In recent years, with a booming economy fostered by the ongoing reforms, the banking sector of Uzbekistan is demonstrating a vigorous growth, becoming increasingly important channel for lending to manufacturing industry and population, as well for implementation of the monetary policy. However, the development of the banking sector is constrained by its vulnerabilities and long-term risks, including the high concentration on state-owned banks, excessive dollarization, and government-controlled allocation of credit resources. In this regard, a positive step is the large-scale reforms initiated by President Mirziyoyev on fundamental transformation of the financial market with a gradual privatization of state-owned banks, improvement of corporate governance and increasing the competitiveness.
The structure of the banking industry is stable, whereas concentration on state-owned banks remains high. The banking sector has grown rapidly in recent years, expanding its total assets to 53% of GDP in 2019 (graph 1). By the number of participants, the sector is stable, increasing to 30 banks in 2019 after Tenge Bank joined the market. Meanwhile, the banking sector remains heavily concentrated on state-owned banks, which comprise 84% of total assets as of December 2020 (graph 2).
After the nationalization of Asia Alliance Bank in 2018, there are currently 13 state-owned banks on the market, three of which are the largest in Uzbekistan (the National Bank, Asaka Bank, and Uzpromstroybank) with almost 50% of the banking sector assets. Their strong positions are traditionally underpinned by their key function as the main creditor of public infrastructure and programs in the social sphere. In turn, the government injects budgetary funds into state-owned banks for directed lending at preferential rates, as well as through the government’s deposit allocation and recapitalization. The remaining 17 market participants are private banks with local shareholders and a small presence of foreign banks from the East and Central Asia regions. Over the past two years, apart from the opening of a subsidiary of a Kazakh bank and the registration of a subsidiary of a Georgian bank, there have been no significant market penetrations from foreign players.
Given the government’s plans, state-owned banks are expected to reduce the volume of direct lending, switch to market funding sources. Moreover, there are also proposals to privatize these institutions. The three largest banks are expected to issue Eurobonds and the National Bank has been already transformed into a joint-stock company. The authorities have already decided to sell 25% of the shares of three banks, which together have a market share of about 6% of total sector assets. Some of the state-owned banks are engaged already in cooperation with international financial institutions. In 2018, IFC started working with Ipoteka-Bank to improve corporate governance, risk management, and operations, in order to possibly participate further in the capital of the bank. IFC is also negotiating a similar type of engagement with Uzpromstroybank, while EBRD is considering to be engaged in the privatization process of Asaka Bank.
The ongoing economic reforms along with the intensification of investments resulted in the acceleration of domestic lending. Since the beginning of 2018, the sector’s total assets have increased by more than 1.5 times, driven by the growth of loans, which skyrocketed by 91% during 2018-2019 (graph 3), covering all sectors of the economy and population. The main government incentives were both the expansion of investments in the modernization of state enterprises and programs for development of agriculture and small and medium-sized businesses. Besides, the liberalization of prices and currency operations, along with the easing of trade conditions also stimulated private demand for loans.
The highest growth rates were observed in retail lending, where banks have tripled their figures since the end of 2017. However, the bulk of the banks’ portfolios are corporate loans, which grew by 77% during 2018-2019. Although corporate loans are diversified by economic activity, there are significant risks of concentration on large public enterprises with directed loans on preferential terms. On the positive side, the share of foreign currency loans, after a rapid surge up to 62% caused by the devaluation in 2017, has declined to 48% in the end of 2019 (graph 3). We have yet to see whether this trend is temporary and that it indicates the beginning of the process of de-dollarization of the banking sector.
One of the strengths of the banking sector is the current level of officially registered non-performing loans, which are much lower than in Central Asian peer-countries and Russia. Despite the doubling of non-performing loans since the beginning of 2018, their ratio to total gross loans stood at only 1,5% as of 4Q 2019, owing to an outsized growth of new loans’ volumes (graph 4). In the medium run, we expect the officially reported level of NPLs to remain stable and even lower in case of some of the bad assets of state companies are transferred to the balance of the UFRD . At the same time, it is necessary to take into account the hidden risks of deterioration of asset quality in the future, as in case of the privatization of the large state-owned banks and companies, they will no longer have government support.
Capital adequacy and profitability have improved significantly. Amidst significant capitalization of state-owned banks, in 4Q 2019, the banks’ regulatory capital grew sharply by almost 2x. The main component and driver of growth is the authorized capital, which had an annual increase of 113% in 2019. As a result, despite the accelerated growth of loan portfolios, the banks have significantly improved their capital adequacy ratio (CAR) to 23,5% as of 4Q 2019, which makes their position resistant to further expansion of loans and possible shocks (graph 5).
Since 2017, the banking sector has raised its net profit by 2,5x up to UZS 4,7 billion in 2019. The main driver was net interest income, which climbed almost 3x, expanding its share in the financial result to 59% (graph 6). As a result, owing to profit growth, the efficiency of the banking system as a whole, measured by the ratio of operating expenses to income, improved from 58% in 4Q 2017 to 46% in 4Q 2019. In turn, ROA and ROE improved in 2019 after a slight decrease in 2018 up to 2,2% and 16,7% in 4Q 2019 respectively (graph 7).