Banco de la República Oriental del Uruguay (BROU), the country’s biggest bank, has room to make considerable improvement, although it has partially recovered from a massive run on deposits in 2002. With profits on average capital of 9.2% and a return on assets of 0.55%, according to The Banker, analysts doubt the management’s stated goal of raising profitability to a 12% return on capital and 1.2% over assets is possible while it continues to be state-owned and there is insufficient demand for credit in the country.
On May 31, deposits amounted to the equivalent of $4.71bn, compared with $3.31bn on May 31, 2002. In the first half of 2006 it made a profit of $39m, more than its stated net profit of $34m for the whole of 2005. Its profits have been steadily rising from the $188m loss of 2002.
However, Alberto Savaria, chief executive of Buenos Aires-based investment bank Savaria Finance Management, says: “BROU is a major player within the local marketplace, but it could be much more flexible and dynamic.
“Old timers still run it – they have been there for many years. It has not been able to capture talented, young employees. It is typical of a state-run bank, in that it should be downsized, but it’s heavily unionised, and there would be huge opposition.”Its cost/income ratio for 2005 was 94%.
Financial crisis
Uruguay suffered an economic meltdown between 2001 and 2003 when the country’s gross domestic product (GDP) collapsed from $20bn to $12.2bn, mostly as a consequence of the economic catastrophe that befell neighbouring Argentina. Total bank deposits dropped by almost 50% from $15bn in November 2001 to $7.8bn in December 2003.
The biggest challenge in the BROU’s recent history came in the first quarter of 2002 when it saw a run on its deposits to the tune of $1.05bn and 30% of its loan book was deemed non-performing.
As part of a restructuring of the banking sector following the crisis, the government transferred the depositors of Banco Hipotecario, the state-owned mortgage lender, to BROU, generating a credit on its balance sheet which has been lowered since that time in line with a pre-arranged timetable.
Poor ratings
Credit ratings agency Moody’s rates the bank’s financial strength at E, the worst possible rating, mainly because it is still recovering from the financial crisis of 2002. Its deposits domestic currency rating is better, at Baa2/-, because BROU would be backed by the Uruguayan state in the case of a financial emergency.
Teresa Stok, an associate analyst of Moody’s, says: “BROU made higher profits during 2005, but this was largely due to an appreciation in the Uruguayan peso. This is not likely to be recurrent.
“The bank needs to improve its intermediation of loans but there is still not enough demand in Uruguay for credit. One of the other problems the bank has stems from the fact that it is state-owned and the government calls upon it to intervene in the financial system if another bank has problems.
“This reduces the bank’s efficiency levels. For example, the staff of Banco Hipotecario could be transferred to BROU in the future.”
During 2002, the bank also reprogrammed $1.46bn of deposits. Depositors had the chance to exchange their deposits for Certificates of Deposits, but 92% of them decided to leave their money with the bank.
Fernando Calloia, president of the state-owned bank, says this was a sign of the public’s confidence in the bank: “BROU has undergone a huge consolidation since the banking crisis of 2002. The main reason for this is the bank’s prestige within the marketplace. This meant that it was able to maintain its position during the crisis and, since that time, increase the level of deposits.”
In December 2003, BROU’s board decided to move all non-performing loans (amounting to $400m) into a special workout vehicle or fiduciary trust. The trust emitted Certificates of Participation for this sum, which were included in the bank’s assets and guaranteed by the state.
Business comeback
Jorge Perrazo, BROU’s vice-president, says: “During the crisis years, a number of small and medium-sized companies fell into debt with the bank, but these companies have been able to turn their situation around.
“They have become good clients of the bank. The trust’s management has had to recover these bad debts and has lowered the number of Certificates of Participation emitted in line with a recovery timetable established at the time of the fund’s creation. On June 30, only $120m of bad credit remained.”
Overall, the bank had to make provisions of $400m as a result of the banking crisis, and had to reduce its head count from 4000 to 3500.
The bank now enjoys a 40% share of the retail banking market in the country.
Mr Calloia says: “Part of the bank’s success has been a redefining of the products it offers clients. We have introduced savings accounts and loans with very attractive rates of interest. We have also become much more involved in credit to the industrial and agricultural sectors, which are central to the country’s future.
“We have also been spearheading attempts by Uruguayan companies to export their goods and services overseas.”
Today, the bank has more than 2000 industrial and commercial clients and more than 4100 clients involved in the agricultural sector.
Arm of government
During the past three years, the bank has granted credit totalling $31m to 23 major industrial projects that underpin the development of the Uruguayan economy. The projects must help exports, create jobs and be located in the interior of the country – indicative of the heavy hand of the state in the bank’s lending policies.
Mr Perrazo says: “We have not been asked to provide credit to the controversial pulp mills proposed on the Uruguay River, but we would not have any problems in doing so.
“We have given loans to some of the construction companies involved but not to the companies directly behind the pulp mills.”
The bank has also assumed a much bigger role in providing credit to social institutions, mostly non-governmental organisations and public and civic bodies. It has granted loans to 350,000 clients in this sector, totalling $310m.
BROU has recovered in a number of ways since the severe economic crisis that shook Uruguay. However, state involvement, whether through projects to develop the country or an inability to streamline its staff, mean that its ability to increase profitability is limited.
