OREANDA-NEWS. New loan loss provisions for mortgages implemented by the Chilean banking regulator in January raised the loan reserve requirement for Chilean banks by USD150 million, according to Fitch Ratings' estimates. Although the new requirements were generally met with existing loan reserves, the new provisioning model will strengthen Chilean banks' loan reserve buffers for mortgages in the medium term, which is important following five years of strong mortgage growth.

The new provisioning model is based on days past due, loss given default, and uses, for the first time, the loan-to-value ratio. This measure is the key driver for the increase in provisions; mortgages grew 13.2% annually on average between 2010 and 2015.

Most banks accounted for the change in 2015, although some only made the adjustment in their January monthly financial statements. We estimate Banco del Estado de Chile (Banco Estado) had the largest requirements, but had approximately USD370m in voluntary reserves for mortgages to meet the higher charges. Banco Estado began building its voluntary reserves in 2009, which was prudent since its mortgage portfolio accounts for approximately one-third of gross loans and has a high concentration of low-income borrowers.

Other large private banks were less affected and typically financed the higher loan reserve requirement with existing additional reserves. In our view, these reserves are high enough to manage this financing. Banco Santander's (BSC) reserve coverage was 127% of non-performing loans (NPLs), while Banco Credito e Inversiones' (BCI's) was 158% as of December 31, 2015. Only Banco Corpbanca booked the cost of complying in its January financial figures. Its reserve coverage was higher at 186%. The impact on mid-sized and niche banks was less material.

We believe that Chilean banks are in a good position to resist a third consecutive year of economic slowdown, and the sector has been building loan reserves. As of January 31, Chilean banks overall had reserves of 1.6x past-due loans over 90 days, up from 1.4x. The mortgage sector maintains low levels of NPLs at 1.9% in January 2016, down from 2.1% a year earlier on the banks' conservative credit risk appetites after tightening in the regulatory framework in 2011. However, Fitch believes NPLs are likely to rise as the Chilean economic slowdown continues.

Slow economic growth, decreasing operating revenues and rising credit costs will also continue to pressure Chilean bank earnings in 2016-2017. Chilean banks earned CLP100billion (USD143 million) in net profits in January 2016, down 10% YOY, according to data released by Chile's banking regulator.