Banco de Chile Not Too Hot

We retain our Hold recommendation on Banco de Chile (BCH - Snapshot Report), one of the biggest banks of Chile. The bank has done well to date, thanks to the support of the Chilean economy, one of the most stable in Latin America. So, we also reiterate our $52 target price.

The bank has strengthened its position after its merger with Citigroup's Chilean banking operations in January. On the other hand, although BCH's first-quarter net earnings were up 19% year over year, it was below our estimate due to higher-than-expected loan loss provisions. Hence, we are cutting our 2008 diluted EPADS estimate to $4.70 from $5.15, partly due to the appreciation of the US$ against the Chilean peso.

To add to that, BCH continues to shift its loan portfolio into higher-risk loans. This may lead to the deterioration of asset-quality measures. The entry of new players into the Chilean financial market is hurting BCH's growth.

Thus, we expect the bank's strong results to moderate. As a result, we believe that EPS growth over the next few years will slow to 11-12%. BCH is currently trading at a P/E of 10.1X the 2009 consensus EPS estimate. Its growth prospects are below average while its dividend yield of 8.6% is well above the industry median. Given these facts, we believe BCH is fully valued at present.

Read the full analyst report on BCH