Banco de Chile Earnings: Credit Costs and Lower Inflation Are Headwinds for Otherwise Strong Results

Narrow-moat-rated Banco de Chile BCH reported decent first-quarter results as the bank continues to outperform its peers in a difficult economic environment. Net revenue increased 2.6% from last year but decreased 12.3% sequentially to CLP 703 billion. Net income fell 8.8% from last year, which translates to a return on average equity of 21.6%. As we incorporate these results, we do not plan to materially alter our fair value estimate for Banco de Chile of $21 per ADR share.

The sequential decline in revenue was primarily driven by lower inflation adjustment income. Banco de Chile has significant positive exposure to inflation through the use of inflation-indexed loans. When the value of these loans rises with inflation, the bank books the value of the adjustment as net interest income. As inflation in Chile slows, this revenue declines, with inflation adjustment income falling 54% from last year to CLP 86 billion. We expect inflation in Chile to continue to decline, and Banco de Chile’s gains from inflation should continue to normalize over time, with the bank’s returns falling closer to our long-term expectations compared with the excess profitability seen in 2022.

Banco de Chile is seeing some signs of credit deterioration, though noticeably less than some of its peers. Charge-offs increased to CLP 97.5 billion from an unusually low CLP 44.6 billion last year. Meanwhile, the bank’s over 90 days past due ratio increased to 1.22% of total loans from 0.88% last year and 1.08% last quarter; it remains well below the industry average for Chile. We expect credit costs to continue to rise for Banco de Chile as unemployment in Chile has begun to increase sharply in 2023, reaching 8.8% in March, as high interest rates begin to take their toll on the Chilean economy. That said, Banco de Chile is in a strong financial position with a common equity Tier 1 ratio of 12.8%, so we do not expect the bank to be placed under financial pressure by higher credit losses.