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After battling with this year's first half GDP contraction, higher provision expenses, complicated negotiations with the salmon industry and stagnant loan growth, Chilean banks are on track to enjoy a more relaxed ride in 2H09 and 2010 as analysts have begun to see some "green shoots" in the local economy.
In 4Q08 Chile's GDP contracted from the previous quarter at an annualized rate of 7.9%. The bulk of the contraction that began in 3Q08 was due to a drop in internal demand - which accounts for about two thirds of the country's GDP.
This led banks to prioritize keeping past-due loan ratios under control and managing their balance sheet mismatch between the local currency and the country's inflation-linked unit - the UF - at the expense of loan growth.
According to local financial services firm Celfin, the financial system posted a weak 2.9% growth in loans during the 12 months to end-June.
This increase was driven by a 7.1% annual acceleration in corporate loans, while loans granted to individuals expanded 2.2% annually. Within retail loans, housing loans rose 10.9% while consumer loans increased by just 0.4% in the year ended June.
While the "green shoots" of economic recovery are still incipient, they do exist: economic sentiment and the local stock market are up, sales of non-durables have improved, mining production is down less in annual terms; and monthly inflation is stabilizing after negative figures since 4Q08.
But on the other hand, industrial production is still down 10% year-on-year, and unemployment continues to increase. Unemployment in the country rose to 10.2% in March-May, the highest rate in four years, according to the latest figures from government statistics agency INE.
According to a recent report by Moody's, major Latin American economies are estimated to report GDP declines of around 1% in 2009, owing to their stabilizing labor markets and a rebound in domestic demand. In this context, Peru and Brazil appear poised to lead the way out of the woods by the end of 2009, followed by Chile, Colombia and Mexico, while Argentina and Venezuela may lag behind.
In 1Q09 the annualized rate of GDP contraction in Chile had slowed to 2.5%, and the figure for 2Q09 will still be negative, but positive readings should start in 3Q09, according to Celfin.
JUNE: THE TURNING POINT?
Banks earned 82.8bn pesos (currently US$153mn) in June alone, 0.73% more than in the previous month, according to the latest report by banking regulator Sbif. On a monthly basis, banks' net profits declined 33% year-on-year - adjusting for monetary correction - mostly as a result of a 14.8% fall in net interest margin due to negative inflation and a 50% increase in provisions.
Second quarter results were better than expected, showing that net income rebounded from a weak 1Q09, in-line with the trends already seen through May, Deutsche Bank (NYSE: DB) said in a report.
But bank results will continue to be under pressure over the coming months given lower inflation figures compared to 2008 - the consensus points to 0.1% inflation for 2009 - as well as increased provision expenses. However, growth in the latter has been showing a significant monthly decline in June and May compared to the previous months of the year.
Chilean banks benefit from inflation because they have a greater amount of assets than liabilities denominated in the UF inflation-linked unit. The 12-month consumer price index in June was 1.9%.
Higher provisions were prompted by the industry's negotiations with the country's ailing salmon industry. Some analysts believe banks had to set aside some US$400mn in additional provisions over the last few months due to the industry's woes.
But despite the fact that recent successful renegotiations with the salmon industry's largest companies mitigated a significant risk variable, analysts believe uncertainty about the evolution of credit quality still persists.
The banking system's asset quality deteriorated in June, with the non-performing loan ratio worsening to 3.16% as of end-June compared to 3.03% at the end of May, according to Sbif figures.
All things considered, analysts believe that June should mark a turning point, partly because a series of recent central bank measures ought to spur credit demand - and inflation should start moving towards the monetary entity's 2-4% target range over the rest of the year.
Earlier this month, the central bank cut the country's benchmark lending rate by 25 basis points to a record low of 0.5% and implemented additional measures to achieve inflation targets as well as align financial asset prices with monetary policy.
The central bank's so-called quantitative measures include the creation of a "short-term liquidity facility" (FLAP) to provide liquidity in 90-180 days at the monetary policy rate. According to local press, banks have already asked the monetary entity for some US$1.31bn through this tool since it was introduced two weeks ago.
The central bank's measures will have a positive effect on banks by lowering funding costs, which should translate into cheaper credit in coming months and thus boost loan activity, but not before 2010.
According to Banchile, loans will grow a mere 1.1% this year as banks are focusing their efforts on containing risk and managing their mismatch between pesos and UFs, but added that loan growth should jump to 9.9% in 2010 as the Chilean economy begins to recover.
"In the long term, we believe the highest growth potential lies in the retail sector, which would regain its growth trend as the local economy cycle recovers," Banchile said in a report, basing its forecast on the country's still-low banking penetration ratios. According to the brokerage, Chilean households' debt to disposable income ratio amounts to 57%, while in developed countries this indicator reaches 118%.
Thanks to an aggressive interest rate-cut strategy, state-owned BancoEstado has been raising the industry's growth ratios, by growing its overall lending 18.7% in the 12 months to end-June, helped by a 26.1% increase in corporate loans and 10.3% growth in retail loans.
On the other hand, the country's second largest bank Banco de Chile (NYSE: BCH) has lost almost one percentage point of market share in the last year as the bank has mostly focused on risk management.
On Monday (Jul 27), finance minister Andrés Velasco applied further pressure to private banks to lower rates.
"At the beginning of the year, banks said [loan] demand was slow, and that people were not asking for credit," he said, adding that the central bank's recent financial stability report demonstrates the trend has reverted.
"Individuals are looking for credit, and not only mortgages. So there is room for that demand to meet an increased supply. And if private banks cannot fulfill this need, BancoEstado can do it very actively," he said.
Chilean banks booked a combined 530bn-peso net profit in the first half of 2009. The regulator does not provide comparative year-on-year figures due to the recent adoption of new accounting rules based on international financial reporting standards (IFRS).