EUR 850.00 For Business Accounts Only

Morningstar | Despite Cybersecurity Incident, Banco de Chile's Fortunes Rise With the Chilean Economy.

Narrow-moat Banco de Chile is clearly benefiting from Chile's improving economy. During the second quarter, the bank's year-over-year loan growth improved to 5.9%, a 230-basis-point acceleration from the previous quarter. In addition, Banco de Chile saw its loan originations increase by more than 100% from the first quarter. As you might expect, this led to a significant improvement in Banco de Chile's net operating income. For the quarter, the bank produced CLP 192 billion in operating income, a 13% sequential improvement. Modest increases in net interest income and modest decreases in provisions drove much of this improvement. We'll be increasing our fair value estimate to $67 per ADR share, but only as a result of the time value of money. We continue to believe that Banco de Chile is a well-managed bank in South America. However, the stock is trading at more than 3 times book value and at more than a 40% premium to our fair value estimate.

As mentioned, it was an impressive quarter for Banco de Chile's loan growth. Much of the bank's acceleration in loan growth came from commercial loans which grew 5.1% from the previous year. This was driven by increased demand for foreign trade loans and large corporate loans. Overall, we think the increase in credit demand bodes well in the short term for Banco de Chile. Chile has seen upward revisions to its GDP growth forecast and the country is now expected to grow GDP by 4%, which should help lift interest rates and potentially enable the bank to earn a better spread on existing loans. During the quarter, the bank benefited from improving net interest margins that increased by 18 basis points from the previous quarter.

Like its major peer, Banco de Chile saw significant growth in its deposit base. Specifically, demand deposits grew by 5.6% from the previous quarter. Through the end of June, Banco de Chile held onto its lead as having the lowest cost of funding in Chile. However, the gap closed slightly during the period. For the quarter, Banco de Chile's cost of funding was 2.6% while Santander Chile's cost of funding was 2.7%, a gap of only 10 basis points. Last quarter, Banco de Chile's cost of funding was 2.5% while Santander Chile's was in line with this quarter.

One cause for concern we had was due to a cybersecurity incident in May which led to a temporary interruption in service. It probably shouldn't have come as surprise that the bank's chief rival mentioned "cybersecurity" or related topics eight different times during its most recent conference call. Both banks seem to be stressing how much they have spent or will be spending on technology. Overall, we are not concerned should Banco de Chile decide to spend more on technology and security. We think these are important areas of investment and should Banco de Chile or any other bank defer investment, we think it carries a big risk.