SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the fiscal year ended
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
For the transition period from to
Commission file number
|(Exact name of Registrant as specified in its charter)|
|(Translation of Registrant’s name into English)|
|(Jurisdiction of incorporation or organization)|
|Banco de Chile|
|(Address of principal executive offices)|
|(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)|
Securities registered or to be registered pursuant to Section 12(b) of the Act.
American Depositary Shares, each representing 200 shares of common stock, without nominal (par) value (“ADSs”)
|BCH||New York Stock Exchange|
|Shares of common stock, without nominal (par) value||
New York Stock Exchange
(for listing purposes only)
Securities registered or to be registered pursuant to Section 12(g) of the Act.
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
Shares of common stock:
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒
this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section
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by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
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TABLE OF CONTENTS
|Item 1||Identity of Directors, Senior Management and Advisers||1|
|Item 2||Offer Statistics and Expected Timetable||1|
|Item 3||Key Information||1|
|Item 4||Information on the Company||29|
|Item 4A||Unresolved Staff Comments||137|
|Item 5||Operating and Financial Review and Prospects||138|
|Item 6||Directors, Senior Management and Employees||198|
|Item 7||Major Shareholders and Related Party Transactions||219|
|Item 8||Financial Information||226|
|Item 9||The Offer and Listing||230|
|Item 10||Additional Information||233|
|Item 11||Quantitative and Qualitative Disclosures About Market Risk||255|
|Item 12||Description of Securities Other Than Equity Securities||255|
|Item 12A||Debt Securities||255|
|Item 12B||Warrants and Rights||255|
|Item 12C||Other Securities||255|
|Item 12D||American Depositary Shares||255|
|Item 13||Defaults, Dividend Arrearages and Delinquencies||256|
|Item 14||Material Modifications to the Rights of Security Holders and Use of Proceeds||256|
|Item 15||Controls and Procedures||256|
|Item 16A||Audit Committee Financial Expert||257|
|Item 16B||Code of Ethics||257|
|Item 16C||Principal Accountant Fees and Services||258|
|Item 16D||Exemptions from the Listing Standards for Audit Committees||258|
|Item 16E||Purchases of Equity Securities by the Issuer and Affiliated Purchasers||258|
|Item 16F||Change in Registrant’s Certifying Accountant||259|
|Item 16G||Corporate Governance||259|
|Item 16H||Mine Safety Disclosure||260|
|Item 16I||Disclosure Regarding Foreign Jurisdictions that Prevent Inspections||260|
|Item 17||Financial Statements||261|
|Item 18||Financial Statements||261|
|LIST OF EXHIBITS||262|
SUMMARY OF RISK FACTORS
An investment in our ADSs is subject to a number of risks, including risks relating to the nature of our business as a financial institution in Chile. The following list summarizes some, but not all, of these risks. Please read the information in the section entitled “Risk Factors” for a more thorough description of these and other risks.
Risks Relating to our Operations and the Chilean Banking Industry
|●||The growth of our loan portfolio in riskier segments may expose us to increased loan losses and require us to establish higher levels of allowances for loan losses in the future.|
|●||Our loan portfolio may not continue to grow at the same or similar rates as it has in the past as a result of changes in macroeconomic trends and reforms to banking and non-banking rules, including those in response to the COVID-19 pandemic.|
|●||Restrictions imposed by regulations, particularly with regards to capital adequacy, liquidity, credit risk provisioning, consumer protection, bankruptcy and taxation may constrain our operations and thereby adversely affect our financial condition and results of operations.|
|●||The Chilean market for financial services is highly competitive. We compete with Chilean and foreign banks, and with other providers of financial services that are not part of the banking industry. Accordingly, competition within this market is increasing as banks and other non-banking competitors are continuously incorporating new and tailored products and services, while striving to improve service quality and to accelerate digital transformation. These dynamics may adversely impact our results of operations as they may translate into higher interest rates paid on deposits and lower interest rates earned on loans, resulting in decreased net interest margins.|
|●||Our results of operations depend greatly on our net interest income. As a result, our results of our operations are affected by interest rate volatility and inflation. Changes in nominal interest rates and inflation could affect the interest rates earned on our interest-earning assets differently from the interest rates paid on our interest-bearing liabilities, resulting in net income reduction. Inflation and interest rates are sensitive to several factors beyond our control, including the Central Bank’s monetary policy, deregulation of the Chilean financial sector, local and international economic developments and political conditions, among other factors.|
|●||The preparation of our financial statements requires management to make judgments and estimates that affect the amounts of assets, liabilities, income and expenses reported in our financial statements. Estimates and assumptions are based on historical experience, expert judgment and other factors, including expectations of future developments under certain alternative scenarios. Although assumptions and estimates are evaluated and revised on a continuous basis, we cannot rule out that projected scenarios could dramatically change in the short term, causing a severe impact on fundamentals and estimates, which could have a material impact on our results of operations and financial position.|
|●||Operational problems, fraud, errors, criminal events or terrorism or other events relating to force majeure may have a material adverse impact on our business, financial condition and results of operations.|
|●||Despite our policies and procedures to detect or prevent money laundering and other financial crime activities, we may not be able to fully detect them or on a timely basis.|
|●||Cybersecurity events or interruptions could negatively affect our reputation or results of operations and may result in litigation.|
|●||Our current credit ratings determine the cost and the terms upon which we are able to obtain funding in the ordinary course of business. Rating agencies regularly evaluate us by considering diverse factors, including our financial strength, the business environment and the economic backdrop in which we operate. Thus, any downgrade in Chile’s or our credit rating could increase our cost of funding, affecting our interest margins, results of operations and profitability.|
Risks Relating to our American Depositary Shares (“ADSs”)
|●||Our principal shareholders are in a position to elect a majority of the members of our board of directors and control all matters decided by a shareholder vote, including the approval of fundamental corporate transactions. Therefore, they may have interests that differ from those of our other shareholders and their significant share ownership may have an adverse effect on the future market price of our ADSs and shares.|
|●||There may be a lack of liquidity and a limited market for our shares and ADSs, which could increase the volatility of the price of our ADSs.|
|●||ADS holders may exercise voting rights associated with common stock only in accordance with the deposit agreement governing our ADSs. Accordingly, ADS holders will face practical limitations when exercising their voting rights because ADS holders must first receive a notice of a shareholders’ meeting from the Depositary and may then exercise their voting rights by instructing the Depositary, on a timely basis, on how they wish to vote. In addition, although Chilean law requires that we grant preemptive rights to all of our shareholders (including holders of ADSs) whenever we issue new shares, such an offering may not be possible unless a registration statement under the Securities Act is effective with respect to such rights and shares, or an exemption from the registration requirements thereunder were available. As a result, ADS holders may be unable to exercise voting rights at shareholders’ meetings and preemptive rights.|
|●||COVID-19 or any other pandemic disease and health events will affect both the global and the Chilean economy, our business or results of operations and could affect our financial condition.|
Risks Relating to Chile
|●||Our core business and transactions are with customers doing business in Chile. Accordingly, our ability to grow our business volumes and results of operations, as well as enhance our financial condition, in general, depends on the dynamics of the Chilean economy or the effects of economic developments in other countries affecting chile, and specific macroeconomic variables such as inflation, unemployment, interest rates, consumption and private investment. If the Chilean economy stagnates or falls into recession, such an occurrence could have an adverse effect on our business growth and the business growth of the Chilean banking industry in general.|
|●||Currency fluctuations could adversely affect our results of operations, the value of our ADSs and any distributions on the ADSs.|
|●||Chile has corporate disclosure standards different from those you may be familiar with in the United States.|
|●||Chilean law may provide shareholders with fewer and less well-defined rights.|
|●||Our operations are highly dependent on the Chilean political and social environment, as most of our customers and borrowers do business in Chile. Thus, our results of operations, including asset quality and profitability, could be negatively impacted by unfavorable political and diplomatic developments, social instability or unrest, as well as dramatic changes in public policies, including expropriation, nationalization, international ownership legislation, interest rate caps and tax policy.|
|●||We are a party to collective bargaining agreements with various labor unions to which most of our employees belong. Disputes regarding the terms of these agreements, our potential inability to negotiate acceptable contracts with these unions, could result in strikes, work stoppages, or other slowdowns by the affected workers, among other things. In addition, recent and pending changes to Chilean labor and pension laws may increase costs. Therefore, reforms to labor and pension laws as well as labor strikes or slowdowns could adversely affect our results of operations.|
This annual report on Form 20-F contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Although we have based these forward-looking statements on our expectations and projections about future events, it is possible that actual results may differ materially from our expectations. In many cases, we include a discussion of the factors that are most likely to cause forward-looking statements to differ from actual results together with the forward-looking statements themselves. These statements appear throughout this annual report, including, without limitation, under “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” Examples of such forward-looking statements include:
|●||projections of operating revenues, net income (loss), net income (loss) per share, capital expenditures, dividends, capital structure or other financial items or ratios;|
|●||statements of our plans, objectives or goals, including those related to anticipated trends, competition and regulation;|
|●||statements about market risks, including interest rate risk and foreign exchange risk;|
|●||statements about our future economic performance or that of Chile or other countries in which we operate; and|
|●||statements of assumptions underlying such statements.|
Words such as “believe,” “anticipate,” “plan,” “aims,” “seeks,” “expect,” “intend,” “target,” “objective,” “estimate,” “project,” “potential,” “predict,” “forecast,” “guideline,” “could,” “may,” “will,” “should” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. These statements may relate to (i) our asset growth and financing plans, (ii) trends affecting our financial condition or results of operations and (iii) the impact of competition and regulations, but are not limited to such topics. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those described in such forward-looking statements included in this annual report as a result of various factors (including, without limitation, the actions of competitors, future global economic conditions, market conditions, foreign exchange rates and operating and financial risks), many of which are beyond our control. The occurrence of any such factors not currently expected by us could significantly alter the results set forth in these statements.
Factors that could cause actual results to differ materially and adversely include, but are not limited to:
|●||changes in general economic, business, political or other conditions in Chile, or changes in general economic or business conditions in Latin America, the United States, Europe or Asia;|
|●||changes in capital markets in general that may affect policies or attitudes towards lending to Chile or Chilean companies;|
|●||increased competition and changes in competition or pricing environments, including the effect of new technological developments;|
|●||unanticipated increases in financing and other costs or the inability to obtain additional debt or equity financing on attractive terms;|
|●||natural disasters or pandemics, such as the novel coronavirus known as COVID-19 (“COVID-19”);|
|●||the effect of tax laws on our business; and|
|●||the factors discussed under “Item 3. Key Information—Risk Factors.”|
You should not place undue reliance on forward-looking statements, which speak only as of the date that they were made. This cautionary statement should be considered in connection with any written or oral forward-looking statements that we may issue in the future. We do not undertake any obligation to publicly release any revisions to such forward-looking statements after the filing of this annual report to reflect later events or circumstances or to reflect the occurrence of unanticipated events.
PRESENTATION OF FINANCIAL INFORMATION
We prepare our audited consolidated financial statements in Chilean pesos and in accordance with International Financial Reporting Standards (“IFRS”) in effect from time to time as issued by the International Accounting Standards Board (“IASB”).
Unless otherwise indicated, the financial information included in this annual report with respect to 2019, 2020 and 2021 has been derived from financial statements that have been prepared in accordance with IFRS. See Note 2(a) to our audited consolidated financial statements as of and for the year ended December 31, 2021 appearing elsewhere in this annual report. IFRS differs in certain significant respects from Chilean Generally Accepted Accounting Principles (the “Chilean GAAP”) as issued by the Superintendencia de Bancos e Instituciones Financieras de Chile (the “Superintendency of Banks and Financial Institutions” or “SBIF”). As a result, our financial information presented under IFRS is not directly comparable to any of our financial information presented under Chilean GAAP. Accordingly, readers should avoid such comparison.
In this annual report, references to “$,” “U.S.$,” “U.S. dollars” and “dollars” are to United States dollars, references to “pesos” or “Ch$” are to Chilean pesos (see Note 2(f)) to our audited consolidated financial statements as of and for the year ended December 31, 2021 appearing elsewhere in this annual report), and references to “UF” are to “Unidades de Fomento.” The UF is an inflation indexed Chilean monetary unit of account with a value in Chilean pesos that is linked to and adjusted daily to reflect changes in the Consumer Price Index (“CPI”) of the Instituto Nacional de Estadísticas (the “Chilean National Statistics Institute”). As of December 31, 2021 and March 31, 2022, one UF equaled Ch$30,991.74 and Ch$31,727.74, respectively.
This annual report contains translations of certain Chilean peso amounts into U.S. dollars at specified rates. These translations should not be construed as representations that the Chilean peso amounts actually represent such U.S. dollar amounts, were converted from U.S. dollars at the rate indicated in our audited consolidated financial statements as of and for the year ended December 31, 2021 or could be converted into U.S. dollars at the rate indicated. Banco de Chile utilizes the exchange rate of accounting representation, or spot exchange rate, for such matters. Thus, unless otherwise indicated, the U.S. dollar amounts have been translated from Chilean pesos based on the exchange rate of accounting representation as of December 30, 2021 as determined by our Treasury on a daily basis, based on the average of the daily closing bid and offer rates reported by Bloomberg for the Santiago Stock Exchange. As of December 30, 2021 (the latest practicable date, as December 31, 2021 was a banking holiday in Chile) and March 31, 2022, the exchange rates of accounting representation were Ch$852.63 = U.S. $1.00 and Ch$784.30 = U.S.$1.00, respectively. As of the same dates, the observed exchange rates, as published by Banco Central de Chile (the “Central Bank”), were Ch$850.25 = U.S.$1.00 and Ch$787.16 = U.S.$1.00, respectively.
The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos.
Unless otherwise specified, all references in this annual report to total loans are to loans to customers before deducting allowances for loan losses, and they do not include loans to banks or contingent loans. In addition, all market share data and financial indicators for the Chilean banking system as compared to Banco de Chile’s financial information presented in this annual report are based on information published periodically by the Financial Market Commission (“CMF”) which is published under Chilean GAAP and prepared on a consolidated basis, unless otherwise indicated. For more information see “Item 4. Information on the Company—Business Overview—Competition.”
In this annual report, “past-due loans” are any loans for which the counterparty has failed to make a payment when contractually due, including installments that are overdue, plus the remaining balance of principal and interest on such loans. In order to distinguish between different overdue time periods, the corresponding time period is included after the term “Past-due Loans” (for example, “Past-due Loans—90 days or more”). For more information, please see “Item 4. Information on the Company—Selected Statistical Information—Analysis of Substandard and Past-Due Loans”
According to Chilean regulations, as of the filing date and for the purposes of this annual report, regulatory capital (“Total Capital” or “Regulatory Capital”) consists of:
|●||CET1 Capital (“CET1”), which is composed of: (i) paid-in capital related to common shares, (ii) stock surplus (share premium) resulting from the issuance of instruments included in CET1, (iii) reserves, whether they come from net income, depreciation or expiration of perpetual bonds or not, (iv) accumulated other comprehensive income related to financial instruments measured at fair-value, (v) retained earnings or losses, net of provisions for minimum dividends, appreciation of perpetual bonds or interests/dividends paid on financial instruments issued for capital adequacy purposes and (vi) minority interest. The CET1, however, is subject to a set of adjustments that include: (i) minority interest, (ii) goodwill and intangible assets, (iii) deferred tax assets (not related to temporary differences), (iv) accumulated other comprehensive income related to cash flow hedge accounting derivatives, (v) insufficiency of credit risk allowances when using internal methodologies for risk weighted assets, (vi) earnings from the sale of securitized assets, (vii) accumulated gains or losses from changes in own issuer risk related to financial liabilities measured at fair value (such as debit value adjustment for derivatives), (viii) assets related to pension plans for staff, (ix) investments in own assets, (x) significant and not significant investments and (xi) threshold adjustments in line with Basel III. CET1, for compliance with minimum levels, must equal to at least 4.5% of risk-weighted assets;|
|●||Additional Tier 1 Capital (“AT1”), which is comprised of perpetual bonds and preferred stocks that, for compliance with minimum levels, must be equal to at least 1.5% of risk-weighted assets, once the CET1 minimum requirements have been fulfilled. Instruments issued by banks’ subsidiaries do not get counted for these purposes; and|
|●||Tier 2 Capital (“Tier 2”), which is composed of (i) subordinated bonds of up to 50% of CET1, excluding subordinated bonds issued by banks’ subsidiaries and (ii) voluntary provisions of up to 1.25% of credit risk-weighted assets if computed by standardized method or 0.625% if computed by internal method. Tier 2 capital may be computed, for compliance with minimum levels, with up to 2.0% of risk-weighted assets, once Tier 1 Capital minimum requirements have been fulfilled.|
These definitions for Total Capital or Regulatory Capital are in place since December 1, 2021. For more information, see “Item 3. Key Information—Risk Factors—Risks Relating to our Operations and the Chilean Banking Industry—Restrictions imposed by regulations may constrain our operations and thereby adversely affect our financial condition and results” and “Item 4. Information on the Company—Regulation and Supervision—Modifications to the General Banking Act.”
Certain figures included in this annual report and in our audited consolidated financial statements as of and for the year ended December 31, 2021 have been rounded for ease of presentation. Percentage figures included in this annual report have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this annual report may vary slightly from those obtained by performing the same calculations using the figures in our audited consolidated financial statements as of and for the year ended December 31, 2021. Certain other amounts that appear in this annual report may similarly not sum due to rounding.
Inflation figures are those reported by the Chilean National Statistics Institute, unless otherwise stated herein or required by the context.
MACRO-ECONOMIC AND MARKET DATA
In this annual report, all macro-economic data relating to the Chilean economy is based on information published by the Central Bank. All market share data, financial indicators and other data relating to the Chilean financial system are based on information published periodically by the CMF, which is published under Chilean GAAP and prepared on a consolidated basis.
Item 1 Identity of Directors, Senior Management and Advisers
Item 2 Offer Statistics and Expected Timetable
Item 3 Key Information
The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties that we do not know about or that we currently think are immaterial may also impair our business operations in the future. Any of the following risks, if they actually occur, could materially and adversely affect our business, results of operations, prospects and financial condition.
We are also subject to market risks that are presented both in this subsection and in Note 43 to our audited consolidated financial statements as of and for the year ended December 31, 2021 appearing elsewhere in this annual report.
Risks Relating to our Operations and the Chilean Banking Industry
The growth of our loan portfolio in riskier segments may expose us to increased loan losses.
During the last five years, our total loan portfolio has grown at a compounded average growth rate (“CAGR”) of 6.2% per year. This expansion has been primarily fostered by growth in both residential mortgage (8.4% per year on average) and commercial loans (6.3% per year on average) and, to a lesser extent, by a moderate growth in consumer loans (1.3% per year on average), which has been impacted by diverse economic factors. The growth in our loan book has been aligned with our mid-term strategic goals, which aim to diversify our business model by optimizing our risk-return relationship in order to maintain profitable growth. In 2020, however, as a result of the prevailing macroeconomic conditions due to the spread of COVID-19, loan growth was severely affected by lower demand for loans, higher unemployment and significant uncertainties regarding the economic outlook in Chile, resulting in a significant decrease in consumer loans granted to individuals and constrained growth in commercial loans for companies. For the year ended December 31, 2021, our loan portfolio was Ch$34,265,873 million, which represented a 10.8% annual increase as compared to the Ch$30,937,690 million we recorded as of December 31, 2020. Our allowances for loans losses decreased 19.7% on an annual basis from Ch$836,107 million in 2020 to Ch$673,496 million in 2021, mainly as a result of a significant decrease in expected credit losses associated with the recovery in economic activity in 2021 after the significant impact of the COVID-19 on the risk profiles of individuals, SMEs, middle market companies and, to a lesser extent, corporations in 2020, given mobility restrictions imposed by the health authority. For individuals, there was a significant improvement in credit quality during 2021 as a consequence of non-recurrent factors that increased disposable income and benefited the payment capacity of individual borrowers. These factors included: (i) direct money transfers made by the government to mitigate the economic effects of the pandemic on unemployment, measures that remained in 2021 in spite of the gradual lifting of mobility restrictions, (ii) the effect of three consecutive pension fund withdrawals and one withdrawal from life annuities (rentas vitalicias) as permitted by the Chilean congress at the end of 2020 and throughout 2021, which, in the aggregate, injected approximately U.S.$48,500 million to the local economy, and (iii) the improvement in unemployment figures as mobility restrictions began to be lifted. These trends also led us to update some of our provisioning models for both group-based and individually-evaluated customers, which coupled with an enhanced economic view going forward, translated into lower probabilities of default and lower credit risk allowances. As a result, our risk-index ratio (allowances for loan losses to total loans) decreased from 2.70% in 2020 to 1.97% in 2021.
Notwithstanding these recent trends, we recognize that the expansion experienced by our retail banking segment over the last years may expose us to higher levels of charge-offs and may require us to establish higher levels of allowances for loan losses in the future. This is due to the fact that the average retail customer is riskier than large companies and corporations, since they are more exposed to the economic cycle than wholesale customers as evidenced during the downturn caused by the COVID-19 pandemic. For example, individuals are impacted by economic factors such as employment and SMEs are impacted by economic conditions affecting domestic demand. For this reason, we are constantly striving to develop and utilize improved scoring and approval models, while strengthening our collection procedures in order to mitigate the risks associated with this business growth.
Our loan portfolio may not continue to grow at the same or similar rates as it has in the past.
Double-digit loan growth during the decade ending in 2013, particularly fostered by increased banking penetration of: (i) lower and middle income segments and (ii) small and medium-sized companies resulted in a marked expansion in consumer, mortgage and commercial loans in the Chilean banking industry. However, the deceleration of the local economy from 2013 to 2017 and the introduction of diverse reforms on general matters, including both banking and non-banking rules, have threatened both the industry’s pace of growth and banking penetration rate, leading to a slowdown in investment spending (capital expenditures) and deteriorated consumer confidence and business sentiment, as evidenced by the indices (Indice de Percepción Económica de los Consumidores (“IPEC”) and Indice Mensual de Confianza Empresarial (“IMCE”)) used by the Central Bank. This trend seemed to shift by the end of 2018, reflected by an economic recovery produced by a rebound in investment spending and GDP growth of 4.0%. This supported a stronger demand for commercial loans and an 11.9% annual growth of total loan balances managed by the Chilean banking industry as a whole (excluding operations of subsidiaries abroad). In 2019, however, GDP recorded a moderate annual expansion of 0.8%, highly influenced by the effect of the social unrest in Chile on October 18, 2019. Despite this subdued performance, the loan portfolio managed by the banking industry increased by 10.0% in nominal terms in 2019, mainly explained by a decoupled behavior of mortgage loans, evidenced by sustained growth of 11.2% over the course of the year. In 2020, the COVID-19 pandemic resulted in a GDP contraction of 6.0% for the Chilean economy and a surge in unemployment rate from 7.3% in December 2019 to 10.3% in December 2020, fostered by long-lasting lockdowns and other measures taken by the government in order to reduce mobility and social interaction across the country, which reduced or halted operations in many economic sectors for months. In this environment, the loan portfolio of the local banking industry grew only 2.4% in nominal terms (excluding operations of subsidiaries abroad), prompted by both residential mortgage loans, which continued to be decoupled from economic dynamics due to unprecedented low interest rates, and the governmental support program of guaranteed loans for SMEs and middle market companies, that increased loans balances. Consumer loans, instead, were substantially affected by the deteriorated macroeconomic scenario, through lower disposable income and the deteriorated payment capacity of borrowers.
In 2021, aligned with the recovery displayed by the local economy, as reflected by GDP growth of 11.7%, the loan portfolio managed by the banking industry also showed some signs of recovery by growing 10.1% in nominal terms. The overall economic activity was highly influenced by both higher inflation and higher than normal levels of household spending, promoted by above average liquidity among individuals. This had a second-round effect on loans to customers, as evidenced by a 6.7% increase in consumer loans, growth that was almost entirely explained by inflation. Although consumer loans began to accelerate by the second half of 2021, non-recurrent liquidity levels continued to significantly increase individuals’ disposable income. Loan growth was thus primarily steered by annual expansions of 13.5% in residential mortgage loans and 9.0% in commercial loans. Whereas growth in residential mortgage loans was explained by inflation and the decoupling of the real estate market from the economic dynamics as mentioned above, the increase in commercial loans was mainly influenced by the effect of the government support program for SMEs launched in February 2021, through which the government backed borrowers’ obligations with the banks in order to facilitate lending by covering credit risk.
Despite the recovery posted by the loan banking industry in 2021, many factors could adversely affect the growth rate of the industry and, therefore, the expansion of our loan portfolio in the future including, but not limited to: (i) a slowdown or negative GDP growth, (ii) changes in household or investment spending, (iii) changes in banking customers’ behavior, (iv) changes in banking regulation, (v) deterioration of consumer confidence and business sentiment, (vi) reforms to be introduced by the recently appointed administration or the ongoing constitutional convention entirely comprised of citizens (the “Constitutional Convention”), which may negatively impact the economic and business environment, and (vii) any effect related to social trends, social unrest, pandemics or any event affecting the growth potential of the Chilean economy. Similarly, this could affect our credit quality indicators causing us to establish higher allowances for loan losses. For more information, see “Item 4. Information on the Company—Regulation and Supervision” and “Item 4. Information on the Company—Selected Statistical Information.”
Restrictions imposed by regulations may constrain our operations and thereby adversely affect our financial condition and results of operations.
The CMF is the entity that oversees and regulates the Chilean financial market, which is comprised of publicly traded companies, insurance companies, insurance brokers, mutual funds and investment funds as well as the Chilean banking industry as a whole and some non-bank lenders. In addition to being subject to regulation by the CMF, in certain matters, we are also subject to regulations issued by the Central Bank. See “Item 4. Information on the Company—Regulation and Supervision.”
Pursuant to the Ley General de Bancos (the “General Banking Act”) all Chilean banks may, subject to the approval of the CMF, engage in certain non-banking businesses approved by the law. The CMF’s approval will depend on the risk of the activity and the strength of the bank. Furthermore, the General Banking Act currently imposes on the Chilean banking system a modified version of the capital adequacy guidelines issued by the Basel Committee on Banking Regulation and Supervisory Practices (the “Basel Committee”) and limits the discretion of the CMF to deny new banking licenses.
In 2018, the Chilean Congress passed modifications to the General Banking Act in diverse topics, including the adoption of Basel III guidelines for the Chilean banking industry. These modifications were enacted in Law No. 21,130 on December 27, 2018 and subsequently published on January 12, 2019. This law addresses four main topics aimed at modernizing the Chilean banking framework by: (i) adopting the Basel III guidelines, considering a phased-in transition from Basel I to be completed four years after the new specific banking framework was issued by the regulator (the implementation date was postponed from December 2020 to December 2021 in light of the impact that the COVID-19 outbreak had on the economy), (ii) introducing changes to the local regulator’s corporate governance, such that powers formerly vested in the SBIF (the former banking supervisor) were transferred to the CMF in June 2019, (iii) reforming the resolution regime for Chilean banks in the case of insolvency, and (iv) introducing changes in relation to confidential information of banks’ customers, among others topics. For more information, see “Item 4. Information on the Company—Regulation and Supervision— Modifications to the General Banking Act.”
In May 2019, the CMF began the publication for comment in respect of their rule-making on a diverse and wide array of topics associated with Basel III. By December 2020, 11 out of 12 final rules had been issued by the CMF while the pending one related to limits to large or single exposures (Article N°84 of the General Banking Act) was issued on November 3, 2021 after a period for comment. The methodology to activate or deactivate the countercyclical buffer, that should be defined by the Central Bank and monitored by the CMF, is still pending issuance.
Regarding capital requirements, since December 1, 2021 new regulatory thresholds have been imposed on local banks, based on the specific regulations issued by the CMF, as follows:
|Ø||CET1 ≥ 4.5% of risk-weighted assets (CET1 ratio);|
|Ø||CET1 ≥ 3.0% of total risk assets (Leverage ratio);|
|Ø||Tier 1 = CET1 + AT1 ≥ 6.0% of risk-weighted assets (Tier 1 ratio);|
|Ø||Tier 1 + Tier 2 ≥ 8.0% of risk-weighted assets (Total Capital ratio);|
|Ø||Conservation Buffer = 2.5% of risk-weighted assets;|
|Ø||Countercyclical Buffer of up to 2.5% of risk-weighted assets, if any;|
|Ø||Systemically-Important Banks (“D-SIB”) Buffer in the range of 1.0% to 3.5% of risk-weighted assets, if any; and|
|Ø||Pillar 2 Buffer of up to 4.0% of risk-weighted assets, if any.|
For more detailed information on each specific regulation currently in effect and capital thresholds, see “Item 4. Information on the Company—Regulation and Supervision—Modifications to the General Banking Act.”
Our capital adequacy ratios under the previous and new regulatory frameworks, as of December 2021, are as follows:
|Capital Ratio||Basel I||Basel III|
|Tier 1 Ratio||13.32||13.97|
|Total Capital Ratio||16.43||%||17.30||%|
On March 31, 2021 the CMF announced that based on the information provided by local banks for the year ended December 31, 2020, there are six domestic systemically important banks, including us, which will be subject to systemic buffers, which will be determined by means of the methodology defined by the CMF. On March 30, 2022 the CMF announced the systemic buffers for the six banks previously determined to be systemically important banks. Based on the methodology established by the CMF for this purpose, the Chilean regulator has imposed a systemic buffer equivalent to 1.25% on us, which will be gradually introduced over a four year period starting December 1, 2022, and continuing at an annual and cumulative rate of 25% every year, completing the 1.25% (if maintained unchanged) on December 1, 2025. Likewise, the prior requirement associated with Article 35 bis of the General Banking Act will continue to decrease at a 25% rate (a process that began on December 1, 2021) reaching 0% on December 1, 2024. During the phase-in process, we must comply with the applicable Basel III systemic buffer and the remaining Article 35 bis buffer until extinguished. Although with the new systemic buffer we continue to be in full compliance with minimum requirements, we cannot be certain about any other potential capital buffers the regulator could impose to us and, therefore, we cannot assure you that our profitability will not be impacted by actions we may take in order to fulfill new regulatory thresholds. For more information, see “Item 4. Information on the Company—Regulation and Supervision—Modifications to the General Banking Act.”
