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Chilean bank earnings see stronger Q1 results, but economic risks remain

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Chilean bank earnings see stronger Q1 results, but economic risks remain

DespiteChile's worsening economic situation and rising unemployment, net income at thecountry's largest private banks rose in the first quarter year over year asloan growth, higher income from net fees and lower loan provisions more thanoffset the impact of higher operating expenses, SNL data show.

Thecombined earnings of Chile's three largest private banks by assets — ,Banco de Chile andBanco de Credito e InversionesSA, or Bci — totaled 331.88 billion pesos in the first quarter of2016, up 13.6% from a year earlier.

Theincrease was due to earnings growth at Banco Santander and Banco de Chile, as Bci'snet income slipped as costs related to its October 2015 of weighedon results.

Totaloperating income of the three banks rose 9.3% to 1.13 trillion pesos, with netinterest income rising 17.2% and income from net fees and commissions ticking10.5% higher.

Theincrease in net interest income and net fees more than offset higher operatingexpenses, which rose 13.6% to 533.71 billion pesos, and higher taxes, whichrose 5.4% to 78.64 billion pesos.

Netcustomer loans rose 15.0% to 68.67 trillion pesos, according to SNL aggregatedata, although the loans-to-deposits ratio for all three banks was lower in thefirst quarter compared to the same period a year earlier.

Onan individual basis, Bci's profit fell 7.6% year-over-year to 73.92 billionpesos, as the bank saw higher operating costs, partly as the result of itsacquisition of City National Bank, as well as higher salaries adjusted forinflation and benefits. Income from net exchange rate and financial operationsalso plunged 69.4%.

ButChile's other large banks reported better results. Banco de Chile posted a13.5% rise in first-quarter net income, as the company saw higher income fromloans and net fees. Total operating revenues rose 7.7%, while operatingexpenses grew by 8.4%.

Meanwhile,Banco Santander posted first-quarter net income attributable to shareholders ofabout 125.44 billion pesos, up 31.4% from the year-ago period, also due tohigher net interest income, an improved funding mix and higher inflation.

SNL Image

Loan growth amid economicchallenges

Acrossthe industry, Chilean banks' net income increased slightly, by 2.1%year-over-year in the first quarter on a nominal basis, as loan growth slowedand net interest margins declined on weak economic growth, according to FitchRatings.

ButBanco Santander and Banco de Chile — the largest of the three banks by assets —were able to buck the trend, mainly by riding higher net interest income andloan portfolio growth, Fitch Ratings' director of Latin America financialinstitutions, Abraham Martinez, told S&P Global Market Intelligence.

Althoughthey both showed loan growth above the market average, Banco de Chile's growthincludes its purchase of BancoPenta's portfolio, Martinez noted, adding this increased its totalportfolio by about $1 billion in 2015.

Asfor Bci, its loan portfolio grew 26% in the first quarter; but, when excludingthe impact of its acquisition of City National Bank, it grew only around 10%organically, which is in line with the Chilean banking system average, Martinezpointed out.

Evenso, as the dominant banks in the Chilean market, the three big banks have theability to set prices and funding costs that are more competitive than small ormedium-sized banks, Martinez said.

"Theyare much more efficient in their use of capital than medium-sized banks,"Martinez said, adding that, unlike smaller banks, they are not obliged toparticipate in certain riskier business segments to maintain their market share.

Interms of loan provisions, all three large banks reported a decline in the firstquarter year-over-year, led by Bci with a 4% reduction, Banco de Chile with a1% drop and Banco Santander, which was relatively flat year over year, Martinezsaid.

Partof the reason is lower organic loan growth compared to the first quarter of2015 as a result of the country's economic slowdown. The main reason, however,is that the banks anticipated a new norm related to provisions for mortgages,which took effect in January 2016, by boosting their provisions in 2015, and sowere not affected in the first quarter of this year, Martinez explained.

Butthat trend could change in the remainder of 2016. "Asset quality shoulddecline in the rest of this year so we should expect higher provisions,"Martinez warned.

Macroeconomic risk

Goingforward, the biggest risk facing the three banks in the rest of 2016 is deteriorationin loan quality in the SME lending segment, as well as in consumer loans andmortgages, as the economy continues to slow and unemployment is expected tocontinue rising, Martinez said.

Thiseffect will likely be felt more towards the end of 2016. "We see the firsthalf of the year as flat with more credit risk in the second half," hesaid.

Ofthe big banks, Santander Chile has the most exposure to retail loans, includingproportionately more mortgages and consumer loans. As result, it could be themost affected by the economic slowdown in 2016, despite recent improvements inthe quality of its loan book, Martinez said.

ForBanco de Chile, which is more focused on corporate loans, it is basicallybusiness as usual, while Bci's risks are more related to its incorporation ofCity National Bank as it continues to consolidate its business in Miami,Martinez added.

Click here to view country level information for Chile.

Click here to access the SNL worldwide bank ranking template and view key balance sheet figures, performance and capital adequacy ratios for individual banks.