Sebastián Piñera, Chile’s former president and current presidential candidate
BBVA’s decision to open talks about selling its Chilean retail bank to Scotiabank could lead to a notable retrenchment of its Latin American operations.
BBVA has a large presence in Latin America, with significant banks in Argentina, Colombia, Mexico, Peru and Venezuela – as well as Chile where it is the country’s sixth largest. However BBVA’s management has in the past indicated that it believes its Chilean retail bank – valued at around €1.2 billion – lacks sufficient scale. That has led analysts to believe that the bank would look to merge with another bank or sell. BBVA has a 68% stake in BBVA Chile, while 29% belongs to the Chilean Said family and the rest of the shares are in free float.
A combination of very high valuations for potential targets (an opportunity for an attractive sale price) and a new banking law that could require a capital injection may be behind BBVA’s apparent decision to sell. The bank is not understood to be looking to sell its consumer finance operation in the country.
Chilean banks have been trading at very high valuations for some time: as an average the NTM (next 12 months) is trading two standard deviations above the five year average of between 12.7x and 12.9x. “This is a significant re-rating,” says a JPMorgan report on Chilean banks that concluded the high valuations in the Chilean market required downgrading Banco de Chile to neutral.
Chilean valuations certainly appear stretched in regional terms: Banco de Chile’s 14.3x and Santander Chile’s 15.1x expected 2018 P/E is above leading banks in Mexico (Banorte at 12.6x and Santander Mexico at 12.1x) Brazil (Bradesco at 10.8x, Itau at 11.0x and Santander Brasil at 10.6x) and Colombia (Bancolombia at 10.7x).
New banking law
Meanwhile, the country’s new banking law that adopts Basel III requirements for Chilean banks has been presented to Congress. The Ministry of Finance estimates that the system will require an additional $2.7 billion of capital. The additional capital requirement is expected to be concentrated to a small number of banks and Moody’s suggests that the banks with the largest need for extra capital are BancoEstado, Itau, Corpbanca and BBVA Chile. The law allows for a phasing in of the additional capital until 2024 and a sale of BBVA’s retail bank would pre-empt that requirement.
BBVA may also have concluded that the valuations prevented them targeting another Chilean bank to build sufficient scale.
“A common argument to defend additional upside is that consensus earnings are currently too low and not reflecting the better macro,” states the JPMorgan report before arguing that the market may be getting too far ahead of itself.
The market is clearly anticipating better growth following this November’s presidential elections (or December if a run off election is required). Former President Sebastián Piñera, who is with the centre-right coalition Chile Vamos, is expected to win and BNP Paribas says the election would likely be a catalyst for improving current pessimistic expectations and points to improving external factors which also play a role in renewed growth.
According to Florencia Vazquez, economist at BNP Paribas: “The global conditions Chile faces currently are positive. Copper prices are up 15% over the last three months, and global growth prospects are upbeat — a key variable for a small, open economy like Chile’s.
While JPMorgan also expects an increase in GDP growth next year (the bank predicts 2.9% against 1.2% this year) it points out that the high level of credit penetration in Chile means the multiplier of loan growth to GDP is limited to around levels that don’t justify the banks’ current valuations.
“We overall find it hard to see loan growth accelerating faster than 1.4x nominal GDP (2010-2014 multiplier average for the system) as the penetration levels, notably in business loans (the main beneficiary of potential GDP expansion in the first moment), are much higher now,” says the report. “Based on Bank for International Settlement (BIS) figures, Chile has 101% total corporate credit-to-GDP (as of 2016), higher than regional peers and above developed countries such as the US, UK, and Japan.”
While securing an acquisition in a market with these valuations poses a challenge for Scotiabank the addition of BBVA Chile would be a significant addition to the Canadian bank’s Latin American operation, which is now focused on the Pacific Alliance countries of Mexico, Peru, Chile and Colombia.
Moody’s says the deal would be credit negative for the Canadian bank but not “financially material” at around 3% of Scotiabank’s total assets (depending on final deal terms). The rating agency also said that: “Merging [Scotiabank’s] existing operations in Chile would create a stronger competitor than either has on a standalone basis. BBVA Chile’s credit strengths include asset quality and an established franchise, while its challenges are weak capitalization, modest profit margins reflecting a conservative loan mix and high costs, and a heavy reliance on wholesale funding.”
In a statement Scotiabank said: “At this time, no formal agreement is in place and there can be no assurance that this process will result in a final agreement.”