Moreover, since 2016, banks have been required to report and monitor liquidity ratios, such as Liquidity Coverage Ratio (“LCR”) and Net Stable Funding Ratio (“NSFR”), for information purposes only. On May 4, 2018 the Central Bank published for comment an amendment to Chapter III.B.2.1 of Compendio de Normas Financieras (the Compendium of Financial Norms), focused on proposing a minimum requirement for the LCR, considering a phase-in period of five years, starting at 60% in 2019 and reaching the final limit of 100% in 2023 (with annual increments of 10% between 2019 and 2023). More recently, on November 11, 2021 the Chilean Central Bank published a modification to liquidity requirements established in Chapter III.B.2.1 of the Compendium of Financial Norms for public comment, including: (i) the anticipation of the 100% requirement for LCR starting January 1, 2022 instead of January 1, 2023 as originally scheduled, (ii) the establishment of a regulatory limit for the NSFR ratio equivalent to 100%, starting January 1, 2022 at 60% and increasing 10% each year until reaching 100% on January 1, 2026, (iii) changes to the liquidity reporting requirements through the incorporation of NSFR, (iv) changes in the treatment of financial instruments pledged as technical reserves (arising from demand deposits levels) in order to be computed as high quality liquid assets when determining LCR, (v) the softening of requisites for using behavioral models for C46 index, (vi) the removal of regulatory limits for C46 index in local currency, (vii) the introduction of contingency measures for breaches of regulatory limits for both the C46 index in foreign currency and the NSFR ratio, and (viii) the softening of measures for regulatory limits in case of local contingencies. In addition, as part of the same proposal, the Central Bank established that banks will be required to carry out an annual Internal Liquidity Adequacy Assessment Process (“ILAAP”), which will go into effect in April 2023, although the possibility of imposing additional High Quality Liquid Assets (“HQLA”) requirements based on the information disclosed in the ILAAP will be in effect only in April 2025. On March 8, 2022, the Chilean Central Bank published the final ruling associated with the changes proposed for Chapter III.B.2.1 of the Compendium of Financial Norms, which adopted, among others, the following relevant changes: (i) the removal of regulatory limit for 30-day and 90-day cash flows mismatches in local currency as measured by C46 index while maintaining the limit for 30-day cash flows mismatches in foreign currency as measured by the C46 index, (ii) the anticipation of the increase of the LCR limit to 90% for the period between January and June 2022 and to 100% from June 2022 onwards, (iii) the incorporation of a regulatory limit for NSFR starting in 60% in June 2022 and increasing 10% in January 2023 to 70% and subsequently 10% per year until reaching 100% in January 2026, (iv) the introduction of specifications on the treatment of securities pledged as technical reserves in order to take them into account as high quality liquid assets and (v) confirmation on the submission of the ILAAP starting April 2023. Even though we do not expect the enactment or entry into force of these requirements to have any material impact on our financial position, results of operations or profitability, we cannot assure that based on the ILAAP results we will not be subject to new liquidity requirements, which could have a material adverse effect on us. As of December 31, 2021 our LCR and NSFR were 228.3% and 113.2%, respectively and we were in fully compliance with the prevailing regulatory requirements. Based on the modifications introduced by the new regulation, although we expect our LCR ratio to decrease from current levels, we will stay in full compliance with all liquidity requirements. We cannot, however, assure you that we will remain in compliance with them if the regulator introduces new standards or requires us to maintain greater amounts of HQLA. This could also lead to acquire lower-margin financial instruments, which could have an adverse effect on results of operations.
As for credit risk matters, on July 6, 2018 the former SBIF published the final amendments to the provisioning rules for commercial loans evaluated on a group basis, which established standardized models for leasing loans, student loans and other commercial loans (not included in the former categories). In addition, the new set of rules also addressed other topics related to loan provisioning. The new provisioning criteria went into effect in July 2019 and had no material impact on our results of operations under both Chilean GAAP and IFRS. On April 27, 2021, to further align Chapter B-1 of the Compendium of Accounting Standards for Banks to the Basel III framework, the CMF published for comment some modifications to the Chapter B-1, such as those associated with loan provisioning guidelines for a more precise treatment for certain sub-segments of the group-based evaluated portfolio. The final rules were published on August 19, 2021 with no major changes in relation to the formerly proposed modifications. We do not foresee a material impact related to these modifications neither under Chilean GAAP nor IFRS. Nevertheless, we cannot be certain that future changes in the provisioning rules for other types of loans or related definitions will not affect our results under IFRS or Chilean GAAP, as applicable.
Additionally, the Chilean Government has focused on matters related to consumer protection in recent years. During the last decade, several legal and administrative regulations have been enacted and amended to strengthen consumer protection and the relationship between financial institutions and their customers. In May 2020, the Chilean Congress passed a law that modifies the current framework regarding liabilities for payment service providers (such as banks) in cases of fraudulent transactions in credit and debit cards, and in electronic funds transfers. Among other matters, these regulations require that charges or transfers that are objected to by the customer, must be returned by the payment service provider when the transaction does not exceed UF 35 (equivalent to Ch$1.1 million as of December 31, 2021), and if the value is higher, the payment service provider must return such amount (UF 35), enabling the financial entity to retain the excess to the extent it judicially proves wrongdoing from the customer. As expected, this new legislation has resulted in an increase in our liabilities towards customers due to digital fraud during 2020 and 2021 as compared to previous years, since we are now required by law to assume certain losses suffered by our customers before proving the fraud. Although we have implemented an array of measures and campaigns with our customers and have been able to adequately mitigate the impact of this legislation, we cannot assure you that we will not continue to see an increase in our liabilities as a result of this new legislation. For further information on the obligations and liabilities imposed by, and characteristics of, this new legislation, see “Item 4. Information on the Company—Regulation and Supervision—Consumer-Oriented Regulation” and “Item 5. Operating and Financial Review and Prospects—Results of Operations for the Years Ended December 31, 2019, 2020 and 2021—Operating Expenses”.
On April 20, 2021, new legislation that modifies consumer protection laws, prohibiting and limiting certain extrajudicial, or out-of-court, debt collection activities towards individuals and SMEs was enacted. Regarding banks, among other matters, this new law: (i) limits the number and type of out-of-court collection measures, (ii) requires keeping detailed records of such actions up to two years after they have been initiated, and (iii) prohibits the continuing of out-of-court collection actions once a collection has been initiated in court. In the year since this law was enacted, we have not seen any significant impacts on our results of operations that could be attributable to such regulation. We cannot, however, rule out that in the future this legislation could reduce our ability to recover delinquencies in our individuals’ and SMEs’ portfolios and could have an impact on our collection costs. This could also signify that we may have to modify strategies in our collection processes to ensure rigorous compliance with the applicable regulation and our internal policies. Consequently, we cannot rule out that this could have an adverse effect on Banco de Chile and the financial industry.
In 2021, a bill addressing a broad range of financial regulation and services was approved by the Chilean Congress and enacted by the Chilean Government. With respect to loan products, this law sets new rules on the application of interests and fees. The main modifications introduced by this new law are: (i) it states that no interests may be charged on the portion of credits that is already paid; (ii) it forbids charging simultaneously and jointly default interests with other kinds of interest over the same amount; and (iii) it establishes that, during the 12 months following the publication of this law, the CMF will dictate specific regulation addressing the extent by which fees or and/or commissions may be charged on credit transactions. These ancillary regulations, which are still pending to be issued by the CMF, could limit our ability to charge and earn fees or commissions on certain credits and loan products. Therefore, as of the date of this annual report, we cannot yet determine or rule out whether this new law will negatively affect our results of operations in the future.
In December 2021, Law 21,398 was enacted. Among other measures to enhance consumer protection, this law introduced rules such as: (i) requiring a competent court to construe certain provisions in favor of the consumer in court procedures, (ii) imposing new obligations applicable to financial service providers in connection with certain products, and (iii) introducing new minimum requirements for pre-payments in credit transactions, among other measures. These new measures may increase our due diligence, operating and legal costs, affect the growth of our customer base and increase the costs associated with the management of our consumer loan portfolio. However, given that this law was recently introduced and that further ancillary regulation is pending to be implemented, as of the date of this annual report, we cannot yet ascertain its impact, if any, on our results of operations in the future.
In addition, there are several bills being discussed in the Chilean Congress, which would modify matters related to loans and credit products, such as interest rate ceilings, prepayment fees and the possibility of capitalizing interests, most of which were introduced by members of the Chilean Congress during the October 2019 aftermath and the COVID-19 pandemic and include an array of amendments from different political constituencies. Some of them also aim to ease the financial burden of certain banking borrowers, such as SMEs and individuals. For example, one of these bills proposes to suspend six credit-related installments for consumer and mortgage loans by postponing these payments to the end of the liability, bearing no additional interests. Other bills introduced during 2021, if enacted, may increase the costs of our consumer loan and mortgage products by setting higher mandatory protections for customers. Another bill introduces additional requirements to judicially exercise rights attained to mortgage loan collaterals; while others may limit our capacity to gather detailed information throughout our risk evaluation process by, for instance, setting higher privacy standards. Moreover, yet another bill related to insolvency law, would limit a bank’s ability to deny providing certain banking products to personal banking customers (individuals) on the grounds that they have been debtors in an insolvency procedure in the past. If enacted, such law may limit the effectiveness of our credit evaluation process and the due diligence we perform over potential customers, as well as our asset quality, and require us to increase provisions for expected credit losses.
Since most of these bills are currently in the early or middle stages in the Chilean Congress, there is no certainty whether any or all of them will be further discussed or not, and as to when or how these bills could change the current regulatory framework if approved. Therefore, we cannot determine or assure you whether they will materially affect our business and, in turn, our financial condition and results of operations in the future.
From the taxation perspective, on August 23, 2018 the Chilean Government sent a bill to the Chilean Congress, which was intended to modernize the Chilean tax system. The Congress, in conjunction with the Government, introduced certain modifications to the original bill, which was passed by the Congress in January 2020 and enacted on February 24, 2020 (Law No. 21,210). Further measures were introduced as part of emergency plans to reactivate the economy following the COVID-19 pandemic. By the end of 2021, the Government submitted two bills to the Congress. The first one establishes a minimum pension for lower income pensioners while the other one proposes to reduce or eliminate tax exemptions in order to finance the former. The latter bill, which was enacted in February 2022 as Law No. 21,420, reduces or eliminates diverse tax exemptions including the following measures: (i) the extension of VAT to any service that was not formerly exempt for services provided after January 1, 2023, (ii) the establishment of the same treatment for financial and tax purposes for financial leasing agreements entered into on or after January 1, 2023, (iii) a 10% tax on capital gains produced by the sale of actively traded stocks (under definitions established by the Chilean Internal Revenue Service (“Chilean IRS”)) for sales performed on or after September 1, 2022, which will not apply to local or foreign institutional investors, (iv) an inheritance tax on profits from life insurance contracts agreed on or after February 4, 2022, (v) an increase in the wealth tax on real estate from 0.275% to 0.425% starting January 1, 2023, (vi) the elimination of the special VAT credit for construction companies targeting middle income homes starting January 1, 2025, (vii) the establishment of a 2.0% annual tax on luxury goods such as airplanes, helicopters, yachts and luxury vehicles, (viii) the reduction of tax benefits on middle income housing, namely, DFL No. 2 of 1959, by limiting the benefit to individuals only and for a maximum of two homes, regardless of the purchase date, starting January 1, 2023, (ix) the elimination of the tax credit on the purchase of fixed assets for large companies and (x) the increase of mining patents’ value.
The changes in the VAT applicable to services and the increase in the rate of wealth tax on real estate, will result in higher operating expenses for the Bank. Likewise, changes in tax benefits associated with the real estate and construction industries may lead to deceleration in demand for loans from individuals and companies for such purposes. In regards to the 10% tax applied to capital gains produced by the sale of actively traded stocks, this could negatively impact us in the future by means of: (i) a decrease in fee income from stock trading carried out by our securities brokerage or mutual funds subsidiaries, (ii) lower traded volume of our shares in Chile, (iii) taxes to be paid on our income by sales of own equity portfolio managed by our securities brokerage subsidiary, and (iv) higher taxes to be paid by investors who hold shares issued by us, among other factors. Additionally, these changes could also affect the financial leasing business in which we also participate. Nonetheless, as of the date of this annual report and based on information currently available to us, we do not foresee a material impact on our results of operations resulting from these initiatives.
Likewise, the recently appointed government administration for the four-year period ending March 11, 2026 has announced that it will send to the Congress one or more bills to: (i) remove or reduce the tax exemptions included in the current Chilean tax legislation, such as exemptions for capital gains on financial position, taxes on fuel for some economic sectors or VAT on some products or services, (ii) impose a wealth tax on taxpayers in the highest income bracket, (iii) levy the mining industry with additional royalty taxes and (iv) modify the tax regime from a semi-integrated system to totally non-integrated system, among other matters. However, we cannot yet determine whether any of these pieces of legislation, if passed, will have a material impact on our business, results of operations or financial condition in the future. Similarly, we cannot assure you these proposals if passed will not have a material impact on the taxes paid by our shareholders.
In August 2021, Law No. 21,365 was enacted, regulating interchange fees in the payment card market in Chile. An autonomous and technical committee was created to determine, on a periodic basis, the fees or rates to be charged by payment card issuers such as banks (“Interchange Rates”) to the operating companies (acquirers). The technical committee is comprised of four members, each appointed by the following institutions: The Central Bank; the CMF; the Office of National Economic Prosecution (Fiscalía Nacional Económica); and the Ministry of Finance. This committee has six months to announce the first transitory limits and, afterwards, Interchange Rates will be reset every three years. On February 5, 2022, the committee announced the new limits for interchange fees with a maximum fee of 0.6% for debit cards, 1.48% for credit cards and 1.04% for prepaid cards. Although we believe the transitory limits published in February 2022 will not have a material impact on our results of operations, given the uncertainty regarding the limits on interchange rates that could be determined by this technical committee in the future, we cannot yet be sure as to whether this new regulation will or will not have a negative impact on the banking industry and on our results of operations in the long term.
Furthermore, during the last years, diverse guidelines and regulations have been issued recommending or requiring companies to adopt policies and procedures with the purpose of enhancing the approach to environmental, governance and social (ESG) matters. Some of these regulations are still in the process of being implemented by Chilean companies. Although we believe that we have already deployed appropriate strategies, policies and procedures to address these matters, we cannot rule out that the adoption of new guidelines and regulations could limit our lending business, restrict our ability to recruit new customers, increase compliance requirements or result in higher operating or funding costs, among other effects that we cannot predict, given the still-developing and evolving regulatory environment.
Changes in regulations may also cause us to face increased compliance costs and limitations on our ability to pursue certain business opportunities and provide certain products and services. As some banking laws and regulations have been recently adopted, the way they are applied to the operations of financial institutions is still evolving. We cannot generally assure that laws or regulations will be adopted, enforced or interpreted in a manner that will not have a material adverse effect on our business and results of operations.
Lastly, we cannot assure you that regulators will not impose more restrictive limitations in the future on the activities of banks, including us, than those that are currently in effect. Any such change in terms of capital adequacy, liquidity, credit risk provisioning, consumer protection, bankruptcy and taxation, among other matters, could have a material adverse effect on our results of operations or financial condition in a fashion that we cannot determine in advance. For more information, see “Item 4. Information on the Company—Regulation and Supervision.”
Modifications to reserve requirements may affect our growth capacity and margins.
According to the Chilean banking regulation, demand deposits and time deposits are subject to reserve requirements of 9.0% and 3.6% (with terms of less than one year), respectively. However, the Central Bank is entitled to require banks to maintain reserves of up to 40.0% for demand deposits and up to 20.0% for time deposits, to the extent needed for monetary policy purposes. In addition, if the aggregate balance of demand deposits and other demand accounts (e.g., deposits in current accounts, other demand deposits or obligations payable on demand and incurred in the ordinary course of business, saving deposits that allow unconditional withdrawals that bear a stated maturity, and other deposits payable immediately unconditionally) held by a bank exceeds 2.5 times its Total Capital or Regulatory Capital (including CET1, additional Tier 1 capital and Tier 2 capital) the bank is required to set aside a technical reserve equivalent to the full amount of that excess. In addition, the Basel III framework recently implemented in Chile, through the General Banking Act, establishes that banks denominated as D-SIB could be subject to stricter technical reserve requirements by which the threshold of 2.5 times the Total Capital or Regulatory Capital could be reduced to 1.5 times. Conditions to set this additional requirement are part of the powers of the CMF, although the decision to impose such additional requirement must be agreed with the Central Bank. On March 31, 2021, the CMF announced that six local banks (including us) were designated as systemically important banks. On March 30, 2022 the CMF announced the systemic buffers for these six banks. The systemic buffer imposed on us is equivalent to 1.25%, as determined based on the prevailing methodology for this purpose. However, as of the date of this annual report, we have not received notice of the other requirements such as stricter technical reserve thresholds, which may be imposed on us due to our classification as a D-SIB. We cannot assure you that we will not be subject to such requirement in the future, which in turn could impact our capacity to afford balance sheet growth or lead us to raise funding from alternative sources, which could have a material adverse effect on our net interest margin. For more information on the implementation of the systemic buffer, see “Item 3. Key Information—Risk Factors—Restrictions imposed by regulations may constrain our operations and thereby adversely affect our financial condition and results of operations”.
Changes in accounting standards could impact our results.
The IASB, or other regulatory bodies, periodically introduce modifications to financial accounting and reporting standards under which we prepare our consolidated financial statements. These changes can materially impact the means by which we report financial information, affecting our results of operations. Also, we could be required to apply new or revised standards retroactively.
Currently, we cannot assure you that future changes in financial accounting and reporting standards will not substantially affect our results of operations or performance indicators, as we do not know the extent of future standards.
Increased competition and industry consolidation may adversely affect our operations.
The Chilean market for financial services is highly competitive. We compete with Chilean and foreign banks, with Banco del Estado de Chile, which is state-owned, and with other providers of financial services that are not part of the banking industry. In addition, the retail segment (which encompasses individuals and small and medium-sized companies) has become the target market of several banks, since banking penetration is still in progress in Chile, particularly in this segment. Accordingly, competition within this market is increasing as banks are continuously incorporating new and tailored products and services, while striving to improve service quality and to accelerate digital transformation. Further, following the new rules issued in the last years by the Chilean regulator, the processing and merchant acquiring services for payment cards (particularly related to new acquirers) may now be accomplished through a four-party mechanism, as done in some developed economies. This model facilitates the entry of new players. As of the date of this annual report, a significant part of merchant acquiring services continued to be provided in Chile by Transbank S.A. (of which we held a 26.16% direct ownership as of December 31, 2021), whereas some competitors have already begun to implement the new four-party model for their own business. As a result, net interest margins (once deducted provisions for loan losses) or fee-based income in these sub-segments could decline over time.
We also face increasingly significant competition from non-banking competitors in some of our credit products, especially credit cards and installment loans, including large department stores and private compensation funds, as well as saving and credit cooperatives. In addition, we face competition from other types of lenders, such as non-banking leasing, crowdfunding, factoring and automobile financing companies, especially in credit products, mutual funds, pension funds and insurance companies within the market for savings products and insurance companies in the market for mortgage loans. Likewise, other non-traditional providers of financial services have emerged over the last years, such as e-commerce, local and foreign fintech companies, Telecom companies, like internet and mobile phone providers, and more recently some marketplaces that may set and provide offerings, in the form of temporary financing, directly to their customers or providers. Some of these companies may have more resources than us, including larger customer bases, stronger brand recognition and more effective marketing tools to approach banking current or potential customers. They may also adopt more aggressive pricing, while devoting significant resources to technology, infrastructure and marketing as it is part of their core business. On top of that, some of these non-banking competitors are not or not fully regulated by the CMF for purposes of banking supervision. Therefore, they are not subject to the same specific solvency or liquidity requirements imposed by the banking regulator, among other requisites, as banks generally are. Nevertheless, banks continue to be the main suppliers of loans, leasing, factoring and mutual fund management, directly or indirectly through subsidiaries, while growing quickly in insurance brokerage services. However, we cannot assure you that this trend will continue in the future.
Likewise, we are aware that new competitors may enter the market, or existing competitors may innovate their services and strategies to improve the quality of services rendered to their customers. If we fail to effectively anticipate or adapt to new trends in the financial services industry, including changes in the way of delivering financial products and services, introduction of emerging technologies, changes in customer behavior or adaption of the kinds of services offered to or needed by them, our business may be adversely affected.
In addition, new technologies, including cryptocurrencies and payment systems, may result in substantial expenditures to adapt and update our existing products and services as we continue to grow our internet and mobile banking capabilities. Similarly, competitors could adapt faster than us to these new trends, which could lead to a temporary competitive disadvantage that could translate into lower revenues. Since we are aware of these new trends, we have devoted efforts to adapt our organizational structure in pursuit of enhanced flexibility to face new challenges while looking for business partnerships in order to take advantage of business opportunities arising in the market. We are also devoting efforts to deploy our digital strategy to offer tailored services and products to customers by leveraging our strategic capabilities and entering into alliances with other banking and non-banking providers. We cannot assure you that other competitors will not copy the strategy we have followed in terms of launching new digital products or entering into digital alliances or that they will not develop better solutions by acquiring more modern technology or designing more innovative solutions.
Also, in the past, increasing competition within the Chilean banking industry has been accompanied by a consolidation wave and the entry of international players into the system through multiple mergers and acquisitions. These trends have continued and resulted in the creation of larger and stronger banking conglomerates, offering a wide range of products and services and targeting most of the segments in the Chilean banking market. These dynamics may adversely impact our results of operations as they may translate into higher interest rates paid on deposits and lower interest rates earned on loans, resulting in decreased net interest margins.
For more information regarding past and recent changes in the Chilean banking industry see “Item 4. Information on the Company—Business Overview—Competition.”
Our exposure to certain segments of the retail market could lead to higher levels of total past-due loans and subsequent charge-offs.
Although we have historically been focused on wholesale banking, over the last years we have continued to reorient our commercial strategy to increase penetration of the retail banking segment. In fact, according to our management information systems, the share of the retail banking segment in our total loan book has increased from 58.0% in 2016 to 62.4% in 2021. Although this trend has been associated with an expansion in middle and higher income personal banking, our retail banking segment is also composed of small and medium-sized companies (approximately 14.9% of our total loan book as of December 31, 2021, which consists of companies with annual sales of up to ~Ch$2,200 million) and, to a much lesser extent, of lower-income individuals (approximately 1.9% of our total loan book as of December 31, 2021, which consists of individuals with monthly incomes ranging from Ch$180,000 to Ch$500,000). Since these customers are likely to be more severely affected by adverse developments in the Chilean economy than large corporations and higher-income individuals, such as those in 2020 as a result of the COVID-19 pandemic, we may be exposed to higher levels of past-due loans and subsequent charge-offs in the future, which could result in materially higher allowances for loan losses that could adversely affect our results of operations.
As of December 31, 2021, our past-due loans (loans 90-days or more past due) amounted to Ch$289,507 million, which represented a 3.3% annual decrease when compared to the Ch$299,408 million recorded in 2020. These figures translated into past-due ratios (loans 90-days or more past due over total loans) of 0.97% in 2020 and 0.85% in 2021. According to our management information systems, as of December 31, 2021 our past-due loans (loans 90-days or more past due) were composed of 81.6% retail banking 90-days or more past-due loans (consumer and residential mortgage loans to individuals, as well as commercial loans to small and medium sized companies) and 18.4% wholesale banking 90 days or more past-due loans (commercial loans to large companies and corporations). During the prior fiscal year, our past-due loans (90 days or more) portfolio was composed of 80.6% retail banking past-due loans (90 days or more) and 19.4% wholesale banking past-due loans (90 days or more).
Diverse economic and business dynamics contributed to the decrease in both the amount of past-due loans and our past-due loans ratio in 2021 when compared to 2020. In the case of past-due loans (loans 90- days or more past due), we experienced an annual decrease of approximately Ch$4,909 million in the retail banking segment and Ch$4,993 million in the wholesale banking segment, in each case, as compared to 2020. The decrease in the wholesale banking segment was supported by improved business conditions for companies in 2021, when mobility restrictions began to be gradually lifted and commercial activity returned to almost normal levels, benefiting companies’ turnover and results, which resulted in enhanced credit behavior. In the case of the retail banking segment, the improvement was related to a decrease in past-due consumer loans and to a lesser extent by lower past-due mortgage loans, which was partly offset by an increase in past-due loans granted to SMEs. The trend shown by individuals’ payment capacity had to do with the excess of liquidity in the economy produced by three consecutive pension fund withdrawals and the government aid package to support individuals, which increased disposable income by the end of 2020 but particularly throughout 2021. These factors positively impacted the payment behavior in both consumer and mortgage loans. Instead, the moderate increase in past-due loans of SMEs was primarily caused by lagged effects of COVID-19 on SMEs’ financial condition. As a result, past-due ratios (90 days or more past-due loans over total loans) decreased from 0.84% in 2020 to 0.51% in 2021 and from 1.21% in 2020 to 1.12% in 2021, in the wholesale banking and the retail banking segment, respectively.
Since the unpredictability of certain social developments, the effects of political and social events in Chile affecting consumer confidence and business sentiment, international events such as the COVID-19 pandemic, market fluctuations, changes to macroeconomic indicators, effects of global armed conflicts on the worldwide and the local economy and delayed effects of these developments, may affect our diverse customer segments, we cannot assure you that we will be able to maintain a balanced risk-return equation if global or local economic conditions deteriorate in the future. In this regard, economic recessions, social turmoil or market volatility could adversely affect the financial condition of our borrowers, which could translate into an increase in our non-performing loans, impair our loan portfolio and result in lower demand for our loans. Any of these trends could have a material adverse effect on our business, financial condition and results of operations.
For more information on past-due loans, see “Item 3. Key Information—Risk Factors—Risks Relating to our ADSs— Developments in international financial markets may adversely affect the market price of the ADSs and shares,” “Item 3. Key Information—Risk Factors—Risks Relating to our ADSs—COVID-19 or any other pandemic disease and health events will affect both the global and the Chilean economy, our business or results of operations and could affect our financial condition” and “Item 4. Information on the Company—Selected Statistical Information—Analysis of Substandard and Past-due loans.”
Our results of operations are affected by interest rate volatility and inflation.
Our results of operations depend greatly on our net interest income, which represented 70.5% of our total operating revenues in 2021. Changes in nominal interest rates and inflation could affect the interest rates earned on our interest-earning assets differently from the interest rates paid on our interest-bearing liabilities, resulting in net income reduction. Inflation and interest rates are sensitive to several factors beyond our control, including the Central Bank’s monetary policy, deregulation of the Chilean financial sector, local and international economic developments and political conditions, among other factors. In addition, changes in interest rates affect securities and other investments or assets that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Any volatility in interest rates could have a material adverse effect on our financial condition and results of operations. Also, real negative interest rates could negatively impact our ability to raise funding for our operations, particularly for short-term maturities, which could result in higher funding costs and lower net interest margin.
The average annual short-term nominal interest rate in Chile for 90 to 360 day deposits received by Chilean financial institutions was 2.72% in 2019, 0.86% in 2020 and 1.71% in 2021, following the trend seen in the monetary policy interest rate. For the same reason, the average interest rate paid by Chilean financial institutions for 90 to 360 days Chilean peso denominated deposits was 6.59% as of the three-month period ended on March 31, 2022. The average long-term nominal interest rate based on the interest rate of the five-year bonds traded in the secondary market, issued by both the Central Bank and the Chilean Government, was 3.31% in 2019, 1.93% in 2020 and 3.51% in 2021. In 2021, market interest rates began to steadily increase in Chile, particularly for longer maturities, based on various factors, including: (i) pension fund withdrawals that severely impacted the pricing of fixed-income securities, (ii) expectations of higher inflation in the near future, and (iii) the presidential election held in December 2021 that determined the administration that took office on March 11, 2022 and the potential consequences its results may have on the prevailing economic system. Based on this, the interest rate of five-year Chilean peso denominated bonds, issued by both the Central Bank and the Chilean Government, increased from 1.58% in December 2020 to 5.59% in December 2021 and to 6.76% in March 2022. In the three-month period ended on March 31, 2022, the interest rate for the same Central Bank and Chilean Government bonds averaged 6.20%.
