2008-08-11 23:47:02 -

- According to a new Fitch special report, entitled 'IFRS and their Impact on the Chilean Banking System', the introduction of IFRS (International Financial Reporting Standards) should significantly increase transparency within the Chilean banking industry, facilitating the implementation of Basel II, particularly Pillar III ('Market Discipline'). In Fitch's opinion, the impact on balance sheets is expected to be lower for

Chilean banks than it has been for most European banks, as Chilean banks have already been using fair value accounting for their investment portfolios and derivative contracts.

Fitch believes that in Chile's case, the greatest impact will stem from the recognition of 'impaired loan portfolios' and the switch to a different loan loss reserve methodology. However, since several banks currently follow Basel II guidelines for calculating loan loss reserves (using 'Probability of Default' and 'Loss Given Default' definitions), significant additional charges for this concept are unlikely.

A significant change will be the elimination of inflation accounting adjustments ('Correccion Monetaria') for non-monetary assets and liabilities, as in the past adjustments for inflation have generated losses when inflation was high and non-monetary liabilities (primarily equity) exceeded non-monetary assets (mostly fixed assets), which is the case for the banking system. The latter reduced net income, and thus a smaller net profit base was available for dividend payments generating an 'implicit capitalization'. In Fitch's opinion, the elimination of this adjustment in 2009 will lead to zero growth in equity stemming from inflation. As a result, a lower capitalization rate is anticipated for those banks that maintain maximum payout ratios. Thus, Fitch will closely monitor banks' dividend policies, particularly under scenarios of increasing inflation.

The implementation of IFRS by the Chilean banking industry was planned in three stages, with the first stage being carried out in June 2006, with the incorporation of fair value accounting for investment portfolios. The second stage, which commenced in January 2008, consisted primarily of the switch to new accounting formats (consistent with IFRS) defined by the Superintendencia de Bancos e Instituciones Financieras (SBIF). The process will be completed in January 2009, when fair value accounting will be applied towards all financial assets and liabilities.

The full special report is available on the agency's web site at www.fitchratings.com.

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