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Moody's: Rising debt weighs on Chilean government's ability to support banks

Moody's said its negative outlook on Chile's banking sector reflects the government's rising debt burden, which could negatively impact the government's ability to support local lenders, especially if its fiscal position deteriorates further.

However, improving economic growth and rising confidence, following the recent re-election of market-friendly President Sebastián Piñera, should provide Chilean banks with a better operating environment, the rating agency said Feb. 23.

Moody's expects the country's GDP to grow 2.7% in 2018 and 2.9% in 2019, up from 1.6% in 2017, driven by higher copper prices.

Improving business conditions together with greater appetite for higher-yielding loans will benefit the sector's profitability, and "the negative effects of this higher risk appetite on asset quality will be limited given the diversified nature of loan portfolios and the stable risk profile of corporate borrowers and consumers," Moody's noted.

Capitalization levels will likely remain modest, although they will increase gradually once Chile's proposed general banking law is approved as some banks look to boost buffers and others remedy deficits against new minimums.

"Despite a potential decrease in the government's ability to support Chile's largest banks if necessary, its willingness to do so remains very high as reflected in a proposed increase in the central bank's deposit guarantee," Moody's added.