Prior to 2021, inflation in Chile had been moderate, especially in comparison with periods of high inflation experienced in the 1980s and 1990s. High levels of inflation in Chile could adversely affect the Chilean economy, consumer purchasing power, household consumption and investment in machinery and equipment and, therefore, the demand for financing and our business. The annual inflation rate (as measured by annual changes in the CPI and as reported by the Chilean National Institute of Statistics) during the last five years and the first three months of 2022 was:
|2022 (through March 31)||3.4||%|
Source: Chilean National Institute of Statistics
During 2021, the inflation rate, measured as CPI variation, was 7.2%. This annual increase was the consequence of many factors, although the sharp increase in household consumption, propelled by above average liquidity among individuals for the reasons mentioned earlier, was a primary cause behind higher-than-expected inflation as the local supply for products and services was not able to meet demand requirements in the short-term. This factor coupled with other inflationary pressures, such as: (i) the increase in the price of oil worldwide, (ii) the constraints experienced in the global supply chain, which translated into an increase in inflation worldwide and (iii) a depreciation of 19.8% of the Chilean peso against the U.S. dollar, which has a pass-through effect associated with the translation of imported goods into Chilean pesos. Although we benefit from a higher-than-expected inflation rate in Chile in the short-term, due to the structure of our assets and liabilities (we have a significant net asset position indexed to the inflation rate), significant and persistent increases or decreases in inflation with respect to current levels could adversely affect our net interest income, results of operations and, therefore, the value of our securities and medium-term profitability.
Additionally, measures taken by the Central Bank to control inflation may adversely affect the Chilean economy, the banking business and our results of operations and financial condition. In this regard, the measures adopted by the Central Bank in the past to control inflation have included the increase of the monetary policy interest rate, which has restricted the demand for loans while negatively affecting economic growth through constrained household spending and capital expenditures. In 2021, the Central Bank increased the monetary policy rate from 0.5% to 0.75% in July, to 1.5% in August, to 2.75% in October and to 4.0% in December 2021. Furthermore, the Central Bank has announced its intention to continue withdrawing the monetary stimulus by leading the monetary interest rate to neutral levels in the short-term, suggesting that further increases could take place in 2022. Accordingly, the Central Bank took the monetary policy interest rate to 5.50% in January 2022 while stating that additional hikes could be applied as long as inflation persists above the target range. As such, most recently, in March 2022, the monetary policy interest rate was increased by 150 basis points ending the month at 7.0%. Since our liabilities generally re-price faster than our assets, sudden and sequential increases in short-term rates could affect our net interest margin.
For more information, see “Item 3. Key Information—Risk Factors—Risks Relating to our ADSs—Developments in international financial markets may adversely affect the market price of the ADSs and shares,” “Item 3. Key Information—Risk Factors—Risks Relating to our ADSs—COVID-19 or any other pandemic disease and health events will affect both the global and the Chilean economy, our business or results of operations and could affect our financial condition,” “Item 5. Operating and Financial Review and Prospects—Operating Results—Overview—Inflation” and “Item 5. Operating and Financial Review and Prospects—Operating Results—Overview—Interest Rates.”
Part of the information included in our financial statements considers assumptions, estimates and modeling which, if inaccurate, could have a material impact on our results of operations and financial position.
The preparation of our financial statements requires management to make judgments and estimates that affect the amounts of assets, liabilities, income and expenses reported in our financial statements. Estimates and assumptions are based on historical experience, expert judgment and other factors, including expectations of future developments under certain alternative scenarios. Although assumptions and estimates are evaluated and revised on a continuous basis, we cannot rule out that projected scenarios could dramatically change in the short term, causing a severe impact on fundamentals and estimates.
We are also subject to model risk since the valuation of financial instruments relies on models (such as cash flows valuation models for fixed-income securities, valuation models for derivatives including technical approximations, value adjustments models for derivatives, and IFRS 9 forward-looking provisioning models, among others) and inputs, which, in some cases, are not observable. Accordingly, computed values for securities and financial instruments may be inaccurate or subject to change, since the inputs used for specific models may be unavailable, particularly for illiquid assets or under scenarios of financial turmoil. In these cases, we will make assumptions and judgments in order to establish the fair value of certain instruments, which involves uncertainty and may translate into inaccurate estimates of actual results.
For example, we assess the credit quality of our borrowers based on the information that is available in Chile regarding their indebtedness with the banking system as a whole. This includes information provided by the CMF, the local credit bureaus, databases we have created through the years and other public sources. However, as mentioned in this annual report, there are non-banking companies that are permitted to grant loans, particularly to individuals, in the form of credit card loans, leasing loans, factoring loans, and others. Information on the indebtedness of our customers and non-customers with these lenders is not publicly available or consolidated with borrowings from banks. As such, our assessment of customers for the scoring and provisioning processes may be based on partial, inaccurate or unreliable information on the borrowers’ creditworthiness, which could lead us to increase our expected credit losses in the future once complete information is fully available through the consolidation of customers’ indebtedness with all banking and non-banking lenders.
In addition, the cessation or replacement of certain rates, market indices or benchmarks extensively used by financial markets and practitioners for valuation purposes, such as interest rates or foreign exchange rates indices, could also impact the accuracy of the estimates we include in our financial statements. On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority (FCA), which regulates the entity that oversees the London interbank offered rate (“LIBOR”), announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of the LIBOR benchmark after 2021. Moreover, on March 5, 2021 the FCA made an announcement confirming that 35 LIBOR settings will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021 for all GBP, EUR, CHF and JPY LIBOR settings, and the one-week and two-month USD LIBOR, and after June 30, 2023 for the Overnight and one-month, three-month, six-month and 12-month USD LIBOR. Later, on October 20, 2021, in the United States, the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency released a joint statement mentioning that (i) after December 31, 2021, supervised companies should not increase exposures to LIBOR or extend the term of existing LIBOR contacts, (ii) starting January 1, 2022, a benchmark other than LIBOR should be used for the origination of new contracts and (iii) between December 31, 2021 and June 30, 2023, banking entities should amend formerly existing LIBOR contracts that do not clearly establish a fallback provision to replace LIBOR. The LIBOR reform and other similar changes may result in various risks for the financial and banking business, including but not limited to: (i) risk management, financial and accounting risks arising from market risk models and from valuation, hedging, discontinuation and recognition of financial instruments linked to benchmark rates; (ii) pricing risks arising from how changes to benchmark indices could impact pricing mechanisms on some instruments; (iii) communication risks arising from misunderstandings with customers or counterparties; (iv) the possibility that a limited number of transactions do not contemplate a LIBOR fallback provision; and (v) the necessity of adapting current IT systems, trading platforms, financial reporting infrastructure and clearing processes, among others. The implementation of alternative benchmark rates for USD, GBP, EUR, CHF and JPY LIBOR is still in progress. However, starting January 1, 2022 most banks, including us, have moved from LIBOR to the Secured Overnight Funding Rate (or “SOFR”) for newly originated transactions, which is the secured overnight financing rate published by the Federal Reserve Bank of New York on its website and is expected to be an appropriate replacement for LIBOR. This could have an adverse effect on our business, results of operations or financial condition if we are unable to agree on an alternative benchmark, like SOFR, with customers and financial counterparties holding contracts formerly based on LIBOR. Publication of SOFR began on April 3, 2018 and it therefore has a limited history. In addition, the future performance of SOFR cannot be predicted based on the limited historical performance. Prior observed patterns, if any, in the behavior of market variables and their relation to SOFR, such as correlations, may change in the future. While some pre-publication historical data have been released by the Federal Reserve Bank of New York, such analysis inherently involves assumptions, estimates and approximations. The future performance of SOFR and other alternative benchmarks, is currently impossible to predict and therefore no future performance of alternatives benchmarks may be inferred from historical simulations or historical performance. Furthermore, we may face a risk of litigation, disputes or other actions from clients, counterparties, customers, investors or others regarding the interpretation or enforcement of related provisions or if we fail to appropriately communicate the effect that the transition to alternative benchmark rates will have on existing and future products. Although we expect to adapt our valuation processes, IT infrastructure and pricing systems as new information arises, we can neither assure you nor calculate the impact this could have on our business and results of operations, if any.
As of December 31, 2021, we had on-balance and off-balance contracts that used LIBOR as a benchmark. Most of them have interests paid in LIBOR or are valued by using LIBOR as the prevailing discount rate, including derivatives, loans and master agreements, such as ISDA contracts. As of December 31, 2021, our on-balance assets based on LIBOR amounted to approximately U.S.$1,039 million and our liabilities based on LIBOR amounted to approximately U.S.$707 million. In the case of assets, as of December 31, 2021, approximately 29.4% was due to expire before June 30, 2023, while the remaining 70.6% was due to expire after June 30, 2023. As of the same date, in terms of liabilities, 68.8% is expiring before June 30, 2023 and 31.2% after that date. Most of the assets are associated with commercial credits linked to LIBOR granted to local customers. In terms of liabilities, most of them relate to financing for trade finance loans and, to a lesser extent, financial obligations. As of December 31, 2021, off-balance sheet arrangements based on LIBOR represented a net liability exposure of approximately U.S.$942 million, of which approximately 34.3% is due to expire before June 30, 2023 and the remaining 65.7% after that date. In addition to the fact that most of our foreign counterparties, particularly those associated with derivative contracts under ISDA agreements, are already set to move from LIBOR to SOFR as contracts consider fallback clauses that allow rate switching, we continue to deploy an action plan that includes: (i) the identification of our main exposures and risks related to the LIBOR transition, (ii) the development of new products linked to the new reference rate, (iii) revision of current contracts and renegotiation with some of our customers, (iv) the construction of new yield curves based on SOFR in order to address and value new derivative transactions, (v) the enhancement of our front and back office platforms to address the implementation of the new reference rate to migrate all former operations based on LIBOR, and (vi) closing newly originated on-balance and off-balance operations by using SOFR or comparable benchmarks in case of local counterparties or using local rates as part of the transaction. As of the date of this annual report, according to our estimates, switching from LIBOR to alternatives benchmarks such as SOFR is not expected to have a material impact on our results of operations. However, we cannot assure you that any other reforms and changes, any establishment of alternative reference rates or any other reforms to these reference rates that may be enacted will not have a material impact on our results of operations in the future.
In addition, the main accounting items subject to risk of incorrect valuation include impairment of loans to customers and advances to banks, valuation of fixed-income securities and financial derivatives held for trading, valuation and impairment of financial assets measured at fair value through other comprehensive income, and deferred tax assets and provisions for liabilities, among others. If our judgment, assumptions or models used in valuing these items are inaccurate, there could be a material effect on our results, funding requirements and capital ratios.
Market turmoil could result in material negative adjustments to the fair value of our financial assets, which could translate into a material effect on our results or financial condition.
Over the last decade worldwide financial markets have been subject to stress coming from diverse fronts that has resulted in sharp temporary changes in interest rates and credit spreads, including those related to the effects of the COVID-19 pandemic and, more recently, to the impact of geopolitical issues arising in eastern Europe, all of which have also affected the Chilean financial market. We have material exposures to debt securities issued by the Chilean Government and the Central Bank and other fixed-income investments in securities issued by local and foreign issuers. Most of these are booked at fair value with direct impact on our income statement or through other comprehensive income, while a remaining minor portion is measured at amortized cost. Therefore, these positions expose us to potential negative fair value adjustments in the short or medium term and to impairments in the long term, due to dramatic and unexpected changes in short- or long-term local and foreign interest rates and credit spreads. Any of these factors could have a material adverse effect on our results of operations and financial condition.
In 2020 and 2021, the Chilean financial market was affected by local non-recurrent factors including, but not limited to: (i) three pension fund withdrawals approved by the Chilean Congress to assist individuals in the context of the COVID-19 pandemic, which led to a change in the pricing of fixed-income securities as pension fund managers liquidated a significant part of their positions in order to overcome withdrawals, (ii) expectations of higher inflation, and (iii) political uncertainty associated with the run-off presidential election in December 2021. Also, in an effort to control inflation, the Central Bank increased the monetary policy rate four times between July and December 2021 from 0.5% to 4.0%, as part of a tightening cycle that is expected to continue in 2022. This was later increased further, as in the first quarter of 2022, the Central Bank raised the monetary policy interest rate twice, to reach 7.0% in March 2022. All of these factors resulted in significant increases for nominal and real interest rates through the whole yield curve. For instance, the average interest rates paid by Chilean banks on 90 to 360 day deposits increased from 0.40% in December 2020 to 5.06% in December 2021, while interest rates of the Central Bank’s five-year Chilean peso denominated bonds increased from 1.58% in December 2020 to 5.59% in December 2021 and to 6.76% in March 2022. All of these factors negatively impacted the market value of financial assets for the entire industry and us, including both financial instruments measured at fair value with direct impact on the income statement and those measured at fair value through other comprehensive income.
As of December 31, 2021, our fixed-income portfolio was composed of securities measured at fair value through profit and loss statement amounting to Ch$3,876,695 million (approximately U.S.$4,547 million) and financial instruments measured at fair value through other comprehensive income amounting to Ch$3,061,174 million (approximately U.S.$3,816 million), which are mostly concentrated in bonds and notes issued by the Central Bank and the Chilean Government. The approval of a fourth pension fund withdrawal, increased uncertainty regarding economic and social reforms to be implemented by Chile’s new administration, escalation of armed conflicts in eastern Europe including the involvement of additional countries leading to a global conflict, and internal or external forces sustaining persistent inflation, among other factors, could cause further increases in short- and long-term local interest rates, which could have additional impacts on the market value of our fixed-income portfolio measured at fair value.
See also “Item 3. Key Information—Risk Factors—Risks Relating to our ADSs—Developments in international financial markets may adversely affect the market price of the ADSs and shares” and “Item 3. Key Information—Risk Factors—Risks Relating to our ADSs—COVID-19 or any other pandemic disease and health events will affect both the global and the Chilean economy, our business or results of operations and could affect our financial condition.”
Operational problems, errors, criminal events or terrorism or other events relating to force majeure may have a material adverse impact on our business, financial condition and results of operations.
As all large financial institutions, we are exposed to many operational risks, including the risk of fraud by employees and outsiders, failure to obtain suitable internal authorizations, failure to properly document in-person and online transactions, equipment failures, mistakes made by employees and natural disasters, such as earthquakes, tsunamis, wildfires and floods.
Chile is located in one of the most seismically active regions in the world–Nazca tectonic plate. Our results of operations can be materially affected by natural disasters, particularly in locations where a significant portion of our loan portfolio is composed of real estate loans. These force majeure events related to nature include, but are not limited to, earthquakes, tsunamis and floods and may cause thorough damage which could impair the asset quality of our loan portfolio and our collateral as well as a material adverse impact on the economy of the affected region and therefore on our bank.
We could also be affected by operational disruptions associated with intentional or unintentional mass employee absence due to social unrest, demonstrations, street riots (such as the one witnessed since October 2019), transportation services interruptions, massive strikes or strikes at an industry level, massive epidemic or pandemic outbreaks, such as COVID-19, among others.
Furthermore, we may be exposed to criminal events, terrorist attacks or rioting that could result in physical damage to our buildings (including our headquarters, offices, branches and automatic teller machines (“ATMs”)) and/or injury to customers, employees and others. In addition, since activating certain aspects of our business continuity plan in response to the COVID-19 pandemic to allow many of our associates to work remotely, our associates’ ability to relocate to a secondary location in the event of any operational disruptions may be limited due to the pandemic. Although we maintain a system of operational controls composed of both trained staff and world-class technological resources that have been enhanced over the last years, as well as comprehensive contingency plans and security procedures, there can be no assurances that operational problems, errors, criminal events or terrorist attacks will not occur and that their occurrence will not have a material adverse impact on our results of operations, financial condition and the value of our shares and ADSs.
Despite our policies and procedures to detect or prevent money laundering and other financial crime activities, we may not be able to fully detect them or on a timely basis.
We are subject to many anti-money laundering (“AML”), anti-terrorism, anti-bribery and corruption laws and regulations. Further, due to our relationship with Citigroup, we have implemented similar AML policies that such bank has implemented which, in cases, are stricter than those applicable to Chilean banks.
We constantly update our policies and procedures for the purpose of timely detection and the prevention of the use of our banking network for money laundering and other criminal activities. Nevertheless, we are aware that new technologies, such as cryptocurrencies and innovative payment methods, could limit our ability to track the movement of funds.
Many threats can never be fully eliminated, and there will be instances where we may be used by other parties to engage in money laundering and other illegal or improper activities. Moreover, we rely on our employees to assist us by spotting such activities and reporting them, and our employees have varying degrees of experience in recognizing criminal tactics and understanding the level of sophistication of criminal organizations. If we are unable to apply the necessary scrutiny and oversight, there remains a risk of regulatory breach. If we are unable to comply fully with applicable laws, regulations and expectations, our regulators and relevant law enforcement agencies have the ability and authority to impose significant sanctions, fines and harsh penalties on us.
There are laws, regulations and policies that require us to, among other things, conduct full customer due diligence (including, but not limited to, sanctions and politically-exposed person screening), keep our customer, account and transaction information updated and, at the same time, implement and develop an array of policies and procedures to prevent the facilitation of financial crime. We conduct AML training programs for our employees on a regular basis to enable them to adequately detect and report suspicious transactions to our AML team, to allow for subsequent proper investigation from law enforcement agencies.
We have policies and procedures to reasonably assure the compliance with legal requirements and policies; however, our ability to comply thereto depends on improving detection and reporting capabilities and reducing variation in control processes and oversight accountability. The latter requires us to implement and enhance our business with effective controls and monitoring. We are also aware that financial crime is permanently evolving and is subject to increasingly stringent regulatory oversight and focus. This requires proactive and adaptable responses from us so that we are able to deter threats and criminality effectively and in a timely fashion.
The reputational damage to our business and brand could be severe if we were found to have breached AML, anti-bribery and corruption or sanctions requirements. Our reputation could also suffer if we are unable to protect our customers’ bank products and services from being used by criminals for illegal or improper purposes. Any such risks could have a material adverse effect on our results of operation, financial condition and prospects.
Cybersecurity events could negatively affect our reputation or results of operations and may result in litigation.
We have access to large amounts of confidential financial information and hold substantial financial assets belonging to our customers as well as to us. In addition, we provide our customers with continuous online access to their accounts. Customers have the ability to transfer substantial financial assets in Chile and abroad through electronic means, while purchasing goods or withdrawing funds with credit and debit cards issued by us. Among the most significant cyber-attack risks that we are constantly facing are internet fraud and loss of sensitive information, both from our customers and ourselves. In particular, loss from internet fraud occurs when cyber criminals extract funds directly from clients’ or our accounts using fraudulent schemes that may include internet-based fund transfers. We are also exposed to cyber-attacks, hacking and other cybersecurity incidents in the normal course of business. Thus, as a financial institution, we are under a constant threat of suffering losses due to these reasons. In addition, our risk and exposure to these matters remains heightened because of the evolving nature and complexity of these threats from cybercriminals and hackers, our plans to continue to provide and enhance our internet banking and mobile banking channels, and our plans to develop additional remote connectivity solutions to serve our customers. Accordingly, cybersecurity is a material risk for us.
There has recently been an increased level of attention focused on cyber-attacks against large corporations that include, but are not limited to, obtaining unauthorized access to digital systems for purposes of misappropriating cash, other assets or sensitive information, corrupting data or causing operational disruptions. Cybersecurity incidents, such as computer break-ins, phishing, identity theft and other disruptions, could negatively affect the security of information stored in and transmitted through our computer systems and network infrastructure. Subsequently, this may result in significant liability to us in excess of insurance coverage, which may carry low coverage limits, and may cause existing and potential customers to refrain from doing business with us. Additionally, cyber-attacks on our network or other systems could have a material adverse effect on our business and results of operations due to financial losses, losses of sensitive information, interruption or delays in our business and operations, regulatory fines, reimbursement or other compensation costs, compliance costs and reputational damage, among other things.
In 2018, we suffered a cybersecurity incident involving the theft of funds that subsequently resulted in an operational write-off of approximately Ch$6,900 million (or U.S.$9.9 million). The incident also caused temporary interruptions to some of our operations, affecting the quality of the services provided to our customers during a short period of time. In spite of the temporary damage to our IT infrastructure, we were able to contain any disruption by deploying a contingency plan, which allowed us to maintain the continuity of our operations, assure that our customers’ funds were absolutely secured, and comply with our short-term financial commitments. We took immediate action and communicated with our network of correspondent banks to recover the stolen funds. For more information on the incident, see “Item 5. Operating Results—Results of Operations for the Years Ended December 31, 2016, 2017 and 2018—Other Income (Loss), Net”, “Item 5. Operating Results—Results of Operations for the Years Ended December 31, 2016, 2017 and 2018—Operating Expenses” and “Item 4. Information about the Company—Our Business Strategy—Operating Efficiency and Productivity” in our annual report on Form 20-F for the year ended December 31, 2018 filed with the SEC on April 26, 2019.
Furthermore, in line with the enhancements in our cybersecurity standards that were performed during the last years, and to further improve our protections against events such as the one that occurred in May 2018, we have made significant efforts and taken steps to enhance our data security and IT infrastructure, including the purchase of protection systems and world-class infrastructure, among others. We reinforced our organizational structure and replaced our former Technological Security Area with our Cybersecurity Division in June 2018, whose main role is to be the first line of defense and be in charge of mitigating and managing cybersecurity threats, while at the same time improving cybersecurity policies, spreading related knowledge among our bank and customers and developing competences that all our employees must possess on this regard. In 2019, we continued to enhance our cybersecurity protocols and infrastructure by improving security in our networks, servers, workstations and digital applications. Similarly, we put significant efforts in enhancing access-control to our networks by using technological solutions and specialized software, while simultaneously improving our capabilities on detection and management of high-risk threats. Also, based on our efforts to change our staff’s culture on cybersecurity matters, we were able to timely detect and block phishing attempts targeting clients and non-clients. In 2020, given the effects of COVID-19 on our operations, most of our staff operated remotely, which accelerated our digital transformation while imposing a challenge for us in terms of cybersecurity, since our collaborators are accessing our network and servers from home. As such, we reinforced cybersecurity measures by implementing new protocols and tools. In 2021, our efforts were oriented to bolster the cybersecurity culture across the corporation by focusing in three main initiatives: (i) an awareness program intended to share with our collaborators the best practices and recommendations to face cybersecurity threats, (ii) the establishment of improved cybersecurity guidelines for selection and classification of providers, and (iii) the enhancement of existing information channels by which our staff reports cybersecurity threats.
Notwithstanding every measure taken to address cybersecurity matters, although we have not experienced any material losses in this matter and are currently performing our best efforts to prevent them, we cannot assure you that we will not suffer additional losses in the future related to these kinds of events.
The occurrence of any cyber-attack or information security breach could result in material adverse consequences to us, including damage to our reputation and the loss of customers. We could also face litigation or additional regulatory scrutiny. Litigation or regulatory actions in turn could lead to significant liability or other sanctions, including fines and penalties or reimbursement of customers adversely affected by this security breach. As mentioned above, although we did not suffer any material adverse effects as a result of the May 2018 cyber-attack, successful attacks or systems failures at our bank or at other financial institutions could lead to a general loss of customer confidence in financial institutions, including us.
In addition, we depend on a variety of internet-based data processing, communication, and information exchange platforms and networks. We cannot assure you that all of our systems are entirely free from vulnerability. Additionally, we enter into contracts with several third parties to provide our customers with data processing and communication services. Therefore, if information security is breached, or if one of our employees or external service providers breaches compliance procedures, information could be lost or misappropriated, which may affect our results of operations, damage others or result in potential litigation.
Further, in light of the high volume of transactions we process, the large number of our clients, partners and counterparties, the increasing sophistication of malicious actors, and our remote work environment in response to the COVID-19 pandemic, a cyber-attack could occur and persist for an extended period of time without detection. We expect that any investigation of a cyber-attack would take substantial amounts of time, and that there may be extensive delays before we obtain full and reliable information. Although we have substantially increased measures to address cybersecurity during the last years and, with the help of service providers, intend to continuously implement security technology devices and establish operational procedures to prevent such damage, we cannot assure you that these security measures will be successful.
Any downgrade in Chile’s or our credit rating could increase our cost of funding, affecting our interest margins, results of operations and profitability.
Our current credit ratings determine the cost and the terms upon which we are able to obtain funding in the ordinary course of business. Rating agencies regularly evaluate us by considering diverse factors, including our financial strength, the business environment and the economic backdrop in which we operate. Thus, methodologies used by rating agencies evaluate Chile’s sovereign debt ratings when determining our ratings. In addition, from time to time, rating agencies review and revise their methodologies, which in some cases could result in adjustments to Chile’s sovereign debt prevailing credit ratings or those of our debt. On March 24, 2021, Standard & Poor’s Ratings Service (“S&P”) downgraded Chile’s sovereign credit rating from A+ to A, while modifying the credit outlook from negative to stable in September 2021. The credit action taken by S&P was founded in the expected negative effects due to the COVID-19 pandemic and the effects of increasing social pressures that may lead the prevailing government to incur further social expenses and increase Chile’s current fiscal deficit in the long-run. Given the credit action taken by S&P on Chile’s sovereign credit rating, this rating agency also downgraded four local banks (excluding us) by one notch, while maintaining the negative outlook for the whole banking industry (including us), with the exception of Banco Estado (a state-owned bank) that received a stable outlook. In June 2021, S&P improved the outlook for two banks from negative to stable, excluding us.
As of the date of this annual report, S&P and Moody’s maintained our credit rating for unsecured long-term debt at levels of A and A1, respectively, both with a negative credit outlook (downgraded from the stable outlook in April 2020) due to the effects of the COVID-19 pandemic on the Chilean economy and banking activity, in conjunction with the slowdown evidenced by the Chilean economy since the social turmoil in October 2019. While Chile’s current long-term debt credit ratings remain investment grade, these credit ratings may deteriorate further and adversely affect our credit rating.
Any downgrade in our debt credit ratings could result in higher borrowing costs for us, while requiring us to post additional collateral or take other actions under some of our derivative and other contracts, and could limit our access to debt and capital markets. All of these factors could adversely impact our commercial business by affecting our ability to: (i) sell or market our products, (ii) obtain long-term debt in Chile or abroad, (iii) retain customers who need minimum ratings thresholds to operate with us, (iv) maintain derivative contracts that require us to have a minimum credit rating and (v) enter into new derivative contracts, which could impact our market risk profile, among other effects. Any of these factors could have an adverse effect on our liquidity, results of operations and financial condition.
Due to (i) the volatility in the financial markets and concerns about the soundness of developed and emerging economies, (ii) the still unpredictable impacts or lagged effects of the COVID-19 pandemic on the global and the local economies, (iii) changes to or attempts to modify the political or economic system by the Constitutional Convention which is currently drafting a new constitution, (iv) potential changes to be introduced in the fiscal policy or long-term government spending by the current or future government administrations in Chile, (v) reforms to be proposed or introduced by the recently appointed administration to modify the characteristics of the current economic and financial system, and (vi) the effects that current or potential geopolitical conflicts may have on the local economy, we cannot assure you that rating agencies will maintain our and Chile’s sovereign debt current ratings and outlooks.
As a financial institution, we are subject to reputational risk that could materially affect our results of operations or financial condition.
Corporate reputation is a crucial competitive advantage for us, as it allows us to attract and retain customers, appeal to investors and avoid employee attrition. Also, reputation is a key element in banking since access to funding is driven by the confidence of depositors and the opinion of ratings agencies on the value of our franchise. Therefore, any disreputable event, including employee misconduct, legal proceedings, regulatory sanctions, failure to deliver minimum standards of service quality, failure to comply with regulatory requirements, unethical behavior by our staff or involvement in political issues or public scandals (or gossip related thereto), complaints filed by customers or non-customers and fake news or alleged issues about us or our operations in social media could damage our reputation and produce significant harm to our results of operations or financial condition. Furthermore, our reputation is highly aligned with the reputation of the banking industry in which we participate and, therefore, actions by other providers of financial services or the banking industry as a whole could also harm our own reputation.
Similarly, the ability to manage potential conflicts of interest has become an increasingly important factor for our business given our widespread operations in many economic sectors with diverse third parties. Accordingly, the failure to address –or even the perceived failure to address– conflicts of interest could affect the willingness of customers and investors to work with us, or could lead to legal actions against us. In order to address and avoid these potential events, we are continuously improving our corporate governance standards by detecting potential failures and adopting world-class principles and procedures. Nevertheless, we cannot assure you that we will not face reputational events in the future that could harm our prospects or the value of our franchise. For more information on corporate governance, see “Item 6. Directors, Senior Management and Employees—Board Practices”.
Risks Relating to our American Depositary Shares (“ADSs”)
Our principal shareholders may have interests that differ from those of our other shareholders and their significant share ownership may have an adverse effect on the future market price of our ADSs and shares.
As of April 20, 2022, LQ Inversiones Financieras S.A. (“LQIF”), a holding company beneficially owned by Quiñenco S.A. and Citigroup Chile S.A., holds directly and indirectly approximately 51.2% of the voting rights of our shares. Subject to our bylaws and applicable law, these principal shareholders are in a position to elect a majority of the members of our board of directors and control all matters decided by a shareholder vote, including the approval of fundamental corporate transactions.
Actions taken by our principal shareholders with respect to the disposition of the shares or ADSs they beneficially own, or the perception that such actions may occur, may adversely affect the trading price of our shares on the various stock exchanges on which they are listed and, consequently, the market price of the ADSs.
There may be a lack of liquidity and a limited market for our shares and ADSs.
While our ADSs have been listed on the New York Stock Exchange (the “NYSE”) since the first quarter of 2002, there can be no assurance that an active trading market for our ADSs will be sustained. During 2021, a daily average volume of approximately 105,352 of our American Depositary Receipts (“ADRs”) were traded on the NYSE, according to data provided by Bloomberg. Although our shares are traded on the Santiago Stock Exchange and the Chilean Electronic Stock Exchange, the Chilean market for our shares in Chile is small and somewhat illiquid. As of April 20, 2022, approximately 48.8% of our outstanding shares were held by shareholders other than our principal shareholders, LQIF.
