Taxes Proving Gift to Chile Banks as Reform Spurs LoansEduardo Thomson
Chile’s biggest tax increases in its 200-year history and seven consecutive months of accelerating inflation are turning into a boon for bank stocks.
President Michelle Bachelet’s tax plan has helped drive a 20 percent rally for Chilean financial stocks over the past year, or 10 times the return of the benchmark index. Fidelity Investments predicts the lenders will be among Latin America’s most profitable as higher corporate tax rates fuel borrowing to fund capital spending. Euroamerica AGF is betting that Banco Santander Chile’s earnings will grow as faster consumer-price increases boost interest payments on inflation-linked loans.
Banks are a bright spot in an economy forecast to slow for a third consecutive year. Corporate lending rose 8.9 percent in the first quarter after credit to the private sector reached the highest in Latin America as a percentage of gross domestic product at the end of 2013. While the market capitalization of lenders has doubled since 2009 to $42 billion, valuations near a four-year low relative to regional peers and a pick-up in inflation bolster the appeal of the industry’s stocks, said Javier Brstilo at Banco de Credito e Inversiones in Santiago.
“The single most important factor for bank earnings in Chile is inflation,” Brstilo, who helps manage $550 million in stocks including Banco Santander Chile and Banco de Chile, said in a telephone interview. “Earlier this year, everybody expected lower inflation, and we’ve seen one surprise after another. We’ve been long on some bank stocks and doing well.”
Business loans in Chile grew to 65.3 trillion pesos at the end of March, according to data from the central bank. Earnings at Chilean lenders surged 44 percent in the first four months of 2014 from a year earlier to a record 814 billion pesos ($1.47 billion), according to the banking regulator.
Banco Santander Chile, the local unit of Spain’s Banco Santander SA, reported a 75 percent increase in first-quarter profit, surpassing analyst estimates by 15 percent. Net income at Banco de Chile, the country’s largest lender by assets, will increase 8 percent this year to a record, according to the average projection of six analysts surveyed by Bloomberg.
Chilean banks will benefit from faster consumer-price increases because most of them lend in inflation-indexed Unidades de Fomento and receive deposits in pesos, said Mauricio Canas, the head of equity research at Santiago-based Banco Penta. As prices increase, they can boost the value of assets versus liabilities and count that as earnings, he said. More than half of Chilean bank loans are tied to inflation, the most in the region, according to the central bank.
Annual inflation accelerated to 4.7 percent in May, and consumer prices will probably remain above the 2 percent to 4 percent target range for a few more months, central bank President Rodrigo Vergara said June 16.
“The return on assets that Chilean banks generate is among the highest in the region, and their valuations have improved a lot,” Adam Kutas, who helps manage about $1.5 billion in equities at Fidelity, including shares of Banco Santander Chile and Banco de Chile, said in a telephone interview from Boston.
While Banco Santander Chile has rallied 21 percent this year through yesterday, the most among lenders in the IPSA equity index, its valuation is still 5 percent below its five-year average, according to data compiled by Bloomberg based on trailing earnings. Banco de Credito e Inversiones’s price-earnings ratio has dropped to 10.5 from a record 16.11 in January 2011.
The IPSA Index retreated 0.2 percent at the close in Santiago. Banco Santander Chile dropped 0.8 percent while Banco de Chile declined 0.9 percent.
The MSCI Chile Financials Index is trading at 12.1 times earnings, 1.7 percent below the valuation of the MSCI Latin America Financial Index, data compiled by Bloomberg show. The spread was 6.9 percent on April 29, the widest since June 2010.
“That’s definitely a very bullish signal,” said Roberto Lampl, who manages $120 million at London-based Alquity Investment Management Ltd., including shares of Banco de Chile. The tax reform will drive an increase in demand for loans to small- and medium-size enterprises, he said.
Bachelet’s tax overhaul seeks to raise about three percentage points of gross domestic product, or $8.2 billion, for spending on education and other social programs. Chile has the highest inequality indicators among all members of the Organization of Economic Cooperation and Development.
The measure was approved by the lower house in May, and the Senate may vote on the bill in August. Final approval may come in September, after lower-house lawmakers vote again.
Measures include the elimination of a mechanism created during the dictatorship of Augusto Pinochet, known as FUT, that enables companies to defer tax payments indefinitely on profit that was retained for future investment.
“This puts an end to a steady source of capital to fund growth,” said Francisco Klapp, an economist at Santiago-based researcher Libertad y Desarrollo, which was founded by the creator of the FUT. “Company owners will have to obtain loans to finance their day-to-day operations.”
While the tax changes could boost demand for loans, they may also damp economic growth, according to Pedro Letelier, who helps manage $17 million in stocks at Santiago-based Corpbanca Administradora General de Fondos SA.
“We’ve already seen most of the upside,” Letelier, whose Corp. Seleccion Nacional fund sold some of its Banco Santander and Banco de Chile shares in May, said in a phone interview.
Chile’s GDP expanded 2.6 percent in the first quarter from a year earlier, the slowest pace since 2010. The economy will grow 3.3 percent this year, down from 4.1 percent in 2013, according to the median of 19 estimates compiled by Bloomberg.
Citigroup Inc.’s Banchile Inversiones cut its year-end estimate for the IPSA to 4,100 from 4,200 on May 19, saying that a faster-than-expected economic slowdown and tax changes will curb investment and corporate profit. The IPSA has gained 1.9 percent over the past year to 3,893.83, the worst performance among Latin American stock benchmarks.
Banks are an exception to the slump as their earnings will probably grow in this environment, according to Jorge Rivera, a money manager at Euroamerica, which has Banco de Chile and BCI in its portfolio.
“Lenders started to rally this year as a defensive sector amid the economic slowdown, and now they’re gaining more because of higher-than-expected inflation,” Rivera, who helps oversee $40 million, said in a telephone interview from Santiago. “Bank stocks still have some more room to go.”