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Morningstar | Banco de Chile's Revenue Accelerates With a Rebounding Economy

Though narrow-moat Banco de Chile saw a 4.3 year-over-year decrease in net income, the bank continues to outperform our expectations. Credit provisions jumped nearly 90% from last year’s third quarter and were pretty much the only reason the bank saw lower net income during the quarter. Yes, a 90% increase in credit provisions seems incredibly high, but this is almost entirely attributable to a more conservative accounting standard. In addition, this change in credit loss models is a one-time adjustment and not reflective of declining credit quality. Excluding this one-time item, credit provisions would have been CLP 56.3 billion, a year-over-year increase of only 12.6%. With year-over-year GDP growth expected to be 3.2%, it is fair to say Chile’s economy has more than rebounded from the challenging economy of 2017. Given Banco de Chile’s outperformance, we’ll be making a few near-term adjustments to our model. However, we will be lowering our fair value estimate to $61 from $69, as the Chilean peso has weakened this year. Our model now assumes a 694 USD/CLP exchange rate as of Oct. 31.

Loan demand is definitely being driven by a rebounding Chilean economy. During the second quarter, Banco de Chile achieved sequential loan growth of 2%, representing growth of more than 8% when annualized. Much of this growth was generated by consumer loans that grew 2.8% from the previous quarter. Banco de Chile anticipates that the Chilean banking industry will grow loans by around 10% in 2019. It does appear that Banco de Chile’s competitors are increasingly willing to compete on price within consumer loans. Though Banco de Chile may see greater competition in consumer lending, management mentioned its hope of taking market share in wholesale lending. What intrigues us is that Banco de Chile is looking to accelerate its loan growth through improved technology enabled underwriting and a personalized pricing system.

We are impressed with Banco de Chile’s operations and specifically the bank’s focus on technology and updating its IT systems. Introducing a new CRM commercial platform doesn’t sound overly exciting, but to us, it’s the basic block and tackling of banking. Specifically, management mentioned decreasing the amount of time it takes to open an account from 25 minutes to 8 minutes. Though banks in North America all discuss improving technology and automating back office systems, Banco de Chile along with its peers, appear to do it with a greater urgency that we find somewhat impressive.