If an ADS holder withdraws the underlying shares from the ADR facility, the small size of the market, its limited liquidity, as well as our concentrated ownership, may impair the ability of the ADS holder to sell the shares in the Chilean market in the amount and at the price and time such holder desires, and could increase the volatility of the price of our ADSs.
ADS holders may be unable to exercise voting rights at shareholders’ meetings and preemptive rights.
ADS holders may exercise voting rights associated with common stock only in accordance with the deposit agreement governing our ADSs. Accordingly, ADS holders will face practical limitations when exercising their voting rights because ADS holders must first receive a notice of a shareholders’ meeting from the Depositary and may then exercise their voting rights by instructing the Depositary, on a timely basis, on how they wish to vote. This voting process necessarily will take longer for ADS holders than for direct common stockholders, who are able to exercise their vote by attending our shareholders’ meetings. Therefore, if the Depositary fails to receive timely voting instructions from some or all ADS holders, the Depositary will assume that ADS holders agree to give a discretionary proxy to a person designated by us to vote their ADSs on their behalf. Furthermore, ADS holders may not receive voting materials in time to instruct the Depositary to vote. Accordingly, ADS holders may not be able to properly exercise their voting rights.
Furthermore, the Ley Sobre Sociedades Anónimas No. 18,046 (the “Chilean Corporations Law”) and the Reglamento de Sociedades Anónimas (the “Chilean Corporations Regulation”) require that whenever we issue new common stock for cash, we grant preemptive rights to all of our shareholders (including holders of ADSs) to purchase a sufficient number of shares to maintain their existing ownership percentage. Such an offering would not be possible unless a registration statement under the Securities Act were effective with respect to such rights and common stock, or an exemption from the registration requirements thereunder were available.
We may elect not to make a registration statement available with respect to the preemptive rights and the common stock, in which case you may be unable to exercise your preemptive rights. If a registration statement is not filed, the depositary will sell such holders’ preemptive rights and distribute the proceeds thereof if a premium can be recognized over the cost of any such sale.
Developments in international financial markets may adversely affect the market price of the ADSs and shares.
The market price of our ADSs and shares may be adversely affected by volatility in international financial markets and unfavorable developments in global economic conditions. The market for Chilean securities and the Chilean economy as a whole are influenced by: (i) economic and market conditions in Chile’s main commercial partners such as the United States, Europe and certain emerging economies, especially Asian countries, (ii) economic as well as political developments in Latin American countries, and (iii) armed conflicts in which some of the Chile’s main trade partners participate or by which they could be affected. Although economic conditions are different in each country, investors’ reactions to specific issues in one country may affect the financial markets in others, including Chile.
After a long period of turbulence and volatility, which began in 2007 with the subprime mortgage crisis, when many U.S. banks and financial institutions disclosed significant write-downs related to their exposure to mortgage-backed securities and other similar financial instruments, the world’s economy began to show a gradual recovery thanks to significant government intervention for important banks worldwide, in order to maintain investors’ and customers’ confidence and to prevent bank runs. These government actions became less frequent as the U.S. and the global economy started to show signs of recovery. Nevertheless, the fiscal condition of many European countries remained weak for a protracted period of time, which, from time to time, created doubts about the financial condition of certain European banks. At the same time, stricter capital requirements were established for banks around the world, namely the Basel III framework or more recently the Basel IV framework.
During 2020, the COVID-19 pandemic was a principal source of instability for financial markets. Equity market valuations lowered significantly while liquidity in fixed income markets decreased dramatically, creating significant volatility and disruption in global financial markets, particularly in the early months of the pandemic, resulting in the fall of stock prices (including the price of our stock) and sudden increases in credit spreads. In the case of interest rates, monetary actions taken by many central banks around the world led short-term and long-term rates to historically low levels, in order to promote lending by banks and assure liquidity in the global financial system. These trends began to revert in 2021 as the pandemic seemed to be under control, massive lockdowns were gradually lifted, individuals and companies returned to normal activities and the vaccination process advanced around the globe. Many developed and developing economies recovered significantly from the contraction displayed in 2020. In fact, according to the International Monetary Fund, global GDP is estimated to have expanded 5.9% in 2021, whereas GDP of developed and emerging economies is estimated to have increased 5.0% and 6.5%, respectively, which were accompanied –or in some cases prompted– by increases in fiscal spending and also a boost in household spending in comparison with 2020, linked to both fiscal aid packages and a recovery in employment.
Additionally, given the effect of diverse economic events such as the United States-China trade war and, more recently, the COVID-19 pandemic on actual economic growth, the U.S. Federal Reserve reduced the federal fund rate starting in March and April 2020, by leading the monetary interest rate to from 1.75% at the beginning of the year to 0.25%, a level at which it remained until December 2021. Recently, the U.S. Federal Reserve has announced its intentions to begin to increase rates during the first half of the year to combat rising inflation. Furthermore, uncertainty regarding the future of emerging and developed economies continues to be a source of instability worldwide. For example, although the “trade war” between the United States and China, by which both countries seek to revise tariffs on the others’ imported goods, seemed to have improved, it continues to be a source of volatility for financial markets from time to time. Also, political and social instability in some Latin American countries like Colombia, Venezuela, Ecuador, Argentina and even Chile produced migration issues in more stable countries within the region. Moreover, the materialization of Brexit, armed conflicts in the Middle East and Asia, the ongoing tensions between the U.S. and Iran, the global migration crisis and waves of populism looming in different countries, as well as terrorism, illustrate volatile social and political environments that could harm foreign trade and economic growth for both developed and developing countries. These changes may also generate significant volatility in international markets and commodity prices. More recently, the armed conflict between Russia and Ukraine in eastern Europe, which threatens to become global if other countries decide to act, is another source of instability that could affect the global economic environment. As of December 31, 2021, and as of the date of this annual report, we do not have any exposure to customers or financial counterparties either in Ukraine or Russia.
Moreover, the slowdown of the Chinese economy has led to increasing volatility in the financial markets in the past, affecting international commodity prices, including copper, which is Chile’s main export. For example, during the first months of the COVID-19 pandemic, there was a slowdown in the Chinese economy due to the quarantine ordered by Chinese authorities in the most affected regions of the country. Due to the importance of copper exports and overall mining activity to Chilean economic growth, a prolonged slowdown in the Chinese economy, a Chinese-U.S. trade war or other developments may drive copper prices down and adversely affect the Chilean economy. Nevertheless, our exposure to the Chilean mining sector represented only 0.8% as of December 31, 2021 in terms of total loans.
The effect of all these trends on market volatility and the economic outlook of developed countries, emerging economies and Chile’s commercial partners could adversely impact the local economy, the local banking industry and, ultimately, our results of operations, financial condition and the price of our shares and ADS.
COVID-19 or any other pandemic disease and health events will affect both the global and the Chilean economy, our business or results of operations and could affect our financial condition.
Pandemic disease and health events, such as the outbreak of COVID-19, have the potential to negatively impact economic activities in many countries, including Chile, with subsequent adverse effects on our business growth, results of operations or financial condition.
Since the worldwide outbreak of COVID-19 in early 2020, countries have responded by taking various measures including mass quarantines, shelter-in-place orders, medical screenings, restricting or banning travel, limiting public gatherings, closing businesses and schools and suspending certain other economic activities. Actions taken by governmental authorities and other third parties in response to the pandemic may negatively impact our business, results of operations and financial condition.
In addition, concerns related to the evolution of the world economy due to COVID-19 lowered equity market valuations, decreased liquidity in fixed income markets that translated into a sudden increase in credit spreads while creating significant volatility and disruption in global financial markets, particularly in the early months of the pandemic, ultimately resulting in the fall of stock prices (including the price of our stock). Also, since new variant strains of COVID-19 appear from time to time, there continue to be concerns on the mid-term effects they will have on international trade (including supply chain disruptions and export levels), travel, employee productivity, employee illness, increased unemployment levels, securities markets, and other economic activities that may continue to have a destabilizing effect on financial markets and economic activity, particularly for companies in the financial sector. Although in certain countries some of the restrictions listed above have been relaxed in light of progressive success of vaccination, most of these countries have had to re-introduce partial or full-scale lockdowns due to new infection waves. Accordingly, the adverse social and economic effects of the pandemic continue to be a threat for economic growth.
In Chile, since the first cases of COVID-19 were detected in March 2020, the Chilean Government has taken diverse measures in order to prepare for and safeguard the country from a mass contagion and to control its spread. In March 2020, the Chilean Government declared a state of catastrophe in the entire country, which restricted freedom of movement and gathering. During the state of catastrophe, partial or total lockdowns with varying levels of severity and length took place in Chile, particularly during the second and the third quarters of 2020, which covered approximately 60% of the Chilean population in the peak of the pandemic. In the fourth quarter of 2020, the level of contagion decreased significantly, and lockdowns started to be lifted, a process that continued during 2021. Likewise, vaccination started by the end of 2020 and continued throughout 2021. Notwithstanding this, a second wave of contagion appeared by mid-March 2021, which caused the Chilean Government to implement new lockdowns for some neighborhoods while restricting some economic activities that are focused on social interaction. After that, the contagion rate began to decrease as a greater portion of the target population became vaccinated, which led the Chilean Government to end the state of catastrophe on September 30, 2021. Since that date, the contagion rate has increased in light of the Omicron COVID-19 variant and other variants that have subsequently emerged, however, given the high rate of vaccination, health authorities have not raised new concerns regarding new contagion waves. According to the Our World in Data website, as of December 31, 2021, approximately 90.5%, 86.5% and 57.8% of the target population had received at least one dose, two doses or a third booster dose of the vaccine. These figures have increased to 93.5%, 91.0% and 84.3% of the population receiving one dose, two doses and a booster dose of the vaccine as of March 31, 2022. The Ministry of Health defines “target population” as (1) critical population (i.e. individuals exposed to infection due to their work or functions); (2) healthy population (i.e. individuals between the ages of 18 and 59); and (3) population at risk (i.e. individuals with an increased risk of experiencing grave morbidity, sequels or death due to COVID-19 by reason of age or pre-existing conditions). The Chilean Government has also begun vaccinating children under 18 years of age and is currently rolling out the booster shot. Moreover, on September 6, 2021 the Public Health Institute (Instituto de Salud Pública) granted the necessary emergency approval for the vaccination of children between six and 12 years of age. Also, in February 2022, the Chilean government began a new vaccination process by promoting a fourth booster dose, which is still in progress as of the date of this annual report.
As vaccinations have increased and appear to be effective in slowing down the spread of COVID-19 and new variant strains, while preventing an increase in the death toll, the Chilean Government has continued to gradually modify the restriction program named “step-by-step”, which has been in effect since March 2020. The new program includes five stages ranging from total restriction (lockdown) to advanced opening, depending on many factors, including the number of new cases per capita in a specific area, size of vulnerable population and access to health services. From a macroeconomic point of view, these measures and the positive advance in the control of the pandemic contributed to the reactivation of the Chilean economy in 2021 as reflected by an annual GDP expansion of 11.7%. Even though GDP growth was mainly fostered by a significant increase of household spending primarily driven by support measures for individuals including direct money transfers (Emergency Income for the Family or Ingreso Familiar de Emergencia – “IFE”) from the Chilean Government and pension fund withdrawals permitted by the Chilean Congress, resulting in enhanced disposable income for individuals. To the extent that the improved vaccination and spread trends do not continue or reverse, the health authority may impose new restrictions, such as country-wide lockdowns, in connection with the appearance of new variants, which could result in a shutdown involving the Bank, our subsidiaries and some or all of our customers operations, such that we would be unable to meet the needs of our customers for an unknown period of time, which could adversely affect our results of operations by reducing revenues, decreasing our collection capabilities.
Furthermore, as the COVID-19 pandemic continues to cause a historic economic downturn, financial institutions face increased credit risk, strategic risk, operational risk, and compliance risk. The spread of new variants of COVID-19 continues to result, from time to time, in increased volatility in both the local and the international financial markets and economic indicators, such as exchange rates, interest rates, credit spreads and commodity prices. Any shocks or unexpected movements in these market factors could result in financial losses associated with our trading portfolio or financial assets measured at fair value through other comprehensive income, which could then cause deterioration of our financial condition or limitations to meet our liabilities. Furthermore, market fears could translate into liquidity constraints and reduced access to funding in both the local and the international markets, negatively affecting our net interest margin and net income. Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which could have an adverse impact on our earnings. In order to prepare for the impacts of this environment, the Chilean financial authorities made various decisions in order to ensure liquidity within the Chilean financial system, the Central Bank carried out consecutive reductions to the monetary policy rate by lowering the reference rate to 0.5%, level at which it remained from April 2020 to July 2021, when the Central Bank began to withdraw the monetary stimulus in an attempt to control inflation. However, additional decisions made by the Central Bank based on the evolution of the pandemic may affect our results of operations in the future. Lastly, contingency plans in order to address the emergency, including remote working arrangements, implementation of alternative offsite locations and so on, could have a negative impact on us in terms of operating expenses and lowered net income.
In terms of the direct effect on our results of operations and financial condition in 2021, they reflected the dynamics of the local economy and the banking system after the worst of the pandemic seemed to be overcome. In this regard, we recorded an annual expansion of 10.8% driven by advances in all lending products, in line with the end of total lockdowns and the reopening of diverse economic activities, particularly those involving social interaction. However, most of the loan growth continued to be driven by low margin lending products, such as residential mortgage and commercial loans, while consumer loans started to display positive growth only by the end of 2021. Thus, commercial loans increased 11.8% in 2021, based on both the FOGAPE Reactiva program (guaranteed by the government) and a moderate reactivation of capital expenditures by wholesale customers. In turn, the sustained upward trend in residential mortgage loans, which grew 10.2% in 2021, was supported by the decoupling of this product from economic drivers. Consumer loans, on the other hand, grew 7.6% in 2021, after the contraction of 2020, reflecting a more dynamic demand for personal banking.
From the funding perspective, since short-term interest rates remained at low levels throughout 2021, due to the measures adopted as consequence of the COVID-19 pandemic, the contribution of our non-interest-bearing demand deposits to our cost of funds continued to be negatively affected in 2021. This was accompanied by an increase of 32.3% in average balances of demand deposits, attributable to the excess of liquidity due to non-recurrent factors, such as direct money transfers from the Chilean Government and the approval of three pension fund withdrawals since 2020. This trend coupled with mid-term financing provided by the Central Bank bearing the monetary policy interest rate (0.5%), from which we further raised Ch$1,238,800 million in 2021 bearing the same rate (Ch$3,110,600 million in 2020). Based on these funding sources we replaced time deposits held by wholesale counterparties. For the same reason, we only reactivated long-term bond placements by the end of 2021, principally in foreign markets, by taking advantage of our credit rating. From the capital adequacy perspective, we continued to maintain a strong equity base in 2021, as reflected by a CET1 ratio that increased from 12.2% to 13.0% and a BIS ratio that increased from 16.0% to 17.3% between December 2020 and December 2021 amid the implementation of the Basel III guidelines in Chile that became effective for purposes of measuring capital and risk-weighted assets in December 2021.
In terms of results, our net income was Ch$1,056,317 million in 2021 as compared to the Ch$401,630 million recorded in 2020. The main drivers of this change were improvements in both provisions for expected credit losses and net interest income. Whereas provisions for expected credit losses recorded a sharp annual decrease, reflecting an overall improvement in the payment behavior of customers and an enhanced economic outlook that benefits forward-looking models, the higher net interest income was primarily attributable to the positive effect of higher inflation on our structural UF net asset exposure.
Although economic activity appears to be recovering, because there have been no comparable recent global pandemics that resulted in a similar global impact, we do not yet know the course and, as such, the full extent of the COVID-19 pandemic’s effects on our business, operations, or the global economy as a whole. Any future development will be highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the effectiveness of our remote working arrangements, third party providers’ ability to support our operations, and any further action taken by governmental authorities and other third parties in response to the pandemic. As the economic impact due to the COVID-19 pandemic continues we cannot provide any assurances as to how long it will be before the COVID-19 pandemic abates and economic activity can begin to resume to pre-COVID-19 pandemic levels.
In the past, Chile has imposed controls on foreign investment and repatriation of investments that affected investments in, and earnings from, our ADSs.
Equity investments held in Chile by non-Chilean residents have historically been subject to various exchange control regulations that restrict the repatriation of investments and earnings from Chile. In April 2001, the Central Bank eliminated most of the regulations affecting foreign investors. However, foreign investors still have to provide the Central Bank with information related to equity investments and must conduct such operations within the Formal Exchange Market. Additional Chilean restrictions applicable to holders of our ADSs, the disposition of the shares underlying them, the repatriation of the proceeds from such disposition or the payment of dividends may be imposed in the future, and we can neither determine in advance nor advise you as to when or how those restrictions could impact you, if imposed.
If for any reason, including changes in Chilean law, the depositary for our ADSs were unable to convert Chilean pesos to U.S. dollars, investors would receive dividends and other distributions, if any, in Chilean pesos.
Risks Relating to Chile
Our growth and profitability depend on the level of economic activity in Chile.
Our core business and transactions are with customers doing business in Chile. Accordingly, our ability to grow our business volumes and results of operations, as well as enhance our financial condition, in general, depends on the dynamics of the Chilean economy or the effects of economic developments in other countries affecting Chile, and specific macroeconomic variables such as inflation, unemployment, interest rates, consumption and private investment. In the past, global financial crises, such as the 2008 financial crisis, have dramatically affected economic growth in developed countries, as well as in Chile where a subsequent slowdown in the local banking industry was observed due to lower levels of consumption and deteriorated credit quality in loan portfolios prompted by unemployment and financial stress experienced by certain economic sectors. In 2019, the local economy grew by only 0.8%, mainly as a result of the social turmoil that took place in Chile on October 18, 2019, which temporarily damaged the productive capacity, income-generating capacity and distribution networks of many economic sectors, resulting in decreased commercial activity and constrained working hours. During 2020, the local economy was severely affected by the impact of the COVID-19 pandemic on overall activity, primarily as a result of the long-lasting lockdowns imposed by the Chilean Government in order to control the spread of the virus across the country, which translated into: (i) a spike in unemployment from 7.1% in December 2019 to a peak of 12.3% in the three-month period between August 2020 and October 2020, which decreased to 10.3% in December 2020, (ii) an 8.0% decline in private consumption, caused by the sharp decrease in disposable income and mobility restrictions and (iii) a contraction of 9.3% in capital expenditures (gross fixed capital formation), since many investment projects were postponed in light of both uncertainty on the economic outlook, social distancing measures and lockdowns that impacted diverse economic sectors. These local events, coupled with the initial effects of the COVID-19 pandemic on Chile’s main trade partners’ economies, particularly China, Europe and the United States, battered the dynamics of some of its key export products. However, in the fourth quarter of 2020, local economic activity began to recover as mobility restrictions were lifted and certain industries, like construction, restaurants and manufacturing, returned to more normal activity. Likewise, household spending was positively impacted by the fiscal aid package implemented by the government to support individuals and the initial effects of two pension fund withdrawals approved by the Chilean Congress. Accordingly, in the fourth quarter of 2020, GDP recovered to 2019 levels, by advancing 0.4%. However, annual GDP contracted 6.0% in 2020.
In 2021, the Chilean economy showed a strong recovery, given both the low comparison base during same period in 2020, as well as a significant rebound in private consumption and, to a lesser extent, in private investment. According to figures reported by the Central Bank, GDP recorded an expansion of 11.7% in 2021 as compared to 2020, primarily driven by household spending, which increased 20.3% as a result of the extraordinary support measures for individuals that began in 2020, such as direct money transfers from the Chilean Government and an additional withdrawal from pension funds approved by the congress that positively impacted individuals’ disposable income. Furthermore, most of the mobility restrictions present in 2020 were gradually lifted in 2021, as a significant part of the population became fully vaccinated and contagion rates decreased steadily, which supported the reactivation of diverse industries, particularly those associated with retail, mass consumption and services. In terms of private investment in infrastructure, machinery and equipment, overall capital expenditures grew 17.6% in 2021 as compared 2020, while government spending expanded 10.3% within the same period, fostered by increasing social demands from the Chilean population and efforts to deal with the lingering effects of the COVID-19 pandemic. Furthermore, the dynamics that boosted household consumption and, to a lesser extent, investment, together with constrained inventories, led the Chilean balance of trade (defined as exports minus imports) to become negative in the year ended December 31, 2021, as reported by the Central Bank.
Although the effects of the COVID-19 pandemic on the local economy and most relevant economies worldwide, such as China, the United States and main European countries, have mostly subsided or significantly improved and the worldwide vaccination process is in progress, it is not clear that new infection waves will not arise, given the appearance of continued or new virus mutations. As such, we cannot assure you that the dynamics displayed by the Chilean economy in 2021 will remain or that the economic growth of Chile’s key international partners will improve or return to pre-COVID-19 levels. Likewise, social developments prompted by the COVID-19 pandemic or new variant strains, could also lead the Chilean economy to severely decelerate, stagnate or even fall into recession, which could have a subsequent adverse effect on our business growth and the business growth of the Chilean banking industry in general.
Additionally, social and political developments occurring in Chile, including the drafting of a new constitution and diverse social and economic reforms that are expected to be sponsored by Chile’s new government administration, which assumed power in March 2022, could affect both consumer confidence and business sentiment, which may in turn result in lowered demand for loans and banking services. Likewise, economic uncertainty linked to these developments could lead to increasing interest rates, higher inflation and an economic slowdown or downturn, which could affect our cost of funds, margins, results of operations, business volumes and financial condition.
Therefore, we cannot assure you that the local economy will grow in the coming years, as it has in the past, or that developments affecting the Chilean economy and the local banking industry will not materially affect our business, financial condition or results of operations. For more information, see “Item 5. Operating and Financial Review and Prospects—Operating Results—Impact of COVID-19 in 2021,” “Item 3. Key Information—Risk Factors—COVID-19 or any other pandemic disease and health events will affect both the global and the Chilean economy, our business or results of operations and could affect our financial condition” and “Item 5. Operating and Financial Review and Prospects—Trend Information—Impact of COVID-19 in 2021.”
Currency fluctuations could adversely affect our results of operations, the value of our ADSs and any distributions on the ADSs.
The Chilean Government’s economic policies and any future changes in the value of the Chilean peso with respect to the U.S. dollar could affect the dollar value of our common stock and our ADSs. Given the floating exchange rate regime that exists in Chile, the Chilean peso has been subject to large fluctuations in the past and this trend could occur again in the future. According to information published by the Central Bank (“Dólar Observado”, which differs from exchange rate of accounting representation or market exchange rate), between December 31, 2020 and December 31, 2021, the value of the U.S. dollar relative to the Chilean peso increased by approximately 19.8%, as compared to the decrease of 5.3% recorded in the period from December 31, 2019 to December 31, 2020. Chilean trading in the shares underlying our ADSs is conducted in Chilean pesos. Cash dividends associated with our shares of common stock are received in Chilean pesos by the depositary, which then converts such amounts to U.S. dollars at the then-prevailing exchange rate for making payments in respect of our ADSs. If the value of the U.S. dollar increases relative to the Chilean peso, the dollar value of our ADSs, and any distributions to be received from the depositary, will decrease. In addition, the depositary will incur customary currency conversion costs (to be borne by the holders of our ADSs) in connection with the conversion and subsequent distribution of dividends or other payments. For more information, see “Item 10. Additional Information—Exchange Controls.”
Since we manage assets and liabilities denominated in foreign currency, our results of operations may be affected by fluctuations in the exchange rates between the Chilean peso and the U.S. dollar, or the Chilean peso in relation to other currencies, despite our policy and Chilean regulations related to the general avoidance of material exchange rate mismatches. In order to reduce the effect of exchange rate mismatches, we enter into foreign exchange derivative transactions, including both hedge accounting derivatives and trading derivatives, that hedge most of our exposure to foreign currency. As of December 31, 2021, our foreign currency-denominated liabilities and Chilean peso-denominated liabilities, which contain repayment terms linked to changes in foreign currency exchange rates, exceeded our foreign currency-denominated assets and Chilean peso denominated assets, which contain repayment terms linked to changes in foreign currency exchange rates, by an amount of Ch$3,600 million (amounting to approximately U.S.$4.2 million as of December 31, 2021), or 0.11% of our paid-in capital and reserves.
We may decide to change our policy regarding exchange rate mismatches. Regulations that limit such mismatches may also be amended or eliminated by regulatory institutions. Higher exchange rate mismatches will increase our exposure to the depreciation of the Chilean peso, and any such depreciation may impair our capacity to service foreign-currency obligations and may, therefore, materially and adversely affect us, our financial condition and results of operations. Additionally, the economic policies of the Chilean Government and any future fluctuations of the Chilean peso, with respect to the U.S. dollar, could adversely affect our financial condition and results of operations.
Chile has corporate disclosure standards different from those you may be familiar with in the United States.
Chilean disclosure requirements for publicly listed companies differ from those in the United States in some significant respects. In addition, although Chilean law imposes restrictions on insider trading and price manipulation, the Chilean securities markets are not as highly regulated and closely supervised as the U.S. securities markets. Accordingly, the information available to you regarding our corporation will not be the same as the information available to shareholders of a U.S. company. For more information, see “Item 16G. Corporate Governance.”
Chilean law may provide shareholders with fewer and less well-defined rights.
Our corporate affairs are governed by our estatutos (bylaws) and the laws of Chile. Under such laws, our shareholders may have fewer or less well-defined rights than they might have as shareholders of a corporation incorporated in a U.S. jurisdiction. For example, our shareholders would not be entitled to appraisal rights in the event of a merger or other business combination undertaken by us.
Our business growth, asset quality and profitability may be affected by political, legal and economic uncertainty, as well as social developments and the drafting of a new constitution in Chile.
Our operations are highly dependent on the Chilean political and social environment, as most of our customers and borrowers do business in Chile. Thus, our results of operations could be negatively impacted by unfavorable political and diplomatic developments, social instability or unrest, as well as dramatic changes in public policies, including expropriation, nationalization, international ownership legislation, interest rate caps and tax policy.
In October 2019, a series of disruptive protests over a variety of social matters were initially sparked by the announcement of a subway fare increase in Santiago. Among these protests, some violent groups vandalized and looted public and private infrastructure in Santiago and other major cities. The protests and related violence have disrupted various economic activities throughout the country. In addition, many banks and other financial institutions experienced physical damages at their branches and ATMs. Although most of our damages were insured, 239 of the Bank’s branches and approximately 170 of our ATMs suffered varying levels of damage during this period, with nine of our branches and 109 ATMs being severely damaged.
The social unrest also led to increased volatility in the Chilean stock market, with a significant correction of stock prices and a sharp depreciation of the Chilean peso against the U.S. dollar, both of which were further affected by COVID-19 since 2020. Furthermore, share prices of local banks, including ours, suffered significant declines in the market, while bond spreads of local banks increased.
In response to the social unrest, the Chilean Government announced a social agenda intended to increase basic pensions, expand social health coverage, and reduce and stabilize tariffs for some public services. To fund these initiatives, the Chilean Government and the opposition agreed on amendments to certain tax legislation that was passed by the Chilean Congress and enacted on January 29, 2020. See “Item 5. Operating and Financial Review and Prospects—Operating Results—Income Tax and Item 10. Additional Information—Taxation—Chilean Tax Considerations”. The long-term effects of the social unrest are difficult to predict, but could include slower economic growth and higher unemployment rates, which could adversely affect our profitability and prospects. For example, an increase in the unemployment rate beyond what we predicted, or for a longer period than predicted, could diminish demand for loans and decrease our customers’ payment capacity to repay loans, increasing expected credit losses. Overall, we cannot assure you that the social unrest will decrease in Chile in the near future, and therefore, we can offer no assurance that it will not have a negative impact on economic growth, the overall Chilean business environment and our results of operations and financial condition.
Moreover, to address the social unrest initiated in October 2019, in November 2019, the majority of the local political parties agreed on a process to draft a project of new constitution to replace the current one dating from 1980. This process includes two referendums, the first of which was held in October 2020 to approve or reject the idea of drafting such a new constitution, at which time, the choice of drafting the project of new constitution by the Constitutional Convention won by a broad margin; the second referendum to approve or reject the finalized project of new constitution will be held on September 4, 2022.
In May 2021, the members of the Constitutional Convention were chosen in national elections. The Constitutional Convention initiated its functions in July 2021. Each new article of the new constitution must be approved by two thirds of the Constitutional Convention, which has until July 2022 to finalize the draft of the project of new constitution. The long-term effects of the implementation of a new constitution that will address among other matters, a reform to our current political, economic and institutional system, if approved by referendum, are still hard to predict. Therefore, we cannot rule out that economic growth and investment in Chile may be affected and, that as a consequence, our results of operations or financial condition, may also be affected.
In national elections held in December 2021, Mr. Gabriel Boric was elected as President and he assumed office on March 11, 2022. The Chilean Congress was also elected by the end of 2021. If there is a lack of control and alignment between the Congress and the Chilean President, delays in political and economic reforms could occur. Further, there can be no assurance as to the policies and reforms that the current administration and the newly elected Congress may take or their impact on Chile’s economic and fiscal situation, growth, stability, outlook and, consequently, as to the effects that any such policies or reforms may have on our business, financial condition and results of operations.
Reforms to labor and pension laws as well as labor strikes or slowdowns could adversely affect our results of operations.
