We Expect Better Results From Banco Santander Chile in 2024 as Pressure on Funding Costs Decreases

Equity Analyst

Michael Miller

Banco Santander Chile is the largest bank by assets in the Chilean market. This scale has afforded the bank the second-cheapest deposit base in the country, significantly contributing to Santander Chile’s impressive returns on equity, which are typically in the upper teens. The bank has benefited from the introduction of the "Superdigital" and "Santander Life" accounts that are part of a larger trend toward increased adoption of digital banking in Chile. The bank’s digital offerings are tailored to reach an estimated population of 4.5 million unbanked Chilean citizens and have allowed the firm to trim down the size of its branch network. 

While the bank does benefit from inflation in Chile through its inflation-indexed loans, its net interest margins came under intense pressure in 2023 as high interest rates caused its funding costs to rapidly increase. Additionally, with inflation in Chile rapidly declining, the bank's inflation adjustment income, which it treats as interest income, collapsed. This led to a more than 30% decline in net interest income in 2023, despite a growing loan book. That said, interest rates in Chile have begun to fall, which will reduce the pressure on the bank's funding costs going forward. We expect the bank's net interest income to begin to recover in 2024 and to normalize by the end of 2025. 

In the medium to long term, the bank will be focused on the success of its digital initiatives, as Santander strives to implement a streamlined, "teller-lite" branch model, expand its reach to middle- and lower-income clients through its digital banks, and bolster fee income. Early progress looks promising and the benefit from these efforts will likely show up in the form of improved efficiency ratios. 

The bank also benefits over its smaller peers due to its membership within the Santander Group, permitting technological diffusion. The most recent example of this is Banco Santander Chile’s recently launched point of sale merchant acquiring arm, Getnet, which is an import from Santander Brazil.

Business Strategy & Outlook

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, the COVID-19 pandemic, 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 within the context of this concentrated banking system Banco Santander Chile is large, with 18.6% and 17.4% of the country’s loans and deposits, respectively, in 2020, making it the largest bank in the country by loans and the second largest by deposits, coming in behind the 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 and its recent entrance into the merchant acquisition industry, through the import of the Santander group’s Getnet business into Chile. 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 the larger 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. The ability to import Getnet, an existing merchant payment firm with an existing product set, into the Chilean market is an example of the bank benefiting from this structure. This advantage, along with the bank’s strong cost management has allowed Santander Chile to historically keep its efficiency ratio in the mid-40s as we calculate it, better than its peers. 

Additionally, the bank has seen increasing success in its digital efforts as digital banking penetration in Chile increases, with the pandemic acting as a catalyst. Chile has a limited presence from disruptive fintech firms and much of the transition toward digital banking has come from the traditional players themselves. The bank’s Santander Life digital banking program has become a major driver of account growth, and it added more than 300,000 new accounts in the first nine months of 2021, compared with a total client base of roughly 4 million. These new accounts are cheaper to open and do not require the same level of service infrastructure. As a result of its increasingly digital service model, the firm has begun to trim its branch network, leading to lower costs and higher per branch productivity. As a result, we do expect the company’s efficiency ratio to trend modestly lower over time as the bank transitions to a more digital service and sales distribution model, though this positive tailwind to the firm’s cost structure will be offset by rising prices as most of the firm’s expenses are indexed to inflation.

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 25% of its total funding come from non-interest-bearing sources, a major tailwind for the bank’s efforts to keep funding costs low. This figure has improved modestly in 2020 and 2021 as fiscal stimulus swelled consumer finances and the bank’s checking account growth benefits from the success of its Santander Life program. That said, this advantage has historically done more to prevent new competitors from gaining a toehold in the Chilean market then to give it 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 (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 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. We note that Banco Santander Chile has been making a strategic allocation toward inflation exposure with over 47% of its assets in UF at the end of 2020 versus only 21% of its interest-bearing liabilities. 

