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Banking Industry Country Risk Assessment: Uruguay


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Banking Industry Country Risk Assessment: Uruguay

Major Factors


S&P Global Ratings classifies the banking sector of Uruguay (BBB/Stable/A-2) in group '6' under its Banking Industry Country Risk Assessment (BICRA). Other countries in group '6' are Brazil, Colombia, Trinidad & Tobago, Portugal, India, Indonesia, Thailand, and China (see chart 1).

Chart 1


Our assessment of Uruguay's economic risks reflects its stable political environment, consistent economic policy, high GDP per capita for the region ($16,143 in 2019), and predictable political institutions that have anchored economic stability. This assessment also incorporates the country's manageable economic imbalances and still high exposure to foreign-currency lending, partly to unhedged borrowers and cyclical sectors such as agriculture, which raises the country's credit risk. We project real GDP to contract 3.6% in 2020 due to the COVID-19 pandemic and global recession, and then grow 4.2% in 2021 supported by infrastructure investments in upcoming years. Private sector's access to credit remains low, at about 29% of GDP, and we expect it will be at the same level in the next 12-18 months. However, we expect nominal credit growth of 10% in the next two years, influenced by the depreciation of the Uruguayan peso, high inflation, and the economy's rebound in 2021. We also expect asset quality metrics to remain under pressure due the likely economic slowdown stemming from containment measures to limit the spread of COVID-19.

Industry risks in Uruguay are higher than those of its peers. Although the domestic banking sector benefits from a large share of customer deposits (relative to system loans), they've been volatile in the past. However, Uruguay's deposit base has remained stable and resilient to withdrawals of non-resident deposits after the tax amnesty in neighboring Argentina, which concluded in March 2017; to the approval of Uruguay's fiscal transparency law in 2016; and to exchange-rate movements. We believe several market distortions exist--such as the significant presence of government-owned banks, labor market rigidities, and the presence of non-deposit taking financial institutions--that stall efficiency and undermine profitability. Finally, Uruguay's Central Bank, BCU, has made significant efforts to align banking regulation and supervision with international standards, but there is still room for further improvement, particularly reducing dollarization.

Economic And Industry Risk Trends

Uruguay's economic risk trend is stable. We expect the country's GDP to rebound in 2021, supported by infrastructure investments in the coming years. Economic imbalances remain manageable, reflecting relatively low real credit expansion and the absence of a credit asset bubble. We expect pressure on banks' asset quality metrics to surge and to be reflected on balance sheets starting from the end of the year, given the regulatory measures to mitigate the downturn's impact.

We view the industry risk trend for Uruguay as stable. We believe Uruguay will strengthen the regulatory framework as the banking system continues to adopt international standards. We expect the deposit base to remain stable, despite some expected growth in the non-resident deposit base, which currently accounts for 10% of total deposits. However, dollarization will likely remain high, weakening resistance to external shocks.

Economic Risk  |  5

We base our economic risk score for Uruguay on our assessment of economic resilience, economic imbalances, and credit risk in the economy, all of which our criteria define.

Economic resilience: We project real GDP to contract in 2020 and rebound in 2021, supported by upcoming infrastructure investments

Economic structure and stability.   Uruguay has been growing consistently for over 15 years. However, growth has recently slowed to 1.3% in 2015-2019 from 4.9% on average in 2010-2014. Deceleration in consumption, in part due to unemployment levels and persistently high inflation, as well as lower public and private investment, explain the recent stagnation. We expect real GDP to contract 3.6% in 2020, following a sharp fall in consumption because of the pandemic and weak global and regional demand. We estimate a 4.2% rebound in GDP in 2021 and average growth of 2.8% over 2022-2023 as consumption resumes and planned investment projects ramp up. These planned investments, including a $800 million public-private partnership railroad and an investment by Finland-based forest and paper company UPM-Kymmene Corp. for $3 billion, will support a recovery in GDP growth in the next several years.

Macroeconomic policy flexibility.   Relatively high inflation and still high dollarization continue to limit Uruguay's monetary policy flexibility, since over half of resident loans are denominated in dollars, while more than 70% of resident deposits are dollar-denominated. The accumulated inflation rate reached 9.2% in March, and inflation expectations over the next 12 months remain above the central bank's target range of 3%-7%. We estimate a 9% inflation rate this year because of the Uruguayan peso's depreciation and pass-through effects to the tradable sector, counterbalanced by falling demand due to the recession.