We are a party to collective bargaining agreements with various labor unions to which most of our employees belong. Therefore, disputes regarding the terms of these agreements, or our potential inability to negotiate acceptable contracts with these unions, could result in strikes, work stoppages, or other slowdowns by the affected workers, among other things. If unionized workers were to engage in a strike, work stoppage, or other slowdown, or other employees were to become unionized, we could experience disruption of our operations or higher ongoing labor costs, either of which could have a material adverse effect on our results of operations. See “Item 6. Directors, Senior Management and Employees—Employees.”
Since 2017, a bill has been under consideration in the Chilean Congress aimed at reducing the maximum working hours from 45 to 40 hours per week, applicable to employees. Most recently in 2021, new bills have been introduced by members of the Chilean Congress on this matter, including one bill that aims to gradually reduce the maximum working hours to 38 per week within the fifth year of its enactment, while precluding employers from reducing wages. Another bill seeks to modify Chilean labor laws by increasing the participation of employees in companies’ profits and the way that this participation is calculated. The recently appointed administration has also stated that the reduction of weekly working hours is among its priorities in terms of labor reforms. These proposed legislations, if approved and enacted, could translate into higher ongoing labor costs, which could have an adverse effect on our results of operations and future financial condition.
Current labor legislation defines a company’s minimum services and emergency teams by the applicable labor regulator after negotiations between a company and each labor union prior to the commencement of a collective bargaining process. As such, minimum services refer to those functions of a company which must continue to be provided during a strike because they have been determined to be essential to protect assets and facilities, to prevent accidents, guarantee public utility services, meet the basic needs of the population and prevent environmental damage or harm to health. A company’s emergency teams are made up of workers assigned by each union to fulfill such minimum services. Therefore, in the event of futures strikes, we could face operational disruptions due to an inadequate number of minimum services and an insufficient staff for the emergency teams.
In recent years, the Chilean Government presented several bills with the purpose of improving the Chilean pension system. The most recent bills presented by the former Government mainly sought to increase minimum pensions, to introduce a social insurance scheme to adjust for longevity, and to increase the amount each worker must contribute to fund pensions. The nature of the entity that would collect and manage such an increase is also under discussion. However, the new Government has expressed an intention to propose its own reform to the pension system. Measures such as, but not limited to the following, may be presented: (i) replacing current private pension fund managers, (ii) transitioning from individual capitalization to a collective pension system, (iii) reinforcing the current solidarity pillar while maintaining individual capitalization and (iv) some initiatives combining certain aspects of (i) through (iii). Given the uncertainty regarding the reforms the new administration will propose and the differences from prior proposals, we are unable to predict what, if any, reform will be enacted or the final content of such pension reform, including whether pension funds will continue to operate under the current regulatory scheme. The potential adverse effect of any such proposed reform on our financial condition and results of operations cannot yet be ascertained.
Further, during the discussions between the Chilean Government and the Chilean Congress to reach an agreement on a feasible pension reform, as a result of the COVID-19 pandemic, three consecutive pension fund withdrawals and one withdrawal from life annuities (rentas vitalicias), jointly amounting to U.S.$48,500 million as of December 31, 2021 have been permitted by the Chilean Congress. In late 2021, a fourth extraordinary withdrawal from the pension funds was rejected by the Senate and, recently, in April 2022, two projects pursuing further withdrawals from the pension funds were also rejected by the Chilean Congress. Nevertheless, we cannot rule out that new withdrawals that may be proposed in the future, could be approved.
Uncertainty on the future of the Chilean pension system remains, since successive government administrations have not been able to reach an agreement with the Chilean Congress on an increase in the pension amounts to be received by Chilean pensioners. The recently appointed administration has committed to a change in the pension system, which would move from the current based on individual retirement accounts to one composed of individual accounts and colectivelly-funded pensions. We are unable to predict the final content of any pension reform and it is not clear whether pension funds will continue to operate under the current regulatory scheme. Therefore, we cannot assure you that our labor costs will not increase. Since the pension fund managers usually invest a portion of the funds they manage in certain debt instruments (for instance, bonds and time deposits), including those issued by Chilean banks, including us, if the amount of funds available in the pension fund system continues to decrease due to new withdrawals, the demand for both the long-term fixed-income securities we issue as debt to finance our operations and our shares of common stock will decrease, and we will not be able to raise funds from pension fund managers as in the past. As a result, there would be further restrictions to our access to long-term financing, compelling us to seek alternative funding sources in Chile and abroad, which may bear more expensive interest rates and include higher transactional costs, and, as a consequence, may have an adverse effect on our net interest margin, results of operations and financial condition in the long term.
Item 4 Information on the Company
History and Development of the Bank
We were founded in 1893, and we have been, for much of our history, among the largest and most profitable Chilean banks in terms of return on average assets and average equity in Chile. Our core business is commercial banking in Chile, providing traditional banking products and specialized financial services to our large and diversified customer base of individuals and companies.
Our legal name is Banco de Chile and we are organized as a banking corporation under the laws of Chile and were licensed by the CMF to operate as a commercial bank on September 17, 1996. Our main executive offices are located at Paseo Ahumada 251, Santiago, Chile, our telephone number is +56 (2) 2637-1111 and our website is www.bancochile.cl. Our representative in the United States is Puglisi & Associates, with offices at 850 Library Avenue, Suite 204, Newark, Delaware 19711.
We are a full-service financial institution that provides, directly and indirectly through our subsidiaries, a wide variety of lending and non-lending products and services to all segments of the Chilean financial market, providing our customers with powerful, differentiated and comprehensive value offerings. In addition to our traditional banking operations, our subsidiaries and affiliates permit us to offer a variety of non-banking but specialized financial services including securities brokerage, mutual funds management, investment banking, insurance brokerage, securitization and collection services.
Our business is not materially affected by seasonality.
We organize our operations and deliver our services to our customers through the following four principal business segments:
|(iii)||treasury and money markets; and|
|(iv)||operations through subsidiaries.|
Through our retail banking segment, we provide our individual customers with credit cards, installment loans and residential mortgage loans, as well as traditional deposit services, such as current accounts, demand deposits, demand accounts, savings accounts and time deposits. We and our subsidiaries also offer financial solutions such as insurance brokerage, securities brokerage, mutual funds management, among others. In addition to personal banking, our retail segment comprises micro, small and medium sized companies that we serve by providing them with short- and long-term financing, deposit and cash management solutions, in addition to an array of financial services, such as insurance brokerage. Our banking services for wholesale customers include commercial loans (including factoring and leasing), trade finance, capital markets services, cash management and non-lending services, such as payroll, payment and collection services, as well as a wide range of treasury, financial advisory and risk management products.
In 2008, we enhanced our value offerings by entering into a strategic partnership with Citigroup Inc., as a result of our merger with Citibank Chile. We also offer international banking services through our representative office in Beijing and a worldwide network of correspondent banks.
According to the CMF, under Chilean GAAP, as of December 31, 2021, we ranked first in the Chilean banking industry in terms of net income attributable to equity holders with a market share of 21.4%. As of the same date and excluding operations of subsidiaries abroad, we were the second largest bank in Chile in terms of total loans with a market share of 16.7%, the largest provider of commercial loans with a market share of 17.1%, the second largest provider of consumer loans with a market share of 17.4% and the third largest private sector bank in terms of residential mortgage loans with a market share of 15.8%. As for liabilities, excluding operations of subsidiaries abroad, we were the largest private bank in Chile in terms of current accounts and demand deposit balances (net of clearance) with a market share of 21.6% and, more importantly, we ranked first in current account balances held by individuals with a market share of 25.3%, both as reported by the CMF and as of December 31, 2021. Lastly, according to the Chilean Association of Mutual Funds, as of December 31, 2021, we were the largest provider of mutual funds management services in Chile with a market share of 24.9%.
As of December 31, 2021, we had:
|●||total assets of Ch$51,425,948 million (approximately U.S.$60,314.5 million);|
|●||total loans of Ch$34,265,873 million (approximately U.S.$40,188.4 million), before deducting allowances for loan losses;|
|●||total deposits of Ch$27,682,797 million (approximately U.S.$32,467.5 million), of which Ch$18,542,791 million (approximately U.S.$21,747.8 million) correspond to current account and demand deposits;|
|●||equity (including net income, non-controlling interest and provisions for minimum dividends) of Ch$4,818,972 million (approximately U.S.$5,651.9 million);|
|●||net income attributable to equity holders of Ch$1,056,316 million (approximately U.S.$1,238.9 million); and|
|●||market capitalization of approximately Ch$6,778,246.1 million (approximately U.S.$7,949.8 million).|
As of December 31, 2021, we had 12,284 employees and delivered financial products and services through a nationwide distribution network of 272 branches and 1,761 ATMs. Our ATMs are part of a larger network of 7,553 ATMs operating in Chile, of which 4,775 ATMs operate under a network managed by Redbanc S.A., a company we partly own along with eight other private sector banks.
We were founded in 1893 as a result of the merger of Banco Nacional de Chile, Banco Agrícola and Banco de Valparaíso, which created the largest private sector bank in Chile. We have played an important role in the economic history of Chile. Before the creation of the Central Bank in 1926 and prior to the enactment of the General Banking Act, we were the main stabilization agent of the Chilean banking system, a role that is now performed by the Central Bank. Beginning in the early 1970s, the Chilean Government assumed control of a majority of Chilean banks, and all but one of the foreign banks that were operating at that time closed their branches and offices within the country. Throughout this era, we remained as a private sector bank, with the exception of a portion of our shares owned by the Chilean Government that were sold to private investors in 1975. Throughout our history we have developed a well-recognized brand name in Chile and expanded our operations in foreign markets, where we developed an extensive network of correspondent banks. In 1987 and 1988, we established four subsidiaries to provide a full range of specialized financial products and services as permitted by the General Banking Act. In 1999, we widened our scope of specialized financial services by creating our insurance brokerage and factoring subsidiaries. During the early 2000s, the Chilean banking industry witnessed intense merger and acquisition activity. In 2002, we merged with Banco de A. Edwards, which allowed us to expand our business to new customer segments. In 2008, we merged our operations with Citibank Chile. As a result of these consolidations, we currently operate a distribution network that is composed of three brand names, namely, “Banco de Chile” (which operates throughout Chile), “Banco Edwards-Citi” (which is primarily oriented to higher income segments) and “Banco CrediChile” (which is focused on consumer loans and demand accounts for lower- and middle-income segments).
During 2017, we were first in terms of net income and profitability within the local banking industry, with a market share of 26.1% and a Return-on-Average-Equity (“ROAE”) of 19.3%, both under our internal reporting policies. These achievements were attained during a difficult economic landscape, which resulted in a significant slowdown of the corporate lending business that impacted certain macroeconomic indicators such as unemployment, which adversely affected the credit quality of our personal banking business. Amid this environment, we maintained our customer-centric approach and focused on developing new ways to enhance the customer experience by expanding our service offerings, business platforms and benefits to our loyalty program. For example, we launched a new website for companies, aimed at serving corporates, other large companies and SME customers. Similarly, we created a new mobile application and upgraded existing ones. We released “MiInversion” which serves as a portfolio management platform for retail customers and developed new functionalities for the MiBanco application. We believe remote channels are the future of banking and are continuously promoting their use among customers while seeking new solutions to offer banking products through mobile or internet technologies. This strategy boosted demand for mobile and internet services that during 2017 reflected increases of 78% and 11% in monetary transactions using these means, respectively. In addition, our enhanced loyalty program added new alliances with two airlines and negotiated access to a VIP lounge for customers at the Santiago airport. These initiatives continue to demonstrate our commitment to superior customer service and have allowed us to obtain a 73.3 % average net promoter score in 2017, as measured by a syndicated study conducted by Consultores Asociados de Marketing Cadem S.A., or “CADEM,” the highest among our relevant peers. We also undertook transformational changes by assessing relevant processes in terms of efficiency, cost control and operational risk. We believe these actions are necessary to maintain our market leading position in an increasingly competitive banking industry. Lastly, we received recognition for our business performance and digital strategy including being recognized as the Best Bank in Chile, Best Digital Bank for Companies in Chile and Best Sub-Custodian Bank in Chile by Global Finance and being named the Best Mobile and Digital Bank in Chile and the Best Investment Bank in Chile by Global Banking & Finance Review.
Throughout 2018, we led the market in terms of net income attributable to equity holders with a 25.3% market share, which translated into an above-average ROAE of 19% (both figures under Chilean GAAP). Thanks to this performance, we were able to earn sufficient income to fully repay the subordinated debt held by SAOS with the Central Bank in April 2019. This was a significant milestone in our history, as we were able to pay off this debt 17 years before the original maturity date. In 2018, our loan book increased 9.7%, thanks to record sales in installment and mortgage loans while also adding a record amount of new current account holders. We also continued to focus on superior customer service, attaining first place in service quality among our peers by posting an average net promoter score of 71.2%, as measured by a syndicated study conducted by CADEM, and an attrition rate of only 6.2%, according to our management information system. Based on these attributes we received the “National Customer Satisfaction Award” and the “Consumer Loyalty Award” in 2018. Aligned with this view, we continued to develop our digital strategy in order to assure stability and efficiency on our diverse platforms while innovating in new products provided online and adding new functionalities to some of our applications (MiBanco, MiPago and MiInversion). Due to these improvements, the number of mobile transactions in our mobile platforms increased to 35.1 million in 2018, which represented an annual increase of 60.8%. Also, thanks to our digital banking strategy we were once again recognized as the “Best Digital and Mobile Bank in Chile” by Global Banking & Finance Review and “Innovative Digital Bank of the year in Chile” by The European Magazine. Cybersecurity was also a central point of attention for us in 2018. After the cyber-attack occurred in May 2018, on which we timely reacted based on solid security protocols, we decided to enhance our organizational structure and IT infrastructure by creating the new Cybersecurity Division, which took various actions in order to promote a cybersecurity culture across the company.
In 2019, we achieved significant accomplishments, all of which were aligned with our long-term strategy, while maintaining a clear focus on our customers’ needs. For example, we began the year signing a long-term, exclusive partnership for life and non-life insurance products with an international insurance company. We expect this partnership to provide our customers with a wide array of insurance solutions, as well as give us the ability to offer products with an excellent price-to-quality ratio. Additionally, we entered a commercial alliance with a local Chilean retailer, allowing us to expand our ATM network by 22.5% on average in Chile during 2019 when compared to 2018. Through these initiatives, we maintained our position as a market leader in fee-based income in 2019, while significantly widening the competitive gap with followers in the industry. During 2019, we also continued working to meet specific goals and improving our customer proximity in order to better meet their needs. To this purpose, we continued to deploy our digital transformation strategy by implementing a digital onboarding for customers seeking to remotely open a checking account. We continued developing our new service model to unify customer service under CrediChile and Banco de Chile brands through merging several branches. Through these initiatives, we continued being an industry leader among major banks in service quality, holding a net promoter score of 72.5% as of December 31, 2019 according to a syndicated study performed by ProCalidad. Further in 2019, we placed our first green bond to finance renewable energy projects in Chile while issuing a subordinated bond to take advantage of both low interest rates and the phase-in period proposed by the regulation in connection with the Basel III implementation in Chile. 2019 was also an iconic year for share ownership, since SAOS was able to fully repay the Central Bank subordinated debt on April 30, 2019 based on the dividend received from our net distributable earnings for the year ended December 31, 2018. Consequently, SM-Chile and SAOS entered into a liquidation process and their Banco de Chile voting rights were transferred to their respective shareholders. As a result, the free-float of our stock increased from approximately 32.09% to 48.74% (including Ergas group). Finally, as of December 31, 2019 we were the market-leading bank in Chile in net income attributable to equity holders and profitability, with a market share of 23.4% and a ROAE of 17.5% (under Chilean GAAP).
In 2020, our main achievements were related to both adapting our operations and processes to the contingencies produced by the COVID-19 pandemic, while being able to successfully overcome the financial challenge posed by the economic crisis caused by the pandemic. In order to continue adapting our operations to the increasing demand for remote settings and faster services from our customers, while still addressing the effects of mobility restrictions and lockdown, during 2020 we emphasized the importance of digital transformation within our organization. First, we enhanced some of our main mobile applications (MiBanco and MiPago) and our online websites for individuals, by optimizing their security protocols while providing better and more organized content to improve the user experience. In addition, one of the most important milestones of the year was the launch of the FAN account, our fully digital onboarding bank account that promotes financial inclusion among all income segments. We believe, this initiative enabled us to strengthen our market-leading position in demand deposits, as reflected by a market stake of 27.1% reached in demand deposit account balances held by individuals as of December 31, 2020 (excluding operations of subsidiaries abroad). As a consequence of these efforts on digital transformation, we were rewarded and recognized as the Innovative Digital Bank of the Year in Chile by The European magazine. Also, during 2020, we continued implementing our new service model for branches, while modernizing them in order to comply with the sanitary restrictions as a result of the COVID-19 pandemic. These actions, coupled with a set of other measures taken in order to guarantee our operational continuity, led us to being recognized as the leading bank in Best Service Quality in 2020 according to Adimark. Moreover, during the course of the year we improved our organizational structure by creating the Productivity and Efficiency Division, which aims to accelerate the implementation of initiatives intended to optimize our operations while identifying new opportunities to improve diverse processes. Likewise, we continued to reinforce our cybersecurity structure by creating three subdivisions in order to better cope with new challenges that digital transformation poses: (i) the Cybersecurity Operations unit, (ii) the Intelligence and Response unit, and (iii) the Detection and Containment unit. Throughout 2020, we also deployed the National Support Plan in order to support our customers that were affected by the COVID-19 pandemic. This initiative enabled customers to reschedule up to six installments of consumer, residential mortgage and commercial loans while reprogramming their credit card debt, as well as a special support program that granted government-guaranteed working capital loans to SMEs and large company clients. As of December 31, 2020, we had granted nearly Ch$1,890,000 million in these secured loans, representing a 6.1% of our total loan portfolio. Also, as of the same date, we had rescheduled approximately Ch$414,155 million of installments of consumer, mortgage and commercial loans.
In 2020, our results were undoubtedly affected by a deteriorated economic landscape caused by the COVID-19 pandemic. This context translated into downward trends in local and foreign interest rates, lower transactionality, reduced demand for loans and increasing unemployment, that led to a decline in customer income and a spike in risk expenses. However, due to our prudent risk policies, strict cost control and a proactive management of our Treasury and Money Market Operations business segment, we were able to deal with this challenge by posting a year-end net income attributable to equity holders of Ch$401,630, equivalent to a ROAE of 10.1%. Lastly, due to the establishment of additional allowances and the increase in equity during 2020, we had the strongest Capital Adequacy Ratio among major local banks, posting a year-end 16.0% BIS Ratio.
During 2021, under Chilean GAAP and according to the CMF, we once again led in terms of net income attributable to equity holders by recording a year-end market share of 21.4% within the banking industry, representing a ROAE of 20.16%, which denotes an annual expansion of 71.2% in net income (under Chilean GAAP). Regarding our loan portfolio, as of December 31, 2021, we recorded Ch$34,265,873 million in loan balances under IFRS, reaching a double-digit expansion on an annual basis. Our loan book was mostly influenced by solid annual increases in commercial and residential mortgage loans that grew steadily over the course of the year. While commercial loans continued to be influenced by the state-guaranteed loan program (FOGAPE and FOGAPE Reactiva), residential mortgage loans managed to expand aligned with higher-than-expected inflation and despite the pick-up in long-term interest rates during 2021. As for consumer loans, the contraction experienced by this lending product during 2020 and much of 2021 began steadily reversing over the last months of 2021 by gradually approaching pre-pandemic loan balances. Furthermore, in 2021, in regard to our digital transformation strategy, we continued to enhance the value offering behind the FAN Account, our full digital onboarding account, by implementing new services, such as: (i) a new customer service channel with a chatbot called FANi, (ii) full access to digital Banco de Chile’s ecosystem and (iii) cardless cash withdrawal. Thanks to these efforts, we managed to attract nearly 581,000 new clients during 2021, which were added to approximately 115,000 new current account holders, resulting in a year-end increase of 22.3% in current accounts and demand deposits and a market-leading share of 21.6% (according to the CMF). In addition, in December 2021, the phase-in period for implementation of the Basel III framework became effective in Chile, which includes new regulations in connection with regulatory capital and credit, market and operational risk-weighted assets. Our proactive approach to Basel III implementation has allowed us to remain as the strongest bank in terms of capital adequacy among major banks in Chile by recording Total Capital or Regulatory Capital and CET1 ratios of 17.3% and 13.0%, respectively, as of December 31, 2021, while having the highest amount of additional provisions (accounted for under Chilean GAAP) among private local banks as of the same date.
Furthermore, in 2021 we received an “A” rating from a recognized international ESG index that assesses diverse categories associated with this subject. This new rating, which denotes an improvement of three notches when compared to the former evaluation, reflects the strong accomplishments we have attained in ESG initiatives. In addition, in December 2021, we issued a U.S.$500 million 144A/Regulation S bond in the international capital markets in order to diversify our liability structure while generating funding for our long-term sustainability. This long-term debt placement joined a special bond issued a few months earlier that was intended to finance SMEs while promoting female development in their workplaces. Lastly, we successfully completed the final steps of our new service model for branches, which will allow us to provide better solutions and services to our customers while offering an improved customer experience through a more efficient, technological and modern branch network.
The 1982-1983 Economic Crisis and the Central Bank Subordinated Debt
During the 1982-1983 economic crisis, the Chilean banking system experienced significant instability that required the Central Bank and the Chilean Government to provide assistance to most Chilean private sector banks, including us. Subsequent to the crisis, like most major Chilean banks, we sold certain of our non-performing loans to the Central Bank at face value on terms that included a repurchase obligation. In 1989, banks were permitted to repurchase the portfolio of non-performing loans in exchange for assuming a subordinated obligation equal to the difference between the face and economic value of such loans, which we did in November 1989.
In November 1996, pursuant to Law No. 19,396, our shareholders approved a reorganization by which Banco de Chile was converted into a holding company named SM-Chile S.A. (SM-Chile). In turn, SM-Chile organized a new wholly-owned banking subsidiary named Banco de Chile, to which the former contributed all of its assets and liabilities, other than the Central Bank subordinated debt. In addition, SM-Chile created a second wholly-owned subsidiary named Sociedad Administradora de la Obligación Subordinada SAOS S.A. (SAOS) that, pursuant to a prior agreement with the Central Bank, assumed a new obligation in favor of the Central Bank that fully replaced the Central Bank’s subordinated debt and received 63.6% of our shares from SM-Chile. Thus, SAOS would repay the new obligation by means of the proceeds of the dividends it would receive from us. Pursuant to SM-Chile’s bylaws, that company would remain in existence until the Central Bank subordinated debt was completely paid off by SAOS, which finally occurred on April 30, 2019 by using the dividends distributed by us with charge to our net distributable earnings for the year ended December 31, 2018. Since that date, SM-Chile has been in the process of liquidation while SAOS was dissolved immediately. As of the date of this annual report, the liquidation process of SM-Chile is in progress and is expected to end by 2025.
As a consequence, the shares of Banco de Chile owned by SM-Chile and by SAOS were distributed among Banco de Chile’s shareholders and the former SM-Chile shareholders became our shareholders. Based on this LQ Inversiones Financieras S.A. and Inversiones LQ–SM Ltda., increased their direct ownership in Banco de Chile, from their prior shareholdings of 27.18% and 0.29%, respectively, to 46.34% and 4.81% in each case, while the public float of our stock increased significantly.
For more information on the Central Bank Subordinated Debt and the liquidation process of SM-Chile, see “Item 4. Information on the Company—History and Development of the Bank–History—The 1982 1983 Economic Crisis and the Central Bank Subordinated Debt” and “Item 7. Major Shareholders and Related Party Transactions—Ownership Structure” in the Form 20-F for the year ended December 31, 2020 filed with the SEC on April 30, 2021.
Merger with Banco de A. Edwards
On December 6, 2001, our shareholders approved our merger with Banco de A. Edwards, which became effective on January 1, 2002. Banco de A. Edwards had been listed on the NYSE since 1995, and since January 2002, we have been listed on the NYSE under the symbol BCH. We concluded the merger process with the consolidation of a new corporate structure and the integration of our technological platforms.
Merger with Citibank Chile
On December 27, 2007, our shareholders approved our merger with Citibank Chile, which became effective on January 1, 2008. During 2008, we integrated Citibank Chile’s technological platforms with ours and established a new organizational structure in order to satisfy the needs of our customers and to achieve important synergies. We concluded the merger process with the integration of Corporación Financiera Atlas S.A. (Citibank Chile’s consumer area) into our Consumer Finance Area (CrediChile), which allowed us to nearly double our customer base and market share in consumer finance. As result of this merger and integration process, we entered into the following agreements with Citigroup Inc. to provide a framework for our relationship with Citigroup Inc., its services and trademarks in Chile: (i) the Global Connectivity Agreement, (ii) the Cooperation Agreement, (iii) the Trademark License Agreement and, (iv) the Master Services Agreement. On October 22, 2015, we entered into a new Global Connectivity Agreement, a new Cooperation Agreement and a new Trademark License Agreement with Citigroup Inc. All of these new agreements replaced the original agreements we entered into on December 27, 2008. In addition, on January 26, 2017, we entered into a new Master Services Agreement with Citigroup Inc. All of these agreements have continued to be extended, amended and/or restated successively. For more information, see “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions.
During 2017 we continued to develop the “Business Center” project, which is our new Sales & Customer Relationship Management tool. This system is expected to support significant improvements in the quality and responsiveness of our back-office and front-office operating processes to enhance our customer centric vision. We launched our Pricing 360° tool, which improves pricing through a deeper knowledge of account officers on customers’ needs, enabling us to provide tailored lending solutions to our diversified customer base. Similarly, we upgraded the “Time Deposits and Savings” module, which permits account officers to tailor offerings to personal banking customers. Moreover, we completed the renewal of our ATM network to meet the new security and quality standards required by the SBIF. Additionally, we launched two new platforms for companies. We renewed the website business platform for these customers by adding new functionalities, security standards and the ability to conduct paperless transactions. We implemented a new electronic platform for factoring, which is aimed at improving the interaction with customers by making transactions easier while also upgrading the middle and back-office systems for this business. In personal banking, we maintained our focus on innovation and digital banking by adding new functionalities to existing mobile applications including the authorization of web transactions through MiPass application, access to MiBanco by means of fingerprint scanner, e-commerce payments through MiPago and an on/off functionality for credit cards in MiBanco.
During 2018, we continued to enhance our diverse IT infrastructure and digital platforms in order to assure stability and efficiency to our processes, attract new potential clients while continuously improving the service provided to our current customers. To this extent, we focused on continued developing new stages of our new CRM system and sales platform by introducing a new pricing tool for individuals that allow our account officers to easily use and access to our customers’ information, and intensified our efforts to expand and improve our remote channels given the massive use of internet and fast adoption of smart phones. In that direction, we added new functionalities to some of our applications, and expanded our RedGiro service to the mobile banking, only available on our website until 2017.
In May 2018 we suffered a cyber-attack involving the theft of funds that subsequently resulted in an operational write-off of approximately Ch$6,900 million or U.S.$9.9 million (mostly recovered from the redemption of an insurance policy). Even though this incident temporarily affected certain services provided to our customers, we were able to maintain the continuity of our operations. In addition, as of this date, based on our internal analysis we have found no evidence whatsoever that our customers were affected by this incident in terms of misappropriation of funds. See “Item 3. Key Information—Risk Factors—Risks Relating to our Operations and the Chilean Banking Industry—Cybersecurity events could negatively affect our reputation or results of operations and may result in litigation.” This cybersecurity incident, although successfully overcome, posed new challenges for us in terms of cybersecurity infrastructure, controls and procedures. Thus, as part of the efforts to improve our cybersecurity risk management, we created the Cybersecurity Division in June 2018, which replaced our former Technological Security Area. The new division is the first line of defense for us on these matters and is in charge of mitigating and managing cybersecurity threats. The division is focused on managing projects aimed at improving our cybersecurity protocols and procedures. During 2018, the Cybersecurity Division undertook diverse IT projects in order to reinforce our infrastructure and cybersecurity capabilities, acquiring world-class protection software and firewalls while investing in specialized platforms to address this significant topic. During 2018, we invested approximately Ch$9,915 million in cybersecurity equipment and software and incurred approximately Ch$9,847 million in operating expenses related to cybersecurity matters. These disbursements almost doubled the total amount incurred in 2017.
In addition to executing our digital transformation strategy to improve customer experience, in 2019 we also developed and implemented various projects aimed at improving cybersecurity infrastructure, efficiency and customer service. We launched our E360° tool, which is a tactical dashboard that enables standardization of offerings, while also improving the management of commercial efforts, customer visits and promises to clients. In SMEs, middle market companies and Corporate Banking, we successfully migrated a majority of the customer base to a new web-based transactional platform, Banconexion 2.0. This platform was developed to address segment needs, delivering an improved customer experience while ensuring high security standards in banking operations. Furthermore, as a result of a commercial partnership with a local retailer, we were able to significantly expand our ATM network by 15%. Additionally, throughout 2019, we carried out various cybersecurity projects aimed at improving in-networks, workstations, servers and digital applications, while enhancing access-control through technological solutions and software. To increase efficiency and productivity, we developed new automated transactional platforms for foreign currency trading to help meet the needs of professional and non-professional counterparties. Lastly, we adopted a world-class module for collateral management, improving the administration of our derivative portfolio and counterparty risk.
