Chile's banking sector faced a tough year in 2009 when the full brunt of the global financial crisis hit the country and the national economy began to contract.
However, banks managed to show a very good performance during that difficult year with the sector posting handsome profits while keeping their loan books healthy.
This year was supposed to be a particularly good year for Chilean banks as a strong recovery of the local economy was expected, and as a result, a return to robust loan demand. Local ratings agency Humphreys predicted on February 24 that loans would expand 10% this year after contracting 0.5% in 2009.
Banks' core business, lending, would once again be the driver of profits this year after 2009 had trading gains and efficiency improvements as profit drivers.
However, only a few days after Humphreys loan forecast, a magnitude-8.8 earthquake struck Chile - together with a tsunami - that made headlines around the world. It turned out to be the fifth largest quake in history and had a devastating impact, killing hundreds, leaving millions homeless and producing major destruction and damage to infrastructure and business in the most affected areas.
So instead of comfortably riding along on the country's economic recovery, Chilean banks were once again faced with an uncertain and what seemed a highly adverse scenario this year.
Roughly a month after the quake, it now seems that 2010 could still be a fairly good year for banks due to the resilience of the economy and a massive reconstruction process.
The Chilean economy contracted 1.5% last year and was expected to be among the fastest growing Latin American countries this year, with GDP expanding in the range of 4.5-5%.
This projection was immediately put into doubt after the devastating quake. But some weeks later, economy minister Juan Andrés Fontaine came out and said the government was still expecting 4.5-5% GDP growth for this year despite the earthquake.
The government of President Sebastian Piñera has estimated the economic cost of the quake to be approximately US$30bn.
The logic behind the government's still optimistic GDP forecast is that the quake would slow down growth in the first half, but the reconstruction effort would push up growth again in the second half of the year.
Barclays Capital said in a research note after the quake that the impact on economic growth would be "short-lived."
However, Moody's Economy.com issued a report recently saying that the Chilean economy would indeed lose steam this year, expanding around 4% instead of the pre-quake estimation of around 5% due to the impact from infrastructure damage, reduced investments, production and job losses.
Even if the economy would "only" expand 4% this year then it would still represent a fairly good figure for the banking sector, especially compared to last year's contraction.
Experts say it is still early to estimate the quake's impact on loan growth, but some predict it will be less than the 10% forecasted by Humphreys.
Aldo Reyes, partner at Humphreys, is one of those experts who now believes lending will come in somewhere below 10% this year due to the quake, for the same reasons that Moody's Economy.com downgraded its GDP projection for Chile.
"Today there are many decisions that have been frozen, and when you leave business projects paralyzed it means less loan demand," he said.
The second half will be "very dynamic" due to the re-investment in damaged infrastructure and the overall reconstruction process, said Reyes. However, it is still difficult to estimate how much the second half will compensate for the drop in the first half since a significant part of the reconstruction will take place in 2011, he noted.
Universidad de Santiago finance professor Francisco Castañeda says that the quake has - at least in the short term - affected the future expectations of Chilean families, which as a result will save more and spend less. The impact on banks - particularly in the first half - will be reduced demand for both mortgage and consumer loans, said Castañeda.
In terms of commercial loans, he said the biggest impact will be seen in the SME segment in the areas most affected by the quake. Chilean micro enterprise and SME trade group Conapyme has estimated its losses from the quake and the tsunami to be at least US$5bn.
Even if banks are today restructuring loans with many SMEs in those areas, they are likely to become stricter in terms of approving new loans for the SME sector, he noted.
Castañeda also predicts that loans will grow less than 10% this year as a result of the quake, although he believes it's too early to give a more definite loan forecast for the year.
It is always hard to find a consensus on forecasts among several experts, and ratings agency Fitch does see lending expanding 10% this year despite the quake impact.
THE STATE BECOMES KEY FIGURE AGAIN
Chile's only state bank, BancoEstado, played a key role last year in mitigating the negative impact of the crisis and the economic downturn; at a time when private sector banks restricted their lending due to the higher perception of risk. In the process, BancoEstado gained significant loan market share and climbed up to third place on the bank ranking.
This is something that could repeat itself this year since the government will actively use the bank to reduce the financial hardships on people and businesses most affected by the quake. The country's largest private banks have also been very proactive since the quake struck in helping their clients with a great variety of solutions to avoid a massive surge in loan defaults. However, they will probably become more restrictive in granting new loans and charge more for the loans they grant as a result of the quake.
State-run loan guarantee fund Fogape is also likely to again play a significant role this year in ensuring that credit flows to ailing and cash-strapped micro and small-sized enterprises.
Fogape issued a record number of guarantees last year due to the crisis and the economic downturn.
The fund closed 2009 with approximately 52,000 loan operations backed with its guarantees, compared to 24,079 in 2008. The previous record had been set in 2004 when the fund guaranteed 34,714 loans.
Chilean banks showed last year they could perform well despite a deep global crisis and economic contraction at home. This year, facing the effects of one of the largest earthquakes in history, they will show their resilience again. They are financially prepared to face the increase in non-performing loans which the quake will inevitably produce, and probably see their loan books grow around 10% or a slightly less.