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Chilean banks still hopeful in the face of economic disappointment


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Investment Banking Essentials Newsletter April Edition - 2022


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Chilean banks still hopeful in the face of economic disappointment

The Chilean banking sector remains optimistic for a strong performance in 2019, despite the country's disappointing economic results in the first quarter and decreasing GDP growth projections. While two of the three major banks posted sinking profits, analysts still foresee increased appetite for risk and greater dynamism in the sector throughout the year.

According to May 20 figures from Banco Central de Chile, the economy expanded 1.6% during the first three months year over year, down from 4.7% in the year-ago period. In seasonally adjusted terms, the Chilean economy showed no variation during the first three months of the year compared to the linked quarter. The central bank currently expects growth for 2019 to hit 3.5%, a number it lowered from 3.8% in April. In 2018, Chile's economy expanded by 4%.

However, after a "very poor" first quarter, Oxford Economics in a recent report told clients to "forget about 3% GDP growth in 2019." It said that its 2019 forecast for Chile's GDP will fall to 2.8% or 2.9%.

Low domestic demand during the quarter, which added to an expected slowdown in the mining sector, was especially troubling, James Watson, analyst at Oxford Economics, noted. "What really worried us was that in the first couple of months of this year the non-mining activity hasn't been particularly strong, and we think we are seeing some reasons for that coming from areas in the labor market ... with unemployment remaining fairly high," Watson said in an interview.

FocusEconomics, meanwhile, still has GDP growth hitting 3.1% for the year, but recently warned that growth likely would slow amid negative consumer sentiment and softer spending, as well as continued weakness in the mining sector amid the ongoing trade war between the U.S. and China. Chile's mining activity contracted 3.6% in the first quarter.

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Optimism despite lower profits

The economic weakness bled into first-quarter profits for Chile's banks, with some of the country's largest banks, including Banco de Chile and Banco Santander Chile, showing double-digit percentage declines in net income year over year.

Banco de Chile Chief Economist Rodrigo Aravena described the first quarter as an "unusual period," due to heavy rains in the north of Chile that negatively impacted mining production. But bank executives maintained that they could still hit their guidance targets for the year as they believe the economy will snap back in the coming quarters.

Similarly at Santander Chile, CFO Emiliano Muratore maintained that "the worst [had already] passed," and that going forward "the economy should continue to grow at an attractive pace." At Banco de Credito e Inversiones SA, head economist Sergio Lehmann said the bank expects some recovery in the latter half of the year to positively impact loan growth. The bank also dismissed the notion that it will see any additional risk from its commercial loan portfolio following an uptick in nonperforming loans from that segment during the quarter.

Banks maintain expansion plans

Moody's analyst Felipe Carvallo agreed that the slump seen at the start of the year was extraordinary, and that banks should begin seeing higher profits supported by an economic rebound. "The banks have more risk appetite and plans to increase consumer lending ... in addition to lending to more people with fewer resources and to SMEs," he said in a telephone interview. Moody's expects Chile's economy to grow by 3.6% this year.

Carvallo noted that, despite the economic slowdown, Chilean banks are still in the mindset to grow their businesses, as seen by the recent flurry of M&A activity in the financial space. He pointed specifically to a number of credit card deals, including BCI's purchase of Walmart Chile SA's credit card and finance businesses and Banco Falabella's integration with sister unit CMR Falabella SA in the latter part of 2018. These investments, Carvallo argued, will strengthen banks as they will have increased access to information on debtors.

"Despite this greater appetite for risk, we think that there will not be significant increases in either banks' delinquency rates ... or in the banks' credit costs," the Moody's analyst said.

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As of May 20, US$1 was equivalent to 698.69 Chilean pesos.