Banco de Chile Earnings: Good Results Despite Lower Inflation Income and Higher Credit Costs

Narrow-moat-rated Banco de Chile BCH reported solid results despite difficult economic conditions in Chile, as the bank continues to materially outperform its closest peers. Net revenue decreased 11.6% from last year but rose 6.5% sequentially to CLP 748 billion. Net income fell 23% from last year, which translates to a return on average equity of 27.6%. There was little in the results to materially change our thesis behind Banco de Chile, and we do not plan to materially alter our fair value estimate of $21 per ADR share.

The decrease in revenue was due to lower net interest income, which decreased 17.1% to CLP 588 billion from last year. Like other Chilean banks, Banco de Chile has significant positive exposure to inflation through the use of inflation-indexed loans and assets. When the value of these loans rises with inflation, the bank treats the value of the adjustment as net interest income. The inflation index used to calculate the adjustment for these assets increased 1.44% during the quarter versus 4.28% last year, placing downward pressure on the bank’s net interest margin, which decreased to 4.99% from 6.45% last year.

On a more positive note, Banco de Chile’s noninterest income continues to perform well, increasing 7.1% to CLP 136 billion. The bank’s payment services and insurance segments led the way, with revenue rising 27% and 24%, respectively, to CLP 49.2 billion and CLP 30.7 billion. Charge-offs also showed signs of stabilization, increasing 94.9% from an unusually low CLP 51.5 billion last year, but only increasing 3% from last quarter to CLP 100.5 billion. Meanwhile, the bank’s over 90 days past due ratio increased to 1.28% from 1.22% last quarter, which is below the industry average. We do expect charge-offs to continue to rise as the Chilean economy remains weak, but rapidly falling inflation does raise the prospect that there is potential for a soft landing and the bank’s financial position is strong, with a common equity Tier 1 ratio of 13.46%