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. Untangling these relationships can become difficult, adding to the stickiness of a bank’s relationships with its 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, 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, though this has become a point of risk. Chilean banks are regulated by the Financial Market Commission that 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 has 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. The Chilean economy has recovered well from the COVID-19 pandemic, aided in no small part by surging copper prices, which makes up the backbone of the Chilean mining industry, a sector that can often exceed 10% of nationwide GDP and 50% of exports. This provides Banco Santander Chile with the triple tailwind of higher inflation, rising rates, and a positive outlook for economic growth. These positives do need to be held against Chile’s politics becoming notably more populist in the aftermath of the 2019 street protests. While the political situation bears monitoring, 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 moat rating.

Narrow

Economic Moat

Banco Santander-Chile

Banco Santander Chile SA engages in the provision of commercial and retail banking services. It operates through the following segments: Retail Banking, Middle-Market, Corporate and Investment Banking, and Other. The Retail banking segment offers consumer loans, credit cards, automobile loans, commercial loans, foreign exchange, mortgage loans, debit cards, checking accounts, savings products, mutual funds, stock brokerage, and insurance brokerage. The Middle-Market segment serves institutions such as universities, government entities, local and regional governments, and companies engaged in the real estate industry who carry out projects to sell properties to third parties. The Corporate and Investment Banking segment consists of foreign and domestic multinational companies. The Other segment represents the results of is financial management division, which develops global management functions, including managing inflation rate risk, foreign currency gaps, interest rate risk and liquidity risk. The company was founded on September 7, 1977 and is headquartered in Santiago, Chile.

Earnings data Q1 2024

Revenue

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

Toronto-Dominion Bank

Investors interested in Banks - Foreign stocks are likely familiar with Banco Santander-Chile (BSAC) and Toronto-Dominion Bank (TD). But which of these two stocks offers value investors a better bang for their buck right now?

BSAC or TD: Which Is the Better Value Stock Right Now?

SANTIAGO, Chile, Feb. 28, 2024 (GLOBE NEWSWIRE) -- Banco Santander Chile (“Santander Chile” or the “Company”) (NYSE: BSAC; SSE: Bsantander) announced today that it has given notice to Citibank, N.A., London Branch, as fiscal agent and paying agent (in such capacity, the “Fiscal and Paying Agent”) that the Company is redeeming all Santander Chile's outstanding JPY 10,500,000,000 0.60% Senior Fixed Rate Notes due 2024 (the “Notes”). A notice of redemption has been issued by Santander Chile today through Euroclear Bank S.A. and N.V., Clearstream Banking, S.A. The redemption date will be March 29, 2024 (the “Redemption Date”) and the redemption price of 100% of the principal amount of the Notes, plus accrued and unpaid interest up to, but excluding, the Redemption Date will be paid in accordance with the final terms of the Notes.

Banco Santander Chile Announces Redemption of Notes

SANTIAGO, Chile, Feb. 22, 2024 (GLOBE NEWSWIRE) -- Banco Santander Chile (“Santander Chile” or the “Company”) (NYSE: BSAC; SSE: Bsantander) announced today that its Annual Report on Form 20-F for the fiscal year ended December 31, 2023 (the “2023 Annual Report”) has been filed with the U.S. Securities and Exchange Commission (the “SEC”).

Banco Santander Chile Announces the Filing of Its Annual Report on Form 20-F With the United States Securities and Exchange Commission for Fiscal Year 2023

SANTIAGO, Chile, Feb. 12, 2024 (GLOBE NEWSWIRE) -- Banco Santander Chile's (NYSE: BSAC) announced that its subsidiary Santander Consumer Finance will acquire Mundo Crédito in an operation for up to US$ 79 million. The operation is subject to the approval of the National Economic Prosecutor's Office, the due diligence process and other usual conditions precedent.

The Santander Chile subsidiary Santander Consumer signs agreement to acquire Mundo Crédito's auto loan portfolio

Banco Santander-Chile (BSAC) Q4 2023 Earnings Call Transcript

SANTIAGO, Chile, Feb. 02, 2024 (GLOBE NEWSWIRE) -- Banco Santander Chile (NYSE: BSAC; SSE: Bsantander) announced today its resultsi for the twelve-month period ended December 31, 2023, and fourth quarter 2023 (4Q23).

