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Morningstar | Though Macro Risks Remain for Santander Chile, Central Bank Rate Hike Signals Tailwinds for 2019

Banco Santander Chile is the largest bank by assets in the Chilean market. This scale has afforded the bank the second-cheapest deposit base, trailing only Banco de Chile. This funding advantage has greatly contributed to Santander Chile’s striking returns on equity, which in recent years have been in the upper teens. Nevertheless, these returns have typically trailed those of Banco de Chile, which has a longer history of operating in Chile and historically has been more efficient in acquiring deposits. In 2018, loans grew at a 9.2% clip, exceeding loan growth of 1.9% in 2017. We’ll observe that Santander Chile’s returns over the past few years were generated at a time of strong economic expansion that will inevitably cool.If you’re looking for the role copper has played in Chilean banking, look no further than Santander Chile’s foreign trade loans, which are mostly used as short-term financing for copper exports. From 2010 to 2015, these loans more than doubled. Since 2015, these loans have contracted more than 25%. While these loans aren’t a credit risk or a hugely significant part of the bank’s business, in a recession we’d expect these loans to be repaid quickly, putting pressure on the bank’s loan growth.In recent years, Santander Chile has placed an emphasis on mortgages. From 2014 through 2018, mortgage loans have compounded at a rate exceeding 10%. In comparison, Chilean GDP only grew at about 2.2% annually during that time, while national home prices appreciated at a rate of about 3% annually.We also note the bank’s focus on growing fee income. Over the last three years, card income has grown at an average annual rate of about 7%. By our estimate, card income has grown to about 11% of recurring net revenue from 7% a decade ago.