Uzbek banks are making hay while the sun of reform is shining

Uzbek banks are making hay while the sun of reform is shining
Uzbek banks increased their profits by 70% in 2018 and are expected to keep the same pace up for the next few years.
By Ben Aris in Berlin November 7, 2019

Uzbekistan is opening up to the world and the banking sector has been both in the forefront of the reform drive and also one of the main vehicles the government is using to dispense cash and manage the transformation. But after over two decades of neglect, and until recently operating in a totalitarian system, the sector remains weak, riddled with risk and dominated by state-owned banks that enjoy significant access to cheap funds, making for a very uneven playing field. 

“There are high level of systemic risks in the banking sector. The current [Banking Sector Risk] score reflects the high concentration of the banking sector, excessive dollarisation and underdeveloped capital markets against the backdrop of elevated inflation and weak national currency,” rating agency Expert RA said in a report released on November 1. 

But the banks have money. The government issued its debut $1bn Eurobond in February, but, as Eugene Chausovsky, senior Eurasia analyst with US think tank Stratfor pointed out in a recent podcast with bne IntelliNews, what it desperately lacks is qualified and experienced people to invest it. The government has distributed about two thirds of the funds raised to the state-owned banks, each of which has been tasked with a different job to invest into growth-boosting sectors or infrastructure projects as banks have some of the few business savvy Uzbeks able to manage these sorts of projects. 

This largess has created a distortion in the financial sector as state-owned banks with access to state funds can lend at much lower rates – typically 14-15% pa – than the commercial bank rate on loans which is on the order of 25% pa, according to businessmen interviewed by bne IntelliNews. However, the cash injected into the system has led to a flurry of activity. 

“The ongoing reforms to liberalise the sector, along with the intensification of investment activity, resulted in the acceleration of domestic lending. We expect the credit boom to continue in 2020, but further growth depends on the authorities’ plans in regard to the scale of directed lending.

The sector is growing fast, but so far the banks have been prudent and stayed within their prudential limits. Despite the rapid growth of risk-weighted assets, the sector’s capital adequacy ratio (CAR) has stayed above the minimum regulatory requirements, and the de facto state support of large banks inspires confidence amongst businesses that their deposits are safe and the non-performing loans (NPLs) remain low, says Expert RA. 


Uzbekistan Selected BSR score Metrics





Domestic credit provided by financial sector to GDP (%)




GDP per capita in PPP terms.USD th




NPL. % loan portfolio




Bank deposits to GDP (%)




Customer deposits to total loans (%)




Bank branches per 100 th adults




Bank concentration (%)




Central bank assets. % to GDP




Return on equity . 5Y volatility




Nominal GDP. USD bn




Inflation rate. annual %




Source: RAEX-Europe based on data from IMF


The downside of this set-up is the assets are concentrating in the state-owned banks in a similar way to how the Russian banking sector developed and the state-owned banks are capturing all the profits. 

“Due to the growth of interest income and the expansion of the interest margin, the banking sector increased its profit by 70% in 2018. We expect further growth in profitability,” Expert RA said in its report. 

Another quirk of the Uzbek banking sector is that instead of relying on the traditional collection of deposits by companies and individuals to fund their operations, the banks originally collected the largest part of their funding from the international financial institutions (IFIs) that have flocked to the country and provided funds to promote various programmes, and more recently, from the state and the money it raised from February’s Eurobond issue. 

“The share of borrowed funds from [IFIs] in the liabilities has exceeded the share of deposits, which remains the main source of funding only for non-state banks,” says Expert RA. 


Uzbekistan Banking Sector Metrics





Assets, UZS bn




Loans, UZS bn




ROA, %




ROE, %




CAR, %




USD exchange rate to UZS




Source: RAEX-Europe based on data from CBU


Banks are playing an important role as the country adjusts to the changes. The economy is growing fast, expanding from a low of 4.1% growth in 2017 to 5.1% last year and is expected to hit 5.5% this year and 6% growth next year. 

The liberalisation of the som and the end of price fixing led to a bout of inflation, but the inflation is starting to cool now. The main problems the government faces are the high level of unemployment in this young country and the low levels of income: per capita income is $8,300 pa, which is a third of the level in Russia and neighbouring Kazakhstan. The upshot is over a million Uzbeks leave the country each year to look for work elsewhere in the Commonwealth of Independent States (CIS). 