We expect the general government (GG) deficit will peak in 2020 as revenue suffers from the economic contraction and spending rises to address the social and economic impact of the pandemic. We believe the GG deficit could expand to 6.2% of GDP in 2020, then fall to an average 3.7% of GDP over 2021-2023 as economic growth resumes and pandemic-related spending slowly subsides. Our definition of the GG includes the central bank and excludes public-sector enterprises.

Political risk.   We believe Uruguay's broad political consensus and its stable and well-established institutions have anchored--and will continue to anchor--economic stability. In this sense, following the election of President Luis Lacalle Pou, whose administration took office on March 1, 2020, we believe political consensus will be key to implementing needed structural reforms.

Table 1

Uruguay--Economic Resilience
(Bil. $) 2016 2017 2018 2019 2020f 2021f
Nominal GDP 52.7 59.5 59.6 56.0 51.1 53.3
Per capita GDP 15,298.4 17,221.4 17,215.9 16,143.0 14,661.9 15,259.4
Real GDP growth (%) 1.7 2.6 1.6 0.2 (3.6) 4.2
Inflation (CPI) rate (%) 9.6 6.2 7.6 7.9 9.0 8.0
Net general government debt as % of GDP 50.9 55.9 58.6 62.5 71.8 70.0
f--Forecast. GDP--Gross domestic product. CPI--Consumer Price Index. Source: S&P Global Ratings
Economic imbalances: Flat real credit growth and no signs of asset bubbles

The private sector's access to credit remains low, at about 29% of GDP, and we expect it stay near that level in the next 24 months, given the stagnate economy and low credit growth. Low private-sector debt and still moderate share of residential mortgages of total loans, which represents about 17% of total private-sector lending, underscore the low likelihood of asset bubble imbalances.

Private sector credit growth.   Lending growth reached 10.4% in nominal terms in 2019, fostered by the 15% depreciation of of the Uruguayan peso against the dollar and its impact on the banking system's dollarized loan portfolio that accounts for 50% of total loans. We expect nominal credit growth of 10% in the next two years influenced by the depreciation of the Uruguayan peso, high inflation, and the economy's rebound in 2021.

Chart 2


Real estate prices.   The official nationwide data on the average annual change over the past four years in inflation-adjusted residential housing prices is unavailable. However, we have used market information on housing prices measured in dollars. Therefore, we estimate an average real increase in housing prices of 4% over the past four years.

Current account and external debt position.   We expect the current account deficit (CAD) to remain below 2% of GDP in the next two years, sustaining Uruguay's balanced external position. While debt is set to increase in 2020, additional funding sources will mostly be long term and with favorable terms. Uruguay has accumulated ample external liquidity in the past to manage potential financing disruptions. Liquidity buffers include contingent credit lines with multilateral institutions (Inter-American Development Bank, CAF, and FLAR), for about 4% of GDP, some of which have already been called upon and disbursed to finance measures in response to the COVID-19 pandemic. Buffers also include government liquid assets for about 2% of GDP as of December 2019. As in the past, we expect the government to continue to meet its overall financing needs mainly through local and international bond issuances.

Table 2

Uruguay--Economic Imbalances
2016 2017 2018 2019 2020f 2021f
Annual change in claims of resident depository institutions in the resident nongovernment sector in % points of GDP (2.3) (1.9) 1.1 0.7 0.8 (0.7)
Annual change in key index for national residential house prices (real) (%) (0.1) 2.0 1.8 8.4 3.5 3.5
Current account balance/GDP 0.6 0.7 0.1 0.7 (1.1) (1.2)
Net external debt / GDP (%) (8.7) (6.6) (5.5) (6.5) (4.0) (6.7)
f--Forecast. GDP--Gross domestic product. Source: S&P Global Ratings.
Credit risk in the economy: High dollarization increases credit risk, despite low leverage

Private-sector debt capacity and leverage.   Although Uruguay's GDP per capita remains higher than those of its BICRA peers, access to credit has stayed low, at about 29% of GDP, and we expect this metric to stay about the same in the next 24 months.

The domestic private sector's nonperforming loans (NPLs, past due loans of more than 60 days) stabilized at about 3% in 2019. This metric is mainly due to weaker credit quality at the government-owned bank, Banco República (BROU; not rated), which accounts for about 30% of system loans and 53% of total NPLs, and by specific cases in the corporate sector. We believe the much more complex global economic scenario will pressure the banks' asset quality metrics. However, the impact will be mitigated by the regulatory measures to support the financial system, which include extending maturities of existing loans that are performing without penalties and lowering reserve requirements for loans granted in Uruguayan pesos in order to encourage credit growth in local currency, among others. In this context, we expect NPLs to reach about 4% by 2021 from 3% by the end of 2019.

