The BB credit rating of the National Bank for Foreign Economic Activity of the Republic of Uzbekistan (hereinafter, NBU, or the Bank) under the international scale reflects the Bank’s significant importance for the Republic of Uzbekistan (hereinafter, Uzbekistan, or the country), and, correspondingly, ACRA’s opinion on the very high possibility of support being provided by the state. The standalone creditworthiness assessment (SCA) of NBU under the international scale (bb) is based on its leading competitive positions as the country’s largest state-owned bank and its status as the priority lender to strategically important projects and sectors of the economy, coupled with its mission to develop Uzbekistan’s export potential. The SCA also takes into account the financial profile, which has a high level of capital adequacy, moderately high asset quality, and average funding and liquidity indicators. Over the next 12 to 18 months, the SCA will continue to be constrained by relatively high operating environment risks compared to global indicators.

The credit rating of NBU is A-(RU) under the national scale for the Russian Federation as per the Methodology for Mapping Credit Ratings Assigned under ACRA’s International Scale to Credit Ratings Assigned under ACRA’s National Scale for the Russian Federation.

The Stable outlook reflects the Bank’s strong ties with Uzbekistan and ACRA’s expectations that the sovereign will maintain its creditworthiness at the current level over the next 12 to 18 months.

In addition, ACRA assigned an eA-(RU) expected credit rating under the national scale for the Russian Federation to NBU’s planned bond issue (RU000A103VY4) of senior unsecured debt. This rating is in line with the Bank’s rating under the national scale.

NBU is a major Uzbek state-owned bank. It is wholly owned by the state via the Uzbekistan Fund for Reconstruction and Development (58.5%) and the Ministry of Finance of the Republic of Uzbekistan (41.5%).

KEY ASSESSMENT FACTORS

Very high level of support from the state. ACRA believes that insolvency of NBU would be a critical obstacle to the stable development of the economy and result in serious reputational risk for Uzbekistan. Nevertheless, the influence of external support on the credit rating is currently neutral due to the already sufficiently high level of the Bank’s standalone creditworthiness in the local context.

NBU ranks first among the country’s banks by asset size, which determines its importance for the economy and financial system. In addition, the Bank holds the largest share of retail deposits in Uzbekistan and it takes priority for placement of funds from the state and state-funded organizations (about 40% of the resource base as of mid-2021, including about 12% of funds held by direct shareholders). Around half of the loan portfolio is made up of loans provided under government initiatives. Due to this, around 41% of the loan portfolio is covered by state guarantees, which mitigate credit risks. State guarantees also cover around 46% of the Bank’s own liabilities. The record of significant capital injections, especially in 2019, as well as in 2017, indicates that the country is willing and able to provide regular and emergency support. NBU’s importance to Uzbekistan is also evidenced by the government’s plans to maintain control over its operations, unlike many other state-owned banks with regard to which it has officially announced its intent to privatize.

The moderately low operating environment assessment is an SCA component and reflects ACRA’s assessment of the economic and industry risks inherent to any bank operating in Uzbekistan. The assessment takes into account the Agency’s opinion on the level of country risks adjusted in view of the negative impact stemming from specific factors inherent to Uzbek banking sector. One of these is the signification dollarization of the industry (approximately half of the aggregate balance sheet of the sector is denominated in foreign currency) coupled with dependence on funds from non-residents (around 35% of total liabilities). In ACRA’s opinion, these aspects of the financial sector make it challenging for banks to operate as destabilization of the sector might amplify during periods of market turbulence, economic stress, devaluation of the local currency, etc. The operating environment is further limited by considerable state intervention in the banking system, which is dominated by government-owned banks (around 82% of the sector’s assets), and directive lending in the economy. In ACRA’s opinion, these factors weaken competition and result in sector imbalances.

The very high business profile assessment reflects NBU’s leading positions in the Uzbek banking services market — as of October 1, 2021, NBU accounted for around 20% of the sector’s assets and 15% of funds of individuals. Solid competitive positions, the status of the largest state-owned bank and well-established relationships with Uzbekistan’s key state-owned companies, and long-term international investors ensure the stability of the Bank’s business and its financial metrics. These advantages combined with NBU’s high capitalization somewhat mitigate the risks associated with its high single-name concentrations. The 20 largest borrowers and 10 largest counterparties account for around half of the loan portfolio and assets prior to reserves, respectively, while the 10 largest lenders form about 55% of total liabilities.

