Executive Summary / Key Takeaways

• Digital Transformation Fuels Superior Profitability: Banco Santander-Chile ($BSAC) has successfully executed a comprehensive digital transformation, culminating in 100% cloud operations and a Work/Café branch model, driving an impressive Return on Average Equity (ROAE) of 24.5% in Q2 2025 and consistently exceeding 20% for five consecutive quarters.
• Robust Fee Income and Efficiency: An expanding client base, particularly through digital channels and the Getnet acquiring business, is generating strong fee income growth, while tight cost control has resulted in an industry-leading efficiency ratio of 35.3% in 2025.
• Asset Quality Stabilization and Capital Strength: Despite past challenges in commercial and mortgage portfolios, asset quality is showing signs of recovery, with NPLs stabilizing. The bank maintains a robust Common Equity Tier 1 (CET1) ratio of 10.9%, well above regulatory minimums, supporting a consistent 60-70% dividend payout.
• Strategic Growth in a Dynamic Macro Environment: While loan growth is projected at low single digits for 2025 due to weak demand and global uncertainty, the bank anticipates a stable Net Interest Margin (NIM) and high single-digit non-NII growth, underpinned by a favorable macroeconomic outlook for Chile with declining interest rates.
• Competitive Edge Through Innovation and Client Focus: BSAC differentiates itself through its aggressive digital client acquisition, innovative Work/Café formats, and specialized services like Getnet, positioning it strongly against both traditional banks and emerging fintech players in the Chilean market.

A Digital Ascent: Santander-Chile's Strategic Evolution

Banco Santander-Chile, incorporated in 1977, stands as a cornerstone of the Chilean financial landscape, deeply embedded in the nation's economic fabric. Its "Chile First" strategy, a multi-pillar approach, aims to solidify its leadership by transforming into a digital bank with a friendly physical presence through its innovative Work/Café branches. This strategic pivot, initiated in late 2016 with the launch of its first digital life account, has been a continuous journey, accelerating with the introduction of a current digital account during the 2020 pandemic and culminating in a significant technological leap in early 2025.

The Chilean banking industry operates within a dynamic macroeconomic environment, characterized by evolving trade dynamics, interest rate adjustments, and political shifts. Recent trade agreements by the U.S., while imposing tariffs on some regions, have maintained a 10% rate for Chile, with key exports like copper excluded from higher duties. Domestically, Chile's GDP grew 2.9% year-on-year in Q2 2025, or 3% excluding mining, signaling a better-than-expected first half of the year. Inflation, at 4.1% in June 2025, is on a disinflationary path, with the Central Bank initiating policy rate cuts, reducing the benchmark from 5% to 4.75% and signaling further reductions. This backdrop of moderating inflation and declining rates sets the stage for a more favorable lending environment, albeit with lingering global and local uncertainties.

Technological Edge: The Cloud-Powered Core

At the heart of Santander-Chile's competitive differentiation is its profound commitment to technological innovation. A pivotal achievement in Q1 2025 was the complete migration of its legacy mainframe service to the cloud through the "Gravity" project, making the bank 100% cloud-operational. This foundational shift provides tangible benefits, enhancing the stability and elasticity of its systems, crucial for a modern digital bank. The "so what" for investors is clear: this infrastructure underpins the bank's ability to scale digital services efficiently, reduce operational complexities, and standardize operations, directly contributing to its industry-leading efficiency.

Beyond the core infrastructure, BSAC has rolled out several innovative digital solutions. Its enhanced smart POS terminals now allow merchants to perform banking transactions, including deposits, withdrawals, and even simple digital account openings, extending the bank's transactional footprint directly into local communities. Initiatives like "Santander en tu comuna" further decentralize services, offering financial access closer to clients. The "Mas Lucas" account, a 100% digital savings account, and a simple savings account for children from birth, demonstrate the bank's aggressive strategy to acquire and engage clients across all demographics, competing directly with traditional state banks. These technological advancements are not just about convenience; they are strategic tools designed to increase transactionality, strengthen the bank's funding base, and ultimately, fortify its competitive moat by offering a seamless, integrated banking experience.