Chart 3


Lending and underwriting standards.  Although, in general, Uruguayan banks have adequate lending and underwriting standards, certain structural characteristics of the domestic economy result in high credit risk for the banking system. Specifically, we believe significant dollarization in the economy and some sector and single-name concentration increase risks. In this sense, foreign currency represents about 51% of the total private-sector credit portfolio, while exposure to the agriculture represents around 16% of total loans. However, we consider that the impact of high dollarization is partly tempered by the dollar-denominated revenue in these sectors.

On the other hand, private banks have a low risk appetite and limit their lending to corporate companies and the high-income population segment. Public banks or finance companies serve the lower-income borrowers. Finally, the banking sector's use of derivatives and complex products to shift risk off their balance sheets is low.

Chart 4


Payment culture and rule of law.   We view payment culture and rule of law in Uruguay as at least moderately strong. Uruguay has robust and predictable institutions that are stronger than those of most of its Latin American peers. Uruguay, in general, scores well on international indicators: corruption is low and rule of law is strong.

Table 3

Uruguay--Credit Risk In The Economy
2016 2017 2018 2019 2020f 2021f
Claims of resident depository institutions in the resident nongovernment sector as a % of GDP 28.9 27.0 28.1 28.9 29.7 29.0
Household debt as % of GDP 10.1 10.3 10.5 10.8 11.2 11.0
Corporate debt as % of GDP 18.0 15.9 17.2 17.5 18.2 17.8
Foreign currency lending as a % of total domestic loans 53.2 51.1 51.0 49.8 48.4 48.0
Domestic nonperforming assets as a % of systemwide domestic loans (year-end) 3.2 3.4 3.2 3.1 3.6 4.1
Domestic loan loss reserves as a % of domestic loans 4.9 5.4 5.2 5.3 4.4 4.1
f--Forecast. GDP--Gross domestic product. Source: BCU and S&P Global Ratings.

Base-Case Credit Losses

We expect that credit losses could increase up to 2.0%- 2.5% of total credit in 2020, from 1.6% in 2019, given more challenging economic conditions. However, these would be somewhat mitigated by regulatory measures, and would then decrease to 1.8% in 2021 as the economy recovers.

Our base-case credit loss estimates take into account our following expectations:

  • Uruguay's GDP contraction of 3.6% in 2020 and growth of 4.2% in 2021;
  • Higher unemployment at about 13.0% in 2020 from 9.1% in 2019, and then stabilizing at 9.6% in 2021;
  • Inflation rate of about 9% in 2020 and 8% in 2021; and
  • Annual credit expansion of 10% in 2020 and 2021 in nominal terms.

Table 4

Uruguay--Base Case Cost Of Risk (%)
2016 2017 2018 2019 2020f 2021f
New loss reserves (% of total loans) 1.2 1.3 1.2 1.6 2.5 1.8
f--Forecast. Source: BCU and S&P Global Ratings.

Industry Risk  |  7

We base our industry risk score for Uruguay on our assessment of its institutional framework, competitive dynamics, and systemwide funding.

Institutional framework: Moving towards international standards

Banking regulation and supervision.  Since the 2002 financial crisis, BCU has consistently improved supervision and regulation. The Financial Services Superintendency (SSF)--the agency within BCU that oversees and regulates the financial system--has made progress in the last few years by adopting a risk-based supervisory approach. In our view, the SSF adequately regulates and supervises the industry.

The SSF has taken a progressive approach to implementing Basel III standards. The banking system already has capital requirements for market, credit, operational, and systemic risks. Regulation on net stable funding ratio (NSFR) went into effect at the end of 2019. In 2018, the banking system began to report under International Financial Reporting Standard (IFRS) guidelines. In addition, the SSF established the regulation by which subordinated instruments convertible into equity could be included in the SSF's calculation of regulatory capital (COCOS). In 2017, the implementation of a liquidity coverage ratio (LCR) became effective, and all the banks comply with the requirement.

On the other hand, although the SSF has introduced regulation to mitigate risks related to foreign-currency exposure, we believe there is room for improvement, because it has not been effective in significantly reducing exchange rate risk.

