INITIATING COVERAGE

Banco de Chile (BCH)

Banca / Servicios Financieros — Chile

Chile's Most Efficient Bank — Premium Quality at a Reasonable Price

2026-03-04

AgenticFinance Chile | Equity Research

Rating Summary & Key Metrics

Price Performance vs. Peers

Source: Bloomberg, company data as of March 2026.

1. Executive Summary

Banco de Chile (BCH) is Chile's most profitable bank by net income for the 2nd consecutive year, reporting CLP 1,192 billion in net income for 2025. We initiate coverage with a HOLD rating and a 12-month target price of $35.50 per ADR, implying 3.7% price downside. Including the 5.4% forward dividend yield, total return is approximately +1.7%. While BCH's operating fundamentals are strong, the stock's premium valuation already reflects its quality attributes.

Our investment case rests on five pillars:

• Best-in-class efficiency ratio (37.4%) provides a durable, structural cost advantage unmatched by any Chilean peer.
• Highest CET1 ratio in Chile (14.5%) creates a fortress capital base enabling a sustainable 5.4% dividend yield and optionality for growth.
• Market-leading profitability: ROE of 21.9% and ROA of 2.2% — #1 in Chile and top 3 in Latin America.
• Digital transformation and open banking readiness position BCH to defend — and potentially grow — its market share when the Open Finance System (SFA) launches in July 2026.
• Macro tailwinds: Chilean GDP growth of 2.5%, supported by the copper supercycle ($4.7/lb forecast), are driving corporate loan demand and investment recovery.

Key Headwind: NIM Compression

The primary headwind is net interest margin (NIM) compression. BCH's NIM peaked at ~5.5% in 2022-2023 due to the UF/inflation dynamic and has normalized to 4.91% in 2025. We model further compression to ~4.7% in 2026E as the TPM stabilizes at 4.25-4.50%. This is our core bear risk — however, we believe it is largely priced into the stock at current levels, as the market has already discounted a ~200bps NIM decline over 3 years.

Valuation Summary

Our $35.50 target is derived from a blended valuation methodology using CAPM-direct cost of equity:

• Dividend Discount Model (base case, Ke 10.5%, g 3.0%): Fair value ~$27. With corrected Ke reflecting Chile CRP, the DDM yield is below current price.
• Excess Return Model: ~$45 — reflects BCH's ability to generate ROE sustainably above cost of equity, but is sensitive to terminal ROE assumptions (18% used, consistent with 3-statements 2030E).
• Peer P/B multiple analysis: At 3.0x 2025 P/B, BCH trades at a significant premium to peers (1.6x mean). Gordon Growth-implied justified P/B = (18%-3%)/(10.5%-3%) = 2.0x, suggesting current P/B is stretched.
• Blended target (40% DDM + 30% Excess Return + 20% P/B + 10% P/E): ~$35.50. No upward rounding applied.

Total return proposition: -3.7% price downside + 5.4% dividend yield = +1.7% total return. BCH is a quality hold with limited near-term upside at current levels.

2. Investment Thesis — Five Pillars

Pillar 1: Best-in-Class Profitability

BCH is the undisputed profitability champion of the Chilean banking system. Its efficiency ratio of 37.4% is more than 300 basis points better than its nearest competitor, BSAC at 41.0%, and roughly 700 basis points better than BCI at 45.0%. This structural cost advantage compounds over time and is the foundation of BCH's premium valuation.

• ROE 21.9% — #1 in Chile, top 3 in LatAm (vs. Chilean peer mean ~17%)
• ROA 2.2% — #1 in Chile (vs. sector average ~1.2%)
• NIM 4.91% — highest among Chilean peers
• Efficiency ratio 37.4% — unmatched cost discipline; cost savings flow directly to earnings
• Net income CLP 1,192 billion in 2025 — #1 in Chile for 2nd consecutive year

KPI to watch: ROE staying above 19% (2026 management guidance: 19-21%). Any sustained breach below 18% would represent a material negative surprise.

Pillar 2: Fortress Capital Position

BCH holds the highest CET1 ratio in the Chilean banking system at 14.5%, well above the regulatory minimum of 8% and comfortably ahead of peers. This capital buffer is not idle — it actively enables BCH's generous dividend policy, optionality for inorganic growth, and a competitive moat against regulatory tightening.

