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29 April 2019 Share

The solidity of the banks generates tranquility in Uruguay



According to the El País newspaper click here, profitability "was 12.9% of the equity in the year to March, after a bad year before." This news is not new either, since various Financial System Reports show this solidity, both in internal analysis and in international organizations.

On the other hand, international financial conditions are changing and this has affected the region, being observed in the political uncertainty of neighboring countries -because they are electoral years- and also because of having strongly polarized societies.

In the specific case of Uruguay, "the photography of the banks at the end of the first quarter shows a very good level of capital and the ability to withstand complicated scenarios of recession, rise in interest rates and devaluation".

As for the context of equity, it is possible to observe "a slight deterioration of the portfolio that already has a trend", therefore, it is an indicator that together with others, point to an economy with less strength.

"Banks do financial intermediation, taking money from depositors and lending it to those who need credit." It is a highly leveraged business in the sense that it loans its own money only in a fraction of the total, the rest of what it provides is from third parties. the credits are paid in the contractual conditions, there are no big problems, but when the difficulties arise to pay within the indebted ones, it is necessary to look at the capacity of the own capital to face the obligations of the bank ".

On the other hand, the regulation of the BCU determines that "there is a minimum level of capital for the characteristics of the business of each bank in terms of the level of risks it takes, if the minimum capital required for all banks is added, as of March 31. from 2018 it reaches US $ 2,409 million When it is said that banks in Uruguay are solvent, it means that their capital or equity exceeds this minimum required In fact, the sum of the capital for all banks is US $ 4,421 million, or 84% above the regulatory minimum".

If you visit the information source of the news click here you will find a graph showing the Evolution of the ratio of Patrimonial Adaptation of the banks in Uruguay. Data are presented as of March 31 analyzed in the last five years, and what stands out is that there is always slack in relation to the minimum, and even in the last two years greater strength was achieved.

The note also mentions that banks to obtain greater strength, sometimes make a sacrifice that involves compromising profitability. "In order for an institution to sustain itself over time, it is necessary for it to generate a return that remunerates the capital destined by the shareholders." When looking at the banks as a whole, it is seen that, with the exception of the year 2016, which was very bad, in all a moderate level of profitability was obtained".

In general, it is observed that private banking ranges between 10% and 15% per year.

To have a reference, you can compare this profitability with that obtained by companies in the same industry that are publicly traded and present their balance sheets publicly. Taking an average of three years (2014 to 2016), "in the regional banks of the United States, the average was 9.0% per annum." To this performance of the activity we would have to add the country risk of investing in a company in Uruguay, which is regulated direct investment, is higher than the country risk of public debt securities.Another way to obtain a point of comparison could be with regional banks located in emerging countries.In this case, the average ROE of the three years it stood at 17.9%.

The values ​​mentioned in this note show, then, that the banks in our country are within the range of minimum acceptable values, which does not mean that they are left over. In addition, our country has an oscillation "which is reflected in the strong fall in profitability in the year ended March 2017, which is mainly due to the inflation adjustment made at the end of 2016".

As a complement to the solvency indicator, the BCU performs a so-called "stress test" every three months in which it simulates an adverse scenario and another crisis scenario. To be able to exemplify it, in the first case: GDP falls by 3.6% and in the second, 8.0%, with simulated devaluations of 14% and 35% respectively. In both scenarios, banks could get ahead of adversity by maintaining "an acceptable patrimonial level".

One of the relevant issues to support difficult scenarios is the management of credit. To do this, banks must take care of the payment capacity of the companies and the people to whom the loans are granted. If there is recession and unemployment, there will be a logical deterioration in the ability to pay. And in the scenario of a devaluation, everything depends on the "exposure to foreign currency that companies or families are." The worst scenario is when they have their debt in dollars and the income is set in pesos.

The aforementioned elements lead first to the delay in debt service payments, and then to the gradual deterioration of credit quality according to the classification in the BCU's fixed scale. On the "El País" page, from which material was extracted for the news, you can also see a graph showing the evolution of the participation of qualified credits 3, 4 and 5 in the banks (it does not include the BHU). As mentioned, the trend in the last five years is upward and in March 2018 it stands at 18.1%. It is a low percentage, but it must be taken into account that it does not yet have the impact of the very bad soybean and rice harvest, which will surely have repercussions for the rest of the year.

Another tendency to take into account is that within these "bad credit", debtors and defaulters are found, and the evolution is similar. In another of the graphs, it is possible to observe the evolution of the percentage of credits in national and foreign currency that fell into default. In March 2014, only 1.7% of the portfolio was in default. By March 2018 this rate went up to 3.8%. It is a rate that by itself does not worry and is possible in a sound financial management of the bank. What should worry is that the bad part of the cycle started "and there is already an increase in this rate".

Finally, the quality of the credit portfolio also manages to influence profitability: when the portfolio deteriorates, financial income is reduced. This could be a problem, but it ends up being something "limited" in the reality of the Uruguayan banks. The note closes the information mentioning that "only 36% of the banking assets is the current credit to the resident non-financial private sector". Much of the profitability comes from placements to the government in public securities, such as: Treasury Bonds, Treasury Bills, Social Security Bonds.

Material generated from the information in the digital version of El País newspaper: Click here

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