Competitive Dynamics: A Differentiated Approach

In the competitive Chilean banking landscape, Santander-Chile strategically positions itself through its blend of digital prowess and a robust physical network. The bank's efficiency ratio of 35.3% in 2025 is the best in the Chilean industry, underscoring its operational effectiveness. In the mortgage market, Santander secured 18.3% of the initial mortgage subsidy auction, the highest among its peers, demonstrating strong market penetration. Its Getnet acquiring business has rapidly gained traction, securing a 20% market share in transaction numbers and becoming the second-largest source of fee income for the bank.

Compared to direct competitors like Banco de Chile (BCH), Santander-Chile's extensive Work/Café network and personalized services offer a unique value proposition, particularly for regional governments and SMEs, where its relationship-based approach differentiates it. However, BCH is often perceived as having a more streamlined digital platform, potentially leading to faster customer onboarding. Against Itau Unibanco (ITUB)'s Chilean operations, BSAC's local expertise and regulatory advantages provide a strong footing in retail products and real estate financing. While Itau may exhibit faster processing for international transactions due to its regional network, BSAC's focus on domestic trust and loyalty enhances its market share in local segments. Similarly, while BBVA (BBVA) Chile boasts advanced digital capabilities, Santander-Chile's strong local brand and community ties foster superior customer loyalty. Scotiabank (BNS) Chile, with its international trade finance strengths, is countered by BSAC's extensive local knowledge and branch network, which are crucial for Chile's export-oriented sectors.

The bank also faces indirect competition from fintechs like Tenpo and Mercado Pago (MELI). While these players offer alternative digital solutions, Santander-Chile's aggressive digital acquisition strategies, coupled with its ability to leverage cross-selling capabilities across a diverse product offering, provide a strong defense. The bank's strategy of digitalizing and transforming faster is yielding good results, allowing it to maintain a competitive edge in customer acquisition and fee generation.

Financial Resilience and Performance Trajectory

Santander-Chile's financial performance in the first half of 2025 underscores its operational strength and strategic execution. The bank reported a net income of CLP 550 billion for the first six months of 2025, with CLP 273 billion in the second quarter alone. This translated into a remarkable ROAE of 24.5% in Q2 2025, marking the fifth consecutive quarter with an ROAE above 20%. This sustained profitability is a direct result of strong income lines and disciplined cost control.

Net Interest Margin (NIM) has been a key driver, improving by approximately 100 basis points over the last year to stabilize around 4.1%. This improvement was significantly bolstered by a 60 basis point gain following the final payment of the FCIC (credit guidance from the Central Bank) in July 2024, which had previously weighed on the balance sheet. Additionally, tight control over the cost of funds contributed another 50 basis points to NIM expansion.

Fee generation has been robust, with fees and financial transactions growing 16.3% year-on-year. This growth is fueled by an expanding client base of 4.5 million, including 2.3 million digital clients, driving a 10% year-on-year increase in current accounts and a 12% rise in credit card transactions. Getnet, the acquiring business, and mutual funds brokered, which grew 19%, are significant contributors to this non-NII growth. Despite an increase in operating expenses in H1 2025, mainly due to the mainframe cloud migration, overall costs grew below inflation, contributing to the industry-best efficiency ratio of 35.3% and a recurrence ratio of 62%, indicating that over 60% of expenses are covered by fee generation.

