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Chile: An Emerging Market Faces Developed Market Challenges

Chile is forecasting slower than anticipated growth throughout 2017 as the country makes its way towards fresh elections in November. How is the slowdown affecting the banking sector and investor perceptions of Chile? We speak with Emiliano Muratore, CFO at Banco Santander-Chile for more on this and the bank’s fundraising strategy.

Apr 21, 2017 // 4:48PM

What is the outlook on the Chilean economy this year? How do you think the banking sector will perform?

We are expecting GDP growth of around 1.5%, in line with current Central Bank forecasts; the Central Bank is currently forecasting GDP growth of between 1-2%, and will likely reach above 2% in 2018. It is lower than the best-case scenario – we would prefer to see the country growing at faster paces in line with previous periods – but we suspect that the upcoming elections later this year is playing some kind of role and weighing on short term growth to an extent.

On a positive note, we see the external environment turning quite favourable for Chile. Copper prices are rising while oil and other commodities are either rising or stabilising, which are both positive for the country, so we are expecting an economic rebound to above 2% GDP growth by 2018 once we have a new government place.

The Chilean banking sector has been performing quite well throughout this phase of slower growth, and the quality of bank balance sheets have not been materially deteriorated by a broader slowdown. Asset quality still remains high. It’s important to highlight that although the unemployment rate has been quite stable, there has been a significant transformation in the labour force – with a greater proportion of workers looking for freelance work or becoming self-employed, which has affected some lenders, but not Banco Santander-Chile. Most banks have been able to adapt their cost and risk-management practices successfully.

Political volatility has been a growing theme in Chile over the past year. What are you hearing from international investors – are they concerned politics will continue to remain a flashpoint or key driver of market sentiment until the forthcoming elections? How does that square with what you are hearing in the local market?

As a part of one of the largest banking groups in the world we have the opportunity to speak with a range of clients based in a number of markets. Increasing political volatility and social unrest has not been as influential on international perceptions of Chile as one might think; most international investors we speak with still feel Chile is a strong market with robust technical, despite lower than normal growth. The problems facing the country aren’t as severe as one might find in other markets - globally or in the region – for instance, in places like Brazil or Venezuela. Sentiment around Chile still tends to be fairly highly correlated with broad emerging market sentiment, particularly in equities, and that has been broadly favourable for the country.

Investment concerns tend to be focused on the domestic sphere, where concerns about low investment growth are already prevalent; political and social concerns feed into that to some extent, and many corporates and investors are still waiting for the political environment to stabilise before boosting expenditure.

Fortunately, this hasn’t stopped local companies from tapping into international markets. LATAM Airlines and CNPC saw very strong uptake on their recent issuances in the US market, for instance, which suggests appetite for Chilean top-tier names remains resilient.

Last year Banco Santander Chile became the first Chilean company to issue a bond in the Formosa market. Can you take us through the issuance process? How did your expectations evolve throughout the transaction?

We thought the market was quite attractive and carried a number of benefits, including the ability to continue working on the transaction documentation after pricing – much like one can in the swiss franc market. In that sense, producing all of the necessary documentation made the whole process more closely resemble a private placement, which makes it easier to execute.

Much like the swiss franc market, the investor base is fairly small, which makes it relatively easy to proceed with a roadshow and reach an extremely broad coverage of investors. The currency was also attractive. We had begun looking at Asian markets as a key source of funding about 8 years ago, particularly the Australian dollar and Japanese yen markets, but the ease of doing US dollar transactions in these markets is also crucial because about 10% of our loan book is denominated in US dollars.

It was an interesting transaction – particularly given that it was executed so closely after the US election. We were not anticipating the outcome, and there were concerns around how investors would interpret that risk within the context of our transaction, but we were fortunate in that it did note really have any impact on pricing.

What are the bank’s capital markets ambitions this year? Is Santander Chile looking to tap into new liquidity pools that it hasn’t previously? What are some of the drivers at work here?

We don’t have any substantial new capital needs as related to any big expenditures, though we will continue to monitor the markets in the event that we can take advantage of any liability management windows. We are looking to raise about US$1bn equivalent from the capital markets this year, which is substantially lower than the amount of debt we raised last year – a record US$3.8bn, split between the international and domestic markets. With loan growth looking a bit more subdued this year than in previous periods, we aren’t looking to expand our borrowing much more.

We are more or less looking at the same liquidity pools that have featured in our borrowing plans for the past 8 years. We are not looking to add any new currencies to our current funding platform, which is why we aren’t actively exploring new market. But we are cautiously monitoring some global markets where there could be an advantage to doing a US dollar transaction and diversifying our investor base – like the Formosa market.

The situation we find ourselves in now is remarkably similar to what we saw last year in that the domestic market seems much more favourable than any other market for fundraising, so most of our needs are likely to be covered in the Chilean market. The swiss market, particularly in the 10-year tenor, is the only market looking comparably attractive to the domestic market; as a result, it is probably the only market outside Chile we may look to place a transaction.

We have been bolstering our private placement capability over the past couple of years. That has proven to be a very effective way of reaching large European institutional investors; it provides a more efficient mechanism for doing smaller deals more frequently, so we are also likely to take advantage of this when we look to raise fresh euro funding;

To what extent do you see Basel III rules on capital requirements prompting more FIs to tap into the capital markets this year?

I don’t see it ramping up supply because the government has not proceeded as quickly as originally intended with the new banking law, which was supposed to provide more clarity on the market for hybrid instruments. This is a law that government announced two years ago, but still has yet to be sent to congress, and, given the election later this year, I would expect to see a longer delay. Until the law is passed, I do expect some lenders to substitute common equity with additional tier 1 capital issuances, but it is something I suspect will be done abroad because we don’t currently have a local market for these kinds of issuances. The banking sector is quite well capitalised at this point, so I wouldn’t expect many banks to be looking to these instruments as a way of hitting minimum regulatory capital thresholds, but these instruments could provide an interesting way of optimising and diversifying their debt capital base.

Americas Chile CFO Insights Latin America

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