Chile Commercial Banking Report

Key Issues

The Chilean commercial banking sector has been growing strongly. This has been the result of the strength of the Chilean economy which has impacted positively on confidence and lending. Aside from their deposits, most aspects of the commercial banks' balance sheets have been growing strongly. Loans have been growing faster than assets, deposits and nominal GDP. The result of this is that the loan/asset, loan/deposit and loan/GDP ratios have all risen over the last year or so even though, by most standards, they were already at fairly high levels. Deposit growth was much weaker than loan growth, at 5.6%, and amongst the lowest rates of growth in the group of 59 countries surveyed. This is not surprising considering that Chile's deposits per capita are already the highest in the Latin American region and actually more in line with middle-income countries in Eastern Europe than with the developing countries. The weak deposit growth is also testament to the low reliability of the deposit base as the single source to fund Chile's strong loan growth. Alternative sources of funding such as securitisation (introduced in Chile in 1994) are however available to satisfy demand for credit.

The continuing development of the Chilean banking system is not without challenges. One is that stronger loan growth could lead to asset quality problems due to laxer underwriting standards. Analysts have in fact forecast that the past-due loan ratio will begin to rise in the second half of 2006 after reaching a record low in July. Another challenge is posed by the possibility of another quarter of decelerated real GDP growth following the slowdown suffered in Q206. However, we remain positive regarding the Chilean economy going forward.

Changes To This Quarter's Commercial Banking Forecast

We have made a number of improvements to the commercial banking reports this quarter. In particular, we have collated information about banks' capital and bond portfolios.

We have looked at capital primarily because we wanted to produce a clearer picture of the banks' balance sheets and, in particular, the liabilities side. We are now much better able to quantify liabilities that are not deposits.

We collated information about the bond portfolios because we wanted to gain additional insights about the risks with which the banks are involved. Across all the countries that we have surveyed, the commercial banks are major investors in government securities. In some instances, the banks are large holders of bonds - by any standard. In other instances, the banks' holdings of securities represent a very substantial portion of their total assets.