BCH shares seen facing pressure on LQIF's waiver to subscribe to capital increase

Friday, January 21, 2011

Banco de Chile's (NYSE: BCH) shares could see some short-term downward pressure due to the decision by the bank's controlling investment vehicle, LQIF, to forego its preferential option to subscribe to a US$500mn capital increase, as it might be seen as a signal of lack of commitment from the controllers, Ruben Catalan, analyst at the studies department of BCI's stock brokerage, told BNamericas.

On Thursday (Jan 20), before Banco de Chile's shareholders approved the capital increase, LQIF announced the move to give "greater liquidity" to the shares. LQIF's stake in the bank will thus be reduced to 60% from 62%.

"The price reaction will depend on how you interpret the decision. If you consider a 2% dilution reasonable, you will probably remain indifferent," Catalan said.

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LQIF's decision should have no effect on Banco de Chile's stock in the medium term, and the bank should have no trouble selling the package, he said. Catalan has an 81.5-peso end-2011 price target on Banco de Chile's shares.

The bank's shares fell 0.69% on Thursday to 72.9 pesos.

The bank's board will set the price of the 3.39bn-share issuance within 120 days following Thursday's shareholders meeting. The transaction should be ready by end-1H11.

LQIF is 50-50% owned by local holding company Quiñenco and Citi (NYSE: C). The shares LQIF did not subscribe - worth some US$150mn - will be sold through a public auction.

The decision not to exercise its preferential option does not apply to the central bank's SAOS unit. SAOS owns a 35% stake in Banco de Chile that goes back to a central bank-led bailout during the country's financial crisis in 1982.

Banco de Chile's capital increase aims at strengthening its equity base and finance business growth over the next few years. The capital increase boosts the bank's equity by 17% and lifts its capital adequacy ratio to 15%.

The bank estimates that its loan portfolio could grow an additional 45%, or the equivalent to US$13bn in new business, over the next three years.

Banco de Chile is the country's second-largest lender and saw its 2010 earnings jump 47% to 379bn pesos (US$772mn).