Chile’s financial industry has developed significantly over the last 20 years, achieving a high level of consolidation. However, when focusing on some of its members, for example banks, pension fund administrators, brokers dealers and asset managers, one may observe very unalike contexts. These significant differences generate different opportunities for such industry players.
On the one hand, the banks and the pension fund administrators (AFP) have been subjected to stringent regulations and fiscal supervision: the Superintendence of Banks and Financial Institutions (SBIF) currently monitors the banks and the Superintendence of Pensions (SP) now oversees the AFPs. High regulatory barriers have deterred new entries into the industry. Thus, during the last decades, these industries have undergone multiple merger processes, resulting in significant industry concentration.
Additionally, the banks and the AFPs have experienced high-growth periods which have led to increased business volumes. This has encouraged banks to assume considerable scales, encompassing increased operating efficiency. But, such scales have a price. The high organisational complexity reached by these players has brought about new challenges regarding their ability to capitalise the broad array of clients and products that they now enjoy.
In this context, these organisations have left interstices that allow the entry of new competitors with niche strategies, such as retail banks and investment banks with leaner organisational structures that enable them to move about more expeditiously.
On the other hand are broker dealers and asset managers; both of them governed by the Superintendence of Securities and Insurance Companies (SVS). These players have had a lesser degree of regulation, allowing for a large number of incumbents.
All things considered, the fact remains that the size of the two industries is relatively small – reason why their current high level of fragmentation is not sustainable. Furthermore, during the last few years, Chile’s capital market regulations have deepened, thereby increasing their operational costs.
In conclusion, the size of these industries, their high level of fragmentation, and the new regulatory environment – which is likely to continue to increasing player costs – should logically be followed by a process of consolidation and intensive M&A activity (see Fig. 1).
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