Chilean banks continue to see asset quality improvement

The Chilean banking sector's results through July 2015 continue to show a mix of sound credit quality, reasonable asset growth and stable profitability, in spite of sluggish macroeconomic growth during the first half of 2015, says Fitch Ratings.

The July data release from Chile's banking regulator also showed operating income increasing, recovering net interest margins and costs contained, which helps to counterbalance the economic slowdown.

Although loan loss provisions increased, asset quality across the sector continues to surprise with nonperforming loans improving to 2.01 percent of total gross loans at July 2015. NPLs declined in all portfolios, including consumer loans, which improved to 2.04 percent from 2.09 percent one year before. The trend reflects the conservative credit risk appetite from banks after important changes in regulatory and operating environment since 2011. It also highlights a more cautious approach toward short and medium-term lending.

Significant M&A activity has occurred in 2015, including among smaller banks. Fitch expects the M&A trend may continue in the short and medium term. The landscape for Chile's banks includes 24 institutions, with the largest five managing 72 percent of the system's consolidated assets. Foreign banks hold 35 percent of the system's total assets. The forthcoming Itau-Corpbanca merger will concentrate the system even more next year, reaching more than 75 percent of total assets in five banks.