global economic system,
which has prevented local banks and corporates from accumulating sizeable
foreign debt or being exposed to toxic assets. At the same time,
Moody's notes that the global recession has led to the decline of
international demand and hence the lowering of prices for a number of
export commodities traded by Uzbekistan, while internal consumption
has also been contained by the low income level of households.
"This has adversely affected certain industries and corporate borrowers,
potentially leading to weakening profitability and asset quality for banks
and giving rise to capitalisation constraints in the long term,
with no clear evidence of the existence of internal or external resources
(other than the government's contributions) available to replenish
the banks' capital levels and boost their funding base,"
explains Ms. Ulyanova.
Moody's notes that government intervention is an integral part of
Uzbek banking, with the state having direct ownership of approximately
half of the system and the whole sector being subject to the authorities'
influence. The government is supportive of the domestic financial
system, acting by means of regulation, monitoring and day-to-day
guidance, as well as through the direct provision of funds.
In autumn 2008, with a view to supporting local banks amid the more
challenging economic environment and securing further growth opportunities
for the developing national banking sector, the government announced
plans to inject additional resources -- mainly in the form of fresh
capital -- into six systemically important banks. This contribution
totals approximately UZS400 billion (US$285 million), which
represents around 20% of the system's pre-contribution
total capital. In addition, the government recently removed
the existing limits on the level of private deposit insurance coverage,
as per the mandatory state insurance programme, thus addressing
the potential impact of the global economic turbulence on individual depositor's
Moody's acknowledges the significance of these measures, but
cautions that the local economy is unlikely to remain completely immune
to the downturn, which could potentially limit the government's
resources and which will need to be spread among a large number of local
financial institutions and other recipients requiring state support.
In addition, the local banking sector's asset quality remains
weak and largely untested and more hostile economic conditions may potentially
reveal latent problems that may absorb a proportion of the government's
In the medium term at least, Moody's expects Uzbek banks to
continue to display high reliance and dependence on the government's
financial policies and support, which will boost capital and direct
the business expansion strategies of a limited number of selected players
(mainly state-owned or state-linked) to the detriment of
the market shares of other banks.
Asset quality will remain the focus of Moody's concerns since many
corporate borrowers in Uzbekistan are fundamentally weak, with some
being severely affected by the economic downturn, while the banks'
credit underwriting standards and collection practices are loose and immature.
As capital flows from international and domestic investors have dried
up, the rating agency believes that the government's previously
announced plans for the privatisation of some banks will be delayed in
favour of the state taking bigger shares in privately owned financial
The principal methodologies used in rating the Uzbek banking system are
the "Bank Financial Strength Ratings: Global Methodology"
and "Incorporation of Joint-Default Analysis into Moody's Bank
Ratings: A Refined Methodology", which can be found at www.moodys.com
in the Credit Policy & Methodologies directory, in the Ratings
Methodologies sub-directory. Other methodologies and factors
that may have been considered in the process of rating the Uzbek banking
system can also be found in the Credit Policy & Methodologies directory.
The "Banking System Outlook: Uzbekistan" is available
* * * *
NOTE TO JOURNALISTS ONLY: For more information please contact New
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Asst Vice President - Analyst
Financial Institutions Group
Moody's Eastern Europe LLC
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091
Moody's outlook for Uzbek banking system is negative
Reynold R. Leegerstee
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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