Moody's on Dec. 12 downgraded its baseline credit assessments, or BCAs, and adjusted BCAs on both Banco Santander Chile and Banco de Chile to "a3" from "a2," concluding a review launched in August.

The outlook on both banks is stable.

The downgrades reflect increased risks to the banks' earnings and asset quality stemming from prospects of a continued slowdown in Chile's economy and relevant market shifts that have changed the competitive landscape, the rating agency said.

However, the banks continue to be the most highly rated in Latin America as they benefit from Chile's still solid macro fundamentals and institutional framework, as well as diversified loan portfolios, solid risk management and leading market shares that continue to sustain ample margins, Moody's added.

As part of the same review, Moody's confirmed its long-term global local and foreign currency deposit ratings on both banks at Aa3, while their long-term foreign currency counterparty risk assessments were confirmed at Aa3(cr).

The confirmations reflect the very high probability that the banks' bondholders and depositors will receive government support in a situation of financial stress because of the banks' very large deposit and loan franchises and the material systemic consequences of an unsupported failure.

The ratings now benefit from three notches of uplift from the banks' BCAs and remain at the same level as the sovereign government bond rating for Chile, Moody's noted.

Going forward, the rating agency expects funding costs for both banks to rise as a result of the introduction of Basel III liquidity requirements. The banks will also face strong competition for retail deposits from other large lenders as well as from pension and mutual funds, Moody's said.