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
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
"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."
Financial Institutions Group
Moody's Investors Service
Maria Andrea Manavella
Vice President - Senior Analyst
Financial Institutions Group