Banco de Chile’s 2014 15% Net Income Growth Set Tone for Positive Year

Banco de Chile reports preliminary financial results for the quarter ended December 31, 2014.

Banco de Chile (NYSE: BCH; CHILE-CL) reported fiscal year 2014 revenue of $1,646 B Chilean Pesos, up 13 percent from 2013. Earnings Per Share (EPS) were Ch $6.24 for the year.

 Annually, Banco de Chile’s net income rose 15 percent year-on-year. Banco de Chile also reported a positive quarter. Fourth quarter average net quarterly income was $128 B Pesos, despite non-recurring items. This was the same amount as the average quarterly net income for 2013. According to the bank’s Earnings Release statement, Banco de Chile’s ROE was 1.4 times its peers, and its ROA was 1.4 times its peers.

 Loans rose 5 percent year-on-year, and 2 percent vs. the third quarter of 2014. This growth was mainly attributable to the retail banking segment. As of December 31, 2014, retail loans comprised 54 percent of the bank’s loan book, compared to 50 percent at the start of the calendar year.

 Banco de Chile set aside $24 B in loan loss provisions. On an annual basis loan loss provisions grew 18 percent year-on-year, mainly due to the expansion in loan growth. On the liability side, demand deposits, at zero percent interest, accounted for 25 percent of total liabilities, and grew 16 percent from 2013.

 This earnings release follows the earnings announcements from the following peers of Banco de Chile – Credicorp Ltd., Banco Bradesco SA Pfd, Banco Santander-Chile, CorpBanca S. A. and Itau Unibanco Holding SA Pfd (BAP-PE, BBDC4-BR, BSANTANDER-CL, CORPBANCA-CL and ITUB4-BR).

Quarterly Highlights

  • Summary numbers: Revenues of CLP 467.59 billion, Net Earnings of CLP 128.13 billion, and Earnings per Share (EPS) of CLP 1.35.
  • Net interest income margins widened from 69.84% to 73.18% compared to the same quarter last year.
  • Net loan assets changed 4.72% compared to same period last year and 5.85% from previous period, total deposits changed 1.64% compared to same period last year and 4.72% from previous period.
  • Ability to declare a higher earnings number? Change in operating cash flow of 359.65% compared to same quarter last year better than change in earnings.
  • Earnings decline from worsening in operating margins as well as one-time items.
  • Earnings per Share (EPS) growth exceeded earnings growth

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income (See complete table at the end of this report):

2013-12-31 2014-03-31 2014-06-30 2014-09-30 2014-12-31
Relevant Numbers (Quarterly)
Revenues (mil) 415916 436056 438329 412354 467592
Revenue Growth (%YOY) 6.86 76.74 664.27 -13.37 12.42
Earnings (mil) 132882 150750 153479 158718 128133
Earnings Growth (%YOY) -3.67 24.1 25.94 15.53 -3.57
Net Margin (%) 31.95 34.57 35.01 38.49 27.4
EPS 1.4 1.58 1.61 1.68 1.35
Return on Equity (%) 23.57 26.35 26.28 26.35 20.61
Return on Assets (%) 2.08 2.32 2.38 2.44 1.89

Market Share Versus Profits

Companies sometimes focus on market share at the expense of profits or earnings growth.

Revenues History
Earnings History

Compared to the same period last year, CHILE-CL’s change in revenue exceeded its change in earnings, which was -3.57%. This suggests perhaps that the company’s focus is on market share at the expense of profitability. But more important, this revenue performance is among the lowest thus far in its sector–inviting the potential for current and future loss of market share. Also, for comparison purposes, revenues changed by 13.40% and earnings by -19.27% compared to the quarter ending September 30, 2014.

Revenues Growth Versus Earnings Growth

Earnings Growth Analysis

The company’s year-on-year earnings decline has not come as a result of decline in net interest income margins or because of any loan loss provisions. Both net interest income margins and net interest income after provisions margins have actually improved. In fact, net interest income margins went from 69.84% to 73.18% and net interest income after provisions margins improved from 53.54% to 57.44% over this period. In addition, loan loss provisions as a percentage of net interest income were 21.52% this period , and 23.34% a year ago.

Net Interest Income Margin Versus Loan Loss Provisions Margin
Net Interest Income Margin History
Loan Loss Provisions Margin History

Net Loans and Total Deposits

A financial institution’s core operations represented by Net Interest Income and Net Interest Income after Provisions are dependent on both the growth and quality of its deposits as well as the growth and quality of its loans. A firm could boost its interest income in the short-term by just increasing its loan assets with less concern about their quality – but this would eventually lead to greater loan loss provisions. Similarly a drive to increase deposits could result in higher interest expenses and eventually effect the firm’s equity. It is thus important to understand net interest income performance in context to loan loss provisions, loan assets and deposits.

Loan Assets Growth Rate History (Qtr YOY)
Total Deposits Growth Rate History (Qtr YOY)

CHILE-CL’s improvement in net interest income margins came in spite of relative drops in the levels of net loan assets and total deposits. On an absolute basis, net loan assets changed 4.72% compared to the same period last year and 5.85% from the previous period. Total deposits changed 1.64% compared to the same period last year and 4.72% from the previous period.

Cash Versus Earnings – Sustainable Performance?

CHILE-CL’s year-on-year change in operating cash flow of 359.65% is better than its change in earnings. This suggests that the company might have been able to declare a higher earnings number. The change in operating cash flow is better than the average of the results announced to date by its peer group.

Operating Cash Flow Growth Versus Earnings Growth

Company Profile

Banco de Chile SA provides banking services. It provides financial services to all segments of the Chilean financial market, directly and indirectly through its subsidiaries. The company provides retail customers with credit cards, residential mortgage loans and consumer loans, traditional deposit services, such as current accounts, demand deposits, savings accounts and time deposits. It operates through four segments: Retail, Wholesale, Treasury and Money Markets and Subsidiaries. Banco de Chile was founded on October 28, 1893 and is headquartered in Santiago, Chile.

CapitalCube does not own any shares in the stocks mentioned and focuses solely on providing unique fundamental research and analysis on approximately 50,000 stocks and ETFs globally. Try any of our analysis, screener or portfolio premium services free for 7 days. To get a quick preview of our services, check out our free quick summary analysis of CHILE-CL.

Leave a Comment