Fixed Income Analysis /

Uzbekistan: Change is coming to the banking sector

  • A decree on banking system reform has been signed by President Shavkat Mirziyoyev, covering the 2020-25 period

  • Government ownership is expected to decline and the share of private sector liabilities is to increase

  • Banks are expected to increasingly adopt various international reporting standards

Uzbekistan: Change is coming to the banking sector
Tolu Alamutu
Tolu Alamutu

Credit Research Analyst, Banks

Tellimer Research
13 May 2020
Published byTellimer Research

A decree on banking system reform has been signed by President Shavkat Mirziyoyev. This covers the 2020-25 period. The banks are to adopt Basel and international financial reporting standards, improve customer service and lending mechanisms and improve staff skills. Further, the share of banks which that not state owned is to rise to 60% in 2025 from the current 15% and the share of the private sector in total liabilities is to increase to 70% from 28%. Uzbekistan is also looking to attract at least three strategic foreign investors. These changes may be seen as ambitious in the current environment but are probably right for the country's banking sector. 

Uzbekistan is one of the few countries that is still expected to grow this year, based on both IMF and EBRD forecasts. In addition, Halyk has launched operations in Uzbekistan, TBC Bank was recently granted a banking license there, and the EBRD has said it will invest in TBC Bank in Uzbekistan and appears to favour investments in the banking sector there over Kazakhstan's banking sector. It is interesting that Uzbekistan is seeking to reduce the size and influence of the state in the banking sector at a time when other countries are having to do the opposite. We note that Uzpromstroybank already reports figures under international accounting standards and, while capital ratios are based on regulations set by the Central Bank of Uzbekistan, these rules follow Basel III methodology, according to the bond documentation.

Six state-owned banks are to be fully privatised. The list includes SQBNZU (a.k.a. Uzpromstroybank, Sanoat Qurilish Bank, Uzbek Industrial and Construction Bank). This is not entirely surprising – in the documentation for the SQBNZU 5.75% 2024 bond, it states that the bank "intends to gradually decrease the share of state ownership and expects to rely less on state subsidised financing in its funding base and instead to rely to a larger extent on funding from other sources, such as customer accounts, interbank lending markets and international capital markets"(our emphasis). 

Having said that, there is Change of Control (CoC) language in the documentation, which gives bondholders the option to have the notes redeemed at par plus accrued interest "upon the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that the Republic of Uzbekistan ceases to beneficially own (directly or indirectly) at least 50% plus one share of the issued and outstanding voting Capital Stock of, or otherwise to control, the Issuer". At the date the prospectus was published, the bank stated that it was "not aware of any arrangements in existence...that could reasonably be expected to result in a change of control".  

Taken together, all this suggests that (a) any ownership changes will have to be gradual to avoid triggering the CoC language, or (b) the issuer will need bondholder approval to amend these clauses, and this will likely involve paying a fee. A sale may not be imminent and much will depend on the strength of the potential buyer. Importantly, Uzbekistan is not the first country to consider selling state-owned lenders, and the success of such plans has been mixed at best.

Comparing the SQBNZU 5.75% 2024 bond to the Republic of Uzbekistan (UZBEK) 4.75% 2024 security, the difference in z-spreads has narrowed from c380bps on 23 March to c260bps now (indicative levels only). The current spread difference is still much wider than it was before March. For additional context, the table below shows select bank and sovereign bond pairs, ranked by spread difference. We note that Ardshinbank (ARBANK) and VP Bank (VIPRJS) are not state owned and at Mongolia Mortgage Corporation (MGMTGE) ownership is 19.3% state-owned entities, 80.7% private entities and banks, 0.07% individuals. The International Bank of Azerbaijan (IBAZAZ) bond was issued after restructuring and the Development Bank of Kazakhstan (DBKAZ) bond has less than US$107mn outstanding.

Table 1: Banks vs. sovereigns
Bond pairSpread difference (bps)Spread multiple (x)

EXCRTU 6.125% 2024 vs TURKEY 2024



EXCRTU 8.25% 2024 vs TURKEY 2024



VEBBNK 2023 vs RUSSIA 2023



BNDES 2024 vs BRAZIL 2024



DBMMN 2023 vs MONGOL 2023/24



DBBYRB 2024 vs BELRUS 2023



DBKAZ 2026 vs KAZAKS 2025



SQBN 2024 vs UZBEK 2024



IBAZAZ 2024 vs AZERBJ 2024



ARBANK 2025 vs ARMEN 2025



VIPRJS 2022 vs VIETNM 2024



MGMTGE 2022 vs MONGOL 21/22



Source: Bloomberg, Tellimer Research. Based on indicative mid z-spreads.