MercoPress. South Atlantic News Agency

Moody’s says Uruguay banking system outlook is stable; strong economic growth and domestic demand

Despite government efforts, “high financial dollarization continues to be a key issue for Uruguayan banks”

The outlook the Uruguayan banking system is stable, based on expectations that continued economic growth and favourable labour market conditions will sustain loan growth and banks' profitability, says Moody's Investors Service in the report “Banking System Outlook: Uruguay.”

Moody's industry outlooks reflect the rating agency's expectations for fundamental business conditions in the industry over the next 12 to 18 months.

“We expect that banks will continue to profit from Uruguay's continued economic growth and its strong labour market,” said Maria Valeria Azconegui, a Moody's Assistant Vice President and author of the report.

“The outlook also incorporates our view on banks' high liquidity and robust capitalization, which provides sufficient buffer to absorb potential losses.”

This cushion will protect Uruguayan banks against a likely modest deterioration in asset quality following the recent expansion in consumer loans, says Moody's. But high financial dollarization continues to be a key issue for Uruguayan banks, despite ongoing efforts by the Uruguayan authorities to improve this structural weakness.

In addition, Uruguay's banks will continue to experience earnings pressure from weak credit demand, high operating costs and the low-interest rate environment, says Moody's.

Depositors' preference for dollar-denominated demand deposits even at very low-yields, benefits banks' cost of funding, but suggests an underlying lack of confidence in the domestic currency. It also creates a significant tail risk for the banks' funding profile as large non-resident deposits, mostly from Argentina, remain very volatile and subject to the evolution of the political and economic situation in this country.

Moody's central scenario forecasts Uruguay's economy to grow by 4.5% in 2013, in line with its trend growth over the past five years, supported by strong domestic demand, low unemployment, high commodity prices and capital inflows from foreign direct investments in export-oriented projects.