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Morningstar | Santander Chile Seeing Benefits of Accelerating Economy

Narrow-moat Banco Santander Chile’s second-quarter results closely resembled the performance of Chile’s strengthening economy. The bank’s pretax income was CLP 195 billion, representing a 0.6% sequential decrease and an increase of 7.3% from the previous year. The biggest variances from the previous year include net fee income growth of 9.7% and one-off realized gains from sales of securities. However, for the year, Santander Chile has outperformed our expectations, and after its second-quarter results, management is increasing its guidance for loan growth to 8%-10% from 6%-8%. The bank’s credit provisions continue to trend below our expectations, and as a result, we've modestly improved our near-term forecast for lower loan losses. Nevertheless, we’re not making any material changes to our long-term forecast. We continue to believe that Santander Chile is a well-run bank that is enjoying a favorable credit environment. Though we’re raising our earnings estimates, we’re maintaining our fair value estimate of $19.50 per share. Our higher near-term estimates are mostly offset by a lower Chilean peso. Our fair value estimate assumes an exchange rate of CLP 642/$1 as of Aug. 7.

Santander Chile’s loan growth continues to impress and partly reflects Chile’s strengthening economy. At the end of the quarter, management guided to Chilean GDP growth of 4%, a significant improvement from the previous quarter. At the end of the first quarter, the bank guided to GDP growth of only 2.5%. In addition, the bank now expects higher short-term interest rates and inflation, which will help the bank’s top line.

We are encouraged that Santander Chile is making such an emphasis on reinvestment in technology. Year to date, personnel expenses are comparable with the previous period, though the bank notes that within its 3% growth in head count, much of that is coming from IT professionals. Where the bank’s IT investment is noticeable is in its administrative expenses. Year to date, admin expenses have increased 10.2% from the first half of 2017. Overall, we think this is a good sign and helps lay the groundwork for future growth and market share gains. Furthermore, we were pleasantly surprised during the call when management said, "Not only are the Work/Cafés more efficient and productive, it is now cheaper to open a Work/Café than a traditional branch." Though many bank analysts are skeptical of cafes replacing branches, we think it’s an interesting concept.