Asset quality, while having faced challenges, is showing tangible signs of recovery. The Non-Performing Loan (NPL) and impaired portfolio saw a reduction in absolute value and as a ratio of total loans, despite a stable loan book. Mortgage NPLs have stabilized in absolute value, and the commercial NPL ratio is now at 3.6% following focused renegotiation efforts and write-offs. The consumer loan book has remained healthy, reflecting the bank's strategy of lending to mid-to-high-income sectors. The cost of risk, at 1.39% year-to-date, is expected to improve slightly to around 1.35% by year-end 2025. The bank also mitigated a CLP 20 billion impact from a June 2025 adjustment to commercial loan guarantee valuations by utilizing voluntary provisions.

Capital Strength and Forward Outlook

Santander-Chile's capital position remains exceptionally strong, with a CET1 ratio of 10.9% in June 2025, comfortably exceeding the minimum regulatory requirement of 9.08% for December 2025. The bank generated 30 basis points of capital over the last 12 months, driven by strong income generation. This robust capital base supports a consistent dividend payout, with shareholders approving a 70% payout of 2024 earnings and a 60% provision for 2025 profits. The bank's management is confident in sustaining these dividend levels, noting that retail, corporate, and mortgage loan growth have different risk-weighted asset profiles, which are factored into their capital planning.

Looking ahead to the second half of 2025, the bank's macro scenario projects GDP growth of approximately 2.1%, a U.S. variation of 3.6%, and an average monetary policy rate of 4.9%. Loan book growth expectations have been adjusted to low single digits due to weak demand, upcoming elections, and global uncertainty. However, the Net Interest Margin is expected to remain within guidance, with a slight impact in Q3 from lower expected inflation, but a return to above 4.0% NIM in Q4, leading to a full-year NIM close to 4.1%. Non-NII guidance projects high single-digit growth, with further interchange fee regulation not expected until year-end. Efficiency levels are anticipated to remain in the mid-30s, and the cost of risk is expected to improve slightly to around 1.35%. Overall, the bank projects solid profitability, with ROEs in the 21% to 23% range for 2025, and a long-term ROE target of above 20%. For 2026, the policy rate is expected to reach 4%, with inflation converging to 3%, supporting sustained NIMs.

Risks and Strategic Mitigations

While Santander-Chile's operational performance is solid, several risks warrant investor attention. Macroeconomic risks primarily stem from abroad, particularly U.S.-China trade dynamics and the potential for a sharper-than-expected global slowdown. Domestically, rising political polarization could hinder legislative agreements aimed at boosting long-term GDP growth. The bank's commercial NPLs are structurally higher due to its strategic focus on SME lending, and mortgage NPLs have been impacted by a significant portion of its book repricing on variable rates. However, the bank actively manages these through renegotiation initiatives and high collateral levels. The delay in reaching Chile's structural deficit target and potential increases in electricity prices also present headwinds.

Santander-Chile mitigates these risks through its diversified business model, strong capital buffers, and proactive digital strategy. The ongoing investments in technology, such as the $450 million plan for 2023-2026, are designed to enhance efficiency and customer engagement, providing a resilient foundation against market volatility. The bank's ability to attract and retain a growing digital client base, coupled with its leading position in customer satisfaction, reinforces its market standing.

Conclusion

Banco Santander-Chile presents a compelling investment thesis, driven by its successful digital transformation and a robust "Chile First" strategy. The bank's proactive shift to a cloud-based core and its innovative Work/Café model have not only enhanced operational efficiency, reflected in its industry-leading cost-to-income ratio, but have also significantly expanded its client base and diversified its revenue streams through strong fee generation. This technological leadership, coupled with disciplined cost management, has propelled the bank to consistently deliver ROAEs above 20%, a testament to its operational excellence.

While external macroeconomic uncertainties and specific asset quality challenges in certain loan segments require ongoing monitoring, Santander-Chile's strong capital position, proactive risk management, and clear strategic roadmap provide a solid foundation. The bank's ability to leverage its digital advantages to drive customer acquisition and cross-selling, alongside its commitment to a high dividend payout, positions it as a resilient and attractive opportunity for discerning investors seeking exposure to a leading financial institution in a dynamic emerging market.