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S&P Global Ratings (Note: This is an abridged version of the press release. Read the full release)
BUENOS AIRES (S&P Global Ratings) Aug. 4, 2017--S&P Global Ratings affirmed the ratings on the following entities and removed the ratings from CreditWatch negative:
At the same time, we assigned a negative outlook on these entities. The rating actions reflect our view of the higher risk of economic imbalances resulting from the modest increase in the sovereign's exposure to external shocks (due to prolonged low economic growth and its deteriorating macroeconomic profile), and our belief that this will be moderated by a slowing growth in credit and real estate prices.
Credit growth in Chile slowed to 5.7% in 2016 from 10.7% in 2015, as a result of softer economic conditions and business confidence that dented investments and corporate loan growth. The growth of mortgage lending also slowed in 2016 after the implementation of the VAT tax on home purchases and the higher requirements of provisions established by regulators (based on the combination of loan to value of the loans and days in arrears). The latter prompted banks to tighten their underwriting standards. We expect modest credit growth to continue in 2017 at nominal rates of about 5% amid lower investments, and to improve to about 8% in 2018 with better economic conditions. As a result, we estimate that total loans will increase on average at less than 2 percentage points of GDP over the next four years, as of 2017, and the system loans will account for about 87% of GDP.
On the other hand, increases in property prices over the last few years markedly decelerated in 2016. According to the index published by the Chilean central bank on new and used units nationally, property prices increased by 2% in 2016, compared with a 6.8% growth in 2015 due to the implementation of the VAT tax on home purchases, higher down payment requirements from financial institutions, and less favorable employment conditions (given the rising unemployment rate and some erosion in quality of jobs). According to the index calculated by the Chamber of Construction of Chile of new units in Santiago and the metropolitan area, prices declined by 1.8% in 2016, compared to an increase of 4.4% in 2015. We expect the growth of property prices in real terms in 2017 to be at slower than historical levels.
However, the dynamics in real estate prices depend on factors such as inventories of available units, interest rates on loans (which are at historically low levels), the number of unfulfilled promises for house purchases, and regulations for construction in Santiago. Construction restrictions in high-demand areas could exert pressure on prices. Because of these factors, the economic risk trend in our assessment of the Banking Industry Country Risk Assessment (BICRA) continues to be negative. This is why the outlook on the ratings on the nine financial institutions is negative.
We maintained our BICRA score on Chile at group '3', which anchors banks operating in Chile at 'bbb+'. Our bank criteria uses our BICRA economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. A BICRA is scored on a scale from '1' to '10', ranging from the lowest-risk banking systems (group '1') to the highest-risk (group '10'). The trend on economic risk remains negative and the industry risk trend as stable.
The economic risk assessment within BICRA is '4'. This reflects a high-risk assessment of economic resilience, a low-risk assessment of economic imbalances, and an intermediate-risk assessment of credit risk in the economy. Credit expansion will remain a concern, coupled with the real estate price growth. Economic recovery may propel a new period of rapid credit growth and pressure upwards houses prices. Such a development is likely to create increasing economic imbalances in the system and lead us to revise the economic risk score.
In addition, the industry risk assessment within BICRA is '3'. This reflects a low-risk institutional framework assessment, an intermediate-risk competitive dynamics, and a low-risk systemwide funding assessment.
The negative outlook on the entities reflects our view that there is at least a one-in-three chance that we could downgrade them if lending growth and property prices stop decelerating, leading to pressures on economic imbalances, given Chile's already weakened external position.
We could revise the outlook to stable over the next 12 to 24 months if the slowdown in property prices and credit growth continues, offsetting the worsening external position of the Chilean economy.