Banco de Chile Earnings: Lower Inflation Is a Headwind to Results, but Credit Quality Is Stabilizing

Narrow-moat-rated Banco de Chile BCH reported decent third-quarter results, despite falling inflation acting as a headwind to the bank’s earnings. Net revenue decreased 12.4% from last year and 8.8% sequentially to CLP 681.9 billion. Meanwhile, net income fell 23.4% from last year to CLP 260 billion. Despite the decline, these earnings still translate to a return on average equity of 21%, an excellent result as Banco de Chile is coming off a cyclical high in profitability. As we incorporate these results, we do not expect to materially change our $21 fair value estimate for Banco de Chile. We see the shares as roughly fairly valued.

The decrease in revenue was entirely driven by lower net interest income, which decreased 30% from last year to CLP 407 billion. 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 only increased 0.3% during the quarter versus 3.5% last year, causing the bank’s inflation adjustment income to collapse 88.6% to CLP 30.8 billion. This placed downward pressure on the bank’s net interest margin, which decreased to 4.16% from 5.77% last year.

Banco de Chile’s credit costs are stabilizing with the bank’s expected credit loss expense declining 43% from last year to CLP 60.5 billion as the firm reduced reserves. Charge-offs were up 89.5% from unusually low levels last year but were down 4.8% from last quarter at CLP 95.7 billion. Additionally, the bank’s over 90 days past due ratio was effectively unchanged from last quarter at 1.35%. Economic risks for the Chilean economy remain, but with both inflation and interest rates declining, prospects for a soft landing are growing, which would have a positive effect on our credit and loan growth projections for Banco de Chile.