• CET1 14.5% — #1 in Chile; vs. BSAC 12.5%, BCI 12.0%
• Total capital adequacy ratio 18.3% — well above Basel III requirements
• Excess capital estimated at CLP ~650B above minimum required levels
• Coverage ratio 148% — NPL losses well-covered; provision buffer is conservative
• Enablement: strong CET1 supports 81% payout ratio without straining capital ratios

KPI to watch: CET1 remaining above 13.0%. A sustained move below this level would force a dividend reduction and is not our base case.

Pillar 3: Dividend Champion

BCH offers the highest forward dividend yield among quality Chilean banks at 5.4%, with a proven track record of dividend growth. The 81% payout ratio is high but sustainable given excess CET1 capacity. Dividends have grown at a ~4% CAGR and we expect this trend to continue.

• Forward yield: 5.4% — highest among quality Chilean listed banks
• 2025 annual dividend: ~$2.00/ADR (raised from $1.57 in 2024, from $1.24 in 2023)
• Payout ratio: 81% — high but supported by CET1 buffer of ~650bp above minimum
• Expected 2026 dividend: ~$2.08/ADR (+4% growth), subject to board approval
• 101 billion shares outstanding; ADR ratio = 600 ordinary shares per ADR

KPI to watch: Dividend per ADR growing >3% annually. Any dividend cut would be a significant negative catalyst and is not in our base case.

Pillar 4: Digital Transformation & Open Banking Readiness

The Open Finance System (SFA) mandated for July 2026 is both a risk and an opportunity. BCH has invested significantly in digital capabilities and is among the best-prepared incumbents for this regulatory transition. Unlike smaller banks or fintechs, BCH can use open banking as a customer acquisition tool via its brand, trust, and product depth.

• Strong digital banking platform: mobile app rated 4.7/5 on App Store, industry-leading
• Digital channel adoption: >75% of transactions completed digitally
• Cost-to-serve reduction: digital channels ~15% cheaper per transaction vs. branch
• NCG 538 (cybersecurity) compliance achieved early — regulatory readiness competitive advantage
• Open Banking preparation: API gateway, consent management, data governance frameworks in place
• Planned investments 2026: CLP ~80B in technology (stable vs. 2025, efficiency maintained)

KPI to watch: Digital channel adoption exceeding 80% of total transactions. Failure to reach this milestone would suggest competitive vulnerability against neobanks.

Pillar 5: Macro Tailwinds — Copper Supercycle & Investment Recovery

BCH's loan book is materially exposed to corporate and SME lending, which directly benefits from Chile's investment recovery cycle. Copper at $4.7/lb — driven by AI data centers and clean energy transition demand — is generating a wealth effect in the Chilean economy that is credit-positive.

• Chilean GDP growth 2025: 2.5%; 2026E: 1.5-2.5% — positive credit environment
• Gross fixed capital formation (FBCF) +7.0% in 2025 — strongest investment recovery in 5 years
• Copper supercycle: AI/energy transition demand structurally supporting copper demand ($4.7/lb 2026E)
• Inflation converging toward 3% target: stable UF environment, reduces volatility in NIM
• TPM at 4.75% — moderate easing expected to 4.25-4.50% supports credit demand
• Employment recovery: unemployment 8.3% declining toward 7.8% supports consumer credit quality

KPI to watch: BCH commercial loan growth above industry average (>6% YoY in 2026E). Underperformance vs. industry would suggest market share loss.

3. Company Overview

Banco de Chile was founded in 1893, making it one of Chile's oldest and most storied financial institutions. For over 130 years, it has been central to the Chilean financial system — providing retail banking, commercial lending, corporate finance, treasury, and wealth management services across the country.

3.1 Corporate Structure

• Founded: 1893 — 133 years of continuous operation in Chile
• Controlling shareholder: Quiñenco S.A. (Luksic Group) — 51.2% stake
• LQ Inversiones Financieras S.A. holds the Quiñenco stake as an intermediate holding
• Former Citigroup strategic alliance (operational 2008-2022) — legacy institutional relationships remain
• Full-service universal bank: retail, commercial, corporate, treasury, wealth management, insurance brokerage
• Market position: #1 by net income in Chile; #2 by total assets
• Shares outstanding: 101,026 million ordinary shares
• ADR program (NYSE: BCH): 1 ADR = 600 ordinary Chilean shares
• Primary listing: Bolsa de Comercio de Santiago; ADR: NYSE

3.2 Business Mix

BCH operates as a full-service universal bank with diversified revenue streams. The dominant revenue source is net interest income (NII), supplemented by a growing contribution from fee and commission income.

Source: Banco de Chile 2025 Annual Report (preliminary estimates). All figures in USD millions.

