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Announcement:

Moody's outlook for Uzbek banking system is negative

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 system.

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 behaviour.

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 facilities.

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 institutions.

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 on www.moodys.com.

* * * *

NOTE TO JOURNALISTS ONLY: For more information please contact New York Press Information +1-212-553-0376; EMEA Press Information in London +44-20-7772-5456; Juan Pablo Soriano in Madrid +34-91-310-1454; Alex Cataldo in Milan +39-02-914-81-100; Eric de Bodard in Paris +33-1-5330-1020; Detlef Scholz in Frankfurt +49-69-707-30-700; Mardig Haladjian in Limassol +357-25-586-586; Alex Sazhin in Moscow +7-495-228-60-60; Petr Vins in Prague +4202 2422 2929; Tokyo Press Information +813-5408-4110; Hilary Parkes in Toronto +1-416-214-1635; Hong Kong Press Information +852-2916-1150; Hector Lim in Sydney +612 9270 8102; Luiz Tess in São Paulo +5511-3043-7300; Alberto Jones Tamayo in Mexico City +5255-1253-5700; Daniel Rúas in Buenos Aires +54 11-4816-2332 ext. 105; Leon Claassen in Johannesburg +27-11-217-5470; Jehad el-Nakla in Dubai +971 4 401 9536; or visit our web site at www.moodys.com

Moscow
Olga Ulyanova
Asst Vice President - Analyst
Financial Institutions Group
Moody's Eastern Europe LLC
Telephone: +7 495 228 6060
Facsimile: +7 495 228 6091

London
Reynold R. Leegerstee
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's outlook for Uzbek banking system is negative
No Related Data.
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