Fitch: Chilean Banks Helped by Inflation-Indexing Assets
The August data release from Chile's banking regulator showed that while operating income was up and net interest margins (NIM) improved, consolidated net income fell 7.3% in the year ending Aug. 31. Loan loss provisions rose by 16% versus the end of July, but were down 2% from one year prior. The provision increase in August is explained by local currency devaluation hurting commercial borrowers, thus affecting commercial loan portfolios.
The sector continues to maintain a sound level of nonperforming loans (NPLs), which improved to 2.02% of total gross loans at August 2015 (versus 2.15% one year before and 2.03% in July 2015). NPLs declined in most portfolios and remained stable in commercial loans. The trend reflects the conservative credit risk appetite from banks after important changes in the regulatory and operating environment since 2011. Total loan loss reserves, including additional reserves over the regulatory requirement, remain ample, with coverage of 1.45x the total past-due loans over 90 days.
Through August 2015, the banking system's gross loans, excluding lending by foreign subsidiaries, increased by 11.4% over the prior one-year period, up from 10.4% at year-end 2014 and versus a slightly lower level of 11.1% for the one-year period ending July 2015. Notable areas of impact within the overall system include slower expansion in commercial and corporate loans (up 9.3% year over year compared to 15.5% in July 2015), stable mortgage loans (up 15.6% year over year), and consumer loan portfolio growth of 10.3% year over year.
Despite the current trends, Fitch expects that loan growth and asset quality will likely show a weaker performance in fourth-quarter 2015 and well into 2016, due to the economic slowdown, higher expected unemployment and exchange rate volatility, all factors that will likely result in a rise in credit costs. By year-end 2015, Chile's GDP will have been held at an average real growth of under 2% for two years. Moreover, the slow recovery is expected to continue in 2016-2017.
Consolidated system results, excluding foreign subsidiaries, reached CLP1.427 billion, a 7.3% decline from one year ago but a solid 14.5% increase over July 2015. Fitch expects this trend to continue for the last four months of 2015 and produce a strengthening of net interest income, since annual inflation is now projected to rise to 4.5% according to market consensus. However, any improvements from better NIMs will likely be offset by higher loan loss provisions.