Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
AmericasJune 1 2011

Consumer markets set to fuel Chilean banking growth

A year on from a devastating earthquake and the delayed impact of the international financial crisis, banks in Latin America's most stable economy now need to focus on supporting the expansion of the middle class.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Consumer markets set to fuel Chilean banking growth

Chile, long considered one of Latin America's most developed and stable countries, is experiencing a post-crisis surge on the back of the high prices for the commodities it exports to Asia, in line with much of the rest of South America. However, the strong outlook for the banking sector has little to do with Chile's famous copper mining industry.

“Most of the large corporate producers are funded by the headquarters of mining groups,” says Raimundo Monge, CEO of Santander Chile. “They tend to borrow very little from local banks.”

The projected growth in lending in the country this year, about 15%, or roughly double projected gross domestic product (GDP) growth, depends more on consumers than the country's corporations.

Unbanked opportunity

“The capital markets in Chile for the needs of corporations are very deep, because of our private pension funds. Corporate loans are not growing as much as we would expect. Corporations are very liquid,” says Mr Monge. “We expect a good year, and the biggest challenge is the penetration and coverage of the country's poor.”

Lionel Olavarría, CEO of Banco de Crédito e Inversiones (BCI), agrees: “Our main opportunities are consumer loans, which are already growing for the second quarter and second semester, and mortgage growth, and we've already approved financing for real-estate projects.”

At 75% to 80%, the country's debt-to-GDP ratio is one of the highest in South America, but 2% of corporate borrowers receive 80% of the loans, and only the top 16% of the working population have mortgages, says Mr Monge. The rest of the population, perhaps themselves buoyed by the commodities boom, provide the real opportunity.

Holding back

Still, Chile has not experienced the explosion in lending to the lower middle classes of the type that has powered the recovery in South America's largest country, Brazil. Tony Volpon, head of emerging market research for the Americas at Nomura Securities in New York, says part of the reason for this is that Chile's international banks have taken more conservative positions.

“Of all the economies in the region, the strongest and most consistent growth is in Chile right now,” says Mr Volpon. “Loan growth is expanding but not nearly at the pace that we had before the crisis and it has actually been the one missing piece in the equation.

“Big multinational banks, because they've had more problems in their home countries, have taken a more risk-averse attitude towards lending, because they've missed a little bit of the boom.” 

A safe play

Chile, a country of 17 million people, has a small, open economy and is vulnerable to swings in the price of copper. The central bank is playing things safe due to the possibility that commodity prices could lead to inflation, and the big banks are being relatively conservative on lending.

“We're seeing a slow, steady normalisation,” says Mr Volpon. “Santander, Banco de Chile, BBVA, they're not being as aggressive as one would expect.”

“This year we expect lending to grow between 15% and 17% for the system as a whole,” adds Mr Monge. “The delinquency level is about 2.6%. We have a 10% ratio of tangible common equity to risk-weighted assets. It's a solid system.”

In the plan to go after the lower-income population, Mr Monge says banks will rely on two strategies: performing better due diligence to understand the risk profiles of previously excluded consumers, and pressing for regulatory reform which will make that task easier.

“Banks need to do their homework and the government needs to level the playing field,” he says. “We have to improve our scoring processes, and develop tools for the input of all the information you have on clients. This means investing a lot of money, and then we have to do a lot of marketing to go where the clients are. They rarely come into branches, so we have to look for them in the streets and do it in a cost-effective way.”

“On the regulatory front, the industry has been asking for the integration of all the financial information that exists on clients, from banks and non-banks,” says Mr Monge. “As it is now we don't have a comprehensive view, so you see good clients being charged more than necessary.” There is a piece of legislation which takes a step in this direction, he says, and hopes it can be passed.

Consumer protection fears

Mr Olavarría sees a more ominous outlook on the regulatory front. “By far the major challenge for the future is the regulation being proposed by the government to parliament concerning consumer protection,” he says. “A new agency will have the power to see the contracts that the banking system has with the consumer, and will intervene in the case of any claims against the banks.”

“They're also enforcing a universal loan with the same set of pricing attributes, so it's easier for the consumer to compare the contracts,” says Mr Olavarría. He says that this was an effect of rhetoric in last year's presidential election, but that it will only mildly increase costs for banks, having instead the effect of making them concentrate on and differentiate bank service.

Chilean banks have other competition for consumer business though. “Banks face pretty tough competition from retail players in terms of commercial credit to buy cars and consumer goods. Retailers were, in many cases, faster in grasping the recovery than banks were,” says Axel Christensen, managing director at BlackRock in Santiago. “The retailer provides the direct credit and they fund themselves through short-term bonds and debentures in local financial markets.”

Surviving change and disaster

Chile came through the handover of power from Michelle Bachelet to Sebastián Piñera, the first right-of-centre elected Chilean leader in more than 50 years, smoothly. More surprisingly, the country came through its catastrophic earthquake in February 2010 without the financial sector suffering too badly, Chilean bankers reported.  

“Ironically enough, the earthquake was a major factor in generating growth, as projects for reconstruction needed to be financed,” says Mr Christensen. “Some banks, such as Banco de Chile, had some specific recovery plans, but there was also some luck involved because there was a whole weekend [after the quake hit] for banks to get their act together. Most banks had no real problem.”

Mr Olavarría says his bank did not even notice the financial effects much. “We didn't see a very big difference between the area affected by the earthquake and the rest of the geographical areas in terms of provisioning. There was some more but nothing that was really important,” he says. “And luckily, some 98% of mortgage holders had earthquake insurance, which was very fortunate.”

Concentrating on expanding the portfolio of mortgages and consumer loans may not be the only priority in the country for long, as corporate demand may catch up as the recovery unfolds. “Usually at this stage of the cycle individuals are more quick to react,” says Mr Monge, “And corporates come later.”

“As soon as real economic traction gains more steam, I assume we will see an increase in loan growth all over the place, including on the corporate side,” says Mr Christensen.

Little consolidation

On the local mergers and acquisitions front, bank deals have recently been few and far between. “There's only been minor activity,” says Mr Christensen. “The biggest transaction has been the merger of the local Citibank, a solid operation which is now disappearing into the ownership structure of Banco de Chile.”

Internationally, however, the region saw the technical merger of the stock exchanges of Peru, Chile and Colombia. This will prove good news for capital markets but not mean much directly in the short term for the big banks, says Mr Monge.

“For banks it's not very meaningful because they cannot own or buy shares. It's mostly good for customers who want to operate in those markets. We have a stock brokerage house, so it is an added benefit for operating it, but I would say most of the growth will be happening in time.”

“We believe we'll see more connection in the foreign exchange markets, and will be able to buy any currency from these countries directly,” says Mr Olavarría. “At times we used to have to go through the dollar or do something more cumbersome.” Another type of internationalisation may be coming from further afield, he says. “Trade financing is very good [and] is growing for us. But we are also seeing Chinese banks wanting to have a presence in Chile. I'd say they have a very clear strategy to follow their companies, which are looking for strategic positions on the commodity side.”

The reason for China's involvement in Chile, of course, is a familiar one: copper. And with commodities prices so volatile lately, Chilean policy-makers are surely nervous about what their swings could mean for the economy. But for the banking sector, these shifts are largely felt indirectly. For the next few years, they are counting on Chile to be what it has been for decades now: the safest and most stable country in Latin America.

Was this article helpful?

Thank you for your feedback!

Read more about:  Americas , Chile