Banco Santander-Chile Announces Fourth Quarter 2023 Earnings

DNB Bank ASA

Investors interested in Banks - Foreign stocks are likely familiar with DNB Bank ASA (DNBBY) and Banco Santander-Chile (BSAC). But which of these two companies is the best option for those looking for undervalued stocks?

DNBBY or BSAC: Which Is the Better Value Stock Right Now?

SANTIAGO, Chile, Jan. 11, 2024 (GLOBE NEWSWIRE) -- Banco Santander Chile's (NYSE: BSAC) announced its return to the Swiss market with the largest placement by a Chilean issuer since 2014.

Santander Chile returns to the Swiss market with the largest placement by a Chilean issuer since 2014

SANTIAGO, Chile, Jan. 08, 2024 (GLOBE NEWSWIRE) -- You are cordially invited to participate in Banco Santander Chile's (NYSE: BSAC) conference call-webcast on Friday, February 2, 2023, at 8.30 AM (New York Time) where we will discuss 4Q 2023 financial results. The Bank's Officers participating in the conference call are: Emiliano Muratore, CFO, Cristian Vicuña, Chief Strategy Officer & Head of IR and Claudio Soto, Chief Economist. A question and answer session will follow the presentation.

Banco Santander Chile: Announces Fourth Quarter 2023 Analyst and Investor Webcast / Conference Call

Mitsubishi UFJ Financial

Investors looking for stocks in the Banks - Foreign sector might want to consider either Mitsubishi UFJ (MUFG) or Banco Santander-Chile (BSAC). But which of these two stocks presents investors with the better value opportunity right now?

MUFG or BSAC: Which Is the Better Value Stock Right Now?

Investors looking for stocks in the Banks - Foreign sector might want to consider either Mitsubishi UFJ (MUFG) or Banco Santander-Chile (BSAC). But which of these two stocks is more attractive to value investors?

MUFG vs. BSAC: Which Stock Is the Better Value Option?

Banco Santander (BSAC) makes an investment plan related to its digital transformational process worth $800 million in Chile by 2026.

Banco Santander (BSAC) Makes $800M Investment Plan by 2026

Part of this historic announcement will be allocated to the construction of Campus Santander, its new corporate building. In this way, the Group shows clear signs that it has a long-term commitment with Chile and that it is working on concrete actions to carry out its roadmap, Chile First. Part of this historic announcement will be allocated to the construction of Campus Santander, its new corporate building. In this way, the Group shows clear signs that it has a long-term commitment with Chile and that it is working on concrete actions to carry out its roadmap, Chile First.

Santander announces investment plan in Chile for US$ 800 million by 2026 within the framework of its digital transformation process

Banco Santander-Chile (NYSE:BSAC ) Q3 2023 Earnings Conference Call November 3, 2023 10:00 AM ET Company Participants Emiliano Muratore - Chief Financial Officer Cristian Vicuna - Chief, Strategic Planning and IR Carmen Gloria Silva - Economist Conference Call Participants Yuri Fernandes - JPMorgan Daniel Mora Ardila - Credicorp Capital Neha Agarwala - HSBC Global Research Ernesto Gabilondo - Bank of America Nicolas Riva - Bank of America Operator Ladies and gentlemen, thank you for standing by. And I would like to welcome you to Banco Santander-Chile 3Q 2023 Results Conference Call on the 3rd of November, 2023.

Banco Santander-Chile (BSAC) Q3 2023 Earnings Call Transcript

SANTIAGO, Chile, Oct. 31, 2023 (GLOBE NEWSWIRE) -- Banco Santander Chile (NYSE: BSAC; SSE: Bsantander) announced today its resultsi for the nine-month period ended September 30, 2023, and third quarter 2023 (3Q23).