The Agency expects the aforementioned business model parameters to be maintained over the next 12 to 18 months. In addition, according to the new business transformation strategy approved in May 2020, by 2025 ACRA expects the share of loans to state enterprises and state-funded organizations (which currently account for around half of the portfolio) to gradually decline, as well as growth of the private commercial lending segment. This switch in focus will probably lead to higher profitability, however, the share of the loan portfolio guaranteed by the government will decline. Besides this, the Bank may have to acquire extra skills and competencies to develop new lines of business. ACRA notes that NBU recognizes potential challenges ahead and as part of its aforementioned strategy is improving its risk management and HR systems, as well as upgrading IT infrastructure.

The high assessment of capital adequacy stems from the strong current indicators — Tier 1 capital ratio, calculated in accordance with Basel standards, amounted to 19% as of January 1, 2021; the local regulatory ratio of Tier 1 capital amounted to 19.9% on the same date and stabilized at 20% by the end of Q3 2021. Such high current values provide a comfortable capital buffer to absorb unexpected losses over the next 12 to 18 months.

Moderately high profitability, expressed by the averaged capital generation ratio (ACGR) for the past five full years at 1.22% supports the capitalization of NBU. ACRA expects this indicator to stabilize at slightly higher levels by the end of 2021, but not exceed 1.5%, because the bulk of credit losses related to the pandemic were already recorded under IFRS in 2020.

Moderately high risk profile. ACRA estimates the share of potentially problem exposures (classified as Stage 3 according to IFRS) at about 3.8% of total assets before reserves and 4.5% of the loan portfolio as of mid-2021. Impairment reserves cover 129% of the aforementioned problem assets (or 4.9% of all assets) and 127% of non-performing loans (or 5.8% of all loans). In spite of this, a growing share of Stage 2 loans under IFRS (4.1% of assets prior to reserves and 4.9% of the loan portfolio as of mid-2021) may put additional pressure on the quality of assets and capital. Besides, NBU’s largest borrowers include companies that require additional attention as they operate in sectors that as per the Agency’s view were hit hardest by the pandemic. ACRA considers the respective loans to be regular mainly due to the availability of government guarantees and potential external support. The share of these exposures amounts to an additional 12% of all assets prior to reserves and 14.3% of the loan portfolio.

As a financial institution focused on developing export operations, NBU has a large share of loans issued in foreign currency, around 70%. The corresponding credit risks are notably mitigated due to the availability of foreign currency revenues earned by of these borrowers (exporters), as well as, in general, due to the presence of a large pool of loans (about 41% of the portfolio as of mid-2021) secured by state guarantees. At the same time, long open currency position at 13% of Tier 1 capital as of the end of September 2021, although staying in accordance with the regulatory range, is assessed as relatively high and subsequently could provoke significant foreign exchange losses in the event of an unforeseen strengthening of the local currency.

Average funding and liquidity. A significant part of funding (about 60% of liabilities) is made up of relatively stable and long-term funds from international institutional investors and direct shareholders of the Bank. Additionally, about a third of liabilities fall on deposits, the predominant part of which is formed by the country’s largest national companies that have strong partnerships with the NBU.

The volume of liquid assets is adequate to the Bank’s the funding profile, in particular, its stability and maturity, and amounts to 11.5% of the balance sheet as of mid-2021.

key assumptions

  • Maintaining the current business model, the Bank’s leading market positions, as well as its role and significance for the economy of Uzbekistan over the next 12 to 18 months.

Potential outlook or rating change factors under the international scale

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • ACRA’s opinion that Uzbekistan’s creditworthiness has improved.

A negative rating action may be prompted by:

  • ACRA’s opinion that Uzbekistan’s creditworthiness has deteriorated;

  • Signs of lower propensity for external support along with deterioration of the Bank’s standalone creditworthiness.

POTENTIAL outlook or rating change factors under the national scale for the Russian Federation

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • ACRA’s opinion that Uzbekistan’s creditworthiness has improved.

