Mar. 18, 2010 (Business Wire) -- After contacting the main banks in Chile, Fitch Ratings estimates that the country's banking sector is well prepared to absorb the effects of the earthquake and tsunami that hit the country in February. Although loan loss provisions will rise and it is too soon to know the exact amount, Fitch expects them to have a limited impact on the final return for the industry, as estimated with information gathered as of this date.
Though damage to the country's wealth stock is considerable and a little less so for the annual production flow (at most, one percentage point of GDP growth according to various local estimates), bank exposure to the most affected economic sectors (agriculture-forestry, construction, manufacturing and transportation) is dominated by lending to large corporations with solid financial profiles (see sector comments published by Fitch, available at 'www.fitchratings.cl'), as well as credit exposures guaranteed with real estate collateral that are generally covered by insurance against these events; in addition, roughly half of the exposure to individual borrowers corresponded to residential mortgages, which are also insured.
According to the regional information published by the banking regulator, the Superintendencia de Instituciones Financieras (SBIF) as of December 2009, the concentration of loans in the most affected VII and VIII regions is relatively limited and accounted for 6.9% of total loans, although the figure could increase when adding credits to large corporates and other local borrowers that have received their loans in Santiago but have operations in the affected area. Of this exposure, 33% corresponds to residential mortgage loans, of which over 95% include earthquake insurance, according to the information provided by the entities, so the loan to value ratio should not be significantly affected by the catastrophe, and hence, the increase of loan loss provisions should be low for these credits.
Consumer loans, meanwhile, represent around 20% of the total exposure in both regions, or 1.4% of total loans for the industry. These would be the most exposed to the eventual deterioration in credit risk, since there are no real collaterals, but only personal guarantees. The entities most exposed to this segment, whose results could potentially be more affected due to the increases in provisions during 2010, are the banks linked to commercial retailers, whose portfolios are less diversified and concentrated in personal loans. According to the available data, the exposure of those entities to the affected areas represent between 8.5% and 12.3% of their portfolio. In the case of the large universal banks, although they have the largest exposures in this segment, they are much lower relative to their total loan books.
The total exposure to the most affected economic sectors represent 23.1% of total lending in the two regions and 1.6% of the total financial system loans nationally and mainly relates to: agriculture (including cattle, forestry, fishing and wood products and infrastructure), construction, industry and transportation. In this respect, Fitch estimates that probably only a small fraction of this exposure should be linked to small- and medium-sized companies, which are likely to be the more affected due to their lower financial flexibility, since most of the Chilean banking sector (with the exception of Banco del Estado, the former Banco del Desarrollo [currently merged into Scotiabank], and the Banefe division of Banco Santander Chile) has been generally reluctant to finance this segment.
During the first week after the earthquake, financial institutions focused on a detailed survey of their risks and affected clients, generating specific plans for each segment and assessing the losses generated by the earthquake, and will also take actions for the retail banking segment (individuals and small companies) directed at facilitating payments that come due over the next 90 days. These actions include differing installments, renegotiations at preferential rates and availability of working capital financing for those clients who could go back to their normal activities once the basic services are reinstated in the affected zones.
The government, on the other hand, announced tax relief measures for six months for those families in the catastrophe zone, and informed of the budgetary flexibility there is to finance the necessary help from the state to face short-time financing needs (after the affected area was declared a 'catastrophe zone', fiscal spending became more flexible), as well as financing facilities from different multilateral organisms.
Although it is likely that delinquency levels could increase in the first half of 2010, as restructuring is generated and credit deterioration is confirmed, generating higher loan loss provisions, Fitch estimates this could be absorbed relatively well by financial institutions with the higher revenues expected for the year. The latter is based on higher commercial activity expected for 2010 (loan growth of at least 10%), with a rising positive inflation that benefits financial institutions inflation indexed assets and wider spreads.
It is very likely that reconstruction costs will require higher financing needs for the affected zones in all the segments, mainly those related to the construction of public infrastructure and housing, as well as those directed at the fishing sector, forestry, agriculture, and utilities. Consumer loans will be boosted by the need for home improvements, especially in the second half of the year, while mortgage financing will probably be slower as reconstruction begins and the specific portfolios with partially or completely deteriorated guarantees are identified (notably, in Chile the realization of a guarantee does not exclude the debtor from paying the debt). The existence of insurance coverage for earthquakes will help mitigate potential losses and Fitch expects that the new employment associated with the investments needed for the reconstruction will allow a strong credit flow for the zone.
Fitch will continue to monitor the situation in the coming weeks as more information on the specific effects of the earthquake on banking portfolios becomes available.
Additional information is available at 'www.fitchratings.com'.
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