Fitch: Chile's Banking Sector Ripe for M&A Activity

Chile's banking sector has a rising likelihood for merger and acquisition activity, which could consolidate some of the country's middle-tier banks, says Fitch Ratings. The maturity and quality of Chile's banking sector, the opportunity created by the possible sale of smaller banks, and a shifting landscape in the country's consumer financing market may bring more investment from regional and international foreign banks, which Fitch believes could be a positive for target banks.

The Chilean market is viewed as attractive due to its history of stability and steady growth, as well as a solid regulatory framework and strong supervision. Chile's middle tier banks face some competitive disadvantages with larger peers given their weaker funding and increasing competition from non-bank lenders and large retailers that offer banking services. Chile has the second-highest banking penetration in Latin America, behind Panama; nonetheless, Fitch still sees solid long-term growth prospects for the Chilean market.

Latin America's weak macroeconomic conditions have helped hold valuations to levels we believe improve the chances for bringing in acquirers. Another catalyst for more M&A is Banco Penta, which is exploring a wider range of sale options in the wake of the scandal involving top management. Penta maintains about US$1.8 billion in assets and has roughly 0.9% market share in corporate and commercial loans. Its troubles prompted initial attempts to sell the bank in January in a package deal that would have included the group's investment bank, stock brokerage and an insurance company. The unsuccessful effort thus far to find a buyer is helping to keep bank valuations in check, but possibilities remain open for an acquiring bank with an adequate balance sheet.

Historically, there has been a size premium on the valuations of Chile's banks, with the largest firms attracting top valuations. In the current environment, we believe that the large established local banks are likely to remain on the sidelines given their market shares and already highly diversified businesses. Smaller and middle-tier firms would more likely be active and ultimately the beneficiaries of any growth and scale that comes with M&A. Regional banks in Latin America, notably Colombian and Peruvian banks, are among the potential acquirers, in our view. Furthermore, international banks seeking local banking licenses may find the market attractive as banking licenses for new banking operations may exceed one year.

Already, there has been a healthy M&A environment in the country. Recent transactions include Itau Corpbanca, which soon will become the fourth-largest bank in Chile, and Scotiabank's joint-venture with Cencosud in its credit card business. Banco Paris, a small niche bank related to Cencosud, was put on sale recently; while Banco Ripley last year absorbed the credit card business of its related retailer.

The landscape for Chile's banks includes 24 institutions, with the largest six managing 78% of the system's assets. There already is significant participation from foreign banks, which hold 50% of the system's total assets. Foreign bank platforms in the country include Banco Santander Chile (the largest bank), BBVA Chile, Itau Chile and Scotiabank Chile. Other smaller foreign players include JP Morgan Chase Bank, N.A., HSBC Bank (Chile), Tokyo Mitsubishi, Deutsche Bank, and Rabobank. Meanwhile, Banco de Chile is still minority owned by Citi.


A previous example of large-scale M&A in Chile was Brazilian investment bank BTG Pactual, which acquired a large Chilean brokerage house in 2011, later converting it into a bank with the strategy to expand its footprint in the region.