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Rating Action:

Moody's raises BROU's financial strength rating; lowers local currency ratings of Uruguay's BROU and BHU

 The document has been translated in other languages

02 Feb 2010

Mexico City, February 02, 2010 -- Moody's Investors Service upgraded Banco de la República Oriental del Uruguay's (BROU) bank financial strength rating (BFSR) to D, from D-, and changed its outlook to positive. The D BFSR maps to an unsupported baseline credit assessment of Ba2.

At the same time, Moody's downgraded the long/short term local currency deposit ratings of BROU and Banco Hipotecario del Uruguay (BHU) to Baa3/Prime-3, from Baa2/Prime-2. Moody's also downgraded the banks' deposit ratings in the Uruguayan national scale to Aa1.uy, from Aaa.uy. All of these ratings now have a stable outlook. The rating actions conclude the reviews for possible downgrade initiated on May 26, 2009.

Moody's also indicated that the banks' foreign currency deposit ratings of Ba3 in the global scale and A1.uy in the national scale, were not affected by this action. The foreign currency deposit ratings remain constrained by Uruguay's foreign currency deposit ceiling, which has a stable outlook.

BHU's bank financial strength rating of E (which maps to a baseline credit assessment of Caa1) was not affected by this action.

Upgrade of BROU's Bank Financial Strength Rating

In upgrading BROU's bank financial strength rating to D, from D-, Moody's acknowledged the bank's dominant domestic franchise, which is reflected in market shares of about 42% of the systems' assets and deposits. The upgrade also recognizes the bank's high liquidity -- which benefits from depositors' confidence - and its much improved asset quality, which has been maintained despite the challenging business conditions of the past months.

The upgrade of BROU's unsupported BFSR also acknowledges its adequate capitalization and reserves coverage, which proved resilient in light of Moody's stress tests. Moody's has employed scenario analysis to determine potential expected losses on the bank's loan and securities portfolios, thus estimating the impact on the bank's capitalization and earnings in the context of the global economic recession, as well as the high dollarization of Uruguay's financial system. Even under stress conditions, BROU's loss absorption capacity has remained strong.

The positive outlook on BROU's D bank financial strength rating acknowledges the bank's sound financial fundamentals -- and its liquidity and capital, in particular -- that position it well for healthy growth in the coming year.

Deposit Rating Change Reflects Revised Approach to Systemic Support

Moody's said that the downgrades of local currency deposit ratings were driven by its global reassessment of the ability of governments to support their countries' banks during a protracted systemic crisis. The likelihood of such support is an important part of Moody's credit analysis, and it provides uplift to ratings above that which would be implied by the banks' own financial strength. For the Uruguayan bank issuers, the downgrades bring the ratings closer in line with that of the government's own local currency bond rating of Ba3.

Moody's has refined its assessment of systemic support for the Uruguayan banks to better reflect the capacity of the government to support the banking system as a whole in the event of a systemic crisis. Moody's continues to believe that most governments are likely to support their banking systems to avoid a meltdown of the local payment system in such an event.

Nevertheless, the agency also views the capacity of a country and its central bank to support the nation's banks to be more closely aligned with the government's own creditworthiness. The revised approach to systemic support is outlined in Moody's special comment entitled "Financial Crisis More Closely Aligns Bank Credit Risk and Government Ratings in Non-Aaa Countries", published in May 2009.

Moody's said that the systemic support indicator for Uruguayan government-owned banks has been established at Baa3, thus replacing the Baa2 local currency deposit ceiling as the systemic support input for bank ratings. The new systemic support indicator nevertheless reflects three notches of uplift above the government's Ba3 local currency bond rating.

The notching differences above the government's own local currency bond rating reflect Moody's view of the Uruguayan government's strong willingness and ability to support the country's banking system, and the differentiation the government has historically made when supporting government-owned versus privately-owned banks during times of stress. The notching differences are underpinned by the following:

1. The Uruguayan government provided full support to government-owned banks during the economic and financial crisis of 2002.

2. Credit stress in the Uruguayan banking system has been low throughout the recent global recession, and banks have not been affected because of their high liquidity position and very low exposure to global markets.

3. Despite the high level of dollarization in the banking system, the banks' net US dollar asset exposure is on average about 20% of equity, while liquidity reserves are at levels of 60% of assets.

4. The Uruguayan banking system is small relative to GDP, with the government-owned banks representing about half of the banking system.

The following ratings were affected by this action:

Banco de la República Oriental del Uruguay

Bank financial strength rating: upgraded to D, from D-. Outlook changed to positive from stable.

Long term local currency deposit rating: downgraded to Baa3, from Baa2

Short term local currency deposit rating: downgraded to Prime-3, from Prime-2

National Scale local currency deposit rating: downgraded to Aa1.uy, from Aaa.uy

Banco Hipotecario del Uruguay

Long term local currency deposit rating: downgraded to Baa3, from Baa2

Short term local currency deposit rating: downgraded to Prime-3, from Prime-2

National Scale local currency deposit rating: downgraded to Aa1.uy, from Aaa.uy

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

New York
M. Celina Vansetti
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's raises BROU's financial strength rating; lowers local currency ratings of Uruguay's BROU and BHU
No Related Data.
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