Chilean banks, which already were bracing for fallout from political turmoil, are now also having to contend with a global health pandemic that is threatening the country’s economy.
Widespread and prolonged social unrest in the latter months of 2019 — spurred initially by a hike in metro fares that subsequently exploded into a constitutional crisis — led to Chile’s weakest economic performances in a decade. GDP contracted 2.1% year over year in the fourth quarter, reversing from a 3.4% expansion in the previous quarter. Both exports and imports declined, consumer spending shrank, and the country’s currency started to show signs of weakening.
The situation battered bank profits. The country’s three major private banks — Banco de Credito e Inversiones SA, Banco Santander Chile and Banco de Chile — posted an aggregate 16.3% drop in quarterly net income as loan growth stalled and asset write-downs jumped by more than 65%.
he coronavirus pandemic is now adding further strain to Chile’s economic issues. While the pace of new COVID-19 cases has been slower in Chile compared to some other parts of Latin America, the global economic fallout has been substantial. The price of copper, which represents nearly half of all Chilean exports, has sunk nearly 23% since the start of the year, while the Chilean peso has lost about 16.5% of its value against the U.S. dollar over that time frame.
“Coronavirus crisis adds to the shock they already suffered,” Sergi Lanau, deputy chief economist at the Institute of International Finance, said in an interview. “There will be a growth cost to lower copper prices.”
Less lending, more asset risks
For banks, experts believe that the latest crisis could impact already-weakened operational figures: loan growth and provisions. And at least part of the threat comes indirectly from the copper industry.
By and large, Chilean banks have little direct exposure to the mining sector; but weaker exports of copper and other commodities can hammer the local currency, which does impact banks’ balance sheets, particularly those with large U.S. dollar loan portfolios. A weaker peso, experts say, will increase banks’ dollar-loan contributions to risk-weighted assets, which in turn constrains their lending capacity.
“So long as the exchange rate keeps going up, banks will have less capacity to increase lending,” ICR Chile, a local rating agency, wrote in a recent report.
Quinn Markwith, an emerging markets economist with Capital Economics, expects the price of copper to fall by up to another 20% before rebounded at year-end, which he says “will probably cause the peso to blow out just a bit more, toward 900 per dollar.” That suggests another 6% drop from the peso’s March 30 per-dollar price of 847.94.
Intervention measures
Still, government intervention measures could help ease the pain for banks. “Rather than an all-out banking crisis what will be more likely is the type of stress that will require further intervention,” Markwith said in an interview.
The economist noted that Chile’s central bank has “adequate ammunition” to mitigate the economic consequences of the coronavirus outbreak.
Already, Banco Central de Chile and the country’s financial regulator have introduced a flurry of changes aimed as mitigating the economic impact of the pandemic — delaying the implementation timetable for Basel III, loosening up provision and liquidity requirements, and offering relief to borrowers. The central bank also dropped its benchmark interest rate by 75 basis points, to 1.0%, while the Chilean government injected the state-run Banco del Estado de Chile with $500 million in capital to support specific sectors.
“The government is really trying to keep the credit engine running,” said Mariela Urbina, a senior financial institution analyst with ICR Chile. Still, loan expectations have dwindled, with estimates now ranging between 4% and 6% compared to 10% previously.
Urbina also expects to see “a significant impact” on asset quality, though noted that new programs that will allow borrowers options to defer or restructure their debt will soften the blow on reported figures and prevent a “drastic deterioration.”
“If [the crisis is] short-lived, we will never see those [higher delinquency] numbers,” she said. “Borrowers will catch up before we notice.”
Importantly, however, the ICR Chile analyst believes that banks will remain profitable. “Banks will obviously give up the profits that they used to have, but it won’t be an industry that will lose money either,” she said.
As of March 30, US$1 was equivalent to 847.94 Chilean pesos.