Banco Santander-Chile Announces Third Quarter 2023 Earnings

SANTIAGO, Chile, Oct. 26, 2023 (GLOBE NEWSWIRE) -- Banco Santander Chile's (NYSE: BSAC) announced its first green bond under its ESG Framework to finance green mortgages.

Santander Chile issues first green bond under its ESG Framework to finance green mortgages

Hudbay Minerals

OUTFRONT Media

BSAC, HBM and OUT have been added to the Zacks Rank #5 (Strong Sell) List on October 20, 2023.

New Strong Sell Stocks for October 20th

SANTIAGO, Chile, Oct. 13, 2023 (GLOBE NEWSWIRE) -- You are cordially invited to participate in Banco Santander Chile's (NYSE: BSAC) conference call-webcast on Friday, November 3, 2023, at 10.00 AM (New York Time) where we will discuss 3Q 2023 financial results. The Bank's Officers participating in the conference call are: Emiliano Muratore, CFO, Cristian Vicuña, Chief Strategy Officer & Head of IR and Carmen Gloria Silva, Economist. A question and answer session will follow the presentation.

Banco Santander Chile: Announces Third Quarter 2023 Analyst and Investor Webcast / Conference Call

United Overseas Bank Ltd

Investors interested in Banks - Foreign stocks are likely familiar with United Overseas Bank Ltd. (UOVEY) and Banco Santander-Chile (BSAC).

UOVEY vs. BSAC: Which Stock Should Value Investors Buy Now?

Banco Santander-Chile (NYSE:BSAC ) Q2 2023 Earnings Conference Call August 4, 2023 11:00 AM ET Corporate Participants Emiliano Muratore - Chief Financial Officer Claudio Soto - Chief Economist Cristian Vicuna - Chief of Strategic Planning and Investor Relations Conference Call Participants Juan Recalde - Scotiabank Ernesto Gabilondo - Bank of America Tito Labarta - Goldman Sachs Daniel Mora Ardila - CrediCorp Capital Isabelle Irish - Baring Asset Management Neha Agarwala - HSBC Global Research Ewald Stark Bittencourt - BICE Inversiones Operator Hello and welcome to Banco Santander-Chile's Second Quarter 2023 Results Conference Call. We are joined today by the CFO, Emiliano Muratore; Chief Strategic Planning and Head of IR, Cristian Vicuna; and Chief Economist, Claudio Soto.

Banco Santander-Chile (BSAC) Q2 2023 Earnings Call Transcript

SANTIAGO, Chile, July 31, 2023 (GLOBE NEWSWIRE) -- Banco Santander Chile (NYSE: BSAC; SSE: Bsantander) announced today its resultsi for the six-month period ended June 30, 2023, and second quarter 2023 (2Q23).

Banco Santander-Chile Announces Second Quarter 2023 Earnings

Fortune Brands Innovations Inc

GPS, FBIN and BSAC made it to the Zacks Rank #1 (Strong Buy) income stocks list on July 26, 2023.

Best Income Stocks to Buy for July 26th

SANTIAGO, Chile, July 11, 2023 (GLOBE NEWSWIRE) -- You are cordially invited to participate in Banco Santander Chile's (NYSE: BSAC) conference call-webcast on Friday, August 4, 2023, at 11.00 AM (Eastern Time) where we will discuss 2Q 2023 financial results. The Bank's Officers participating in the conference call are: Emiliano Muratore, CFO, Cristian Vicuña, Chief Strategy Officer & Head of IR and Claudio Soto, Chief Economist. A question and answer session will follow the presentation.

Banco Santander Chile: Announces Second Quarter 2023 Analyst and Investor Webcast / Conference Call

ICICI Bank Ltd.

Investors interested in Banks - Foreign stocks are likely familiar with Banco Santander-Chile (BSAC) and ICICI Bank Limited (IBN). But which of these two companies is the best option for those looking for undervalued stocks?

BSAC vs. IBN: Which Stock Is the Better Value Option?

BSAC made it to the Zacks Rank #1 (Strong Buy) momentum stock list on May 12, 2023.

News for Banco Santander-Chile Stock (BSAC)