We charge you more because we can, we control your country…:

Many Banks have told me that when talking about what used to be the more admired democracy in LATAM for the right side of the political spectrum.

Let’s analyze just data. comparing Canadian Banks with Chilean Banks since many are own by the same companies :

Canada Data :

To understand the ratio where banks in Canada make money based on the information you’ve provided, we need to compare the interest rates banks pay on deposits versus what they charge on loans. The interest rates banks offer for savings or deposits are the costs to the bank, and the rates they charge on loans represent their income. The difference between these rates is a key source of bank revenue, often referred to as the “net interest margin.”

Interest Earned on Deposits

1. Standard Interest Range: 0.65% to 1.90%
2. Smart Interest: An additional 0.50% for saving at least $200 a month (up to a balance limit of $200,000).
3. Bonus Interest: A bonus interest rate of 3.35% for the first four months on new accounts (up to a balance limit of $1,000,000).
4. Maximum Interest Potential: Up to 5.75%.

Average Personal Loan Interest Rates by Credit Score

• Poor (500 to 579): 17.49%
• Fair (580 to 669): 14.20%
• Good (670 to 739): 9.85%
• Excellent (740 to 900): 7.20%

Analysis

Banks make money on the spread between what they pay out in interest on deposits and what they earn on loans. The exact ratio can vary widely depending on the mix of loans and deposits a bank has, as well as the specific rates involved.

• On Deposits: The bank’s cost can vary from as low as 0.65% to as high as 5.75%, considering all types of interests including standard, smart, and bonus interests.
• On Loans: The bank’s income from loans can range from 7.20% (excellent credit) to 17.49% (poor credit).

Calculating the Ratio

To calculate a simple ratio of income to cost, we can consider the lowest earning rate on loans (7.20%) and the highest cost rate on deposits (5.75%).

However, a more accurate measure would consider the average loan rate and the weighted average cost of deposits, taking into account how much money is held in accounts with each interest rate. Given the vast range in loan interest rates and the potential for high deposit rates (up to 5.75%), the net interest margin can vary significantly.

Let’s proceed with a simplified calculation using the lowest loan rate (for excellent credit scores) and the highest potential deposit rate to get a conservative estimate of the bank’s interest margin.

Interest Margin Ratio=Lowest Loan RateHighest Deposit Rate=7.20%5.75%Interest Margin Ratio=Highest Deposit RateLowest Loan Rate​=5.75%7.20%​

Let’s calculate this ratio.

The simplified interest margin ratio, using the lowest loan rate (7.20%) and the highest potential deposit rate (5.75%), is approximately 1.25. This means that for every dollar the bank pays in interest on deposits, it earns about $1.25 in interest from loans to borrowers with excellent credit scores. It’s important to note that this is a very simplified analysis and actual bank profitability from interest can vary based on a multitude of factors, including the distribution of loans across different credit scores and the actual balances held at various interest rates for deposits. ​​

What when take a look at Chile :

To analyze the interest margin ratio for banks in Chile using the numbers you’ve provided, we’ll consider the interest rates banks pay (or equivalent financial metrics) and the rates they charge on loans.

Deposit Rates in Chile

From your description, it seems the focus is on the general interest environment rather than specific deposit rates offered by banks. However, the provided average value of 4.69% with a minimum of 0.32% and a maximum of 11.25% could serve as a proxy for the cost of funds or interest paid on deposits over time. For our purposes, let’s use the average rate of 4.69% as a stand-in for the cost of deposits, acknowledging this is a simplification.

Lending Rates in Chile

1. Bank Lending Rate in 2023: Averaged 16.61%.
2. Credit Card and Retail Loans: Averaged 42% over the last five years, with a high of 48% in 2023.

Analysis

For this analysis, we will compare the average cost of deposits (4.69%) to:

1. The average bank lending rate in 2023 (16.61%).
2. The average rate for credit card and retail loans over the last five years (42%).
3. The high rate for credit card and retail loans in 2023 (48%).

This will give us an understanding of the range of interest margin ratios banks in Chile might experience across different types of lending.

Let’s calculate these ratios now.Error analyzing

The calculated interest margin ratios for banks in Chile, based on the provided data, are as follows:

1. For the average bank lending rate in 2023 (16.61%) compared to the average cost of deposits (4.69%), the interest margin ratio is approximately 3.54. This means that for every dollar the bank pays in interest on deposits, it earns about $3.54 in interest from loans.
2. For the average rate for credit card and retail loans over the last five years (42%) compared to the average cost of deposits, the interest margin ratio is approximately 8.96. This indicates that for every dollar paid in deposit interest, the bank earns about $8.96 in interest from credit card and retail loans.
3. For the high rate for credit card and retail loans in 2023 (48%) compared to the average cost of deposits, the interest margin ratio is approximately 10.23. This suggests that for every dollar paid in interest on deposits, the bank earns about $10.23 in interest from these loans at the high rate.

These ratios illustrate the significant difference in potential profitability between traditional lending and credit card or retail loan products, with the latter offering substantially higher margins. ​

So how do Bankers explains the differences vs one an another ?

When comparing the interest margin ratios in Canada and Chile, several key observations stand out, reflecting differences in the banking landscapes and economic conditions of the two countries:

Canada’s Banking Environment

• The interest margin ratio calculated for Canada, using a simplified approach and conservative estimates (the lowest loan rate for excellent credit and the highest deposit rate), was approximately 1.25. This suggests a relatively narrower margin between what banks earn on loans and what they pay on deposits.
• The Canadian banking system is known for its stability and conservative lending practices. The relatively lower margin reflects a more regulated environment, where interest rates on loans and deposits are closer together, partially due to competitive pressures and a focus on maintaining financial system stability.

Chile’s Banking Environment

• In Chile, the interest margin ratios calculated were significantly higher, with ratios of 3.54 for traditional bank lending, 8.96 for the average rate on credit card and retail loans over the last five years, and 10.23 for the high rate in 2023. These higher ratios indicate a much larger spread between the interest banks earn on loans and what they pay on deposits.
• The higher ratios in Chile can be attributed to several factors, including potentially higher operational costs, risk premiums due to economic volatility, and a different regulatory environment. Credit card and retail loans, in particular, show exceptionally high interest rates, reflecting the higher risk and possibly higher default rates associated with these types of lending.