Money flows south

Chile is developing a strong financial services sector, based on its political stability, strong savings rate, and low lending rates.

The best benchmark for the growth of the Chilean financial sector? As in many countries, it seems to be the sprouting number of skyscrapers that dot Las Condes, the neighborhood of Santiago that hosts many of Chile’s roughly 20 banks, 60 insurance companies, and numerous asset management companies.

Finance is Chile’s hottest economic engine, thanks in large part to the country’s stability, down-to-earth economic policies, and governance. Financial services already represent 16% of Chilean GDP, as much as mining.

“Chile remains a small financial platform,” explains Alejandro Alarcon, head of ABIF, Chile’s banking association. “Our total banking assets are the same as that of one large Brazilian bank.”

Although small, Chile lies on sound bases, as explains Lionel Olavarria, chairman of BCI, Chile’s third largest bank: “Our 1982 financial crisis – remember the petrodollars? – ensured that we cleaned up our banking framework and instilled some healthy competition. It also freed our currency from its previous dollar peg.”

“One of the most important drivers of our financial sector is the tremendously high savings rate,” pursues Joaquin Echenique of Primamerica Consultores, a consulting firm specialized in insurance. “Because there are no company retirement plans, and only a limited government retirement plan, almost two-thirds of the Chilean working population have private pension plans, managed via five asset management firms.”

The Chilean savings rate is currently an astounding 21.6%, placing Chile in the ranks of the top frugal countries worldwide. The country’s mandatory savings system for all dependent employees certainly helps. Also of assistance to the financial sector is the fact that the Chilean government has been in regular budget surplus for the past years.

Growth via openness

Surely the openness of Chile’s financial market – namely to foreign investors – has been an important driving factor. “Under our constitution, domestic and foreign investors have the same rights. The suspension of the reserve requirement, and the elimination of the one-year minimum requirement have also been strong growth factors,” emphasizes Mr. Alarcon.

banking1Chile’s banking sector underwent some structural reform in 1997, when the capital market laws helped enforce market deregulation. Further openness was achieved in the early 2000s under president Ricardo Lagos, when the capital account was opened, and tax levels were reduced (namely capital gains tax and withholding tax).

Chile currently has 20 banks, of which the largest is Santander, followed by Banco de Chile (see table). Foreign banks poured into the country when the sector opened up to foreign investment. Aside from Santander, other players from abroad include Scotia Bank, Itau, Deutsche Bank, HSBC and others. “There is still good growth potential for banks, as there subsists a substantial number of Chileans without bank accounts,” says Mr. Olavarria of BCI.

With this vast pool of savings to invest, it will come as no surprise that Chile has experienced fast growth. “Mutual funds have had 20% compound annual growth over the past ten years,” expounds Valentin Carril of Principal Financial. “Our biggest challenge is to find good investments in Chile, especially since Chile Central Bank bonds yield only around 3%.”

Further growth can be expected due to Chile’s low risk premium, as Felipe Bosselin, deputy chairman of the Association of Mutual Funds, explains: “Our prudent macro-economic management has translated into a low risk premium, which will mean a lower external funding cost for Chilean companies and therefore an increasing investment portfolio.”

It does not help that Chile’s stock exchanges are not the most dynamic. “We need to work on that front,” says Mr. Alarcon. “Our Bolsa de Comercio is old and not very deep with an insufficient amount of titles traded. The more recent Bolsa Electronica, which operates between Chilean banks, could speed things up.” Another boost could come from commodity markets, especially since Chile is home to so much mineral production.

The extension of the Chilean exchanges could also facilitate the integration with other South American countries, as explains Mr. Olavarria of BCI: “I trust our new government to be more active in this area, and also hopefully in helping to create a separate high-yield market for small-cap companies. Chile needs more investment opportunities, especially since many companies are family-controlled and therefore inaccessible to outside investors.” ●

For more information:
ABIF (Association of Chilean Banks and Financial Institutions)
Jorge Awad, Chairman, + 56 2 892 2802

Success Story
Growth factors

What will drive the further growth of the Chilean financial sector? At least three factors shine through.

The underlying economic growth of Chile will have its normal multiplier effect on the sector. “Chile has a good economic system that weathered the recession well and enables the country to pull ahead quickly. Growth will be derived from the reconstruction and rebuilding projects,” purports Mr. Hassi of MetLife. The expected 6% growth for 2010 will probably be followed by higher levels thereafter, he pursues.

Novel marketing techniques, combined with a non-saturated market also mean growth will remain healthy in the near future. “We experimented with direct marketing and telemarketing in 2007, and although it represents a small portion of sales, it shows good promise,” says Hassi of Metlife. “Another growth factor has been the extension of our network of branches nationwide.”

“The increasing globalization of our business is a key driver,” explains Mr. de la Barra of Compass Group. “The outlook is very positive outlook for the next five years. Much investment is coming in.” For Compass, the sectors showing the best promise include healthcare, education, infrastructure and real estate, which never suffered from a bubble so the market fundamentals are strong. “Education is one area I would stress,” says Mr. de la Barra. “There is a current deficit which needs to be addressed. There is also a need for school construction, especially post-earthquake.”