No credit bubble, significant spillover from La Polar scandal - BofA Merrill Lynch

Wednesday, June 29, 2011

Following the recently unveiled scandal at Chile's fourth largest retailer, La Polar, Bank of America Merrill Lynch (BofA Merrill Lynch) said there are no signs pointing to a potential credit bubble or spillover from the news that will impact the overall economy, a research note reads.

On June 9, La Polar announced that it might have to set aside as much as 200bn pesos (US$430mn) in provisions for bad loans in its credit card portfolio and that it would restructure its management. But later on June 17, the retailer hiked that estimate to 538bn pesos.

"The exposure of the financial sector to La Polar seems to be low. One source of spillover would be if financial institutions had significant exposure to La Polar. However, we believe the exposure is low. As of May, 0.21% of pension fund's assets were in La Polar stocks and 0.24% in bonds," BofA Merrill Lynch analyst Marcos Buscaglia wrote.

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Buscaglia added that he does not expect significant changes in loan expansion rates, but noted that a deceleration could come from "changes in retailers' or banks' credit policies, and/or from regulatory policy changes," although it is too early to tell.


Regarding loan growth, Buscaglia said that it has not expanded "at abnormal rates in recent months," noting that as of May, bank credit was growing 9.4% year-on-year in inflation-adjusted terms, below the average increase for other countries in the region.

"This is not surprising given that total loan (to the private sector) penetration is close to 77% of GDP in Chile, compared to 46.9% in Brazil, and in the low 10% in Argentina and Mexico," Buscaglia wrote.

The analyst added that even though consumer loans grew at a faster pace than total loans in 4Q10 and 1Q11, they are not growing at unsustainable levels, as they have expanded at a significantly slower pace than in 2002-07.

But Buscaglia acknowledged that credit card financing's strong expansion remains a concern, even if the overall percentage of past-due consumer loans is at a very low level.