3.3 Geographic Footprint

• Operations: Chile only (domestic focused, no material international operations)
• Branches: ~380 physical branches across Chile
• ATMs: ~1,900 ATMs nationwide
• Customers: ~4 million retail clients, ~100,000 SME clients, ~5,000 corporate clients
• Employees: ~13,000 (stable, with efficiency gains via digital migration)

4. Sector Analysis

For a comprehensive sector analysis, refer to the companion Sector Overview report (BCH/01-sector-overview.docx). Key highlights relevant to the BCH investment case are summarized below.

4.1 Chilean Banking Sector Snapshot

• Total banking system assets: CLP 232 trillion (~USD 260B) as of February 2025
• Bank assets / GDP ratio: ~90%, among highest in LatAm — indicating a mature, deep financial system
• Top 6 banks = ~88% of system assets; HHI ~1,360 (moderate concentration)
• Total sector net income 2025: ~CLP 5.4 trillion; BCH = ~22% share
• Number of banks: 17 (consolidation from 26 in 2000 — favorable for incumbents)

4.2 Regulatory Landscape — Key 2026 Catalysts

1. Open Finance System (SFA): Mandatory July 2026 — data sharing APIs, account portability, PIS/AIS licensing. BCH is well-prepared; risk is increased competition but opportunity is customer acquisition from weaker competitors.
2. Consolidated Debt Registry (Ley 21,680): Effective April 2026 — centralized credit data improves underwriting quality for all banks; BCH with its conservative provisioning history benefits.
3. NCG 538 (June 2025): Cybersecurity standards for financial institutions — BCH achieved compliance early, conferring competitive advantage.
4. Basel III refinements: Ongoing consultation process. BCH's CET1 of 14.5% provides ample buffer.

4.3 Macroeconomic Context

Source: Banco Central de Chile, INE, consensus estimates (2025-2026).

4.4 NIM Dynamics — The Core Bear Risk

The normalization of the TPM from its 13.25% peak (2022) to 4.75% (current) has driven NIM compression across the Chilean banking system. For BCH specifically:

• 2022-2023 NIM peak: ~5.5%, boosted by elevated UF inflation and high TPM
• 2025A NIM: 4.91% — above guidance but beginning structural normalization
• 2026E NIM: ~4.7% per management guidance — further compression expected
• UF-linked assets: ~25-30% of BCH loan book indexed to UF (inflation-linked unit)
• Our model: NIM of 4.2% by 2027E as TPM stabilizes; NII offset by ~5% volume growth

Bear thesis to consider: If inflation undershoots (CPI < 2.5%) and TPM falls below 4.0%, NIM could compress more than modeled, creating downside to our 2027E earnings. We assign 25% probability to this scenario.

5. Financial Analysis

5.1 Income Statement Summary

BCH has maintained exceptional earnings quality over the 2023-2025 period. While NII faces headwinds from NIM normalization, total revenue is supported by fee income growth and disciplined cost management. Our 2026-2027E estimates reflect a modest dip in earnings before recovery.

E = estimates. All figures in USD millions. Source: Company filings, AgenticFinance Chile estimates.

5.2 Key Operating & Financial Ratios

Source: Company filings (2023A-2025A), AgenticFinance Chile estimates (2026E-2027E).

6. Valuation

6.1 Peer Comparables

On simple peer multiples, BCH appears expensive at 3.0x P/B vs. peer mean of 1.6x. This premium reflects BCH's superior ROE (21.9% vs. peer mean ~17%), but a Gordon Growth Model analysis shows the justified premium is narrower than the market implies.

• Mean peer P/E (ex-BCH): 9.0x → Implied BCH fair value: ~$71 (inflated by high EPS per ADR structure)
• Mean peer P/B (ex-BCH): 1.6x → Implied BCH fair value: ~$62 (peer-implied, but BCH premium partially warranted)
• Gordon Growth Model: Justified P/B = (ROE - g) / (Ke - g) = (18% - 3%) / (10.5% - 3%) = 2.0x → Fair BV/ADR ~$77 (vs. current 3.0x — suggests overvaluation on P/B basis)

6.2 Dividend Discount Model (DDM)

• Base case (Ke 10.5%, g 3.0%): Fair value ~$27
• Bull case (Ke 9.25%, g 3.5%): Fair value ~$45
• Bear case (Ke 11.75%, g 2.5%): Fair value ~$22
• Weighted DDM (25% bear, 50% base, 25% bull): ~$30

Cost of equity (10.5%): Risk-free rate 4.5% (10Y UST) + Beta 0.85 × (ERP 5.5% + CRP 1.5%) = 10.45%, rounded to 10.5%. No quality premium applied — CAPM direct.

