The banking sector in Chile, where Canada’s Bank of Nova Scotia recently signed a major deal, is ripe for further merger and acquisition activity, says Fitch Ratings.

In a new report, Fitch says that it sees a rising likelihood of M&A activity in the Chilean banking sector, which could consolidate some of the country’s middle-tier banks. “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,” it says.

The report notes that foreign banks are already significant players in the Chilean market, holding 50% of the banking system’s total assets. The top foreign players in the country include Banco Santander Chile, BBVA Chile, Itau Chile, and Scotiabank Chile, it says.

Last week, Scotiabank announced the closing a of 15-year joint venture deal with retailer, Cencosud S.A., bolstering its position in the Chilean banking market and making it one of the country’s top credit card issuers.

Smaller foreign players include JP Morgan Chase Bank, N.A., HSBC Bank (Chile), Tokyo Mitsubishi, Deutsche Bank, and Rabobank.

Fitch says that 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 has the second-highest banking penetration in Latin America, behind Panama, Fitch reports; yet it says that it still sees solid long-term growth prospects for the market.

Moreover, it suggests that the country’s middle tier banks are facing some competitive disadvantages, given their weaker funding, and increasing competition from non-bank lenders and large retailers that offer banking services. “Latin America’s weak macroeconomic conditions have helped hold valuations to levels we believe improve the chances for bringing in acquirers,” it adds.

And, Fitch says that there’s already a healthy M&A environment in the country; pointing to Scotia’s recent deal, among others. Indeed, another possible catalyst for more M&A, Fitch says, is Banco Penta, “which is exploring a wider range of sale options in the wake of the scandal involving top management.”

“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,” Fitch says. “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.”