In 2020, it became clear that the acceleration of our digital transformation was critical to remain competitive in this challenging industry. Since the beginning of the COVID-19 pandemic in our country, we have been continuously identifying upgrades in our models, processes and platforms in a year where our customers are increasingly demanding less physical contact, while still receiving fast, flexible and reliable services. In this context, in September 2020, we officially launched the FAN account, a 100% digital debit account for individuals. Moreover, we continued to migrate our middle market companies to Banconexion 2.0, the online transactional platform for companies. Furthermore, this platform was used to grant government-guaranteed working capital loans to SMEs and middle market companies, related to the FOGAPE program, which coupled with the National Support Plan that provided funding to our customers during the difficult times of the COVID-19 pandemic. In addition, an increased number of employees working at home compelled us to improve our cybersecurity protocols, such as the implementation of the Authentication Enrollment (MFA) platform that allows our collaborators to authorize their login to the Bank’s software through their personal smartphones. Furthermore, we updated our main website and both MiBanco and MiPago mobile apps, by improving their structure, security protocols and graphics, in order to offer an optimized and unified web view within our digital channels. Lastly, we also advanced in the implementation of “Pricing Empresas,” a pricing model for companies that seeks to improve our management and customer segmentation, as well as implementing a new module in the Murex system associated with collateral management for derivatives.
During 2021, we strengthened our transactional coverage, service standards as well as increased functionalities on our web and digital platforms, incorporating digital marketing tools which were crucial to providing effective and timely support to customers. First, we made upgrades in some of our mobile applications, most of them related to enhanced security protocols, updated graphics as well as new and optimized functionalities, to allow us to provide a unified offering through our digital channels. With that in mind, in order to make things easier for our clients, we launched a QR code payment service for SMEs through the MiPago and MiBanco applications, a service that is already available in more than 6,000 commercial locations across the country and in WebPay, an online secure payments gateway. We also implemented a smart-pay service for credit and debit cards that enables customers to make payments through their digital wallets, using Garmin Pay, Fitbit or Google Pay in smartphones and smartwatches. Similarly, we relaunched MiSeguro, our application that allows our customers to address and manage their insurance programs by adding new functionalities that will facilitate the acquisition of new insurance policies while simplifying after-sale support services. Moreover, in 2021 we completed the migration of our SMEs, large companies and corporate customer base to Banconexion 2.0, a new website for companies that aims to improve the customer experience by providing one of the highest cybersecurity standards within the banking industry, which coupled with the addition of new products to the platform that allowed our customers, for instance, to manage and apply for FOGAPE Reactiva loans completely through Banconexion 2.0. In addition, we launched the mobile application Mi Banconexion, a new mobile application that allows companies to visualize and monitor their balances and movements in banking accounts, credit cards and lines of credit. Furthermore, our online banking incorporated a new feature that enables customers to request the rescheduling of their installments of residential mortgage loans as well as the possibility to send payment orders abroad. In terms of our FAN account, our 100% digital debit account for individuals, we reached nearly 730,000 clients as of December 31, 2021. Lastly, we launched B-TV, a nationally televised live show intended to prompt direct and 100% online communication between clients and collaborators by providing relevant content to our viewers (commercial campaigns, talks, events, webinars, among others). Through this new communication channel, we expect to develop a closer relationship with our clients and the communities in which we operate.
Through these efforts we have maintained our commitment to anticipating changes and minimizing risks related to technological advances, including cybersecurity risks, as mentioned in “Item 3. Key Information—Risk Factors—Risks Relating to our Operations and the Chilean Banking Industry” and “Item 3. Key Information—Risk Factors—Risks Relating to our Operations and the Chilean Banking Industry—Cybersecurity events could negatively affect our reputation or results of operations and may result in litigation.”
The following table sets forth our capital expenditures in each of the three years ended December 31, 2019, 2020 and 2021:
|For the Year Ended December 31,|
|BANK’S INTERNAL REPORTING POLICIES:||(in millions of Ch$)|
|Furniture, machinery and installations||2,656||1,510||2,349|
Our budget for capital expenditures for 2022 amounts to approximately Ch$79,466 million, of which expenditures in information technology investments represent 78.2%, while infrastructure projects represent the remaining 21.8%. The budget for capital expenditures is in line with our mid-term strategic priorities of improving our efficiency and enhancing our customer service capabilities with a firm focus on digitalization. These capital expenditures will be principally financed by cash on hand and long-term debt financing.
Among the budgeted expenditures for information technology, 59.1% corresponds to new and ongoing IT projects undertaken by Banco de Chile, which are intended to provide us with business solutions for customers, technological stability, cybersecurity tools, improvements in productivity, enhancements in our communication network and cloud as well as reinforced cybersecurity infrastructure and systems. Of the remaining 40.9% budgeted for IT expenditures, 18.0% is intended for the renewal of our technological infrastructure, which includes further optimization of our nationwide ATM network, 14.7% relates to the development of applications in order to provide us with digital alternatives to meet customers’ needs, another 5.6% is aimed at supporting regulatory compliance requirements and the remaining 2.6% consists of investments in technological equipment and system improvements to be carried out by certain subsidiaries.
Our 2022 infrastructure expenditures budget includes disbursements associated with general maintenance investments (34.0%), the refurbishment of our branch network (30.0%), renovation and restoration of our corporate buildings (20.9%), implementation of security devices for branches (12.0%) and other initiatives related to subsidiaries and security expenditures (3.1%).
All of the aforementioned investments have been or will be made in Chile.
Our Competitive Strengths
Building on our knowledge of the Chilean financial market, we have historically been able to develop significant competitive advantages based on our strong brand recognition, our widespread branch network, the diversity and relative size of our customer base, our highly competitive funding structure, the superior asset quality of our loan portfolio as compared to our peers in Chile, an attractive risk-return relationship and our market leadership in a diverse range of financial products and services.
Our main competitive strengths are:
Brand Recognition and Strong Corporate Image
We have operated in the Chilean financial industry for 128 years under the “Banco de Chile” brand name. In order to provide our customers with specialized value offerings and a wider range of financial products and services, we have also developed the “Banco Edwards-Citi” and “Banchile” brand names. We believe our long-standing history in the Chilean market is recognized by our customers and the general public, who associate our brands with value, quality, reliability and social responsibility within the Chilean financial industry, as demonstrated in various polls conducted by well-known market research companies. We believe that our long history in the Chilean banking industry is a key element that differentiates us from our competitors.
Additionally, we believe that our merger with Citibank Chile reinforced our corporate image as a leading financial institution within Chile and allowed us to gain recognition among customers and investors all over the world.
We also believe that our strong corporate image is further strengthened by our commitment to social responsibility, which includes supporting the Teleton Foundation (a non-governmental organization dedicated to assisting and treating disabled Chilean children), our partnership with institutions dedicated to improving the quality of Chilean education, our participation in campaigns intended to improve the quality of life of needy people, our commitment to supporting and sponsoring diverse monetary and non-monetary campaigns for recovery efforts from natural disasters in Chile, including wildfires, earthquakes, floods and tsunamis, and the development of other initiatives intended to strengthen our role in, and contribution to, Chilean society. Furthermore, over the last years we have devoted efforts to improve our commitment to the environment by carrying out numerous initiatives.
In 2021, we received various distinctions due to our strong brand recognition within the banking industry. Among these awards, we ranked second in corporate responsibility and corporate governance among local banks, according to a study conducted by MERCO. Likewise, Global Finance magazine recognized us as the Best Bank in Chile at the Best Bank Awards 2021. According to studies conducted by GFK Adimark, we ranked first among comparable peers in various categories such as most reliable bank, most solvent bank in terms of capital base and the bank with the strongest commitment to its customers, for the year ended December 31, 2021.
Business Scale and Leading Market Position
We are one of the largest financial institutions in Chile and a market leader in a broad range of financial products and services within the Chilean financial system, as listed in the following table:
|As of December 31, 2021|
|Market Share||Market Position|
|Total Balances of Demand Deposits and Current Account (1)||21.6||%||1st|
|Current Accounts Balances held by Individuals||25.3||%||1st|
|Mutual Funds (Assets Under Management)||24.3||%||1st|
|Net Fees and Commissions Income||20.3||%||1st|
|Net Income of Securities Brokerage Subsidiary (2)||25.1||%||1st|
Source: Chilean Association of Mutual Funds and the CMF.
|(1)||Excluding operations of subsidiaries abroad and net of clearings.|
|(2)||Including the whole market and not only subsidiaries of local banks.|
We have traditionally had a strong presence in the wholesale segment by maintaining long-term relationships with major local and multinational companies that operate in Chile. We have been able to maintain this leading position by continuously improving our products and services and supplementing them with comprehensive and tailored service models that allow us to successfully serve our customers’ needs. We have also added value to our service offerings by including treasury products for hedging purposes, together with investment banking, insurance brokerage and other specialized financial services provided by our subsidiaries.
In addition, in recent years we have focused on further penetrating the retail banking market through diverse value offerings intended to cover our target demographics and enterprises. Therefore, in recent years we have prioritized the expansion of our residential mortgage portfolio and our presence in transactional services such as credit cards, current accounts and demand accounts, as we believe they are effective means to build long-term relationships and customer loyalty, while increasing cross-selling opportunities. For this reason, through our Individual and SME Banking Area, we aim to lead the market in services offered to high, medium and low-income individuals for whom we have developed an attractive and complete portfolio of financial services, including a full range of wealth management services through one of our subsidiaries. We supplement these value offerings with specific proposals for SMEs, which in recent years has coupled with value offerings satisfying small scale entrepreneurs’ financial needs and individual customers in outlying districts seeking deposit and transactional solutions. This broad variety of services has also enabled us to lead the Chilean market in terms of income from fees and commissions.
We believe our financial strength, prestige and brand recognition among Chilean customers have allowed us to become the market leader in terms of current account balances within the Chilean financial system, especially among individuals, who have demonstrated their preference for our services. Our position was further consolidated in the financial downturn that started in 2008 and the local social unrest in late 2019, when we benefited from a “flight-to-quality” effect as investors and depositors were seeking a reliable institution to keep their funds.
Broad and Diversified Customer Base
We believe that we have one of the largest customer bases among financial institutions in Chile. In recent years, we have been able to expand our customer base by providing attractive and tailored value offerings based on continuously improving segmentation and by applying sophisticated business intelligence tools. As of December 31, 2021, according to our management information system, we had approximately 1,338,549 core clients, which had at least a current account or a loan outstanding with us. In addition, with respect to our main banking products, as of December 31, 2021, we had approximately 1,081,119 current accounts holders, approximately 170,348 time deposit holders, approximately 114,026 saving account holders. Similarly, as of December 31, 2021, we were the largest privately-owned bank in terms of number of borrowers with a 18.1% market share associated with 1,026,722 debtors, according to data published by the CMF. As of the same date, according to the CMF, we had 1,471,584 credit card account holders.
We believe that our broad customer base is both an essential driver of our business and a valuable asset that enables us to cross-sell our traditional lending products and services along with non-lending services provided primarily through our subsidiaries, including our securities brokerage, mutual funds management, securitization, financial advisory, insurance brokerage and collection services.
Multichannel Distribution Approach
In order to better serve our customers, we offer a distribution approach composed of both physical and non-physical channels.
We are present in all regions of Chile and strive to be accessible to every Chilean customer through our large branch network as well as non-physical contact channels. As of December 31, 2021, we had a nationwide branch network of 272 branches, the second largest in Chile among private sector banks, according to information published by the CMF. This network is composed of 238 branches under our “Banco de Chile” brand name and 34 branches under our “Banco Edwards Citi” brand name. During 2021, we completed the consolidation process of our “Banco CrediChile” branches under the “Banco de Chile” brand name. We believe that our branch network enables us to develop close relationships with our customers and therefore we are constantly assessing new branch locations throughout Chile.
We have also complemented our branch network with non-physical remote channels, such as ATMs, internet-based online platforms and mobile banking applications. As of December 31, 2021, we had 1,761 ATMs throughout Chile and we provided our customers with specialized internet websites for each of the segments we target, coupled with diverse mobile banking applications, including MiBanco, MiBanconexion, MiBeneficio, MiCuenta, MiPago, MiPass, MiInversion and MiSeguro. During 2021, 81% of the total transactions (monetary and non-monetary) carried out by customers and non-customers in our distribution channels were performed through non-physical remote channels.
Proven Digital Banking and Business Intelligence Capabilities
Over the last years, digital transformation has been steadily increasing its importance within the Chilean banking industry, a trend that was accelerated during 2020 because of the health and social contingencies derived from the COVID-19 pandemic. In order to be aligned with our customers’ needs during such a challenging period, we made several cultural changes within our organization, which include the introduction of new financial products, services and technologies. By doing so, we expect to achieve sustainable growth in the coming years and to improve both our processes’ efficiency and the consumer experience with the Bank.
Key Pillars of Banco de Chile’s Digital Transformation Strategy
During 2021, we implemented several advances in both the back and front office aimed at improving customer experience by expanding digital channels, adding new products and functionalities. We have also continued increasing sales through these points of contact by working with advanced analytics in order to improve cross-selling. Additionally, we are working on developing a talent and digital culture across the Bank in order to bolster our capabilities while emboldening innovation.
One of the key pillars of our digital banking strategy has been the development of cutting-edge mobile applications and customized websites. Over the last years, we have devoted efforts to enhance our mobile banking platforms by developing and launching diverse applications, including MiBanco, Mi Pago, MiSeguro, MiInversion, MiPass and MiBeneficio. We are continually improving the functionalities and robustness of applications that enable our customers to perform most of the transactions they can execute on our websites, such as: (i) accessing their account balances, (ii) executing electronic money transfers, (iii) generating secure passwords to make such transfers, (iv) making cash advances from credit cards to checking accounts, (v) making bill payments, (vi) requesting for reimbursements from other Banco de Chile’s customers by scanning a QR code, and (vii) managing their personal investment portfolio by investing or disinvesting in equity, fixed-income and mutual funds, among others.
Also, in 2020, we launched FAN Account, which is a full digital onboarding demand account. As of December 31, 2021, we have reached 729,611 customers. In addition, throughout 2021 we added more functionalities to the FAN Account in order to improve customer experience while fostering loyalty.
We believe these and other similar initiatives have allowed us to continue improving our online channel usage rates, as illustrated in the table below, which sets forth information regarding the evolution of the numbers of transactions (monetary and non-monetary) carried out by customers and non-customers through our diverse distribution channels were performed through non-physical remote channels. See “Item 4. Distribution Channels and Electronic Banking”.
Competitive Funding Structure
We believe that we have a cost effective and highly competitive funding structure based on our leading market position in current accounts and demand deposits, especially among individuals. According to the CMF, as of December 31, 2021, with a 25.3% market share, we ranked first within the Chilean banking industry in current account and demand deposits held by individuals. Similarly, as of that same date and excluding operations of subsidiaries abroad, we were the first bank in Chile in terms of total balances of non-interest bearing current accounts and demand deposits representing 21.6% of the industry (net of clearing), as reported by the CMF. Our total balances of current accounts and demand deposits represented 35.9% of our funding structure as of December 31, 2021 (under Chilean GAAP), as compared to the 27.5% reported by the Chilean financial industry as a whole, excluding Banco de Chile. In addition, we have a solid base of funding from retail customers, who held demand deposits and time deposits that jointly represented 44% of our total funding as of December 31, 2021. This characteristic provides us with a stable source of funding that is reflected by a 30-day moving average renewal rate of retail time deposits which reached around 79% as of December 31, 2021.
We strive to diversify our liability structure in terms of sources, types of instruments and markets with the aim of maintaining a competitive cost of funding and improving our liquidity. In 2021 we were more active than in the previous year in terms of long-term debt placements in both local and overseas markets. The increase in debt issuance was the result of our mid-term funding strategy that aims to diversify our liability structure in order to finance loan growth at convenient cost of funds amid expectations of increasing interest rates a lower funding from demand deposits for the same reason. As such, we will continue monitoring market opportunities in order to take advantage of our superior credit rating within Chile and Latin America. In 2021 we carried out the following debt placements: (i) Ch$36,097 million in Japan with a 10-year maturity, (ii) Ch$31,203 million in Australia with a 10-year maturity, (iii) Ch$698,435 million in commercial paper, (iv) approximately Ch$115,483 million in Switzerland with a five-year maturity, (v) Ch$82,543 million in Japan with a five-year maturity, and (vi) Ch$419,345 million in the international capital markets through a Rule 144A/Regulation S issuance with a ten-year maturity.
We believe that our funding structure provides us with a cost advantage over many of our competitors (which use a higher proportion of interest-bearing liabilities), as current accounts and demand deposits are non-interest bearing in Chile. We also believe that our solid market position in demand deposits, together with our high international credit ratings, translated into one of the lowest costs of funding from liabilities associated with interest bearing deposits and long-term debt, among the five largest banks in Chile.
Prudent Risk Management & Superior Asset Quality
We are one of the Chilean financial institutions with the highest credit quality and the healthiest loan portfolio in Chile. We believe this asset quality is the result of our well-known prudent risk management approach and accurate credit risk models that are continuously being updated and have enabled us to maintain relatively low levels of past-due loans (loans 90 days or more past due) and high coverage indicators over the last few years. According to the CMF, and under our internal reporting policies, as of December 31, 2021, we had a delinquency ratio (loans 90 days or more past due as a percentage of total loans) of 0.85% which was well below the industry average delinquency ratio of 1.33% posted by the Chilean banking industry (excluding Banco de Chile) as of the same date. Additionally, according to data published by the CMF, as of December 31, 2021, we had a coverage ratio (allowances for loan losses over loans 90 days or more past due) of 248.2%, which was well above the industry average coverage ratio of 183.9% as of the same date (excluding Banco de Chile). Over the last years, the utilization of business intelligence tools has also contributed to an improvement in our credit risk management. In this regard, during 2018 we successfully re-launched our pre-approved loan program through which we target a select group of retail customers to help them meet their borrowing needs depending on their life cycle stage and credit profile. During 2019, we successfully added SMEs to the pre-approved loan program, which enabled us to maintain solid growth rates in this segment with contained credit risk. In 2020, we also adjusted and implemented new admission protocols for the credit granting process considering an economic landscape of higher uncertainty, increased unemployment and lower disposable income of our customers. In addition, we continued to implement “Pricing Empresas,” our pricing model for companies.
In 2021, we continued to improve our provisioning models while reinforcing our credit risk monitoring in order to reflect accurately the effects of the dynamics of the local economy on the payment behavior of our borrowers while being prepared to respond to lagging indicators of the effects of the pandemic on asset quality.
In 2008, we enhanced our value offerings by entering into a strategic partnership with Citigroup Inc., as a result of our merger with Citibank Chile, effective on January 1, 2008. As result of the merger and integration process, we entered into various agreements with Citigroup Inc. to establish a framework for our relationship with Citigroup Inc., including the services to be rendered by each party and the use of trademarks in Chile. For more information, see “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions.
This strategic alliance, backed by a Global Connectivity Agreement with Citigroup Inc., has allowed us to broaden our service offerings by adding a comprehensive portfolio of international financial services that previously we could only partially provide. Based on this relationship, we are able to provide our local customers with world-class financial services and participate with them in their international ventures. Furthermore, we provide a reliable business platform for Citibank’s customers who aim to operate in Chile.
Our Business Strategy
‘We are a leading and globally-connected corporation with a prestigious business tradition. We provide excellent financial services to all of our customer segments by offering creative and effective solutions while at the same time ensuring that we add value for our shareholders, employees and community as a whole.’
To accomplish this mission, we believe it is essential to attain industry leadership in all businesses and financial areas in which we operate, namely, profitability, efficiency, business scale, customer base, human resources development and corporate social responsibility.
‘We aspire to be, in all things we do, the best bank for our customers, the best place to work and the best investment for our shareholders. In order to accomplish this vision, we are committed to the development of our employees and the community as a whole.’
Our mission and vision commit us to all of the diverse stakeholders related to our business, including customers, employees, investors and the community. Thus, our vision is shared and internalized by all areas across the corporation, senior management and the board of directors while also constituting the basis for our strategic objectives. This vision requires initiatives to achieve comprehensive excellence in management, with customer satisfaction as our major goal. For this reason, we apply high industry standards in information technology, business models and service quality, all of which are summarized by the value creation cycle below:
Our way of thinking is reflected by a set of values that are shared by our employees and shareholders, which are aimed at providing our customers with world-class financial solutions and quality standards.
‘We are a company that contributes to the economic development of the country by generating favorable conditions for the development of individuals and enterprises, providing them with financial solutions that fit their needs at every stage of their lifetime.’
In order to accomplish this, we have made commitments to all of our stakeholders, since we are convinced that we will achieve excellence in all of our businesses and projects as long as we are able to satisfy stakeholders in their interactions with us.
We aim to satisfy the expectations of the following stakeholders by:
|●||Offering innovative and top-quality banking products and financial services.|
|●||Providing customers with excellent service based on customized relationships and a proactive attitude.|
|●||Ensuring the availability and stability of physical and non-physical service channels.|
|●||Maintaining trusted relationships in order to be our customers’ main bank.|
|●||Providing employees with career opportunities based on merit.|
|●||Promoting a respectful and friendly work environment.|
|●||Offering competitive compensation and economic benefits.|
|●||Supplying adequate technological tools and infrastructure.|
|●||Improving quality of life and managing adversity.|
|●||Strengthening the quality of education in Chile.|
|●||Protecting the environment.|
|●||Building strong relationships with suppliers.|
|●||Leading the industry in net income generation and profitability.|
|●||Maintaining a strong market position in terms of business volume.|
|●||Fostering operating efficiency and productivity.|
|●||Developing a prudent approach to risk management.|
Our long-term strategy is intended to maintain profitable growth by placing the customer at the center of all of our decisions and continuously improving efficiency and productivity in all of our processes and procedures while maintaining a strong commitment to the country. These are our strategic priorities and we aspire to attain them through collaboration and teamwork.
Source: Banco de Chile.
|●||Customer Centric Decision Making|
We aim to support our customers and meet their needs throughout their lives. In order to achieve this goal, we strive to promote customer proximity and reliability, while providing our customers with the best service quality within the local market.
In our retail banking segment, our aim is to lead the market by providing differentiated and comprehensive value offerings based on a deep and continuously improving segmentation that permits us to engage in profitable and high-growth potential business opportunities. Thus, we expect to expand our business and customer base by developing tailored service models, optimizing our branch network, enhancing our presence in the small and medium-size company market and reinforcing certain lending products that should enable us to consolidate long-term relationships with the upper and middle-income individual customers, particularly through payment channel usage (such as credit cards), digital banking, installment loans and residential mortgage loans. Similarly, we aspire to target lower-income individuals and microbusinesses by promoting payroll-deduction lending and attracting customers previously unattached to any bank through a basic array of services.
We firmly believe that there is room to grow in retail banking. Although Chile’s per capita GDP has increased fourfold over the last 30 years, banking penetration is still below that in developed countries, particularly in relation to residential mortgage and consumer loans. In fact, as of December 31, 2021, the loan book of the Chilean banking industry (excluding operations of subsidiaries abroad) represented 85% of Chilean GDP. As of the same date, mortgage and consumer loans represented 27% and 10%, respectively. On the other hand, according to the CMF, as of December 31, 2021, we had market shares of 15.8% and 17.4% in residential mortgage loans and consumer loans, respectively, both behind the market leader by 5.4% and 3.1% in each case. Given the fierce competition in the Chilean banking industry, in order to take advantage of these opportunities, we are continuously developing innovative products and services to diversify our revenue sources. Accordingly, we have strived to build comprehensive value offerings for our retail segment in order to continue enhancing our fee-based income by promoting digitalization of products and services provided to these customers while improving benefits related to our customer loyalty programs.
Similarly, in our wholesale banking segment, we aim to maintain a market-leading position in loans while growing profitably in a market that is characterized by low margins and fierce competition. We intend to accomplish these goals by increasing our cross-selling of non-lending products and services. For this reason, we are focused on improving our cash management services, enhancing our internet-based and mobile services, increasing the penetration of products designed by our treasury and money market operations segment, strengthening our presence in certain lending products such as leasing and factoring and promoting international businesses by taking advantage of the Global Connectivity Agreement we maintain with Citigroup and the specialized array of financial services offered by our subsidiaries, such as securities brokerage, mutual funds management and financial advisory in order to meet the needs of certain niches within this business segment. The success of our wholesale banking segment is critical to our ability to maintain sustainable growth in revenues, particularly in fee-based income. Thus, cross-selling is one of our main priorities in this segment.
In our treasury and money market operations segment, we intend to take advantage of our specialized knowledge in order to increase the penetration of widely-used products in our current customer base while offering innovative products to potential clients. Also, we continuously seek newer and more convenient funding choices, locally and internationally, in order to support our long-term business strategy by promoting an adequate diversification of our funding structure.
|●||Main Achievements in 2021|
(1) Leading Position in Demand Deposits
Our funding structure is one of our most important competitive advantages. In 2021, we continued to lead the industry among private banks in current accounts and demand deposit accounts by recruiting approximately 116,600 new current account holders. This recruitment partly sustained an 8.0% increase in the amount of current account holders, when compared to the holders we had as of December 31, 2020. Further, we achieved solid growth in the premium account holders base, which are accounts that have the highest average balance per current account in the local banking industry. We also continued to benefit from a flight-to-quality effect during 2021, amid the uncertainty produced by the COVID-19 pandemic among our customers as well as liquidity levels above average figures due to diverse non recurrent effects, which is supported by our superior credit rating and reputation, based on a strong soundness image.
Accordingly, we reached Ch$18,542,791 million in year–end demand deposit account balances in 2021, which represented a 22.3% increase compared to 2020. As of December 31, 2021, we held a market share of 21.6% in total demand deposit account balances within the industry, excluding the operations of subsidiaries abroad and net of clearing, which placed us as the largest privately-owned bank in Chile. More importantly, we held a market share of 25.6% in personal banking based on account balances, ranking first within the whole banking industry.
(2) FAN Account
In the second half of 2020, we launched the FAN Account, our full digital onboarding account designed for all type of individual customers. This account may be digitally opened without visiting our branches, with no paperwork but still subject to our strict account approval processes. Additionally, the FAN Account permits holders to perform local and international purchases with no entrance or maintenance fees, which pursues to promote financial inclusion. Also, the FAN account holders have access to all the benefits and platforms offered by the Bank to its customers. During 2021, we continued to enhance the value offering behind the FAN Account by implementing services, such as: (i) a new customer service channel with a chatbot called FANi, (ii) full access to digital Banco de Chile’s ecosystem and (iii) cardless cash withdrawal.
Based on these advantages, as of December 31, 2021 we had been able to attract new customers through FAN Account by reaching 581,418 new holders during the year, 94% of whom were not previously Banco de Chile account holders.
(3) Advances in Digital Banking
In 2020, we increased the use and development of new digital and remote channels in order to offer our customers tailored and timely services in order to meet their needs and also to preserve a long-term relationship with them.
Thus, during 2021 we continued to enhance our digital and mobile banking services, offering a set of mobile applications: MiBanco, MiCuenta, MiPago, MiPass, MiSeguro, MiInversion and MiBeneficio. Particularly, we made upgrades in MiBanco, MiPago and MiSeguro, most of them related to enhanced security protocols, updated graphics as well as new and optimized functionalities, to allow us to provide a unified offering between our digital channels. Likewise, we implemented a smart-pay service that enables customers to make payments through their smartphones and smartwatches while launching a QR code payment service for SMEs through MiPago application. We also updated our personal banking internet-based platform by bringing more functionalities, integrating analytics tools and making our website’s interface more intuitive to allow clients to navigate it more easily.
Also, in 2021, we migrated our SMEs, large companies and corporate customer base to Banconexion 2.0, which is a new website for companies that aims to improve the customer experience by providing one of the highest cybersecurity standards within the banking industry.
As a result of these efforts, in 2021 we were once again recognized as the most Innovative Digital Bank of the Year in Chile by The European magazine.
(4) Continuous Improvements in Service Quality
We are convinced that in a highly competitive industry such as the Chilean banking system, a customer-centric focus is critical to generating loyalty and creating long-term profitable relationships. We believe that our high service quality is a competitive strength that differentiates us from competitors and supports our long-term strategy by responding to the preferences of our current and potential customers. Accordingly, we strive to continuously improve our relationships with customers by developing commercial strategies and value offerings aligned with their needs, as well as improving our response time and customer satisfaction indicators. Consistent with this view, during 2021 we continued enhancing our commitment to service quality, improving existing and developing new online channels and new functionalities for mobile applications, while implementing organizational changes to provide our customers with a more comprehensive approach and customized solutions.
We believe that our continued focus on our strategy and customers have contributed to our leading position among our peers in terms of service quality perception, as illustrated by rankings conducted by GFK Adimark in which we were we ranked first among our main banking peers in terms of the preferred bank to switch into with a 19% of positive mentions for the year ended December 31, 2021, nearly 7%, on average, above our main peers.
We believe that our effort in developing comprehensive and customized value offerings for customers has contributed to improve the customer experience over time, and that the solutions that we launched have allowed us to maintain customer satisfaction at healthy levels as reflected by a net promoter score of 68% as of December 31, 2021, according to a syndicated study conducted by Procalidad. This has also been supported by an average attrition rate of 3.6% for year ended December 31, 2021, which favorably compares to the 4.3% attrition rate recorded in 2020 and the 6.2% average attrition rate posted sequentially between 2017 and 2019, according to our management information system.
|●||Operating Efficiency and Productivity|
We believe that efficiency and productivity are key competitive strengths that we have to maintain in order to sustain profitable growth in a changing business environment that is under increasing regulatory focus. Accordingly, we aim to become a productive and efficiency-oriented organization in all business aspects by developing simple, effective, secure and low-cost processes while maintaining the tightest cost control in the industry. To accomplish these goals, we have invested in information technology and the development of simpler, more manageable, secure and modern business processes and platforms to attain faster response times and higher productivity. We also continue to enhance our strategic development capabilities, increase our business scale, develop economies of scope by incorporating new financially related products and services, optimize our branch network, enhance our remote transactional channels, improve our credit processes, develop a higher level of automation in our internal processes and consolidate our cost control policy and monitoring procedures.