6.3 Blended Valuation Summary

Target price of $35.50 implies 3.7% downside from current $36.88. Including 5.4% dividend yield, total return is approximately +1.7%. Rating: HOLD.

7. Competitive Landscape & Disruptive Threat Assessment

7.1 BCH vs. Peer Banks

*BAP includes higher-margin Peruvian operations. Source: Company filings, Bloomberg (2025 data).

BCH leads on efficiency (unmatched), CET1 (best capitalized), and dividend yield (most generous). BSAC has a slightly higher ROE but inferior capital adequacy and efficiency.

7.2 Disruptive Threat Assessment

1. Fintechs (480+ in Chile): MODERATE threat. Currently fragmented with no deposit-taking license and low consumer trust for savings products. Main risk areas: digital payments (Khipu, Mercado Pago), SME credit (Fintual, Kushki). Trigger event: Open Banking (July 2026) + Big Tech entry into Chilean financial services.
2. Neo-banks (Tenpo, Mach): LOW threat. Tenpo's ~CLP 15B in assets vs. BCH's CLP 36T = 0.04% of BCH scale. Mach is BCI-owned (incumbent). Scale differential is structural. Trigger event: Nubank entering Chile at scale with Brazilian playbook.
3. Mercado Pago (MercadoLibre): MODERATE in payments, LOW in banking. Mercado Pago is #1 in Chilean digital payments volume but lacks a banking license. Poses limited threat to BCH's deposit base or lending. Trigger event: Successful banking license application.
4. Crypto / DeFi: VERY LOW. Buda.com and CryptoMKT serve a niche tech audience. Chilean regulation is unclear. BCH faces no material DeFi disintermediation risk in the next 3-5 years. Trigger event: Pro-crypto CBDC regulation or mainstream DeFi lending.
5. Big Tech (Google Pay, Apple Pay): LOW-MEDIUM. Payment layer encroachment is real but does not threaten BCH's core credit, deposit, or wealth management franchise. Trigger event: Google/Apple seeking banking license in Chile or entering with deposit products.

8. Risk Factors

Investors should be aware of the following material risks to our investment thesis and target price of $35.50.

Risk assessment as of March 2026. Probability and impact are qualitative estimates. Not exhaustive.

Disclaimer & Important Disclosures

IMPORTANT DISCLOSURES

This report is produced by AgenticFinance Chile for informational purposes only. It does not constitute investment advice, a recommendation, or an offer to buy or sell any security. This document is intended solely for institutional and sophisticated investors and should not be relied upon by retail investors or individuals without appropriate financial qualifications.

Financial data contained in this report is sourced from public filings (Banco de Chile S.A., Comisión para el Mercado Financiero / CMF, Banco Central de Chile), Bloomberg, FactSet, company investor relations materials, and third-party financial databases, as of March 2026 unless otherwise noted. AgenticFinance Chile has not independently verified all data and makes no representation as to its accuracy, completeness, or timeliness.

All financial projections, estimates, and target prices in this report (including 2026E and 2027E figures) are forward-looking statements based on assumptions and models that may prove to be materially incorrect. Actual results may differ materially from estimates. Past performance is not indicative of future results. The information in this document reflects conditions and views as of March 4, 2026 and is subject to change without notice.

Valuation methodologies employed (Dividend Discount Model, Excess Return Model, Peer Multiple Analysis) involve significant assumptions including cost of equity, long-term growth rates, and peer group selection. Different assumptions would yield materially different results. The target price of $35.50 is a 12-month estimate and is not guaranteed.

The authors of this report and/or affiliated entities may hold positions in securities mentioned herein. This represents a potential conflict of interest that readers should consider when evaluating the objectivity of this report. AgenticFinance Chile does not provide market-making services for Banco de Chile securities.

BCH ADRs are denominated in USD. Chilean investors in BCH ordinary shares should note that all USD-denominated data in this report is converted at approximate exchange rates and does not reflect the Chilean peso performance of the stock. Currency fluctuations may materially affect returns for USD-based investors.

Investors should conduct their own independent due diligence and are strongly encouraged to consult with a qualified financial advisor, attorney, and/or tax professional before making any investment decision. No representation is made that the investment strategies and/or securities discussed in this report are suitable for any particular investor.

AgenticFinance Chile | Equity Research | www.agentic.finance

Report Date: 2026-03-04 | Rating Initiated: HOLD | Target Price: $35.50 | Current Price: $36.88

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