Timothy Puls: Today, we'd like to highlight two Chilean banks that we recently upgraded to wide moat--Banco Santander Chile (BSAC) and Banco De Chile (BCH). We've upgraded these two banks to wide moat primarily because of the tremendous earnings power that each bank possesses--which is illustrated by historical returns on equity of over 20% for each bank--as well as our recent assessment that Chile's banking system is a good and, therefore, stable banking environment.
We consider Banco De Chile and Banco Santander Chile to be the best-run banks in their home country but also two of the best in all of Latin America. Both banks command a nearly 20% share of the Chilean deposit market, which contributes to a funding cost advantage over peers.
Banco Santander Chile distinguishes itself from its main rival in that it has been a particularly lean operator, consistently reporting an efficiency ratio of below 45%, which should continue given the bank's ability to draw upon the power of its global parent. And while Banco De Chile also is an efficient operator, it stands out from the competition with dependably low credit losses that no Chilean peer has been able to match.
These cost advantages give both banks the ability to compete aggressively for new business, protecting their position as the best banks in Chile. As such, we expect both Banco Santander Chile and Banco De Chile to continue to generate high-teens returns on equity for many years--well in excess of the 10% estimated cost of equity we assign for the banks.
Our assessment of Chile as a good and stable banking environment draws on four key factors: First, the country has a credible and effective regulatory system, and a political environment that supports economic activity. Additionally, competition makes the system profitable for nearly all participants. And finally, we continue to have a positive outlook on the macroeconomic environment.
Given this backdrop, we think current valuations for both banks offer an attractive investment opportunity for investors to own these banks, though we favor Banco Santander Chile on the basis of its larger discount to fair value.