Banks to experience narrower spreads in 2011 after profits surge 26.2% last year

- Monday, January 31, 2011

Banks to experience narrower spreads in 2011 after profits surge 26.2% last year

Despite that the central bank is expected to increase benchmark interest rates this year, Chilean banks will likely see spreads narrow in 2011 given increased competition, for which they are preparing by bolstering their equity bases, Fitch senior director Eduardo Santibáñez told BNamericas.

"I think credit consumers will benefit this year from a wider supply compared with previous years, which will pressure spreads," he said.

Over the last few weeks, some of the country's largest banks have announced capitalization plans to get ready for a more dynamic loan expansion scenario in 2011.

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Banks' net profits were up 26.2% in 2010 compared with the previous year to 1.58tn pesos (US$3.28bn), according to a report published Monday by banking regulator SBIF.

The system's interest income was up 11.2% to 3.72tn pesos, with fee income rising 9.04% to 1.14tn pesos in 2010.

Provisions fell 21.8% to 1tn pesos last year, and administrative expenses increased 6.21% to 2.51tn pesos.

Santander Chile (NYSE: SAN) and Banco de Chile (NYSE: BCH) continued as the top two banks, earning 479bn pesos and 379bn pesos last year, respectively.

However, the system's earnings were down 84.1% in December compared with the previous month to 136bn pesos, mainly due to higher voluntary provision rules set to come into effect in 2011 but that banks decided to bring forward last year, SBIF said.

LENDING UP 5.12%

According to SBIF, net loans rose 5.12% as of December 31 compared with the same time in 2009 to 76tn pesos, fueled by consumer loans - which rose 9.25% - and mortgage lending, which expanded by 8.95%. Corporate lending - the system's largest segment - was up 4.33% to 45.6tn pesos.

A good chunk of last year's loan growth was spurred by low interest rates. In early January, the country's central bank unexpectedly left the benchmark interest rate unchanged at 3.25%, halting a tightening process that began from a record low of 0.5% in June 2010.

Market observers such as financial services firm Celfin have said that interest rates will continue to be expansionary this year, and that they expect the benchmark interest rate to end 2011 at 5.25%.

The banking system's non-performing loan (NPL) ratio stood at 2.71% at the end of December, compared with 2.75% at the end of the previous month, SBIF said.