Fitch Publishes Peer Review of Large Chilean Banks
As part of its Nov. 9, 2015 peer review, Fitch had affirmed the National ratings for the following: Banco Santander Chile (SAN), Banco de Chile (BCH), Banco Estado (Banco Estado) and Banco Credito e Inversiones (BCI). In addition, Fitch affirmed the Long-Term Issuer Default Ratings (IDRs) and Viability Ratings (VRs) for SAN, Banco Estado and BCI. Fitch had also revised the Rating Outlook for BCI's Long-term IDRs and National long-term rating to Positive from Stable.
Each of the entities' ratings considered their dominant competitive positions, stable operating environment and solid regulatory framework, as well as healthy risk appetite, asset quality and profitability. The Outlook for BCI's Long-term IDRs and National rating was revised to Positive from Stable to reflect the positive trend in financial metrics observed in recent years.
Despite the low-growth environment in Chile (GPD growth 2.1% over the past 12 months), which has lead to slower loan growth during 2015. The large Chilean banks have shown resilience trough the cycles and have a track record of consistent results despite the economic slowdown in Chile and international volatility. These banks have faced the challenges with more predictable profitability levels, greater internal generation of capital and higher portfolio quality than their regional peers.
The large Chilean banks exhibit a solid risk management framework based on local regulatory standards and robust corporate governance practices, adequate provisioning and controlled impairment levels. Corporate portfolio concentrations reflect the small size and relatively concentrated nature of the local market, where these entities play a key role in the economy's funding chain. Notably, concentration levels are not excessive.
Fitch believes that the main Chilean banks exhibit solid liquidity and asset-liability management, adequate diversification of their funding sources, and a stable client deposit base. Their strong market shares reflect their robust franchises and the confidence they enjoy from their depositors, even during periods of stress in the financial markets. In addition, the deep local capital market gives Chilean banks access to significant amounts of long-term funding.
The banking system continues to be challenged to increase its core capital to support future growth in the context of lower profitability and likely higher requirements as Basel III rules are adopted. The replacement of complementary capital instruments that currently do not absorb losses before the entity reaches non-viability will be a key issue and the local regulator still hasn't established the parameters for a possible improvement in complementary capital.
Local regulations keep pushing Chilean banks to implement best practices, particularly in terms of provisioning, corporate governance and, more recently, liquidity to comply with the LCR and NSFR concepts of Basel III. In Fitch's opinion, progress towards Basel III capital requirements would be positive for the industry, as it would converge toward stricter international standards. Fitch expects the law reform will likely not be approved during 2016 and that the implementation of the new rules will be gradual, as has been the case in most countries.
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