Banco Santander Chile Earnings: Falling Inflation Cuts Into Revenue and Net Income

Narrow-moat-rated Banco Santander Chile BSAC reported weak third-quarter earnings that were in line with our expectations, as falling inflation compressed the bank’s profitability. Net revenue fell 21.3% from last year and 10.9% from last quarter to CLP 426 billion. Meanwhile, net income decreased 54% year over year to CLP 334 billion, which translates to a return on equity of 5.4%, well below the bank’s historical average. As we incorporate these results, we do not plan to change our fair value estimate of $18 per ADR share, and we see the shares as roughly fairly valued.

The drop in the bank’s earnings was due to lower net interest and readjustment income, which fell 42% from last year to CLP 211 billion. Like other Chilean banks, Banco Santander 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 only 0.3% during the recent quarter versus 3.5% in the year-ago period, causing the bank’s inflation adjustment income to collapse 91.7% year over year to CLP 20.4 billion. This pushed its net interest margin, or NIM, down to 1.6% from 3.0% last year as the bank still suffers from a high cost of funds.

On a more positive note, Chile’s central bank has begun to decrease interest rates with the latest rate cut bringing the country’s benchmark rate down to 9.50% from a peak of 11.25% earlier this year. This has removed upward pressure on the bank’s cost of funds, which fell to 6.6% from 7.3% last quarter. With inflation in Chile in the midsingle digits, we expect interest rates in Chile to continue to fall over time, which will benefit the bank’s funding costs. As a result, we expect its NIM will begin to recover in 2024 and that the bank should return to more normal levels of profitability over time.