Executive Summary

We are raising our 12-month price target on Banco de Chile (BCH) to $39.50/ADR from $35.50, representing +11.3% upside to our prior target, while maintaining our HOLD rating. The revision is driven by three factors: (1) correction of the FY2025 base year to reflect actual results (NI CLP 1,192B vs. our prior model's CLP 1,080B), (2) upward revision to near-term NIM estimates as the rate easing cycle stalls and UF-linked assets benefit from rising inflation expectations, and (3) the confirmed 85% dividend payout ratio (vs. our prior 80% assumption).

At the current price of $38.15, BCH offers a total return of ~9.0% (3.5% price appreciation + 5.5% dividend yield). While attractive for a defensive banking name, this falls short of the >15% threshold required for an upgrade to BUY. We would become more constructive below $35, where total return would exceed 18%.

1. Update Trigger: Macro + Base Year Correction

This model update is triggered by a combination of macro developments and the need to correct stale 2025A estimates in the Personalizado model. Key changes since the prior model (March 11, 2026):

2. Key Assumption Changes

Net Interest Margin: 4.2% → 4.50% (+30bps)

The prior model assumed aggressive NIM compression from 4.91% (2025A actual) to 4.2% in 2026E. We now project a more gradual decline to 4.50%, reflecting: (a) the TPM held at 4.5% with no near-term easing expected, (b) rising inflation expectations (oil shock) benefiting BCH's ~40% UF-linked loan book, and (c) management guidance suggesting NIM will compress but remain above 4.3%.

Cost of Risk: 1.1% → 1.15% (+5bps)

Slight upward revision aligned with management guidance of 1.1-1.2%. Oil price shock and potential rate increases create modest pressure on consumer credit quality. However, BCH's 1.7% NPL ratio with 223% coverage provides substantial buffer. We model 1.15% as a prudent midpoint.

Efficiency Ratio: 39.1% → 39.0% (stable)

Maintained near management guidance of ~39%. FY2025A actual of 37.4% suggests some upside, but management has flagged increased technology investments (CLP 80B planned for 2026) and wage inflation. Digital channel adoption (>75% of transactions) provides structural tailwind.

Dividend Payout: 80% → 85% (+500bps)

Confirmed by the March 2026 dividend declaration: $2.08/ADR representing 84.7% of FY2025 earnings. Board approved at Junta Ordinaria (March 26). Sustainable given CET1 of 14.5% (highest in Chile), well above Basel III minimum requirements.

Loan Growth: 2.8% → 4.5% (nominal)

Management guided 6-7% nominal loan growth (above industry 4.5%). We discount to 4.5% reflecting: (a) January IMACEC below expectations, (b) US-China tariff war uncertainty on Chilean trade, and (c) potential consumer spending drag from higher fuel costs. Still above industry average given BCH's market position.

Cost of Equity (Ke): 10.5% → 10.0% (-50bps)

The prior Ke of 10.5% was too high relative to the corrected fundamentals (ROE 21.9%, CET1 14.5%). We reduce to 10.0%, partially offset by +35bps of additional macro risk premium for geopolitical uncertainty (Middle East, US-China tariffs, oil volatility). Net effect: -50bps.

3. Revised Forward Estimates

Below we present the revised 3-statement estimates alongside prior model figures. All values in CLP Billions unless noted.

Income Statement Revisions

Key Ratios Comparison

Per-ADR Estimates

4. Valuation Impact

We employ a blended three-method approach consistent with our initiation methodology:

Target Price Bridge: $35.50 → $39.50

DDM Sensitivity (USD/ADR)

Two-stage DDM: explicit 5-year period + terminal value. Terminal ROE 19%, payout 85%.

5. Summary & Recommended Action

Is This Thesis-Changing?

No. This update corrects stale model inputs and incorporates macro developments. All five investment thesis pillars remain On Track. The core narrative is unchanged: BCH is Chile's highest-quality bank with best-in-class ROE, superior asset quality, and an attractive dividend yield. The primary adjustment is bringing the Personalizado model in line with the Q4 2025 actuals that were already reflected in the coverage-plugins model.

Rating & Price Target

Maintain HOLD. Raise 12-month price target from $35.50 to $39.50 (+11.3%).

At $38.15, BCH offers ~3.5% capital upside and ~5.5% dividend yield = ~9.0% total return. This is attractive for a defensive, high-quality banking name but insufficient for a BUY upgrade (requires >15% total return). The stock would need to trade below ~$35 for us to upgrade.

Macro Risk Assessment

We flag elevated near-term uncertainty from three vectors:

• Oil shock (Middle East war): Approaching $100/bbl, will push Chilean inflation to ~4% in Q2, potentially forcing a TPM hike. Net effect on BCH is mixed: higher NIM (UF benefit) vs. worse consumer credit quality.
• US-China tariff war: Creates volatility in copper prices and Chilean trade flows. Record copper prices ($12,400-$13,900/MT) are a tailwind but Chile's regulator warns they may have peaked.
• Rate path uncertainty: BCCh's April 27-28 meeting is pivotal. Board members have discussed potential rate increases. Any hike would temporarily benefit NIM but signal macro stress.

Key Catalysts Ahead

Conviction

Conviction raised from 3.5 to 4.0 out of 5.0. Q4 2025 actuals validated the core thesis pillars (ROE >20%, NPL <2%, CET1 >14%, payout >80%). All pillars remain On Track. Macro uncertainty is the primary drag on full conviction.