A negative rating action may be prompted by:

  • ACRA’s opinion that Uzbekistan’s creditworthiness has deteriorated;

  • Signs of lower propensity for external support along with deterioration of the Bank’s standalone creditworthiness.

RATING COMPONENTS UNDER THE INTERNATIONAL SCALE

SCA: bb.

Support: ACRA assesses the level of state support as very high, however, this component of the rating assessment is neutral for the final rating.

ISSUE RATINGS

Expected credit rating rationale. The planned issue (RU000A103VY4) is senior unsecured debt of the Bank. Due to the absence of either structural or contractual subordination of the planned issue, ACRA regards it as equal to other existing and future unsecured and unsubordinated debt obligations of NBU in terms of priority. According to the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments on the National Scale for the Russian Federation, the credit rating of NBU under the international scale (BB, outlook Stable) was used to assign an expected credit rating under the national scale for the Russian Federation to the issue and the Methodology for Mapping Credit Ratings Assigned under ACRA’s International Scale to Credit Ratings Assigned under ACRA’s National Scale for the Russian Federation was applied. In accordance with this methodology, the expected credit rating of the issue under the ACRA’s national scale for the Russian Federation is set at eA-(RU).

Borrower

National Bank for Foreign Economic Activity of the Republic of Uzbekistan

Issuer’s credit rating under the international scale

BB, outlook Stable

Actual issuer

National Bank for Foreign Economic Activity of the Republic of Uzbekistan

Type of security

Interest-bearing certificated bonds subject to centralized titled registration

Type of debt

Senior unsecured

Issue volume

RUB 10 bln

Preliminary placement date

-

Expected maturity

Three years

ISIN

RU000A103VY4

REGULATORY DISCLOSURE

The credit rating has been assigned to the National Bank for Foreign Economic Activity of the Republic of Uzbekistan under the international scale based on the Methodology for Credit Rating Assignment to Banks and Banking Groups under the International Scale and the Methodology for Analyzing Rated Entities Associated with a State or a Group. The credit rating has been assigned to the National Bank for Foreign Economic Activity of the Republic of Uzbekistan under the national scale for the Russian Federation based on the Methodology for Mapping Credit Ratings Assigned under ACRA’s International Scale to Credit Ratings Assigned under ACRA’s National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

The expected credit rating of the bond issue (RU000A103VY4) of the National Bank for Foreign Economic Activity of the Republic of Uzbekistan has been assigned under the national scale for the Russian Federation based on the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments on the National Scale for the Russian Federation, Methodology for Mapping Credit Ratings Assigned under ACRA’s International Scale to Credit Ratings Assigned under ACRA’s National Scale for the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

ACRA will assign a credit rating to the bond issue (RU000A103VY4) of the National Bank for Foreign Economic Activity of the Republic of Uzbekistan after the final documentation is provided. In case of any significant discrepancies between the final documentation and the preliminary materials, ACRA may change the issue’s credit rating against the expected credit rating.

Credit ratings have been assigned to the National Bank for Foreign Economic Activity of the Republic of Uzbekistan under the international scale and the national scale for the Russian Federation for the first time. The credit ratings and their outlooks are expected to be revised within one year following the publication date of this press release. An expected credit rating has been assigned to the bond issue (RU000A103VY4) of the National Bank for Foreign Economic Activity of the Republic of Uzbekistan for the first time. The next rating action is expected within 180 days following the publication date of this press release.

The credit ratings of the National Bank for Foreign Economic Activity of the Republic of Uzbekistan and the expected credit rating of the bond issue (RU000A103VY4) of the National Bank for Foreign Economic Activity of the Republic of Uzbekistan were assigned based on data provided by the National Bank for Foreign Economic Activity of the Republic of Uzbekistan, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the financial statements of the National Bank for Foreign Economic Activity of the Republic of Uzbekistan. The credit ratings and the expected credit rating of the bond issue (RU000A103VY4) are solicited, and the National Bank for Foreign Economic Activity of the Republic of Uzbekistan participated in their assignment.

In assigning the credit ratings and the expected credit rating of the bond issue (RU000A103VY4), ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.

ACRA provided no additional services to the National Bank for Foreign Economic Activity of the Republic of Uzbekistan. No conflicts of interest were discovered in the course of credit rating and expected credit rating assignment.


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