Chile Commercial Banking Report Q1 2009

The real macroeconomic effects of the global credit crunch have already begun to play out in Chile and we expect a continuation of this well into 2009. Collapsing global copper prices have seen Chilean exports fall by a staggering 24.4% year-on-year (y-o-y) in December, marking the largest drop in exports in a single month in over a decade. Chile’s trade surplus almost halved, to US$12.9bn from US$23.7bn, in 2007 on the back of anaemic export growth. Chile relies heavily on raw material exports and as such is vulnerable to the economic slowdown .The banking system will be particularly hard hit with asset and credit growth likely to fall both on the back of rising external borrowing costs and declining domestic demand for new loans. That said, we do stress that currently we are not forecasting a recession in Chile and the banking system in not expected to have a systemic crisis. As such, over a multi-year time horizon, we retain our view that Chile will be in a better position to recover.

This report is being written at a time when the global financial crisis – which arose as a result of the evaporation of inter-bank liquidity – has moved into a new phase. Stock market participants appear – reasonably – to have taken the view that the policy responses taken by governments, central banks and multi-lateral institutions will be sufficient to prevent a total collapse of the global financial system.

Instead, stock market participants are focusing on the impact of a near-global recession on the earnings of non-financial companies.

The number and size of stand-by facilities agreed by the IMF since early October supports our view that, of the emerging markets whose commercial banking sectors are surveyed by BMI, the countries of Central and Eastern Europe are those whose economies are most at risk of suffering adverse affects as a result of the global financial crisis. This is partly because the macroeconomic imbalances are relatively severe and partly because the Central and Eastern European countries are more directly affected by the brutal recession that is unfolding in wealthier member states of the EU.

As yet, it has not been possible to collate hard numbers, for most of the countries whose commercial banking sectors are surveyed by BMI, that clearly quantify the impact of the global financial crisis on the banks. As we explain in the section that discusses changes that we are making to the report, we again include a lengthy essay which attempts to identify the key issues. In essence, in the emerging markets – and, indeed, the developed countries – of the Asia-Pacific, commercial banks appear to be well placed to deal with the crisis. The same is, broadly, true of commercial banks in the various countries of the Middle East and North Africa. Latin America, Chile, Brazil, Mexico and Colombia appear better placed than Argentina, Venezuela, Bolivia and Ecuador. South Africa’s situation appears to have much in common with that of Brazil. In contrast, Nigeria faces some of the same challenges as those that confront Venezuela. The positions of most countries in Central and Eastern Europe, however, are alarming.

From Q209, we will include data that pertains to late 2008 and extend forecasts out to 2013. We will also incorporate much greater discussion of the various protagonists in each country’s commercial banking sector and a number of new features. We believe that the figures we compiled in mid-2008 provide insights as to how the various commercial banking sectors will fare in the current, extremely uncertain, climate. We have, therefore, left them essentially unchanged.

The figures on the tables above provide a snapshot of the banking sector in Chile prior to the onset of the global financial crisis. To place the figures in context, it may be useful to bear in mind certain aspects of the 59 countries whose banking sectors are currently surveyed by BMI. Across this sample, the median growth in assets in local currency terms was 21.3% (in Colombia). The median loan growth was 21.6% (in India). The median growth in deposits was 17.9% (in Brazil).

On their own, the ratios of loans to deposits, assets and GDP mean little. However, they can provide useful hints when combined with other data. Across the 59 countries, the median loan/deposit ratio is 92.3% (in Greece). The median loan/asset ratio is 56.0% (in Poland). The median loan/GDP ratio was 63.9% in India.

As in previous reports, we include a SWOT analysis for Chile. We suggest that the two most important of these are government stability and the commitment to focus on positive action to mitigate the effects of the global financial crisis. Market concentration in the banking sector also remains low, so there is still incentive for players to grow their business through increased market shares. In contrast, there are weaknesses such as the exposure of the economy to the global economic downturn, or the recession.

Deposits per-capita in Chile are also the highest in the region and as such are vulnerable to a slowdown.

Since Q108 we have calculated, on a consistent basis, a Commercial Bank Business Environment Rating (CBBER) for each of the 59 countries surveyed. The CBBER includes an assessment of the limits of potential returns. It does this by taking into account the size, growth potential and bancassurance potential of the banking sector, as well as aspects of the economy in 2007. The CBBER also depends on an assessment of the risks to the realisation of potential returns. This reflects BMI’s assessments of overall country risk, together with the regulatory and competitive environment.

Chile’s overall CBBER is 62.4. Within the limits to potential returns, the banking elements and the country elements are almost evenly rated, with scores of 60.6 and 62.5 respectively. Within the risks to the realisation of potential returns, however, the banking elements are much more highly rated, with scores of 80.0 and 54.7 respectively.