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AmericasOctober 5 2008

Crisis shrugged off as banking thrives

The Uruguayan banking system has put the dark days of 2002 behind it. Deposits and lending are booming, and banks have shown an annual growth rate of 14% for five consecutive years. By Fernando Calloia.
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The Uruguayan banking system is looking healthy and robust and has emerged healthily from the crisis of 2002. The contrast is particularly marked and encouraging when one considers the very difficult situation prevailing five years ago, when Uruguay was just emerging from the worst financial crisis in its history, a period marked by the disappearance of 30% of the private banking system.

Nowadays, the banking system is composed of 14 first-rate international private banks and a sound, profitable public bank with a large market share. In the past five years, the system has grown consistently by an annual rate of 14% in US dollars. The favourable national and international context and the dynamism observed in deposits and lending have had a positive impact on almost all indicators (including solvency, profitability and portfolio quality).

Bank deposits

Bank deposits have shown strong growth over the past three years, reaching an average annual rate of 13% in US dollars. This dynamism has been boosted mainly by deposits from residents. In July 2008 deposits amounted to $10.4bn. That exceeds by 20% the deposit level before the 2002 crisis, which caused the loss of 50% of banking system deposits.

Meanwhile, deposits from non-residents (mainly Argentines) have remained relatively stable at about 16% of total deposits, far from the 40% attained before the crisis.

At the same time, there has been a trend to reduce the dollarisation of deposits, with the amount held in dollar accounts falling from above 90% to 78% currently.

This fact, together with the lower incidence of deposits from non-residents, reduces the vulnerability of the banking system to regional and/or international financial turbulence.

Bank loans

Bank loans have grown speedily in the past three years, achieving an average annual growth of 18% in US dollars, having shown some sluggishness in the years following the 2002 crisis compared with GDP growth.

Due to the growth in economic activity and investment, an increase in corporate and consumer loan demand has been generated. This has been mostly seen in local currency loans, which rose from 23% of the total in 2006 to 29% in 2007.

A significant decrease in delinquency has been observed throughout the banking system. After reaching 42% in 2002, delinquency fell to 1% in July this year.

This remarkable improvement has been observed by all banking institutions.

Loans have been oriented to better-rated customers, boosting portfolio quality.

Creditworthiness, Liquidity and Profitability

The Uruguayan banking system is now sound, liquid and profitable, and creditworthiness indicators reflect this sound position, which is in line with Basel regulation requirements.

The capital adequacy represented by Tier 1 capital to risk-weighted assets ratio was 19% in July. Equally, liquidity levels are also adequate, standing at 59% in July for transactions of 91 days.

Lastly, the profits of the banking system reached $188m in 2007, which implied an average return on equity of 12.5% in 2007, 16% higher than 2006 and 102% higher than 2005. The favourable external context together with the increase in economic activity, the depreciation of the US dollar, and the improvement of management, all helped to make this possible.

The strengthening of the Uruguayan banking system, reflected in the growth of core business lines and growing profitability and creditworthiness, has awakened the interest of important international banks. The country has welcomed Brazil’s Banco Itaú as well as stimulated the merger of first-rate banks (the acquisition of ABN AMRO by Banco Santander), and the creation or acquisition of non-banking financial companies by banks. Simultaneously, the intensification of competition in retail banking has led banks to market extensively to lower-income customers, a segment that was largely overlooked. Indeed, international banks have given up on strategies of differentiation to increase turnover through diversification of products and services.

The performance of Banco República

In the above context, Banco de la República Oriental del Uruguay has definitely stood out, posting the best levels of profitability and creditworthiness of the whole banking system over the past three years.

The bank’s equity has increased from $381m in 2005 to $819m in June. The rate of return on assets has risen from 1.5% in 2006 to 1.7% in the fiscal year ended in June, implying a return on equity of 16%. At the same time, the delinquency rate registered a significant fall, from 8% in 2005 to 1.9% in 2008. Finally, the efficiency ratio is currently near 50%, a level comparable with first-rate international banks.

The excellent performance achieved by Banco República was the result of the strategy adopted in 2005, which rested on four pillars: gradual achievement of competitive advantage in the cost base; a structure marked by its simple and flexible organisation, with appropriate performance evaluation based on goals and rewards for hitting targets; a redesign of commercial product lines, seeking to simplify and standardise existing products; and finally decentralisation of the management of business units, in line with the strategic plan.

According to Moody’s Investors Service, the bank’s rating improvement for fiscal year 2007 “resulted from the Banco República’s adequate financial fundamentals, which include a liquid balance sheet and… base of deposits, as well as a good capital structure with higher profitability and better asset quality”.

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