Banco Santander Chile Earnings: Interest Income Falls Because of Low Inflation and High Funding Costs

Narrow-moat-rated Banco Santander Chile BSAC reported decent second-quarter results that were in line with our expectations, as rising cost of funds and higher credit costs were partially offset by strong cost management. The bank’s revenue decreased 22.7% from last year to CLP 967.7 billion. Net income decreased 48.5% year over year to CLP 272.6 billion, which translates to a return on equity of 13%, modestly below the firm’s long-term average. There was nothing in Banco Santander Chile’s earnings that changed our thesis on the bank, and as we incorporate these results, we do not plan to alter our $21 fair value estimate per ADR share.

The drop in revenue was due to lower net interest and readjustment income, which fell 52.1% from last year and 8.2% from last quarter. The decline was primarily driven by a contracting net interest margin, with the firm’s NIM falling to 2.2% from 4.5% last year as the combination of falling inflation and high short-term rates pressure the bank’s margins. Banco Santander Chile has a significant amount of inflation-indexed loans on its balance sheet, and the inflation-based readjustments feed into the bank’s NIM. As inflation in Chile falls from its peak, inflation readjustment income fell 67.5% from last year to CLP 129.5 billion.

Additionally, the bank’s cost of funds rose faster than its average asset yield as the yield curve in Chile has become deeply inverted, with the bank’s funding costs increasing to 7.1%, 3.08% higher than last year. That said, with inflation in Chile falling sharply, interest rates will likely begin to decline soon. This will relieve pressure on the bank’s funding costs, and we expect its NIM to recover in 2024.

On a more positive note, the bank continues to do a good job at managing its expenses. Operating expenses fell 7.5% year over year and grew 2% sequentially to CLP 439 million. This allowed the bank to maintain its efficiency ratio at 46.3%, a decent result despite the drop in net interest income.