1. Screening Methodology

This screening exercise evaluates the six major banks in the Chilean banking sector using a multi-factor quantitative framework. The objective is to identify the most attractive investment idea based on fundamental quality, valuation, and franchise strength.

1.1 Universe Definition

The screening universe consists of the six systemically important banks designated by the CMF as of December 2024:

• Banco de Chile (BCH) - NYSE ADR, largest by profitability share
• Banco Santander Chile (BSAC) - NYSE ADR, largest by loan market share
• Banco de Credito e Inversiones (BCI) - BCS listed, third-largest private bank
• BancoEstado - State-owned, not publicly traded (included for competitive context only)
• Scotiabank Chile - BCS listed, Canadian-controlled
• Itau Chile - BCS listed, Brazilian-controlled

1.2 Scoring Framework

Each bank is scored on a 1-10 scale across five categories, weighted as follows:

• Profitability (30%): ROE, ROA, and trend stability
• Asset Quality (25%): NPL ratio, coverage ratio, cost of risk, and impaired loan trends
• Efficiency (15%): Cost-to-income ratio and operating leverage trajectory
• Valuation (15%): P/E, P/B relative to ROE delivery, dividend yield
• Franchise Strength (15%): Market share breadth, deposit franchise, digital positioning, fee income diversification

Weights emphasize profitability and asset quality as the primary differentiators in a mature, well-regulated banking market where these metrics drive long-term shareholder value creation.

2. Quantitative Screening Results

2.1 Key Metrics Comparison

Source: Company filings (FY2025), CMF statistics, Yahoo Finance, Investing.com. Estimates marked ~ based on available public data.

2.2 Key Observations

Profitability: BSAC leads with 23.5% ROE, closely followed by BCH at 21.9%. Both significantly outperform the system average of 15.5%. BCH leads in ROA (2.2% vs. system 1.3%), reflecting superior capital efficiency.

Asset Quality: BCH is the clear leader with a 2.4% NPL ratio and 148% coverage ratio, providing the widest buffer against credit deterioration. BSAC's 3.2% NPL and 114.5% coverage represent the weakest metrics among the top-2 banks, with mortgage impairments rising.

Efficiency: BSAC edges out BCH with a 36.0% cost-to-income ratio vs. 37.4%, both exceptional relative to peers and regional benchmarks. BCI, Scotiabank, and Itau operate at significantly higher cost levels.

Valuation: BCH and BSAC trade at premium P/B multiples (3.04x and 3.25x respectively), justified by their superior ROE delivery. BCI, Scotiabank, and Itau trade at more modest valuations, reflecting lower returns on equity. BCH offers the highest dividend yield in the group at 5.6%.

3. Composite Scoring and Ranking

Composite = weighted average of category scores. BancoEstado excluded from valuation scoring (not publicly traded).

3.1 Ranking Analysis

#1 Banco de Chile (BCH) - Composite 8.8/10

BCH emerges as the top-ranked bank in our screening, driven by its unmatched combination of profitability, asset quality, and efficiency. Key differentiators:

• Best-in-class asset quality: 2.4% NPL ratio is 80bp below system average, with 148% coverage providing a substantial buffer
• Superior profitability: 21.9% ROE and 2.2% ROA both significantly above system averages (15.5% and 1.3%)
• Highest dividend yield: 5.6% yield with 84.7% payout ratio, supported by CLP 9.998/share distribution
• Proven efficiency: 37.4% cost-to-income ratio among the best in Latin American banking
• Strongest balance sheet: Leading profitability share (22.1% of system net income as of June 2025)

#2 Banco Santander Chile (BSAC) - Composite 8.6/10

BSAC ranks a close second, with the highest ROE in the sector and the best efficiency ratio. Key differentiators:

• Sector-leading ROE: 23.5% ROAE represents a 330bp improvement year-over-year, reflecting superior capital deployment
• Best efficiency: 36.0% cost-to-income ratio, 300bp improvement over the prior year
• Largest franchise: 16.6% total loan share, dominance in consumer (19.2%) and credit cards (24.2%)
• Key risk: Higher NPLs (3.2%) and rising mortgage impairments (5.4% to 6.3%) weigh on asset quality score
• Digital leadership: Strong investment in digital transformation, positioned for Open Finance System

#3 BCI - Composite 6.7/10

BCI offers solid mid-market exposure and attractive valuation (~9x P/E, ~1.3x P/B), but lower returns on equity (~14% ROE) and higher cost levels (~45% C/I) limit its composite score. Best suited as a value play for investors prioritizing low entry multiples over peak profitability.

#4 Scotiabank Chile - Composite 5.9/10

Scotiabank Chile operates a solid corporate banking franchise but lacks the scale and profitability of the top-3 banks. Limited ADR liquidity constrains foreign investor access.

#5 (Tie) Itau Chile & BancoEstado - Composite 5.2/10

Itau Chile is still integrating the 2016 CorpBanca merger and has the weakest asset quality metrics. BancoEstado, while systemically important and dominant in financial inclusion, is not publicly traded and operates at a structurally lower ROE due to its social mandate.

4. Thematic Overlays

4.1 Digital Transformation Winners

With the Open Finance System (NCG 514) launching July 2026, banks with the strongest digital platforms are positioned for structural market share gains:

• BSAC: Most advanced digital platform, highest digital adoption rates, leadership in credit card and payments processing
• BCH: Strong digital investment combined with superior cost discipline, well-positioned to capture digital banking opportunities without sacrificing efficiency
• Fintech challengers (Tenpo, itu) represent incremental competition but limited systemic threat to dominant incumbents

4.2 Rate Cycle Beneficiaries

As the BCCh begins its easing cycle (TPM expected from 5.00% to ~4.25% by year-end 2026), asset-sensitive banks with large variable-rate books will face NIM compression. However, banks with strong fee income diversification can offset this:

• BSAC: Most fee-income diversified franchise (credit cards, current accounts, wealth management)
• BCH: Strong non-interest income supported by treasury and wealth management operations

4.3 Dividend Yield Theme

For income-oriented investors, BCH stands out with a 5.6% dividend yield, the highest in the Chilean banking sector. The 84.7% payout ratio is sustainable given BCH's capital position and consistent profitability trajectory.

5. Screening Conclusion and Recommendation

Our quantitative multi-factor screen identifies Banco de Chile (BCH) as the top investment idea in Chilean banking, with a composite score of 8.8/10. BCH offers the most attractive risk-adjusted profile, combining:

1. Best asset quality in the system (lowest NPL, highest coverage)
2. Top-tier profitability (21.9% ROE, 2.2% ROA)
3. Leading efficiency (37.4% cost-to-income ratio)
4. Highest dividend yield (5.6%) among investable peers
5. Strong franchise value with the largest profitability market share

We recommend initiating coverage on BCH as the primary Chilean banking exposure. BSAC (ranked #2, composite 8.6/10) represents a strong alternative for investors prioritizing revenue growth and digital transformation momentum over asset quality and dividends.

The screening was conducted objectively using publicly available financial data. No pre-determined rating or bias was applied. Rankings reflect the mechanical output of the weighted multi-factor scoring model.

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This report is for informational purposes only and does not constitute investment advice.