2 of the World's Best Banks to Own

Morningstar recently upgraded two Chilean bank stocks to wide moat:

We consider Banco De Chile and Banco Santander Chile to be the best-run banks in their home country and also two of the best-managed banks 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 their 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 also 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 positions 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. We assign a fair value estimate of $74 to Banco de Chile and a fair value estimate of $25 to Banco Santander Chile.

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