智利银行

Banco de Chile reported strong second-quarter results on the surface, largely driven from much higher inflation adjustment income than a year ago. Net revenue increased 20.9% to CLP 922 billion, while net income rose 28.1% to CLP 390 billion.

Why it matters: The bank's core results were still solid for the quarter. Fees grew by 10.7%, with two-thirds of the increase attributable to transaction services, indicating strong customer activity. Banco de Chile also controlled expenses well, with only a 2.8% increase from the prior-year quarter. When adjusting out inflation indexation income, Banco de Chile generated an adjusted 40.9% efficiency ratio. This is impressive because it approaches management's medium-term 40% target, which includes inflation-adjusted income. Chilean banks tend to hold net positive exposure to inflation through UF-denominated loans, causing volatility from quarter to quarter. Strong results this quarter were heavily skewed by high inflation, so this is not a signal of consistent growth and profitability.

The bottom line: We anticipate a $32.60 per ADR share fair value estimate increase for narrow-moat-rated Banco de Chile, in the low- to mid-single-digit percentage range. Even with our anticipated change, we see shares as overvalued at current prices. We plan on slightly increasing net interest margin assumptions, as loan spreads should widen and demand deposit headwinds should shrink given that monetary policy benchmark rates should remain higher than previously expected. That said, we are slightly cautious of the Chilean macroeconomic environment from fresher expectations of lower gross domestic product, higher unemployment, and slightly weaker inflation than previously thought.

We are increasing our fair value estimate to $35 per ADR share from $32.60. The positive adjustment is mostly due to higher net interest projections and the time value of money, partially offset by foreign-exchange rate movements since our last update. Our fair value estimate uses an exchange rate of CLP 928.47 as of Aug. 3.

Lower interest rates are positively impacting the bank's loan growth, which has been anemic in recent years. We expect loan growth to accelerate to around 6.34% in 2026 from effectively zero in 2025. Noninterest income was a major bright spot for the bank in 2025, increasing by more than 11%. While we expect this to decelerate, as the bank's mutual fund business benefited from cyclical tailwinds, we still expect high-single-digit growth in 2026.

Lower inflation-adjustment income will continue to be a headwind in 2026, but that should be offset by lower funding costs. We expect the bank’s net interest margin to stabilize around 4.31%.

Banco de Chile finished 2025 with an efficiency ratio, as we calculate it, of 37.4%, below the bank's historic levels. The bank’s investments in IT and infrastructure are yielding results, with enhanced digital banking capabilities that enable it to rapidly reduce its branch count. This, in turn, has led the firm's compensation expense growth to trail its revenue.

At the end of our forecast window, we project a normalized return on equity of 24.5%, and we use a total cost of equity of 10%, which includes a country risk premium for Chile of 1.2%.

In our view, Banco de Chile has a narrow Morningstar Economic Moat Rating, as the strength of its competitive position has allowed the bank to consistently enjoy returns above its cost of capital. With the absence of any new major competitive threats or trends eroding the bank’s strong competitive position, Banco de Chile’s cost advantages and the implicit switching costs facing its customers should protect the company’s economic moat and allow it to generate excess returns.

Banco de Chile’s size and history within the Chilean banking system drive this strength. Founded in 1893 as a result of a merger that made it the largest bank in Chile, Banco de Chile predates the Chilean central bank by more than 30 years. The firm’s long history as a key bank in Chile gives it powerful brand recognition, and the bank remains an important part of Chile’s financial system, particularly in corporate banking. As a result of consolidation over time, the six largest banks in Chile account for over 85% of total lending and bank deposits. With 15.4% and 23.6% of the country’s total loans and consumer deposits, respectively, as of 2025, Banco de Chile is the second largest bank in the country by loans and the largest by consumer deposits. Furthermore, the bank’s reach in the Chilean financial system extends beyond direct banking services. Banco de Chile has a roughly 22.5% share of mutual fund assets and a 17.2% market share in credit card usage. The company also provides insurance brokerage services through a long-term agreement with Chubb, which gives the bank a significant breadth of services and allows it to take advantage of cross-selling opportunities within its business.

In our opinion, bank moats are typically achieved through cost advantages (either through superior operational cost structure, better funding sources, or superior underwriting), switching costs, and the banking system in which the company operates. Cost efficiency is a strength of Banco de Chile; strong expense management has enabled the bank to maintain its efficiency ratio in the mid-to-high 40s, as we calculate it, which is better than most of its peers. As a result of its increasingly digital service model, the firm has significantly reduced its physical footprint, shrinking its branch count from over 400 several years ago to just 214 at the end June 2026. As a result, we do expect the company’s efficiency ratio to fall as the bank transitions to a more digital service and sales distribution model.

Chilean banks benefit from low costs 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. Historically, this has been a particular strong point for Banco de Chile, as while the firm is third in deposits, behind Banco Santander Chile and the Chilean state bank, it is the market leader for checking accounts. This provides the bank with a strong tailwind for managing its overall cost of funding, as more than 30% of Banco de Chile’s total budget comes from non-interest-bearing sources. That said, this advantage is offset by the cheaper sources of nondeposit funding that some of its competitors have access to, particularly its international rivals. Banco de Chile’s total cost of funds is functionally equal to that of its largest competitor, Banco Santander Chile, leaving the firm with neither an advantage nor a disadvantage in this area versus its largest private opponent. That said, the bank’s large pool of deposits does provide it with a material advantage against potential new competitors to its market.

Chilean banks also benefit from the convention of issuing loans denominated in special currency called Unidad de Fomento (UF), 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 behind this system 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, 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, with the reverse being true as well.

We generally assign switching costs to all traditional banks with meaningful moats. We see switching costs as stemming from economies of scale and scope, which can point to the existence of switching costs for customers as they develop multi-product relationships with a single firm. This remains a core part of the bank’s strategy, as it offers a slew of cash management and non-lending services to its commercial clients as well as investments and insurance products to its retail customers. 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, in our view, it is still relevant for banks holding onto large established customer bases, and we believe Banco de Chile, with one of the largest existing customer bases in Chile, falls into this category.

All in all, given the strength of Banco de Chile’s position and its competitive advantages, we believe the firm will continue to outearn its cost of equity, earning the company a narrow moat rating.

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

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

Chile has one of the most forward-looking and risk-averse regulator regimes in the world. This has contributed to a stable banking environment with high credit standards, resulting in a healthy banking industry.

Banco de 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.

Mortgage lending represents a third of the book, and pressure in home prices following a long bull market could see higher loan-to-value ratios and charge-offs.