We are continuously developing and optimizing internal processes in order to reduce and manage our expenses. Throughout 2021, we continued to enhance our IT infrastructure in order to increase stability and efficiency for all of our customers. Likewise, we continued to disburse financial resources to reinforce our IT infrastructure in respect of cybersecurity matters. We believe this is the best way to improve our operating efficiency and enhance security standards while properly meeting our customers’ needs, which are increasingly linked to digital channels, fast response and timely service. For more information see “Item 4. Information on the Company—Capital Expenditures”
|●||Main Achievements in 2021|
(1) Branch Network and Headcount Optimization
We believe that remote channels are key to the future of banking, particularly amid new regulatory requirements, intensified competition, the entry of new banking players and higher reputational exposure, all of which translates into higher costs. Similarly, customers are increasingly demanding new and innovative distribution channels and visiting branches less, given lack of time, but mostly due to the massive use of internet and the fast adoption of smartphones. In 2018, these trends led us to undertake financial and strategic analyses aimed at revising our entire branch network in terms of profitability, location, layout and services offered through these channels. In 2021, we continued to deploy this analysis by considering demographic change, physical coverage, and customers’ profiles, among other topics. In this regard, our current service model strategy includes the integration of the CrediChile network into the Banco de Chile’s network. Through these means, we believe that we are able to provide superior and tailored local solutions, as well as reduce operational costs.
As a result, we have reduced our branch network from 390 locations as of December 31, 2018 to 272 branches as of December 31, 2021. Most of this decrease was related to our efficiency and branch optimization program.
Likewise, the deployment of our efficiency program has enabled us to streamline diverse internal processes with a front-to-back approach that, along with organizational restructuring we have carried out in order to both imprint an efficiency-focused culture across the corporation and due to the branch network optimization, has translated into a steady decline in headcount from 13,831 employees in 2018 to 12,284 employees in December 2021, which represents an 11.2% contraction.
(2) Cost Control & Productivity Initiatives
Cost control has become one of our key efficiency pillars, for which we have established a specialized area that is implementing a cross-enterprise cost management program that seeks incremental savings gains in all the activities we carry out. In 2021, our cost base recorded a slight 0.6% annual increase when compared to 2020, mainly as a result of the implementation of a wide array of long-term cost control initiatives focused on improving and streamlining our processes by means of a front-to-back approach in order to improve productivity while reinforcing cost efficiency in the long-run. In line with this, we have significantly revised our organizational structure in order to carry out the changes we need to align the corporate culture with our digital transformation strategy across the Bank. Likewise, we have a multidisciplinary board that assesses the feasibility, adequacy and the value added by new capital expenditures and major expenses, which has enabled us to control our cost base closer. Based on these initiatives, our cost-to-income ratio improved from 45.4% in 2020 to 39.6% in 2021, mostly explained by higher operating revenues. For more information, see “Item 5. Operating and Financial Review and Prospects—Results of Operations for the Years Ended December 31, 2019, 2020 and 2021—Operating Expenses.”
The previously mentioned achievements have allowed us to improve certain ratios such as loans per employees, loans per branches and operating expenses to assets, as displayed in the following table, as of the dates indicated:
|For the Year Ended December 31,|
|BANK’S INTERNAL REPORTING POLICIES:||(in millions of Ch$)|
|Loans per Branch (Millions of Ch$)||83,620||92,626||125,942|
|Loans per Employee (Millions of Ch$)||2,213||2,355||2,789|
|Expenses to Total Loans (%)||3.0||%||2.9||%||2.6||%|
|●||Commitment to Chile|
Banco de Chile is devoted to focus on the progress of its customers by means of providing them with a wide array of services while supporting their funding needs. As an extension of this view, Banco de Chile is committed to the development of Chile and its individuals and companies by providing innovative tools that contribute to improve their quality of life. In this regard, we firmly believe that modern companies need to create effective mechanisms to build positive connections with all of their stakeholders and the society in which they carry out their business activities. This has become increasingly important in the midst of societal changes in Chile and worldwide.
This view is shared by the Bank and its employees, who support the development of Chile through diverse methods such as promoting social progress, contributing to environmental protection, decreasing extreme poverty, providing high-quality education to needy people, assisting disabled young people, fostering cultural development and embracing campaigns intended to overcome the effects of specific adverse events such as natural disasters.
|●||Main Achievements in 2021|
(1) Entrepreneurship Support
During 2021, we supported diverse entrepreneurship by assisting our customers in the context of the economic recovery observed throughout the year once mobility restrictions began to be lifted and commercial activity returned to most of the industries. Thus, for instance, we satisfied SMEs funding needs by granting Ch$1,234,501 million in secured loans associated with the FOGAPE Reactiva Program as of December 31, 2021.
In addition, we launched the Sixth National Entrepreneur Challenge, which attracted approximately 24,000 of micro and SMEs across Chile. This initiative is part of our SMEs for Chile Program and aims to provide entrepreneurs with training and tools that permit SMEs to improve their management and ensure their sustainability over time. Likewise, this initiative permits entrepreneurs to enter into an ecosystem in which they will increase visibility, boost sales and generate stronger and long-lasting relationships with their current and potential customers. The finalists participated in an unprecedented TV show, where they received support and mentoring from specialists in management, marketing and entrepreneurship matters while allowing them to make their business stories and ventures known across the country.
Likewise, during November 2021, we launched the new TV network show Rutas para Chile, which is a joint effort between us and a collaborative network integrated by players focused on entrepreneurship in Chile such as Universidad del Desarrollo Ventures, Fundación País Digital, Propyme, Nubox, Cebra, COMPITE and Multivende. This network aims to promote the expansion of SMEs in the country to increase their sales, improve the management of their businesses and support entrepreneurship. The TV program aims to promote tourism across the country by showcasing Chilean SMEs and entrepreneurs participating in the tourism industry across the country.
Also, as part of our Digital Transformation strategy, we have put at disposal of our SME customers new payment service, Mi Pago QR, based on scanning a QR Code or purchase code to facilitate transactions between entrepreneurs and their customer. This payment service is already available in more than 6,000 commercial locations across the country and in WebPay. By means of this new service, our customers may use their mobile phones to pay for services and products without needing a physical card.
(2) Environmental Sustainability
Environmental sustainability has become a crucial goal for us, which has led us to think and take business actions in what we believe is a sustainable approach by caring for the environment and working to leave a better planet for future generations. For this reason, in the context of a new World Environment Day, we implemented a new Sustainable Welcome Kit for Personal Banking new customers, which includes compostable bags and cards created from recycled plastic. In order to do this, we modified the Welcome Kit from a traditional cardboard box to a compostable corn bag that degrades between three to six months without requiring an industrial process, which compares to the 500 years that it takes for a normal plastic bag to degrade. In addition, one of the main and most innovative products to be included in this new Welcome Kit are the cards made from 85% recycled plastic, which maintain the same properties of the former, but considerably reduce the impact of CO2 emissions by 36% for each card produced, as well as saving energy by 50% and water by 75%. The new Welcome Kit is also expected to reduce the use of paper by 15 tons per year, thanks to the incorporation of a QR code, by which new customers will be able to access the Welcome Customer’s Guide digitally, in addition to eliminating checkbooks. In 2021, we also managed to reduce our GHG footprint and paper consumption by 27% and 3% respectively.
(3) Social Responsibility and COVID-19
As a result of our continuous focus on providing our employees and customers with a secure environment while taking all the sanitary measures defined by the health authority, in April 2021 we were recognized as one of the most responsible companies and with the best corporate governance in Chile in the tenth edition of the Corporate Responsibility and Governance ranking conducted by the Corporate Reputation Business Monitor, MERCO Chile. In a year marked by the COVID-19 pandemic, we ranked second, out of 100 Chilean companies. The ranking highlights the 100 most responsible companies with the best corporate governance, and measures their commitment to sustainability, social responsibility, contribution to the community, ethics and transparency.
Likewise, in November 2021, we became the first local bank to receive the COVID-19 Seal granted by Mutual de Seguridad (a non-for-profit labor accidents insurer to which we are affiliated), which certifies that all our branches, phone banking and headquarters across the country fully comply with preventive measures, recommendations and regulations promoted by the health authority during the pandemic. This recognition reflects our commitment and constant concern for the safety and health of our employees and customers.
(4) Financial Education “Cuentas con el Chile Program”
We have a strong commitment to financial education, which has materialized through diverse initiatives. The “Cuentas con el Chile” program is a financial education and wellness program, which aims to contribute to financial education and inclusion through the implementation of various activities, including digital financial education, face-to-face financial education and financial education mentoring. In 2020, this initiative trained 4,634 entrepreneurs, including micro-entrepreneurs, SMEs, sector leaders, neighborhood leaders, migrants and students from different universities, schools and regions of Chile. In order to continue contributing to education and inclusion, in 2021, for the second consecutive year, we carried out our financial education course, a free program that targets high school students in the country. This year, approximately 2,429 students from 35 schools across the country benefited from mentoring in financial education matters, based on contents developed by AgentPiggy, a financial education program for children that complies with the requirements of the Education Ministry. These students joined the 3,415 students trained in 2020 under the same course.
(5) Disability Inclusion
Our commitment to disabled people is permanent. In 2021 we worked once again alongside Teleton for its annual fund-raising campaign by putting our nationwide distribution network, which includes internet-based platforms and mobile applications for smartphones, in addition to other technological resources, at Teleton’s disposal. We have been supporting the Teleton Foundation since its establishment 43 years ago, supporting disabled athletes and artists, and we continued to make important monetary donations to the Foundation.
We also continued to promote our Inclusion Policy across the corporation. This policy is intended to improve our knowledge of physical disability and develop higher sensitivity with respect to the treatment of disabled people. We believe this is the first step to improve the service we render to customers who experience this reality while providing our disabled employees with supportive workplace conditions and benefits. Under this approach, we created the Advisory Council which is composed of 54 representatives from across the entire corporation and its various divisions.
Additionally, we held the fourth consecutive season of Expo Inclusión, an inclusive recruitment fair through which we aim to strengthen our commitment to support people with disabilities. In October 2021, more than 180 organizations and 50 presenters participated during this initiative that generated nearly 180 job opportunities. As a result, in 2021 over 1.3% of our staff had been identified as members of a disabled group, which is above the minimum required by the Chilean law. Moreover, we have continued to advance our plan of special benefits for our current disabled employees while implementing inclusive recruitment processes.
(6) Material Advances in ESG
All of the achievements mentioned earlier, as well as our solid corporate governance, have allowed us to achieve significant advances in ESG and we have recognized in that front. During 2021, we received an A rating from a prestigious international index that assesses diverse categories associated with ESG. This rating represented a three notch improvement from the former evaluation and reflects the strong accomplishments we have attained over the last year in ESG related matters, given our firm commitment to the community, the environment and our way of doing business.
One of the main goals of any corporation is to align employees’ perspectives with the company’s culture. In Banco de Chile, every worker has a crucial role in allowing us to achieve our strategic goals. In exchange for that, we believe all of our staff receives fair compensation and have access to benefits and policies that enable them to expand their professional capabilities in a work environment is committed to remain free of accidents, professional illnesses, work harassment, mobbing and discrimination.
In order to consolidate profitable growth, achieve high standards of service quality, attain operating efficiency and maintain a commitment to the country over the long run, we must have a motivated and highly qualified workforce committed to our corporate values. Accordingly, we strive to develop a distinctive culture among our employees by promoting: (i) a clear focus on the customer, (ii) confidence and responsibility, (iii) leadership and empowerment, (iv) collaboration and teamwork and (v) innovation and continuous improvement.
|●||Main Achievements in 2021|
(1) Talent Attraction
We believe that talent attraction is crucial in order to achieve our medium-term goals. Consequently, we have devoted efforts over the last years in order to improve our participation in university fairs while strengthening our presence on social networks and reinforcing IT tools in order to expand our reach to prospective candidates. In 2021, we ranked first in the general ranking of “Merco Talento Chile 2021”, as in the last eight editions, which awarded us as the best organization in the country in terms of talent attraction and retention.
(2) Other initiatives
We also seek to remain one of the most respected employers in Chile. We continue to strengthen our connection to our employees in order to align corporate values and goals with their career development and personal goals. In this regard, we have continued to focus on developing leadership capabilities and overall technical skills through training activities. Similarly, we have deployed diverse presentations on topics of interest for our employees, which have been conducted by specialized lecturers that transmit their experiences and knowledge on dealing with various professional situations. We believe these initiatives are aligned with our strategy and the professional development that our team aspires to achieve.
The following diagram shows our share ownership structure as of April 20, 2022:
Principal Business Activities
We are a full-service financial institution that provides, directly and indirectly through our subsidiaries and affiliates, a wide variety of lending and non-lending products and services to all segments of the Chilean financial market. Accordingly, for management purposes we organize our operations in the following four business segments:
The information related to our business segments presented in this section has been prepared in accordance with our internal reporting policies. See “Item 5. Operating and Financial Review and Prospects—Operating Results—Results of Operations for the Years Ended December 31, 2019, 2020 and 2021—Business Segments” and “Item 5. Operating and Financial Review and Prospects—Operating Results—Results of Operations for the Years Ended December 31, 2019, 2020 and 2021—Summary of Differences between Internal Reporting Policies and IFRS” for a description of the most significant differences between our internal reporting policies and IFRS.
On February 4, 2021, we began a voluntary and anticipated dissolution process for Banchile Securitizadora S.A. as approved by the subsidiary’s shareholders during the extraordinary meeting held on the same date. The dissolution was approved by the CMF and the process of liquidation is still in progress.
The following table sets forth information on the composition of our loan portfolio and our consolidated income before income tax in accordance with our internal reporting policies for the year ended December 31, 2021, allocated among our principal business segments:
|For the Year Ended December 31, 2021|
|Total Loans||% Participation in Total Loans||Income before Income Tax(1)|
|(in millions of Ch$, except percentages)|
|BANK’S INTERNAL REPORTING POLICIES:|
|Treasury and money market operations||—||—||52,854|
|Operations through subsidiaries||32,202||0.1||81,332|
|Other (adjustments and eliminations)||—||—||—|
|(1)||This net income breakdown is used for internal reporting and planning purposes and it is based on, among other things, our estimated funding cost and direct and indirect cost allocations. This breakdown may differ in some extents from breakdowns of our operating income for financial reporting and regulatory purposes. Separate information on the operations, assets and income of our financial services subsidiaries and affiliates is provided below under “—Operations through Subsidiaries.”|
The following table sets forth our consolidated operating revenues in accordance with our internal reporting policies, allocated among our principal business segments, for the years indicated:
|For the Year Ended December 31,|
|(in millions of Ch$)|
|BANK’S INTERNAL REPORTING POLICIES:|
|Treasury and money market operations||25,659||69,572||56,673|
|Operations through subsidiaries||199,611||177,931||196,148|
|Other (adjustments and eliminations)||(14,949||)||(21,480||)||(20,857||)|
|Total Operating Revenues||Ch$|
The following table sets forth a geographic market breakdown of our operating revenues in accordance with our internal reporting policies, for the years indicated:
|For the Year Ended December 31,|
|(in millions of Ch$)|
|BANK’S INTERNAL REPORTING POLICIES:|
|Operations through subsidiaries||199,611||177,931||196,148|
|Operations through subsidiaries||—||—||—|
|Other (adjustments and eliminations)||(14,949||)||(21,480||)||(20,857||)|
|Total Operating Revenues||Ch$||2,014,520||Ch$||1,938,743||Ch$||2,230,257|
The following table sets forth a breakdown of our loan portfolio by customer and business segments, in accordance with our internal reporting policies for the year ended December 31, 2021:
|For the Year Ended December 31, 2021|
|(in millions of Ch)|
|BANK’S INTERNAL REPORTING POLICIES:|
|Individuals (Personal Banking)||Ch$||2,630,044||Ch$||9,572,924||Ch$||4,055,118||Ch$||16,258,086|
|Small & Medium Enterprises||4,159,425||752,575||188,891||5,100,891|
Retail Banking Segment
Our retail banking segment serves the financial needs of individuals and small and medium sized companies through our branch network. As of December 31, 2021, our retail banking segment managed 238 branches operating under our “Banco de Chile” and “Banco Edwards-Citi” brand names and 34 branches within the “Banco CrediChile” network. As of December 31, 2021, loans granted by our retail banking segment amounted to Ch$21,358,977 million and represented 62.4% of our total loans as of the same date.
In terms of composition, as set forth in the following table, as of December 31, 2021 our retail segment’s loan portfolio was principally focused on residential mortgage loans, which represented 48.3% of the segment’s loan book. The remaining loans were distributed between commercial loans (31.8%) and consumer (19.9%).
|As of December 31, 2021|
|(in millions of Ch$,|
|BANK’S INTERNAL REPORTING POLICIES:|
|Total Commercial Loans||6,789,473||31.8|
|Residential Mortgage Loans||10,325,499||48.3|
|Lines of credit and other loans||173,741||0.8|
|Total Consumer Loans||4,244,009||19.9|
We serve the retail market through our Individuals and SME Area, which is responsible for offering financial services to individuals with monthly incomes over Ch$180,000 (or Ch$2.1 million per year), small and medium sized companies with annual sales of up to approximately Ch$2,200 million and micro businesses. This area manages our branch network operating under the brand names “Banco de Chile” and “Banco Edwards Citi” and had 272 branches as of December 31, 2021. For purposes of personal banking, the Individuals and SME Area maintains a segmentation to provide costumers of all income segments ranging from Consumer Finance (monthly income from Ch$180,000 to Ch$500,000) to premium customers (middle- and high-income segments) with tailored value propositions. As reported on our Form 20-F for the year ended December 31, 2020 filed with the SEC on April 30, 2021, during 2021, we completed the merger of our former Consumer Finance Area (CrediChile) into our Individuals and SME Area.
The strategy followed by our Individuals and SME Area is mainly focused on sub segmentation, multi brand positioning, cross sell of lending and non-lending products and service quality based on customized service models for specific customer needs. Also, loyalty programs have been increasingly incorporated into our commercial targets for each sub segment and they have enabled us to increase the use of our credit cards and our fee-based income. In addition, the area’s operations count on the support of specialized call centers, mobile and internet banking services, along with a wide range of management tools that allow us to measure returns, the performance of cross sold products and the effectiveness of marketing campaigns. Similarly, over the last years the area has strengthened value offering for SMEs by promoting a close relationship, while accompanying entrepreneurs in the diverse stages of their life cycle.
We also focus on developing and marketing innovative and customized products targeted to satisfy the needs of our Consumer Finance and microbusinesses customers while introducing them to the banking system. We complement the services offered by our other business segments, especially our wholesale market segment, by offering services to employers, such as direct deposit capabilities for payroll payment purposes, which in turn enable employees to use our deposit services. In recent years, we have strived to improve our value offering services by designing and implementing two new financial services, ‘Caja Chile’ and ‘Microbusiness Banking’. The former consists of a limited range of basic financial services (e.g. deposits, withdrawals and bill payments) offered to customers and non-customers through remote IT platforms located in small convenience stores within socially and/or geographically isolated areas of Chile. On the other hand, the ‘Microbusiness Banking’ is a specialized portfolio of financial services designed for microbusiness (generally personal businesses) that includes financial advisory, lending and non-lending products and general financial solutions for a segment that has been traditionally uncovered by the banking services.
During 2021, the Individuals and SME Area focused on targeted growth opportunities while developing new business solutions and benefits for its clients in order to improve our customers’ experience. Additionally, because of the COVID-19 outbreak, since 2020, we have witnessed an unprecedented scenario where digital banking has played a major role, which encouraged us to continue providing enhanced digital solutions in order to meet our customers’ needs, particularly in the context of the COVID-19 pandemic. In addition, prompted by higher levels of liquidity among individuals given three withdrawals from pension funds and direct government money transfer to them, demand deposits held by this area grew 43% on average when compared to 2020 (under internal reporting policies). We also believe that our brand recognition and strong corporate image helped us to further increase this source of funding against the uncertain context of the COVID-19 pandemic, as investors and depositors sought reliable institutions to keep their funds. Similarly, as mentioned earlier, in 2020 we launched the FAN account, our new online onboarding bank account, which reinforced our leadership in both digital banking and demand deposit accounts. During 2021, we were active in growing in this digital onboarding and made available several new tools for these customers that aided in strengthening ties with them, such as cross-selling insurance, credit and investment products, which led to nearly 581,000 additional new FAN account holders in our customer base that completed over 50 million transactions
Furthermore, we continually strive to improve benefits for our credit card account holders and other customers by widening strategic partnership and alliances mostly through our loyalty program named Dolares-Premio (a credit card points system). During 2021, more than 450,000 customers made use of these benefits by exchanging their Dolares-Premio for tickets, discounts or other benefits. Also, given the contraction in commercial activity in 2020 due to the COVID-19 pandemic, during 2021 we reactivated our partnership with Sky Airlines, which led to an annual growth of 63% in clients’ redeeming benefits. As for SMEs, in February 2021, we deployed the FOGAPE Reactiva program, the continuation of the government-backed COVID-19 loans granted in 2020, to support SMEs. In addition, thanks to these actions, we ranked first among privately-owned banks in the “Bank that supports SMEs and entrepreneurs” category, according to a study conducted by Adimark. Lastly, as of December 31, 2021, commercial loans granted to microbusinesses accounted for approximately Ch$32,228 million, associated with 8,484 borrowers. At the same time, we finalized the implementation of our new service model by merging branches in certain locations for Banco de Chile and former CrediChile customers, which in turn allows us to benefit from economies of scale by optimizing the use of spaces.
In 2021, the Individuals and SME Area also achieved significant increases in lending and saving products. In this regard, throughout the year the segment’s customer base grew by approximately 79,703 new current account holders and attained record sales of new installment and residential mortgage loans granted to its customers.
As of December 31, 2021, the Individuals and SME Area served approximately 1,308,649 core customers (those holding a current account or a loan outstanding) of which 927,043 were individuals, 138,056 were small and medium sized Chilean companies and 243,550 were Consumer Finance clients. This customer base resulted jointly in total loans granted to 1,076,114 borrowers, which included 139,372 residential mortgage loans debtors, 128.609 commercial loan debtors, 380,456 utilized lines of credit and 361,860 installment loans. As of the same date, the Commercial Finance held 1,051,808 current accounts, 120,503 savings accounts and 367,207 time deposits.
As of December 31, 2021, 73.1% of our loans managed by this area were granted to individuals, which represents Ch$15,604,418 million. As of the same date, Ch$5,100,891 million (23.9% of loans granted to retail banking clients) and Ch$653,668 million (3.1%) were granted to SMEs and Consumer Finance clients, respectively.
We offer a variety of financial services to individuals, SMEs and microbusinesses, directly through the Individuals and SME Area or indirectly through our subsidiaries, such as current accounts, automatic bill payment, debit cards, credit cards, revolving credit lines, residential mortgage loans, consumer loans, commercial loans, mortgage loans for general purposes, leasing agreements, factoring services, mutual funds management and stock brokerage, trade finance, payments and collections, insurance brokerage (which includes life and casualty insurance), savings instruments and foreign currency services.
Our consumer installment loans are generally incurred, up to a customer’s approved credit limit, to afford purchases of goods and/or services, such as cars, travels, household furnishings and education, among others. Consumer loans may be denominated in both pesos and UF, bear fixed or variable interest rates and are generally repayable in installments over a period of up to 45 months.
As of December 31, 2021, we had Ch$2,541,102 million in installment loans granted by our Individuals and SME Area, which accounted for 59.9% of the retail market business segment’s consumer loans. Most of these installment loans are denominated in Chilean pesos and are payable on a monthly basis.
Residential Mortgage Loans
As of December 31, 2021, we had outstanding residential mortgage loans of Ch$10,346,652 million (under internal reporting policies considering the Bank as a whole), which represented 30.2% of our total loan book as of the same date. According to information published by the CMF, as of December 31, 2021, we were Chile’s third largest private sector bank in terms of year-end mortgage loans balances, accounting for approximately 15.8% of mortgage loans granted by the Chilean banking industry, excluding operations of banks’ subsidiaries operating abroad.
Our residential mortgage loans are generally denominated in UF and have maturities ranging from five to 30 years. As of December 31, 2021, the average residual maturity of our residential mortgage loan portfolio was 16.4 years. Originally, we funded our residential mortgage loans through the issuance of mortgage finance bonds, which are recourse obligations only to us with payment terms that are matched to the residential loans. Also, the mortgage finance bonds bear real market interest rates plus a fixed spread over the variable rate of the UF, which permits us to partially reduce our exposure to interest rate fluctuations and inflation. Chilean banking regulations allow us to finance up to 100% of a residential mortgage loan with mortgage finance bonds, based on the purchase price of the property securing the loan or the appraised value of such property. In addition, we generally require that the monthly payments on a residential mortgage loan not exceed 25% of the borrower’s household after tax monthly income, when the customer belongs to the low-income population segment. However, that limit may be adjusted for the middle- and high-income population segments.
Over the last decade, we have also promoted the expansion of Mutuos Hipotecarios, a mortgage lending product, which is not financed by mortgage finance bonds, but instead through our general funds. As of December 31, 2021, our residential mortgage loan portfolio was principally composed of Mutuos Hipotecarios, as customers have preferred them due to their flexibility and simplicity (for instance the interest rate is known in advance by the customer, which is not the case for mortgage finance bonds that are traded in the secondary market and, therefore, subject to discounts), as they are easier to prepay and permit financing of up to 100% of the purchase price (as stated by the applicable local regulation), although banks limit such maximum financing portion based on internal credit policies and economic cycles, among others.
The following table sets forth the composition of our residential mortgage loan portfolio by product type:
|As of December 31, 2021|
|(in millions of Ch$, |
|BANK’S INTERNAL REPORTING POLICIES:|
|Secured Residential Mortgage Loans(1)|
|Loans financed with Mortgage Bonds||Ch$||10,340,588||99.9||%|
|Total Secured Residential Mortgage Loans||Ch$|
|(1)||Corresponds to the Bank’s total secured residential mortgage loans and not only those associated with the Individuals and SME Area.|
As shown above, as of December 31, 2021 residential mortgage loans related to Mutuos Hipotecarios represented 99.9% of our total residential mortgage loan portfolio, while the remaining 0.1% corresponded to mortgage loans financed with Mortgage Bonds. As of the same date, the Mutuos Hipotecarios portfolio had an average origination period of four years (the period from the date when the loans were granted to the specified date). Conversely, as of December 31, 2021, loans financed with Mortgage Bonds had an average origination period of 19 years (the period from the date when the loans were granted). In terms of credit risk, in 2021, loans related to Mutuos Hipotecarios, as well as those financed with Mortgage Bonds, had low gross (before recoveries) credit risk ratios of 0.05% and 0.69%, respectively. It is important to mention that the residential mortgage loan portfolio financed with Mortgage Bonds is annually increasing in an amount, and as a proportion of, the total residential mortgage loan portfolio because it is composed of old loans and the instrument is no longer offered by the Bank.
Regarding Mortgage Bonds that finance residential mortgage loans, the Bank is solely responsible for the payment of the Mortgage Bond obligation to the mortgage bond holders, regardless of the payment behavior of the residential mortgage borrower. Accordingly, in the ordinary course of business, none of our residential mortgage loans serves as a guarantee or collateral for our mortgage bonds.
For those loans that finance a higher portion of the property appraised value, we demand that customers comply with stricter requirements, which are verified during the credit assessment stage. These requirements are related to: (i) the history of the relationship between the Bank and the customer (new or current client), (ii) credit risk scores, (iii) monthly income, (iv) type of job (employed or self-employed) and (v) years employed. In order to illustrate the above mentioned, the table below sets forth an example of requirements for residential mortgage loans that finance up to 80% and more than 80% of the property value, with a common term and granted to employed as well as self-employed new customers.
(in millions of Ch$, except percentages)
|Years employed||≥1 year||≥1 year|
|Years Employed(2)||≥2 years||≥2 years|
|New Customers with a University degree(3)|
|Years employed||≥1 year||≥1 year|
|Years Employed(2)||≥2 years||≥2 years|
|(1)||Refers to customers with or without university degree, who do not supplement income with a guarantor’s income.|
|(2)||In the case of self-employed customers, years employed refers to the minimum period of time in which the customer has filed annual tax bills with the Chilean Internal Revenue Service.|
|(3)||Refers to customers with university degree awarded by a group of universities according to our internal credit approval process.|
During 2021, only 1.5% of the residential mortgage loans granted to our customers financed between 90% and 100% of the property value. Similarly, during 2021, loans financing between 75% and 90% of the property appraised value represented 45.0% of these loans, loans financing between 50% and 75% of the property value represented 42.4% of these loans, and loans financing less than 50% of the property value represented 11.1% of these loans. According to our prudent risk approach, we have been tightening our credit granting policy for residential mortgage loans by restricting the loan financing limit as a percentage of the property’s value, although higher financing may be granted to longstanding customers within specific segments. This explains the decrease in the share of residential mortgage loans that financed between 90% and 100% of the property value over the last years, from 14.9% in 2015 to 1.5% in 2021.
