2015 could find Uruguay Banks under Pressure

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2015 could find Uruguay Banks under Pressure

Fitch Ratings has revised its sector outlook for Uruguayan banks downwards to Stable from Positive. Fitch believes the sector’s growth and financial performance will be pressured in 2015 by declining gross domestic product (GDP) growth, possible increases of international interest rates and a further devaluation of the Uruguayan peso.

The sector outlook could be revised to negative under a scenario of even lower profits and a deterioration on asset quality trends, although is not Fitch’s base case scenario for 2015. In turn, higher than expected profitability together with a sustained good asset quality trends and preserving current capital levels may lead to a positive change on the Sector Outlook. All of the Uruguayan bank’s ratings have a Stable Outlook and depend on their foreign shareholders’ capacity and/or willingness to provide support. Accordingly, the banks’ ratings will be associated with the credit ratings of their parent.

Uruguayan banks are in a time of sustained growth and have been able to maintain sound loan quality. Nonperforming loans (NPLs) remained at low levels, below 1.5% of total loans in the last four years. Loan loss reserve coverage is ample and stood at 2.5x of NPLs. Fitch expects a slight deterioration of the portfolio quality due to the negative effect of the depreciation of the Uruguayan peso versus the U.S. dollar and the natural seasoning of the recently expanded retail portfolio.

Uruguayan banks have benefited from the Uruguay’s positive environment, although profitability has been vulnerable to global economic upheavals. In general, 2014 showed a decline in revenues. Fitch expects a challenging environment in 2015 where the recent individual loan expansion, possible peso depreciation and an increase in global interest rates may result in an increase of loan loss provisions, with operating revenues growing more moderately. In general, Fitch expects that overall profitability will remain challenged.

Uruguayan banks’ solvency metrics remain solid, with capitalization ratios at comfortable levels, showing ratios of tangible equity to tangible assets ranging 9.0%-9.5%. High-quality equity components and conservative regimen of loan loss reserves support the sound capitalization of the Uruguayan banks. For 2015, Fitch expects a slight decline in capital ratios as a result of the projected loan growth and still weak profitability.

Liquidity remains sound, underpinned by increasing deposits and an ample base of highly liquid assets. Common liquidity metrics are strong, such as cash plus liquid securities accounting for almost 40% of short-term liabilities. Liquidity metrics have been reduced to some extent due to loan growth, and Fitch sees possible liquidity pressures in the case that dollarization trends keep its unbalanced movements.

Fitch believes that high dollarization will continue to be a structural weakness of the system over the foreseeable future. For 2015, Fitch expects liquidity needs in pesos for the banks as the peso-denominated loans grow faster than local currency deposits. Similar to other dollarized economies in Latin America (LatAm), the stickiness of U.S. dollar-denominated deposits in times of foreign exchange (FX) volatility may limit the trend on the reversion of the dollarization of the loan portfolio.

Challenges from a more disruptive economic adjustment in Argentina remain, although financial and trade channels are weaker than a decade ago. Uruguay has expanded its access to international markets and has become a more open, stable economy that is better able to withstand external shocks.

‘Outlook 2015: Uruguayan Banks’ is available at ‘www.fitchratings.com‘ or by clicking the above link.

Additional information is available at ‘www.fitchratings.com‘.

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