Banco Santander Chile Earnings: Lower Inflation and High Cost of Funds Pressure Results

Narrow moat-rated Banco Santander Chile’s BSAC first-quarter results showed that the bank’s net interest margin, or NIM, remains under heavy pressure from lower inflation and rising funding costs, though profitability did materially improve from last quarter thanks to strong noninterest income. Net revenue was down 16% year over year but up 8.5% sequentially to CLP 489.2 billion. Meanwhile, earnings per ADR share fell 42.4% from last year and rose 33.3% from last quarter to $0.36, which translates to a return on equity of 10.1%. As we incorporate these results, we do not plan to materially alter our $21 per ADR share fair value estimate for Banco Santander Chile.

The year-over-year decrease in revenue was driven by lower net interest income, which fell 35% from last year and was effectively flat sequentially. The decline is due to net interest margin contraction, with the bank’s NIM falling from 3.7% last year to 2.2% as lower inflation and the bank’s rising cost of funds pressured results. Banco Santander has a significant amount of inflation-indexed loans on its balance sheet, and the inflation-based readjustments feed into the bank’s NIM. Inflation readjustment income fell 50% from last year to CLP 101.5 billion as inflation in Chile declines. Additionally, the bank’s customers are exhibiting cash sorting behavior, with demand deposits falling 18.2% year over year while the bank’s higher-yielding time deposits have increased 40.4% over the same period. This, along with rising interest rates, has led the bank’s cost of funds to rise to 6.8% from 2.9% last year.

On a more positive note, the bank’s noninterest income impressed during the quarter, increasing 34% year over year and 20% sequentially to CLP 129.9 billion, offsetting some of the downward pressure from the bank’s lower NIM. Card fees and insurance brokerage remain the largest drivers of fee-based growth, with revenue from the two segments increasing 32.9% and 42.1%, respectively, over the last year.