In all there are a total of 30 banks on the market after two new banks opened up in 2019, state-owned Poytakht Bank and Tenge Bank, a subsidiary of leading Kazakh bank Halyk. 

The bulk of the banking business is in the hands of the three leading state-owned banks, the National Bank of Uzbekistan (NBU) with 27.4% of the sector assets, Asaka bank (14.1%), and Industrial and Construction Bank (13.4%) as of the third quarter of this year. Altogether there are 13 state-owned banks on the market, or about a third of the total, but between them they control half (54.9%) of the sector’s assets. 

The remaining 17 privately owned market participants accounted for only 13.9% of total assets as September this year and Uzbek companies and individuals dominate their ownership structure. Even in the cases where the banks are owned by overseas holding companies, their ultimate beneficial owners are almost all Uzbeks. There is only a handful of truly foreign owned banks and those were set up with Turkey and South Korea for trading and direct investment purposes. The government remains very wary of allowing the banks of regional big powers China and Russia into the sector as they would quickly dominate. 

Tenge Bank has been the most recent entry to the market, but Georgia’s leading commercial bank TBC has also established a foothold, as bne IntelliNews reported, by buying local fintech payment service Payme, paying $5.5mn for a 51% stake in the widely used company. TBC told bne IntelliNews in an interview the bank plans to roll out an entirely virtual banking service on the basis of Payme client base, but as Payme is not a registered bank neither it nor TBC can offer credits without first formally registering a banking entity with the Central Bank of Uzbekistan. 

The government is aware of its heavy role in the sector and has announced plans to privatise some of its banking ownership as part of an ambitious privatisation programme. While the government is promising to put controlling stakes in some of its most attractive assets on the block as soon as in two years time, these plans remain plans for the meantime. 

However, the president signed a decree at the end of April ordering the sale of 25% stakes in three of its smaller banks – Aloka Bank, Turon Bank and Asia Alliance Bank – that collectively have a 5% market share, to test the waters. Another decree this summer gave foreign investors the right to buy up to a 5% stake in a bank without having to seek the central bank’s permission. 

The IFIs are also starting to reengage with some of the banks to get them market ready and also as a way of promoting the development of the economy in general. The International Financial Corporation (IFC) has provided a $35mn credit facility to Ipotekha Bank, a mortgage and housing loan specialist bank, to improve its corporate governance and risk management ahead of its mooted privatisation in 2022. The IFC is also in cooperation talks with big-three Industrial and Construction Bank while the EBRD is talking to big-three Asaka Bank. 

Off to a fast start 

Uzbekistan’s banking sector already has assets that are equivalent to 54% of GDP, overtaking Kazakhstan in this ratio earlier this year, largely thanks to the government’s injection of Eurobond funds. 

However, the bank sector assets are growing fast and were up 29% in 2018 and by 28.2% in the first nine months of this year. Again the state-owned banks are making most of the running. Their assets were up 30.4% in 2018 thanks to the Fund for Reconstruction and Development of the Republic of Uzbekistan (UFRD), the vehicle for distributing state funds to the banks and the economy at large. 

“The growth rates of reserve capital and retained earnings were sound in 2018 at 63.9% and 58.6%, respectively, but their share is insignificant and the authorized capital dominates, representing almost 73% of total capital as of 3Q 2019,” says Expert RA. 

The fast growth of lending, as the state encourages bank-led investment programmes, has put some downward pressure on banks’ CARs, but these remained a healthy 15.6% as of the third quarter, down from 18.8% in 2018 and still well above the mandatory minimum of 13%. The nature of the directed lending can be seen from the changes in capital adequacy as the CAR of state-owned banks sank from 19.2% to 15.4% over this year period, whereas that of the privately owned banks remained stable at 16.9%, according to Expert RA. 

In lieu of investment programmes the banks have been increasing their loans to business to promote transformation and lending was up 51.4% year-on-year in 2018 and 40.2% in the first nine months of this year to bring the total loans extended to UZS231 trillion, or 79.4% of the total banking sector assets as of October 1. The government is in a rush to make a difference. 

Corporates still dominate the economy and specifically the banking business, accounting for the lion’s share of deposits. After a moderate growth of 17.5% in 2018, corporate deposits climbed by 30.5% over the first nine months of this year. However, corporates' share in liabilities shrank to 35.6%. The bulk of the deposits are from corporates, whereas the share of households' funds remained insignificant at 21% as of the end of the third quarter. 

