Chilean banks: Piñera’s win final ingredient for strong 2018

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By:
Rob Dwyer
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GDP growth expected to drive acceleration in credit demand; Santander Chile’s CFO expects BBVA to sell to Scotia.

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Sebastián Piñera celebrates his victory in the Chilean presidential election

Senior bankers in Chile expect a triumvirate of positive factors to make 2018 a much more positive year for banking performance than this year: lower political risk, higher GDP growth and favourable competitive dynamics in the banking market.

First, the clarification of Sebastián Piñera as the country’s next president, announced on Sunday, removes a long-lingering political risk that has weighed on credit demand from both corporates (investment decisions) and individuals (consumption).

Piñera won 54% of the low turnout – less than 50% of the electorate – and will take over from socialist president Michelle Bachelet in a clear move to the right for Chile.

His campaign commitments included a pledge to “simplify and reduce the burden caused by the tax reform”, which includes “gradually reducing the corporate tax rate to match the OECD average” and “perfecting the gaps and problems of the labour reform”.

Piñera was the market-friendly candidate and his victory should ensure that the second positive factor – a strong and broad-based economic recovery under way since mid-2017 – should be maintained.

Mining sector

Not only has the economically vital mining sector been showing a strong rebound since its record contraction in the first half of 2017, the previous governments’ efforts to diversify the economy seem to be working. Manufacturing growth is now in positive territory and there has been an acceleration in domestic retail sales and both import and export activity.

Alberto Ramos, economist for Goldman Sachs, points out that real GDP growth was accelerating in the second half of 2017 – even with the political uncertainty from the surprisingly close presidential election.

“Real GDP growth accelerated to 2.2% year on year in 3Q2017, the strongest figure since 2016,” he says. “Mining GDP posted a strong 7.5% YoY expansion in 3Q2017, the first positive figure after the contractions in each of the previous eight quarters, and we expect it to contribute meaningfully to growth through 2018.”

Goldman estimates that the carry-over from mining expansion will be significant: if output remained at October 2017 levels for the following year it would equate to a sectorial growth of 5.5% in 2018 – equivalent to 0.6 percentage points of GDP.

Claudio Soto, chief economist for Santander Chile, believes Chilean banks will benefit from a potential doubling of GDP growth in 2017 (2.5% to 3% from 1.5% in 2017). Soto says that will lead to credit growth, and he expects Santander to see loan growth of between 6% to 8% – again double 2017’s result.

Higher credit growth will help offset the end of the positive effect for banks of the easing cycle – the Chilean central bank cut base rates by 100 basis points in the course of the year – which benefited the banks “as the repricing of funding occurs quicker than that of loans”.

In 2018, the banks’ cost of credit should stabilize, meaning growth will need to come from a pick-up in credit volumes.

BBVA Chile sale

Meanwhile, Santander Chile’s CFO Emiliano Muratore says the large banks should benefit from continued consolidation in the Chilean market. Itaú’s partial acquisition of CorpBanca is expected to be followed by a sale of BBVA Chile to Scotiabank – the banks have been holding exclusive talks since the middle of 2017 and an announcement is expected shortly.

Analysts say that BBVA Chile had been unable to achieve sufficient scale to generate the profitability seen by its other Latin American banks. Also, high valuations for Chilean banks made non-organic growth expensive and the expected need to inject capital into the bank to make it compliant with a new banking law have all led to BBVA’s decision to explore an exit from Chile.

Muratore hints that he expects this announcement to confirm Scotia’s acquisition, saying: “That is a transaction that looks like it will finally happen and it will increase the concentration of the system,” he says. “There will be six banks concentrating about 90% of assets, liabilities and income.”

“We think that this merger would be relatively positive [for Santander] in the short run, as we saw with Itaú and CorpBanca. The first two or three years creates problems in execution and implementation in mergers of these sizes and so that’s a commercial positive for the rest.”

He also says smaller organizations have to try to grow organically through price competition and expects a merger of BBVA and Scotia to lessen this dynamic.

“BBVA and Scotiabank will have a market share of about 15% – that’s a relevant critical mass – and that’s also positive as we have seen strong pressure on prices as they have been trying to achieve organic growth,” he says.

However, he add that competition is – and will remain – high for the higher-income retail segment that is a focus of Santander Chile.

“Most of the [Chilean] banks are focusing on the same segment, but we have been able to grow the asset quality mix there,” says Muratore.

“We expect the competition to remain strong, but we are confident we can keep winning market share and we also see some room to get into some lower segments – medium to low segments where we don’t see such high levels of competition.”