Analyst Note| Michael Miller |
Narrow-moat-rated Banco de Chile reported decent second-quarter results, beating the FactSet consensus estimate of CLP 1.56 per share with reported adjusted EPS of CLP 1.61. These results equate to a return on average equity of 16.8% for the quarter. Political uncertainty related to the constitutional rewrite continues to be an overhang on the share prices of our Chilean bank coverage. We believe that the current constitutional rewrite process could have significant implications for Chile in the long term. However, we do not see a material medium-term impact on the bank’s performance from the political uncertainty. Chile has seen political uncertainty and social unrest for a few years now, but the underlying Chilean economy continues to be robust. We think that Chile is set for a strong economic recovery on the back of expansionary monetary and fiscal policy, strong commodity prices, and increased mobility with more than 60% of the Chilean population fully vaccinated. After incorporating the second-quarter results, we are updating our fair value estimate from $23 per ADR share to $21.70 per ADR share for the bank. Our updated fair value estimate accounts for the time value of money, an unfavorable exchange rate, and slightly lower credit costs. We believe that shares of Banco de Chile are still around 20% undervalued at the current share price and we would recommend the company to investors who have a higher risk appetite.