Chile Banking Report

Chile’s banks tend to be solid, profitable outfits.

They are benefiting from a favorable operating environment that shows no signs of deteriorating significantly.

Loan growth is forecast to register at 12% over the next 12-18 months, according to a recent Moody’s report.

This is up from growth of 9.93% registered for 2018.

A driver is the mortgage segment, benefiting from historically low rates. Spanish banking giant Santander, one of the biggest players, has launched a 40-year mortgage product. The buy-to-rent segment has grown apace. 

GDP growth has sputtered but is still likely to come in at around 3% this year – and against this backdrop banks have been tightening their focus on lower-end consumer borrowers and smaller companies.

Owing to the economic recovery and diversified portfolios, the fallout from this strategy should not result in a major increase in the 1.9% non-performing loan ratio registered at the end of last year, Moody’s vice president Felipe Carvallo said.

In terms of bottom line, the country’s 18 banks reported 881bn pesos (US$1.27bn) for January-April, up 2.87% year-on-year according to data from watchdog CMF. If similar profits are reported for rest of the year, the system could register a bottom line of almost US$4.00bn for 2019.

In terms of loan market share a group of six banks – Santander, Bci, Banco de Chile, BancoEstado, Scotiabank and Itaú – enjoy a clear lead over the rest of the pack. Together they accounted for 161tn pesos of the industry’s overall loan portfolio of 182tn pesos at end-April.

With a strong focus on loan growth and a huge gap between them and the small players, the big six are unlikely to be dislodged anytime soon.

 

 

REGULATORY LANDSCAPE

The biggest recent development on the regulatory front was the approval of the country’s banking bill, signed into law in January. Authorities are in the process of drafting secondary legislation.

The law brings sector rules and regulations in line with Basel III standards. The move will lead to more stringent capital requirements for Chile’s banks.

Many of the largest banks already comply with the requirements, but Itaú Corpbanca, Scotiabank and state-owned BancoEstado will need to increase capital levels.

Under the law, which also merges banking watchdog Sbif into financial services commission CMF –which happened on June 1 – regulators are given enhanced powers over troubled banks, Moody’s said.

The finance ministry is also working on bill to regulate crowdfunding and cryptocurrency trading platforms. This is due to be submitted to congress before the end of the year. Fintechs are calling for legislation that does not create high entry barriers while banks are demanding a level regulatory playing field.

The B2B crowdlending segment is targeting Chile’s SMEs, which typically face high financing costs from traditional players such as high street banks and factoring companies.

A financial services cybersecurity bill is also in the pipeline.

Lawmakers are also debating a bill that makes banks, not clients, accountable for fraudulent payment transactions. The draft legislation has come under fire from banks.

A data protection bill, which gives an individual control over how their personal data is used and brings Chile’s framework in line with international standards, is also in congress.

The government is also working to covert Chile into an international financial services hub.

Finally, the Chilean payment acquisition market is opening up to increased competition and the country’s prepaid card market is poised to expand.

M&A

The past few years have been busy ones on the banking M&A front in Chile.

The local unit of Spain’s BBVA was merged into the subsidiary of Canada’s Scotiabank.

Elsewhere, domestic lender Bci was given the final nod to purchase the financial services business of Walmart Chile. Bci has also expanded its US footprint by buying Florida lender TotalBank.

Retail-focused lender Falabella, meanwhile, absorbed its CMR store card business.

Santander has also been busy, agreeing to buy vehicle distribution and retail group SKBergé’s stake in car financing firm Santander Consumer Chile.

Carvallo said these moves reflect the increased risk appetite among local banks.

“We don’t think this will affect the profitability of banks through credit costs, on account of a better operating environment,” Carvallo said.
He also cited lower forecast operating costs, partly the result of investment in digital transformation.

The prospect of more banks being merged or sold in Chile’s consolidated market is low.

“Looking ahead, I don’t think we will see more purchases among banks,” he said. “But perhaps of non-bank entities, perhaps of card issuers. But no more consolidation [within the banking sector].

FINTECH LANDSCAPE

Chile has a growing fintech ecosystem and is home to players including Latin America’s biggest crowdlending platform, Cumplo.

The country has the highest concentration of fintechs per capita in Latin America, according to a report by the Inter-American Development Bank and fintech-promoting organization Finnovista.

Chile is home to more than 70 fintechs, with the three largest segments being payments and remittances, enterprise financial management, and crowdfunding, according to Finnovista.

Chile’s fintechs are seeking to collaborate and join forces with banks. They are also in favor of adoption of an open banking framework.

In June, a landmark bank-fintech transaction was announced. The deal, which involves financial services player Grupo Consorcio injecting US$500,000 into payments gateway Pago Fácil, was the first of its kind and could be the first of many if other players follow suit. 

KEY ASSOCIATIONS, REGULATOR

Chile’s commercial banks are represented by Abif, while the sector is regulated by CMF. 

Fintechile represents the country’s fintechs and insurtechs and its remit includes working with authorities on regulations and evangelizing about the benefits its member companies bring to the financial services sphere.