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Moody's outlook for Uruguayan banks is stable

 The document has been translated in other languages

09 Jan 2008
Moody's outlook for Uruguayan banks is stable

New York, January 09, 2008 -- Moody's Investors Service sees a steady outlook for the low average D- bank financial strength rating of Uruguayan banks, citing better asset quality and profitability, and improved regulatory supervision. The agency also points to the stabilizing effects of significant foreign and government ownership, which underpins the deposit ratings of the Uruguayan banks and additionally has a positive impact on access to resources, franchise development, and risk management.

However, Moody's adds that its ratings are constrained by the still-challenging operating environment and by the limited generation of consistent income from financial intermediation -- despite a generally positive trend in lending and deposit activity deriving from an improving economy. Cost controls also remain a concern, the agency says.

The report emphasizes that the system's high level of dollarization, at nearly 86% of total deposits, limits the Central Bank of Uruguay's ability to act as lender of last resort in case of stress.

"Nevertheless," Moody's points out, "banks' profitability has been increasing, underpinned by the wide margin between deposits and the high rates offered by the Uruguayan government on its securities, and to a lesser extent, by the expansion of loan portfolios."

Aided by important write-offs and restructurings, the quality of the banks' balance sheets has also improved, in the rating agency's opinion, although the government-owned banks continue to try and deal with legacies from the 2002 crisis in the form of high levels of past-due loans.

In any case, Moody's observes that the system's asset quality overall is stronger and, therefore, loan loss provisions stemming from seasoning of the new loan portfolios are likely to be contained. Prudent risk management and adequate risk monitoring, particularly by foreign banks, play a part in this likelihood.

"After suffering substantial outflows in the wake of the crisis," the rating agency says, "liquidity has been enhanced by the banks' shift towards resident deposits and away from nonresident deposits." Liquidity is also supported by holdings of liquid Uruguayan government securities though rated low by Moody's.

This is not to say that Moody's does not have certain concerns about Uruguay's banking industry. According to its report, "the banks continue to be challenged to increase the share of more stable recurring earnings from loans and fees and commissions; moreover, commercial loans represent only a small percentage of the banks' assets, and competition for good credit quality has become fierce."

Finally, the rating agency identifies Uruguay's high labor costs and entrenched bank unions as high obstacles to management success in smoothing operating efficiency.

The report is titled "Banking System Outlook: Uruguay."

New York
Felipe Carvallo-Mendoza
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Buenos Aires
Maria Andrea Manavella
Vice President - Senior Analyst
Financial Institutions Group

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