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Fitch: Venezuela's new exchange rate system to have neutral impact on bank ratings

Venezuela'srecent restructuring of its exchange rate regime is unlikely to have a large impacton bank profitability or capital, according to Fitch Ratings, who believes the policychange is neutral for bank ratings.

Earlier in March,the Venezuelan government launcheda new dual exchange rate system that will include a fixed rate for essential goodsand services, or the Dipro, and a floating rate for all other areas of the economy,or the Dicom.

Fitch expectsno immediate impact on the banks' income statement from devaluation, given thatalmost all securities are classified as hold to maturity or available for sale.

Fitch notedthat Venezuela's banking regulator has yet to announce which exchange rate the bankingsystem will be required to use to report foreign currency assets, but the ratingagency expects that authorities will require banks to report at the new fixed primaryDipro rate.

Under the Dipro rate, valuation of net U.S.-dollar assets oflarge private banks sampled by Fitch would result in a negligible rise in capitalfrom 7.1% to 7.2% of total assets. Meanwhile, allowing banks to value U.S.-dollarassets at the Dicom rate would increase capital to 10.7% of total assets.

The new regulationalso requires foreign currency credit card transactions by Venezuelans overseasto be settled at the floating Dicom rate. "However, given that most banks areat or near the regulatory limit on consumer lending, and the low foreign currencypurchasing power of credit card holders, [we expect] that the volume and potentialimpact of such transactions will be minimal," Fitch said.

The rating agencynoted that Venezuelan banks have typically benefited from prior devaluations, butit also warned that banks' net foreign assets have steadily declined, providingless scope for benefits to capital from devaluation.