Fitch: Uruguayan Banks' NPLs Rise to Highest Level Since 2011
OREANDA-NEWS. Uruguayan banks' nonperforming loans (NPLs) rose to about 2.5% of total loans at the end of the third quarter, the highest level in the local banking system since 2011, says Fitch Ratings. The jump in the volume of NPLs over the most recent quarter was 58% year over year.
Rapid growth of indebtedness of companies and individuals partially explains the increase in delinquencies. In consumer loan segments, Fitch believes that Uruguayan banks' underwriting standards have been somewhat relaxed. Local banks have focused on growing their peso-denominated portfolios in order to reduce foreign currency risk from dollar-denominated portfolios as the dollar strengthened. More generally, lower economic growth, high inflation, an aging loan portfolio and the slowdown of credit growth are adding to the headwinds causing an increase in delinquencies. Fitch expects that GDP growth in Uruguay will have slowed to 2.5% through 2015, from 3.5% in 2014. The real credit growth rate since 2014 has slowed to about 7% to 8%, compared with rates of 15% to 20% in prior years. Five-year average inflation is the highest in the 'BBB' category, peaking at 9.0% in July 2015.
Although we view delinquencies at controlled levels, the third quarter flashes an increasing potential for higher reserve charges and charge-offs over the near term. This could begin to create pressure on the relatively low profitability of Uruguayan banks.
At the end of third-quarter 2015, loan impairment charges were 10% of pre-impairment operating income. While in the two previous years, loan impairment charges were between 4% and 5% of pre-impairment operating income. Charge-offs are also growing, representing approximately 0.5% of total loans in recent periods. The systems' reserves-to-impaired loan ratio was 166% at the end of third quarter, according to data from Banco Central de Uruguay. The ratio's modestly upward trend since the end of 2014 indicates that banks are already lifting their reserve charges.
Uruguayan bank loan deterioration is seen in all loan portfolios types. We note that impaired loan metrics in Uruguay, unlike other Latin American countries, are considered impaired at just 60 days overdue. For commercial loans, NPL ratios rose to 1.7% from near their historically lowest levels of under 1%. Consumer loans to individuals rose to 3.4% from historic low levels of 3%. For mortgage loans, NPL ratios are deceptively improving, declining to 2% of the overall portfolio from 4% at year-end 2013. The change is attributable, however, to the acceleration of mortgage loans mainly by the state-owned bank, Banco Hipotecario. Therefore, Fitch expects a similar weakening effect to eventually be revealed as the new loans mature.
Even though there is high dollarization of commercial loans in Uruguay, the majority of USD loans is to companies related to the import/export sector, and thus, generates US dollars. So while this does not mean that commercial loan portfolios are immune to local currency depreciation, the majority of loans to individuals are denominated in pesos or indexed units.
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