A positive development in 2018-2019 was the gradual decrease in FX deposits from 48% to 42%, as well as a significant increase in long-term deposits for more than one year, which are up five-fold since 2017 and continue to increase, testament to the growing confidence in the banking system. 

However, there is a big difference between the funding of state-owned banks and private banks. While the state-owned banks collect more deposits from both corporate and retail clients, these funds only make up a third (30%) of their total liabilities, as the state-owned banks rely on the state and IFIs for longer-term cheaper funds. Eventually, the state-owned banks will start issuing bonds and other securities to access funds with similarly low cost, long maturities, but the contact with the international bond market has only just been established. The private banks, without access to these attractive state funds, are more reliant on their much more expensive deposits as their main source of funding, which make up 73% of their liabilities. Lending is also increasing for similar reasons. 

“Rapidly developing lending activity exceeded forecasts with financing increasing across of all sectors of the economy and population. The main incentives from the state are both the expansion of investments in modernization of state enterprises and programs for the development of agriculture and small and medium-sized businesses,” says Expert RA. “Besides, liberalisation of prices and currency operations, along with the easing of trade conditions, also stimulated private demand for loans. Nevertheless, the highest growth rates were observed in retail lending, where banks have more than tripled their figures since the beginning of 2018, the share of individuals in the bank portfolio remains quite low at only 16.1% as of 1 October 2019."

With low incomes and high unemployment most of the bank lending activity is aimed at corporates and within that much goes into real estate as the first big ticket item that always takes off once a country starts liberalising. 

Banks' corporate loan portfolios grew by 47.4% in 2018 and by 37.7% in 9M19. Even though financing is diversified by economic activity, there are significant risks of concentration in the public sector, warns Expert RA, because the state banks, which accounted for 45% of the lending growth in 2018, mainly finance state-owned enterprises by providing directed loans on preferential terms. 

“The share of directed loans in the total volume of lending comprised almost 60% of total loans, with more than a third in foreign currency,” reports Expert RA. “At the same time, the interest rates on directed loans are much lower than the market rates. Thus, in January-September 2019, the average interest rate on market loans in the national currency was 24.1%, while the rate on directed loans was only 7.3%.”

The use of directed lending is a recipe for disaster and could lead to an eventual banking crisis if too much is lent and too many of those directed loans go bad at once. But as it is early days yet, the state is hoping to prime the pump and start a boom where growth will cushion the pain of mistakes. 

In addition to the directed lending, Uzbekistan is also making large use of foreign currency loans to corporate clients because of their significantly lower interest rates (about 10% less according to bne IntelliNews sources), which expose it to FX risk. The share of foreign currency loans surged two years ago after the exchange rate was liberalised, causing a devaluation of the currency, but since then it has fallen back somewhat to a still high 58% of total loans at the end of the third quarter. 

Despite these two clear dangers to the banking sector, as Uzbekistan is still stepping off square one neither of them present a danger for the moment. The quality of lending remains good with the share of non-performing loans (NLPs) in the loan portfolio currently lower than in the other countries of the region, including Russia, which has a particularly well-managed banking sector. Although the level of NPLs doubled in 2018, they only rose to 1.3% of the total loan book – a very low level as of the end of the third quarter. 

The government does anticipate the level of NPLs to increase going forward, but the plan is to transfer the worst of the delinquent loans to the UFRD to be restructured. 

In the meantime the sector’s profits are growing, and that buys leeway to continue the growth of the banking business. In 2018 the net profits of the sector were up 70% year-on-year to UZS3.2 trillion from UZS1.9 trillion in 2017. 

Most of the profits are coming from interest income, which was up 84.6% in 2018 year-on-year and makes up half (54%) of the total profits. Net non-interest income still plays a small role and was up only 5% in 2018 year-on-year, according to Expert RA. On the expenditure side operating costs were up 35% year-on-year. 

The profits of the banking sector are expected to continue to grow strongly in 2019 as is typical of a country opening up and implementing rapid reforms as banks have good exposure to the rapid growth in incomes and the appearance of a middle class. The profits in the first nine months of this year have already exceeded all the profits for all of 2018. Return on assets remained stable in 2018-2019 at an average level of 2%, while return on equity remained high at 18.2% as of October 1, 2019.