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Moody's: Chilean bank lending growth seen slowing on economic woes

Moody'sexpects annual growth in lending by Chilean banks to slow to about 8% in 2016, downfrom double-digit growth in previous years, due to the country's worsening economicclimate and slower growth in mortgages, Felipe Carvallo, a senior analyst in Moody'sfinancial institutions group, told S&P Global Market Intelligence.

Chile'seconomy remains closely linked to the copper price, which has fallen along withother commodities, while the business community and consumers are broadly pessimistic,the analyst said on the sidelines of Moody's first annual conference in Santiago,Chile, on Oct. 4. In this context, with Chile on the brink of a technical , Moody's expects Chile'sGDP to grow 1.5% in 2016 and about 2% in 2017, which is well below its historicallevels.

"Weexpect the asset quality of banks to worsen in the future," Carvallo said.

In additionto lower economic growth, a recent boom in mortgages is coming to an end. Many homebuyerswho had tried to get ahead of a value-added sales tax, known locally as IVA, tobe levied on new properties are now reneging on their purchase agreements, Carvallonoted. The new tax was initially scheduled to take effect from January 2016 butits implementation has been postponed by a year.

"Weare now seeing mortgage growth levels very similar to the overall loan portfolio,"he said.

Althoughlower loan growth means lower risk for banks, their asset quality is also worseningdue to unemployment and the country's generally poor economic situation, Carvallopointed out.

Partlyfor this reason, Moody's revisedits outlook for Chile's banking sector to negative in July.

However,there are some reasons for optimism. Banks have been preparing for this situationfor at least two years by restructuring their loan portfolios to reduce risk andlowering dividends, Carvallo noted.

Moreover,even though the profitability of Chilean banks is declining, partly as the resultof higher taxes, it remains well above peer banks in other markets and Chilean banks'ratings are among the highest in Latin America, Carvallo said in his presentationduring the conference.

Localbanks benefit from a broad funding base thanks to large investments by private pensionfund managers, or AFPs, as well as access to international markets, he said. Althoughcompetition for funding and good quality clients is increasing, funding costs remainrelatively low, he noted.

In addition,the proposed reform ofthe country's banking law in line with Basel III capital requirements, which ispending approval by Congress and will be gradually implemented in the coming years,is good for banks since it will eventually improve their capitalization levels,Carvallo said.

Overall,Chilean banks bracing for lower loan growth, declining asset quality and highertaxes are prepared to maintain stable capital levels going forward, the Moody'sanalyst noted.