Banco Santander Chile

Banco Santander Chile reported strong second-quarter results, with net revenue growing 13.4% from last year and net income growing 40% to CLP 382.6 billion. Profitability was also quite strong, with the bank's return on average equity coming out to 31.5%.

Why it matters: Most of this improvement in revenue and net income is due to higher inflation-adjusted income, which swings drastically from quarter to quarter. Digging deeper, we view the bank's core results less favorably than the headline numbers would suggest, as fee income decreased and loan growth was subpar. Fee income shrank by 4.8%. Asset management and insurance fees grew 16.1% from the prior year but were entirely offset by a 15.1% decline in payment fees. Even though it's a smaller contributor to revenue than readjustment income, we value consistent revenue streams more. Although loans grew 1.2% during the quarter from last year, about 43% came from mortgage lending, which is almost entirely inflation-indexed. We still see a weak commercial lending environment, which may be a barrier to management's mid-single-digit loan growth target.

The bottom line: We will maintain our $29.60 per ADR share fair value estimate for narrow-moat-rated Banco Santander Chile. We view shares as overvalued at current prices. We may revise our short-term projections up if inflation adjustment income remains strong, but we would have to see evidence of more solid loan growth and optimism from business customers before we become more constructive on the name. Higher inflation should benefit the bank, but economic conditions in Chile seem to be weakening, with lower gross domestic product growth projections, weaker private consumption, and higher unemployment than before.

Our fair value estimate of $29.60 per ADR share assumes an exchange rate of CLP 902/$1.

Our valuation assumes the bank's net interest margin remains well above its 2023 low. That said, we expect low net interest income growth in 2026 as the bank faces dual headwinds from falling inflation adjustment income and low loan growth. We expect better business conditions to drive a recovery in loan growth, which has been anemic in recent years. We project total annual loan growth to average about 4.9% over the next five years, and we forecast charge-off levels will normalize at around 1.07% by 2029.

We also expect Banco Santander Chile to continue to enjoy solid noninterest income growth. The bank's card and payment revenue streams have been a major bright spot for the firm, with revenue from its Getnet merchant acquiring business increasing 38.8% in 2025. While this is offset by weaker results elsewhere, we see total noninterest income increasing at a 5.5% compound annual rate from 2025 to 2030.

At the end of our forecast window, we project a normalized return on equity of 20.5%. We use a total cost of equity of 10%, which includes a country risk premium for Chile of 1.2%.

In our view, Banco Santander Chile has a narrow economic moat as the value of its competitive position has allowed the bank to consistently enjoy returns above its cost of capital, even in the face of falling interest rates, volatile inflation, and increased political uncertainty in Chile during and after the 2019 street protests. Given the absence of any new major competitive threats or trends eroding the bank’s competitive position, Banco Santander Chile’s cost advantages and the implicit switching costs facing its customers should protect the company’s economic moat and allow it to continue to generate excess returns.

Fundamentally, this strength is driven by Banco Santander Chile’s status as the leading firm in Chile’s highly concentrated banking sector. As the result of consolidation over time, the six largest banks in Chile account for over 85% of total lending and bank deposits. Even in the context of this concentrated banking system, Banco Santander Chile is large, with 17.1% and 17.2% of the country’s loans and deposits, respectively, in 2024, making it the largest bank in the country by loans and the second largest by deposits, coming in behind state-owned Banco del Estado de Chile.

The company is also a major player in the payment space, with roughly 25% of the credit card market by usage. The bank’s outsize position in the Chilean financial system is both a sign and the driving force behind the competitive advantages that drive the firm’s returns.

In our opinion, bank moats are typically achieved through cost advantages, either through superior operational cost structure or better funding sources, switching costs, and the banking system in which the company operates. Cost efficiency has been a historical strength of Banco Santander Chile, due in part to the company’s inclusion in Santander Group, allowing the firm to benefit from technology and software development that occurs elsewhere in the group as well as broader cost efficiencies from the company’s large scale. This advantage, along with the bank’s strong cost management has allowed Santander Chile to historically keep its efficiency ratio in the low 40s as we calculate it, better than most of its peers.

Chilean banks benefit from low cost of funding, due in part to checking accounts in Chile generally not paying interest. This allows firms with large existing demand deposit bases to obtain a significant cost advantage over those without. Banco Santander Chile has historically had around 26% of its total funding come from non-interest-bearing sources, a major tailwind for the bank’s efforts to keep funding costs low. This advantage has historically done more to prevent new competitors from gaining a toehold in the Chilean market than to offer an edge against its most significant rivals, which also have substantial deposit bases. Banco Santander Chile’s total cost of funds is functionally equal to that of its largest competitor, Banco de Chile, leaving the firm with neither an advantage nor a disadvantage in this area versus its largest private opponent.

Chilean banks also benefit from the convention of issuing loans denominated in special currency called Unidad de Fomento, which is indexed to inflation. If a borrower takes a UF-denominated loan out at 4.5% and inflation for the year is 3%, then the real interest rate behind the loan is 7.5% as the borrower’s Chilean pesos would have depreciated 3% against the UF-denominated loan. The intent is to protect the financial system and long-term contracts from high inflation, which the country has experienced in the past, but it also has the effect of allowing the major Chilean banks to be direct beneficiaries of inflation.

UF-denominated lending has persisted long after the special currency’s creation and the high inflation that inspired it, a sign of the market power of the major banks, as depending on market events in this process can be unfriendly to borrowers. The use of UF-denominated loans and financing allows the Chilean banks to adjust their inflation exposure up or down by controlling the gap between their UF-denominated assets and UF-denominated liabilities. The more UF assets exceed UF liabilities, the more net interest income increases when inflation rises. Banco Santander Chile has been making a strategic allocation toward inflation exposure with over 49% of its assets in UF at the end of 2024 versus only 17% of its interest-bearing liabilities.

We generally assign switching costs to all traditional banks with meaningful moats. When customers develop multiproduct relationships with a single firm, untangling these relationships can become difficult, adding stickiness to a bank’s customer base. There is also the inherent inertia against switching once you have already established an account/relationship with a bank. While this effect can be small on an individual basis, particularly for Banco Santander Chile’s new digital accounts, in our view it is still relevant for banks holding on to large established customer bases, and we believe the company, with one of the largest existing customer bases in Chile, falls into this category.

From a systemic standpoint, we believe that Chile offers a good operating environment. Chilean banks are regulated by the Financial Market Commission, which was created in 2017 and in 2019 became the primary regulator for the entire Chilean financial system. We generally regard banking regulations in Chile as well thought out, and a simplified regulatory body for the country’s financial system eases compliance. The Chilean central bank responded well to rising inflation in 2021, rapidly increasing interest rates to 4% by the end of the year, adding to the institution’s credibility. Given the strength of Santander’s position and its competitive advantages, we believe the firm will continue to outearn its cost of capital, earning the company a Narrow Morningstar Economic Moat Rating.

Banco Santander Chile has one of the largest deposit bases in Chile, and its recent success with its new digital accounts could add to this strength.

Lower interest rates in Chile could lead to a stronger recovery in loan growth than expected.

Strong copper prices could provide the Chilean economy with a major tailwind, supporting better business conditions for Banco Santander Chile.

Banco Santander Chile's net interest margin could suffer from lower inflation.

The bank's shares have soared on prospects for more political certainty, but the political situation in Chile could fail to stabilize following 2025 election results.

Santander is not the only Chilean bank expanding its digital service offerings; initial success could moderate as competition increases.