Regulatory track record.   The regulator has gradually taken a more prudent and proactive stance in response to the key underlying regulatory weaknesses that the 2002 financial crisis brought to light. Our assessment also considers the regulator's inability to prevent the 2002 financial crisis, during which a severe and systemic run on deposits occurred (almost half of deposits in six months), NPLs soared, and five banks became insolvent and closed.

Nonetheless, as mentioned above, following the COVID-19 outbreak in early March 2020, BCU provided several measures to mitigate the impact of the pandemic on the economy and financial system, which are largely aligned with those of other regulators in the region. These measures include a maturities extension of up to 180 days for performing loans without penalties, reduced reserve requirements for loans granted in pesos or in indexed units, and higher coverage of the collateral granted by SIGA (Sistema Nacional de Garantías; the national guarantee system).

Governance and transparency.   There is transparency regarding bank ownership: banks are either public or are branches or subsidiaries of international financial institutions. Reporting to the regulator is standardized and frequent, and monthly system reports are available. The quality and disclosure of information is good.

Competitive dynamics: Stable competitive environment with significant presence of public banks

Risk appetite.   The Uruguayan banking system has a moderate risk appetite, given the modest presence of innovative, complex, or risky products in the market, which indicates limited risk-shared lending. Furthermore, banks focus on traditional banking products, are customer-oriented, and have a limited use of securitizations. Additionally, there's no subprime lending and commercial practices are generally conservative.

Last year, the banking system posted record profitability, largely influenced by exchange rate fluctuations and the long dollar positions of most banks. The sector's return on average assets and return on average equity surpassed the good results of the previous year, reaching 2.5% and 22%, respectively. The Uruguayan banking system has high levels of liquidity, with excess liquidity allocated in low-risk instruments, mainly U.S. Treasury securities. For the next few quarters, we expect banks' profitability to take a hit from lower returns in investment portfolios, given negligible international interest rates, higher cost of risk, and tight margins, partly compensated by gains from exchange-rate fluctuations.

Industry stability.  The number of banks operating in the country has been stable, with 11 entities operating in the past five years. We believe there's a low probability of new entrants in the market because of the dominant position of the largest lenders, unless a new bank enters the market through an acquisition. The financial system consists of two government-owned banks, which account for half of total assets, and nine private international banks.

Market distortions.   There are several market distortions in Uruguay's financial system:

  • Significant presence of government-owned banks (BROU and BHU). BROU is the largest bank, with about a 44% market share in terms of assets and 30% in terms of loans. BROU has some competitive advantages, such as its monopoly of public-sector deposits.
  • Labor market rigidities (high wages indexed and social security expenses, high costs of firing employees, powerful labor unions, etc.) and higher taxes compared with other sectors of the economy.
  • Non-deposit taking institutions (Empresas Administradoras de Crédito [EACs]), which aren't subject to the same regulatory supervision as banks. These entities focus on lower-income borrowers and on credit cards and installment loans at high interest rates.

Table 5

Uruguay--Competitive Dynamics
2016 2017 2018 2019 2020f 2021f
Return on equity (ROE) of domestic banks 2.8 11.6 19.5 22.0 18.0 17.0
Systemwide return on average assets (%) 0.2 1.1 2.1 2.5 2.0 2.0
Market share of largest three banks (%) 69.4 69.3 71.3 72.1 75.0 75.0
Market share of government-owned and not-for-profit banks (%) 47.9 49.0 50.7 50.4 55.0 55.0
f--Forecast. Source: BCU and S&P Global Ratings.
Systemwide funding: Banking system mainly funded with deposits

Core customer deposits.   The Uruguayan banking system's funding mix reflects a stable deposit base, although this base has been volatile in the past, for example during the 2002 financial crisis. Therefore, our assessment of systemwide funding includes a downward adjustment. Still, in our view, the systemwide funding risk has dropped because the system hasn't experienced a bank run since 2002. In addition, it has proven resilient to the withdrawal of non-resident deposits after the tax amnesty in neighboring Argentina, which concluded in March 2017; to the approval of Uruguay's fiscal transparency law in 2016; and to exchange-rate movements. Furthermore, the banks took action to diminish their exposure to non-resident deposits in order to reduce the risk of volatility in their deposit bases. Non-resident deposits remained stable over the last four years, accounting for about 10% of deposits as of December 2019 (mainly from Argentineans given that country's financial turmoil), compared to 15% in 2016 and 42% in 2002. Core customer deposits remain the main funding source in the Uruguayan banking system.

