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Moody's ups outlook on Chile's banking sector to stable

Moody's changed its outlook on the Chilean banking sector to stable from negative as it expects the country's economic growth to stabilize, albeit at a slower pace than seen previously.

In a banking system outlook report released March 30, the rating agency said that Chile's banks should benefit from strong funding and relatively stable profitability, though asset risks are projected to be higher over the next 12 to 18 months. Delinquencies will likely also see modest growth due to slow economic growth, the Moody's noted that banks have recently pulled back from riskier asset classes which should help mitigate the impact of credit quality deterioration.

Chilean banks will also likely compete more for retail deposits, in line with new liquidity requirements, and this should lead to higher costs. Meanwhile, market funding in long-term assets should stabilize, as the housing sector has slowed down from previous years.

The rating agency also expects net interest margins among borrowers to narrow from currently strong levels. Provision expenses should also grow due to higher non-performing loans. However, earnings should remain relatively high by global standards, boosted by high operating efficiency.

Moody's also believes the government still has a high willingness and capacity to support banks.

Analysts from Moody's previously commented on the possibility that annual growth in lending from the country's banks might drop to about 8% in 2016 and the country may see a technical recession, or two consecutive quarters of negative growth.