We believe fixed income is better positioned for 2025, thanks to the attractive yields offered by high quality fixed income (Investment Grade), with more favorable valuations compared to equities.

• Bond yields are attractive in a context where equity valuations and credit spreads are not, which gives the bond yields Investmet Grade a favorable starting point.
• Even with the possibility of a longer pause by the Federal Reserve (Fed) in interest rate cuts, we believe intermediate maturity bond rates are attractive by historical standards, we consider intermediate maturity bond rates to be attractive by historical standards.

Favorable macroeconomic environment

• The U.S. economy enters 2025 with strong momentum, marked by sustained growth, a normalized yield curve and improving banking sector fundamentals. Declining unrealized losses in securities portfolios have strengthened bank balance sheets, while solid capital adequacy ratios bolster their resilience. These factors have translated into higher profitability, establishing a solid foundation for the banking sector to thrive in the credit markets.
• Improved banking sector earnings, derived from higher net interest margins and lower provisioning expenses, have strengthened financial positions across the sector. Compared to other industries, banks have maintained relatively conservative leverage ratios and higher quality asset bases. IG credit spreads narrowed significantly in 2024 as confidence in the sector grew, driven by strong balance sheets and favorable macroeconomic trends. We believe this credit spread compression will particularly benefit the financial sector in 2025.

Opportunities in U.S. bank fixed income.

• The sector Financials sector is one of the most attractive within corporate credit in the U.S., as it offers 14.2 bp spread per year of durationhigher than the average of 10 bp of all sectors, which implies a better compensation for the risk assumed. In addition, it has 95 bp of yield per year of durationsignificantly higher than the average of 68 bp of the rest of the sectors. In addition In addition to these favorable attributes, its spread is similar to the corporate index and other sectors, but with a better rating. rating (A/A- vs. A-/BBB+) and a shorter duration (5.46 vs. 7 years), which positions it as a defensive option without sacrificing return.

Opportunities in fixed income bank bonds USD Chile

In the case of local banks, they have experienced several years of good results and high yields, driven by a higher interest margin, in addition to being well capitalized.

• At the end of 2024, the CET1 (Common Equity Tier 1) of BCI, BancoEstado, Banco de Chile and Santander were 11.0%, 11.9%, 14.37% and 11%, respectively.
• Profitability levels (ROE) will remain high given the greater persistence of inflation. Banco de Chile: 22.5%; BCI: 12.2%; BancoEstado: 16%; Santander: 19.8%.
• On the other hand, NPLs (Non Performing Loans) appear to be at well-controlled levels in large financial institutions -Banco de Chile: 1.4%; BCI: 2.2%; BancoEstado: 4.2%; Santander: 3.1%-, suggesting that delinquency risks are limited.

In particular, dollar-denominated issues in the context of Basel III requirements, (BCICI 8.75 PERP (BB+) and BANCO 7.95 PERP (BBB-), offer attractive risk-adjusted yields.

While BCI's issuance is "High Yield"both BCI and BancoEstado are Investment Grade issuers. Investment Grade and the perpetual nature of these issues (with a call to 2029) means that the bonds trade at relatively high rates compared to their peers.

A combination of CL and US bank bonds offers an attractive risk-return ratio, IG rating, coupon rate averaging 6.0%, YTM averaging 5.64% (123 bps spread of spread).

Humberto Mora

Investment, Finance, and Business Manager; Stockbroker