Last year, the deposit base grew 17%, fostered by the depreciation of the Uruguayan peso, and represented about 95% of total banking system's liabilities. In addition, core customer deposits (half of wholesale domestic deposits and all of domestic retail deposits) accounted for 134% of total systemwide domestic loans, and we expect that ratio to remain at 133%-138% in the next 12-18 months. (There is no public information on the shares of corporate and retail deposits. We assume 60% wholesale deposits and 40% retail deposits based on rated bank data). We expect the deposit base to remain stable despite some expected growth in the non-resident deposit base),mainly from Argentineans given that country's financial turmoil but the large share of foreign currency and sight deposits increase the risk of volatility in the event of system stress.

External funding.   The banking sector holds a net external creditor position because of large holdings in investments abroad. The loans-to-deposits ratio remains low because foreign direct investment has mostly covered large investment projects' credit needs.

Domestic debt-capital markets.   We view the Uruguayan domestic debt capital market as narrow and shallow, given the low amount of private-sector debt issued locally, which accounted for less than 5% of GDP in 2019.

Government role.   We view the government's role in systemwide funding as adequate. Although the government was unable to provide banks with enough liquidity during the 2002 crisis due to the flight of large amounts of capital, it did make efforts to assist banks. We believe that Uruguay is now in a better position to support the banking system's liquidity because the past decade's economic performance has resulted in greater flexibility and the existence of buffers (like contingent credit lines, international reserves, deposit insurance framework, sound capitalization, etc.). Furthermore, policies and practices related to liquidity have significantly improved since 2002, with the regulator taking a more proactive stance.

Table 6

Uruguay--Systemwide Funding
2016 2017 2018 2019 2020f 2021f
Systemwide domestic core customer deposits by formula as a % of systemwide domestic loans* 120.6 123.8 126.4 133.8 136.2 138.7
Net banking sector external debt as a % of systemwide domestic loans (38.0) (36.4) (39.0) (47.3) (50.7) (52.8)
Systemwide domestic loans as a % of systemwide domestic assets 53.8 50.9 51.4 48.5 47.6 N.A.
Total consolidated assets of FIs as a % of GDP 68.7 64.6 66.3 71.9 76.6 N.A.
Total domestic assets of FIs as a % of GDP 54.6 53.4 54.8 59.4 63.3 N.A.
*Calculated as 100% of retail deposits plus 50% of wholesale ones. We estimate 40% of the system's deposits are retail and 60% wholesale. f--Forecast. N.A.--Not available. FIs--Financial Institutions. GDP--Gross domestic product. Source: BCU and S&P Global Ratings.

Peer BICRA Scores

Table 7

Peer BICRA Scores




Trinidad and Tobago






BICRA group 6 6 6 6 6 6 6 6 6
Economic risk score 5 7 7 7 6 7 7 6 7
Industry risk score 7 5 5 5 6 5 5 6 4
Government support assessment Supportive Supportive Supportive Supportive Uncertain Highly supportive Highly supportive Highly supportive Highly supportive
Source: S&P Global Ratings.

Government Support

We classify the Uruguayan government as supportive of the domestic banking sector. We believe the government will provide support to systemically important banks whose failure could compromise the country's payment system in the event of a crisis. Following the 2002 financial crisis, the government defined BCU as a lender of last resort. Furthermore, the Uruguayan government proved its willingness to provide extraordinary support to the banking sector in 2002, although its resources were insufficient to effectively stall the crisis. Finally, the government guarantees BROU's and BHU's deposits, which hold 50% of total system deposits.

Table 8

Five Largest Banks In Uruguay*
Assets (bil. UYU)* Systemic importance
Banco de la República Oriental del Uruguay 646.2 N.A.
Banco Santander S.A. 224.9 N.A.
Banco Itaú Uruguay S.A. 185.8 N.A.
Banco Bilbao Vizcaya Argentaria Uruguay S.A. 132.4 Moderate
Scotiabank Uruguay S.A. 115.9 N.A.
*Data as of June 2020. N.A.--Not available. UYU--Uruguayan peso. Source: BCU and S&P Global Ratings.

Related Criteria And Research

Related Criteria
Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Sofia Ballester, Buenos Aires + 54 11 4891 2136;
Secondary Contact:Ivana L Recalde, Buenos Aires (54) 114-891-2127;
Sovereign Analyst:Constanza M Perez Aquino, Buenos Aires (54) 114-891-2167;

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