An additional feature of our mortgage loans is that mortgaged property sometimes, and under certain conditions, secures some of the mortgagor’s other credits with us, including installment loans and due balances associated with credit cards and credit lines. Our total amount of loans secured by real estate guarantees, their loan–to–value (LTV) ratio and their relative share in our total loan portfolio, as of December 31, 2021, are depicted in the table below:
|As of December 31, 2021|
|% of Bank’s Total Loans|
|(in millions of Ch$, except percentages)|
|BANK’S INTERNAL REPORTING POLICIES:|
|Residential Mortgage Loans||Ch$||10,346,650||64.6||%||30.2||%|
|Other than mortgage loans||1,114,217||19.6||3.3|
|Total Secured Loans||Ch$||11,460,868||71.5||%||33.5||%|
|(1)||Corresponds to the Bank’s total secured loans and not only those associated with the Individuals and SME Area.|
|(2)||LTV ratio is computed as the amount of secured loans divided by the value of their associated collateral.|
|(3)||For other-than-mortgage loans, the LTV ratio is computed as the amount of the excess guarantee (after deductions) of the balance of the associated residential mortgage loans, as those guarantees are initially established in order to secure the residential mortgage loan.|
The LTV ratios provided above are based on estimated property values that we update monthly with the collateral valuation models managed by our Retail Credit Risk Division. These models determine a rate of depreciation that provides an updated collateral value, based on variables such as geographic location, last appraisal date, type of property and type of customer. Accordingly, the LTV ratios set forth above take into account the most recent available data regarding collateral values.
In addition, the following table sets forth the composition of the other-than-mortgage loans secured by real estate guarantees:
|As of December 31, 2021|
|(in millions of Ch$, except percentages)|
|BANK’S INTERNAL REPORTING POLICIES:|
|Secured Other-than-Mortgage Loans(1)|
|Total Secured Other-than-Mortgage Loans||Ch$|
|(1)||Corresponds to the Bank’s total secured Other-than-Mortgage Loans and not only those associated with the Individuals and SME Area.|
Unlike in other countries, in addition to the specific legal rights afforded by the mortgage loan (including foreclosure rights), the Bank may collect the pending balance of the mortgage loan over other assets of the mortgage debtor based on certain legal liens provided by law (derecho de prenda general). Regarding the foreclosure processes, as permitted by Chilean regulations we may write-off secured loans (such as residential mortgage loans) the earlier of 48 months from the date the loans become overdue and once we have made all efforts for recovering the past-due loans without success. This applies to residential mortgage loans financed with mortgage finance bonds as well as for Mutuos Hipotecarios. Our foreclosure processes comply with the procedures specified by Chilean regulation. However, as we strive to continuously improve our collection processes, we have achieved average terms of 11 months for foreclosures associated with residential mortgage loans.
As for our historical loss rates, we periodically review our collateral pricing models by adjusting the parameters that support them, such as appreciation and depreciation rates, as well as updated recovery and loss rates, based on historical and empirical data. Thus, we normally revise our collateral pricing models by incorporating updated information from re-appraised assets or foreclosure processes that have been completed by the Bank in the past.
In addition, the valuation of guarantees is based on a prudent approach, which aims to anticipate and cover unexpected reductions in their market price as a result of changes in market variables, such as an unforeseen slowdown in the global or local economy, lack of liquidity of real estate assets or decrease in real salaries. Accordingly, our collateral pricing models depreciate the value of the guarantee regarding the market value determined by an independent appraiser. This approach has allowed us to minimize the loss rates, as the value obtained from auctions (if foreclosure applies) generally exceeds the value assigned to the asset as guarantee.
As of December 31, 2021, we issued both individual and corporate Visa and MasterCard credit cards. In addition to traditional credit cards, our portfolio also includes co-branded cards. As of December 31, 2021, we had two loyalty programs or cobranding agreements, namely “Travel Club” and “Entel Visa”. Credit cards issued under these cobranding agreements supplemented the credit cards that we issued under the brand names Banco de Chile and Banco Edwards-Citi. In addition, as of December 31, 2021, we offered 18 types of credit cards, targeting diverse types of segments and encompassing different benefits, including: Visa Corporate, Visa Corporate Signature, Visa Dorada, Visa Infinite, Visa Infinite Plus, Visa Internacional, Visa Platinum, Visa Platinum Pyme, Visa Pyme/Empresarial, Visa Signature, Visa Signature Entel, Visa FAN Internacional, MasterCard Black, MasterCard Dorada, MasterCard Internacional, MasterCard Platinum, MasterCard Corporate and MasterCard Corporate Executive.
Our affiliate, Transbank S.A., provides us with merchant acquisition and credit card processing services. As of December 31, 2021, Transbank S.A. had 11 shareholders (including us) and as of the same date, our equity ownership in Transbank S.A. was 26.16%. Upon obtaining the required regulatory approvals, on November 29, 2021, the shareholder banks of Nexus S.A., including us, sold 100% of the respective shares that each held in Nexus.
As of December 31, 2021, we had 1,305,128 valid credit card accounts, with 1,471,584 credit cards issued to individuals and small and medium sized companies (according to the CMF), held by 1,110,364 customers. Total charges on our credit cards during 2021 amounted to approximately Ch$5,118,314 million, with Ch$4,858,045 million corresponding to purchases in Chile and abroad and Ch$260,269 million corresponding to cash withdrawals both within Chile and abroad. The amount of purchases made by our customers accounted for 16.2% of the total purchase volume of banks’ credit cards in 2021, according to statistics provided by the CMF. Similarly, our market share in terms of cash withdrawals and automatic bill charges were 9.3% and 17.2% as of the same date, according to the CMF.
As of December 31, 2021, our credit card loans to individuals and small and medium sized companies amounted to Ch$1,110,779 million and represented 26.2% of our retail market business segment’s consumer loans.
We believe that the Chilean market for credit cards has a high growth potential, especially among lower- and middle-income customer segments, as fees should continue to decline due to increasing competition from other traditional banks operating in Chile and non-banking players, such as large department stores and other companies, from diverse industries, involved in the issuance of credit cards. As a result, we strive to develop customized commercial strategies to reinforce this payment channel by applying business intelligence tools that enable us to satisfy the needs of our diverse customer base. Following the new rules issued in the last years by our regulator, the processing and merchant acquiring services for credit and debit cards (particularly related to new acquirers) may now be accomplished through a four-party mechanism, in order to facilitate the entry of new players. As of the date of this annual report, most merchant acquiring services continued to be provided by Transbank S.A. in Chile, but some competitors have already begun to create new merchant payment processing subsidiaries (also known as “acquirers” or companies in charge of payment processing), which may change the market dynamics in the future.
Commercial credits granted by our Individuals and SME Area mainly consist of project financing, long-term financing and working capital loans granted to small and medium sized companies, which are denominated in Chilean pesos, UF and U.S. dollars and may bear fixed or variable rates of interest with average maturities of approximately four years (excluding non-residential mortgage loans). As of December 31, 2021, our Individuals and SME Area had outstanding commercial loans of Ch$5,965,240 million, representing 27.9% of the retail banking segment’s total loans and 17.4% of our total loans as of the same date.
Leasing contracts are financial leases for capital equipment and property. Leasing contracts may bear fixed or variable interest rates and they generally have terms that range from one to five years for equipment and from five to 20 years for properties. Most of these contracts are denominated in UF. As of December 31, 2021, our Individuals and SME Area had outstanding leasing contracts of Ch$494,261 million, representing 2.3% of the retail banking segment’s total loans and 1.4% of our total loans as of the same date.
Lines of Credit
As of December 31, 2021, the Individuals and SME Area had approximately 847,093 approved lines of credit to individual customers and small and medium sized companies. Also, the unit had outstanding advances to 340,763 individual customers and small and medium sized companies that totaled Ch$161,494 million, or 0.8% of the retail banking segment’s total loans and 0.5% of our total loans.
Our lines of credit for individual customers are generally available on a revolving basis, up to an approved credit limit, and may be used for any purpose. Advances under lines of credit are denominated in Chilean pesos and bear an interest rate that is set monthly.
We offer different types of debit cards to our customers. Depending on their specifications, these cards can be used for banking transactions at ATMs that operate on the local network provided by Redbanc and the local network of merchants participating in the local Redcompra debit program. Also, our debit cards can be used internationally through the Visa International PLUS network or the international network of merchants associated with the Electron program. We name these debit cards depending on the card’s specific features and the link between the brand and target market which they serve. During 2021, we offered the following debit cards: Visa Infinite, Visa Estándar, Visa Estandar FAN, Visa Signature, Visa Platinum, Visa Debit Business and debit cards for companies. As of December 31, 2021, according to the CMF, we held a 10.2% market share of debit card transactions, which corresponds to approximately 243 million transactions throughout the year, according to the CMF.
We strategically offer deposit products to increase our deposit-taking activities as a means of diversifying our sources of funding. We believe that the deposits of our individual customers provide us with a relatively low-cost, stable source of funding, as well as an opportunity to cross-market our other products and services. In this regard, we offer current accounts, time deposits and savings accounts to our individual customers. Current accounts are Chilean peso-denominated and the majority bear no interest (approximately 0.05% or 579 of our total current accounts are interest-bearing), and savings accounts are denominated in UF and bear a fixed-interest rate. Time deposits may be denominated in Chilean pesos, UF and U.S. dollars and most of them bear interest at a fixed rate with terms that range between seven to 360 days.
While demand has historically been focused on UF-denominated deposits during periods of high inflation, demand for Chilean peso-denominated deposits has increased in recent years as a consequence of lower and more stable inflation rates in Chile.
In the last two years, we have seen an important increase in demand deposits. In fact, amid the high volatility and low interest rates observed in the financial markets throughout 2008 and 2009 (in line with monetary stimulus undertaken by central banks worldwide to overcome the financial crisis), we benefited from a flight-to-quality effect, since customers increasingly deposited their funds in their current accounts managed by us, particularly those denominated in Chilean pesos, as they preferred liquidity to investing in products with low profitability. A similar phenomenon has taken place over the last few years as a result of the Central Bank’s monetary stimulus plan in response to (i) Chile’s economic slowdown towards the end of 2013 and (ii) inflation below the Central Bank’s target. Hence, as low interest rates have prevailed in Chile since 2014 interest rates paid on Chilean peso-denominated saving accounts and time deposits have remained low. The same flight-to-quality effect mentioned earlier took place in the last quarter of 2019 and, more importantly, during 2020, as a consequence of the social unrest in Chile and the effects of the COVID-19 pandemic, respectively, when both uncertainty regarding the economic outlook and low interest rates motivated depositors to seek safer products and financial institutions, while maintaining enough liquidity in case of contingencies. This trend has encouraged investors to prefer current accounts balances over interest-bearing deposits. As a result, according to our management information system, annual average balances of current accounts and demand deposits managed by our Individuals and SME Area increased by 43.2% and 42.9% in 2020 and 2021, respectively.
Wholesale Banking Segment
Our wholesale banking segment serves the needs of corporate customers. In 2021, this business segment recorded annual operating revenues of approximately Ch$621,472 million, which represented 27.9% of our total operating revenues. Also, for the year ended December 31, 2021 this segment recorded an income before income tax of Ch$345,244 million, which represented 35.5% of our consolidated income before income tax. As of December 31, 2021, loans granted by this business segment amounted to Ch$12,865,005 million and represented 37.6% of our total loan portfolio.
The following table sets forth the composition of our portfolio of loans to the wholesale market in accordance with our internal reporting policies, as of December 31, 2021:
|As of December 31, 2021|
|(in millions of Ch$,|
|BANK’S INTERNAL REPORTING POLICIES:|
|Foreign trade loans||1,178,260||9.2|
As of December 31, 2021, we had 10,849 debtors out of a total of 29,898 core customers (those holding either a loan or a current account with us). Our wholesale customers are engaged in a wide range of economic sectors. As of December 31, 2021, loans granted by our wholesale banking segment were mainly related to:
|●||financial services (approximately 23.6% of all loans granted by this business segment);|
|●||construction (approximately 9.6% of all loans granted by this business segment);|
|●||manufacturing (approximately 9.4% of all loans granted by this business segment);|
|●||commerce and trade (approximately 8.5% of all loans granted by this business segment);|
|●||communication and transportation (approximately 8.1% of all loans granted by this business segment);|
|●||agriculture, forestry and fishing (approximately 5.9% of all loans granted by this business segment);|
|●||community, social and personal services (approximately 2.8% of all loans granted by this business segment);|
|●||utilities (approximately 2.0% of all loans granted by this business segment); and|
|●||mining (approximately 0.8% of all loans granted by this business segment).|
In line with our strategy of identifying and differentiating market segments in order to provide improved value propositions for a diversified customer base, two of our areas provide our wholesale customer base with banking and financial products and services: (i) the Corporate Area, (ii) the Special Business Area and (iii) the Large Companies Area.
The Corporate Area provides banking products and services to corporations with annual sales exceeding approximately Ch$90,000 million. This area’s customers consist of a large proportion of Chile’s publicly-traded and non-listed companies, subsidiaries of multinational companies and conglomerates operating in Chile (including those operating in the financial, commercial, manufacturing, industrial and infrastructure sectors), projects and concessions, as well as family offices (wealth management). Thus, in addition to traditional lending products, this area offers a wide range of non-lending services related to project finance, deal structuring associated with business acquisitions, cash management, deposits and funds administration, financial advisory, among others. Also, this area is in charge of coordinating and overseeing both our Leasing Business and our International Private Banking Unit.
In May 2021, some subsegments of the Corporate Area were migrated to the Large Companies Area, while the Special Business Area was spun-off from the Corporate Area.
As of December 31, 2021, the Corporate Area had approximately 1,072 debtors out of a total of approximately 4,121 core customers (those holding either a current account or a loan with us). Also, this area managed total outstanding loans of Ch$5,095,038 million, which represented 14.9% of our total loan book as of the same date.
The following table sets forth the composition of our Corporate Area’s loan portfolio in accordance with our internal reporting policies, as of December 31, 2021:
|As of December 31, 2021|
|(in millions of Ch$,|
|BANK’S INTERNAL REPORTING POLICIES:|
|Foreign trade loans||471,035||9.2|
We offer a wide range of products to large corporations that include short- and long-term financing, working capital loans, mortgage loans, leasing, long-term syndicated loans and factoring, as well as investment banking services offered by our subsidiary Banchile Asesoría Financiera S.A. We also offer cash management, including payment services (payrolls, suppliers, pensions, dividends, etc.), collection services and connections to international funds transfer networks, as well as traditional deposit products, in particular current accounts.
In cash management, as of December 31, 2021, we were party to approximately 9,346 payment service contracts and approximately 858 collection service agreements with corporations. We believe that cash management and payment service contracts, in particular, provide us with a source of low-cost deposits and the opportunity to cross sell our products and fees to payees, many of whom maintain accounts with us. Under our collection contracts, we act as a collection agent for our corporate customers, providing centralized collection services for their accounts receivable and other similar payments. For the year ended December 31, 2021, joint volumes associated with collection and payment agreements increased by approximately 34.9% when compared to 2020.
In order to provide highly competitive and differentiated services, our Corporate Area has the direct support of our Treasury and Money Market Operations segment, which directly fulfills our corporate customers’ liquidity, short-term loans and hedging needs. We have also improved our technology to facilitate connections with customers and enhance their self-service practices. Similarly, we offer derivative products, which we believe have become increasingly important, especially those associated with Chilean peso-U.S. dollar and UF-U.S. dollar forward contracts, cross currency swaps, interest rate swaps and options, among other derivative products.
In recent years, the market for loans to corporations in Chile has been characterized by reduced margins due to increasing competition and moderate expansion in terms of borrowing. This fierce competition has involved not only local banking players but also, increasingly, overseas lenders who are eager to lend to Chilean companies that hold high credit ratings supported by a high sovereign credit rating. For this reason, we have focused on optimizing the profitability in this segment by enhancing our cross selling through the generation and enhancement of fee-based services, such as payroll processing, dividend payments and billing services, as well as computer banking services. This strategy has enabled us to maintain profitable and long-term relationships with our corporate customers while preserving the ability to grant loans when appropriate business opportunities arise.
Accordingly, during 2021, our Corporate Area focused on: (i) maximizing cross-selling and profitability at the level of each business relationship, (ii) improving the customer experience in their interaction with the bank’s distribution channels and (iii) promoting and motivating the area’s team to encourage “innovation” in all the business aspects managed by account officers. These initiatives are intended to optimize the risk-return relationship of this segment through non-lending revenues and customer proximity. In all of these topics, but particularly in cross-selling, the synergies that arise from the Global Connectivity Agreement with Citigroup have been important when assisting our corporate customers with offshore transactions, derivatives structuring and financial advisory services.
As mentioned earlier, during 2021 the local economy posted a strong recovery after the slowdown evidenced in 2020 due to the COVID-19 pandemic, recording an annual GDP expansion of 11.7%, according to the local Central Bank. Even though this performance was highly influenced by government support programs that boosted private consumption, overall investment spending also grew on an annual basis, which in turn was partly explained by the reactivation of several industries across the country given greater mobility and social interaction amid the successful vaccination program carried out in Chile. This performance, coupled with a low comparison base from 2020, translated into an annual increase of 19.7% in loan balances managed by the Corporate Area, mainly influenced by an increase in commercial credits, factoring loans and trade finance loans, the latter one explained by higher international trade in 2021 when compared to 2020. Moreover, during 2021, the Corporate Area recorded a significant increase in demand deposits, as well as enhanced cross-selling opportunities across our Corporate customers, particularly in derivative instruments. Lastly, we created Mi Banconexion, a new mobile application for companies where they can visualize and monitor their balances and movements in banking accounts, credit cards and lines of credit.
In addition, the Corporate Area was able to benefit from cross-selling, such as investment banking services offered through our investment banking subsidiary (Banchile Asesoría Financiera). During 2021, revenues and net income from this subsidiary increased when compared to 2020, having executed 20 transactions. Also, the subsidiary maintained its leadership position in investment banking while being recognized as the “Best Investment Bank in Chile” by Global Finance for the third consecutive year.
The foreign trade business is also managed by our Corporate Area, although balances and results are allocated to different business areas depending on the customer who performs the transaction. It is worth mentioning that during 2021, the foreign trade business recorded a 31.5% increase in loan balances for the Bank as a whole and a 12.6% expansion in the Corporate Area in particular, mainly associated with Chilean peso trends in 2021 as well as the base effect of lower international trade in 2020 due to the COVID-19 pandemic.
Special Businesses Area
The Special Business Area provides tailored financial products and services to the real estate and construction industries, as well as family offices. Thus, in addition to traditional lending products, this area offers a wide range of non-lending services related to project finance, deal structuring associated with business acquisitions, cash management, custody services, deposits and funds administration, investment banking, derivative instruments, among others.
As of December 31, 2021, our Special Businesses Area had approximately 773 borrowers out of a total of 7,484 core customers (those holding either a current account or a loan with us). In addition, as of the same date, loans granted by this area accounted for Ch$2,617,921 million, which represented 7.6% of our total loans.
The following table displays the loan portfolio composition of the Special Businesses Area, in accordance with our internal reporting policies, as of December 31, 2021:
|As of December 31, 2021|
|(in millions of Ch$,|
|BANK’S INTERNAL REPORTING POLICIES:|
During 2021 the Special Businesses Area focused on strengthening a comprehensive strategy intended to take advantage of opportunities that arise in the local market within the family office sub-segment. In this group of customers, relationships are crucial and, therefore, this area has concentrated on reinforcing the team’s capabilities while establishing a collaborative work relationship with our subsidiaries Banchile Administradora General de Fondos and Banchile Corredora de Bolsa (jointly, Banchile Inversiones) in order to put their wide range of wealth management services and products at the disposal of these customers. In addition, the Special Businesses Area recorded an annual increase of 20.6% in total loans during 2021, particularly concentrated in commercial credits.
Large Companies Area
Our Large Companies Area provides companies, with annual sales that range from approximately Ch$2,000 million to approximately Ch$90,000 million, with a broad range of financial products and services. Customers served by this area are those related to the commercial, manufacturing, agricultural, forestry, fishing and infrastructure sectors, among others.
In May 2021, some subsegments of the Corporate Area were migrated to the Large Companies Area.
As of December 31, 2021, we had 8,996 large company debtors out of a total of 18,280 core customers (those holding either a current account or a loan with us). Loans granted by the Large Companies Area amounted to Ch$5,152,046 million as of the same date, which represented 15.0% of our total loans.
The following table sets forth the loan portfolio composition of the Large Companies Area, in accordance with our internal reporting policies, as of December 31, 2021:
|As of December 31, 2021|
|(in millions of Ch$, except percentages)|
|BANK’S INTERNAL REPORTING POLICIES:|
|Foreign trade loans||698,611||13.6|
Products and services offered by this area are mainly related to commercial loans, lines of credit, trade finance and foreign currency transactions, factoring services, leasing, non-residential mortgage loans, syndicated loans, investment banking and financial advisory services for mergers and acquisitions, debt restructuring assistance, payments and collections services, current accounts and related saving services, corporate credit cards, cash and investment management, derivative contracts to hedge against currency or interest rate fluctuations, insurance brokerage, among other traditional and tailored services.
The Large Companies Area aims to provide its customers with excellent service based on proactive financial support that enhances long term relationships with customers. Over time, the area has developed service models intended to take advantage of synergies arising from the interaction of account and specialized support executives responsible for ensuring comprehensive customer service. These models have enabled the Large Companies Area to strengthen customer relationships and product offerings.
In 2021, the Large Companies Area prioritized a customer centric approach in order to maintain a market-leading position in commercial loans. In the context of the economic slowdown prompted by the COVID-19 pandemic, the Large Companies Area had a crucial role in the implementation of the National Support Plan deployed in 2020 that involved government-guaranteed working capital loans, particularly by the FOGAPE Reactiva program that began in February 2021. This support plan largely explained the annual increase of 5.1%, or Ch$250,822 million, in year-end loan balances managed by this area, although lower than the 9.7% increment seen in 2020. At the product level, the area posted an increase of 44.9% on an annual basis in trade finance loan balances supported by Chilean peso trends and, as compared to the base effect due to the unusual behavior of international trade in 2020 due to the COVID-19 pandemic.
Our factoring business is part of the Large Companies Area. During 2021, we posted an annual increase of 9.0% in year-end balances of factoring loans on a consolidated basis.
Treasury and Money Market Operations
Our Treasury and Money Market Operations business segment provides a wide range of financial services to our customers, including currency intermediation, forward contracts, interest rate swaps, transactions under repurchase agreements and investment products based on bonds, mortgage finance bonds and deposits.
In addition, our Treasury and Money Market Operations business segment is focused on managing our currency, interest rate and maturity gaps, ensuring adequate liquidity levels, managing our investment portfolio and performing the intermediation of fixed-income instruments, currencies and derivatives. Interest rate gap management is aimed at generating an adequate funding structure, prioritizing our capitalization and asset and liability cost structure and funding source diversification.
The Treasury and Money Market Operations business segment is also responsible for: (i) the issuance of short- and long-term senior bonds, as well as long-term subordinated bonds, in Chile or abroad, (ii) monitoring compliance with regulatory deposit limits, technical reserves and maturity and rate matches/mismatches, (iii) monitoring our adherence to the security margins defined by regulatory limits, and risk limits for interest rate, currency and investment gaps. This segment continually monitors the Bank’s cost of funding by benchmarking with the rest of the local financial system and financing alternatives in Chile or abroad.
Regarding funding functions, during 2021, we continued to develop a funding diversification strategy by conducting important transactions in Chile and abroad. This strategy is aimed at maintaining a competitive cost of funding that supports the value offerings we provide to our wide customer base and improving our liquidity by issuing debt of longer maturities that match long-term assets. For that reason, we are continually seeking alternative sources, types of instruments and markets. We generally conduct international bond issuances only if the cost (including costs of interest rate swaps and other transactional expenses) is below the cost of raising funds locally and the currency or interest rate exposure is fully hedged via cross currency swaps.
We are constantly striving to diversify our liability structure in terms of sources, types of instruments and markets with the aim of maintaining a competitive cost of funding and improving our liquidity. In this context, in 2021 we were more active than in the previous year in terms of long-term debt placements in both local and overseas markets. The increase in debt issuance was largely a result of our mid-term funding strategy that aims to diversify our liability structure while financing long-term loan growth, which, in 2020, experienced an extraordinary surge in current account and other demand deposits. In 2021, we carried out the following debt placements:
|●||Approximately Ch$277,910 million (denominated in UF) within the local market. These debt placements had maturities ranging from six to nine years, while bearing premium spreads over the relevant benchmark.|
|●||We also carried out a debt placement in an international capital market by taking advantage of our superior credit rating within Chile and the Latin American region, which enabled us to benefit from liquidity and low interest rates in major capital markets, as follows: (i) Ch$36,097 million in Japan with a 10-year maturity, (ii) Ch$31,203 million in Australia with a 10-year maturity, (iii) Ch$115,483 million in Switzerland with a five-year maturity, (iv) Ch$82,543 million in Japan with a five-year maturity, and (v) Ch$419,345 million in the international capital markets through a Rule 144A/Regulation S issuance with a ten-year maturity. These placements were accompanied by cross currency swap hedge arrangements in order to offset any effects associated with changes in foreign exchange that could impact our cost of funding.|
|●||Furthermore, we continued to utilize short-term funding associated with our commercial paper program, which provides us with premium funding for Trade Finance transactions. During 2021, we issued a total amount of approximately Ch$698,435 million. As of December 31, 2021, we had an outstanding balance of approximately Ch$348,445 million.|
The funding functions carried out by our Treasury area are complemented by our international area, namely International Financial Institutions (“IFI”), which manages relations with correspondent banks worldwide, facilitating international payments and obtaining foreign currency financing for us. As of December 31, 2021, we have established a network of approximately 600 foreign banks, among which we maintained credit relationships with approximately 130 correspondent banks, from which we maintained 17 account relationships. IFI played an important role in structuring international transactions aimed at diversifying our funding.
From the business perspective, our Treasury and Money Market segment recorded operating revenues of Ch$56,673 in 2021, which was lower than the Ch$68,547 recorded in 2020. This performance was based on a proactive management of our investment portfolio and financial gaps and also a very high basis for comparison represented by 2020 when sharp decreases in both local and foreign interest rates translated into remarkable mark-to-market gains in the Investment and Trading portfolios.
Regarding the management of our securities portfolio, as of December 31, 2021, the portfolio amounted to Ch$7,777,613 million and was composed of financial instruments measured at fair value through other comprehensive income that totaled Ch$3,061,174 million, securities held for trading amounting to Ch$3,876,695 million and financial instruments at amortized cost (held-to-maturity) totaling Ch$839,744 million. As for the type of instruments included in our securities portfolio, as of December 31, 2021, 87.4% consisted of securities issued by the Central Bank and the Chilean Government, 10.3% consisted of securities issued by local financial institutions, and 2.2% consisted of securities issued by non-financial Chilean corporate issuers, foreign issuers and other securities. Our investment strategy is designed to supplement our expected profitability, risks and economic variable projections while adhering to the regulatory guidelines and internal limits defined by our finance committee. In this regard, neither proprietary trading nor speculation on equity holdings are business goals for us and, therefore, equity instruments only represented 0.1% of our investment portfolio as of December 31, 2021.
Operations through Subsidiaries
We have made several strategic long-term investments in financial services companies that are engaged in activities complementary to our commercial banking activities. In making these investments our goal is to develop a comprehensive financial group capable of meeting the diverse financial needs of our current and potential clients by offering traditional banking products and specialized financial services through our different subsidiaries.
The following table sets forth information with respect to our financial services subsidiaries in accordance with our internal reporting policies as of December 31, 2021:
|(in millions of Ch$)|
|BANK’S INTERNAL REPORTING POLICIES|
|Banchile Corredores de Bolsa S.A.||Ch$||868,794||Ch$||139,056||Ch$||27,901|
|Banchile Administradora General de Fondos S.A.||55,729||37,571||25,241|
|Banchile Corredores de Seguros Ltda.||25,139||10,222||6,909|
|Banchile Asesoria Financiera S.A.||3,908||3,291||2,112|
|Banchile Securitizadora S.A. (In process of liquidation)||24||14||(129||)|
The following table sets forth information with respect to our ownership interest in our financial services subsidiaries as of December 31, 2021:
|Banchile Administradora General de Fondos S.A.||99.98||%||0.02||%||100.00||%|
|Banchile Asesoría Financiera S.A.||99.96||—||99.96|
|Banchile Corredores de Seguros Ltda.||99.83||0.17||100.00|
|Banchile Corredores de Bolsa S.A.||99.70||0.30||100.00|
|Banchile Securitizadora S.A. (In process of liquidation)||99.01||0.99||100.00|
Securities Brokerage Services
We provide securities brokerage services through Banchile Corredores de Bolsa S.A. is registered as a securities broker with the CMF, the regulator of Chilean publicly listed companies, and is a member of the Santiago Stock Exchange and the Chilean Electronic Stock Exchange. Since it was founded in 1989, Banchile Corredores de Bolsa S.A. has provided stock brokerage services, fixed income investments and foreign exchange products to individuals and companies through our branch network. In early 2009, Citibank Agencia de Valores S.A. merged with Banchile Corredores de Bolsa S.A.
During the year ended December 31, 2021, Banchile Corredores de Bolsa S.A. recorded an aggregate stock trading turnover on the Santiago Stock Exchange and the Chilean Electronic Stock Exchange that amounted to approximately Ch$9,156,530 million, which represented a 11.7% market share within the Chilean stock market.
Also, as of December 31, 2021, Banchile Corredores de Bolsa S.A. had equity amounting to Ch$139,056 million and, for the year ended December 31, 2021, recorded net income of Ch$27,901 million, which represented 3.5% of our consolidated net income for that period (under the bank’s internal reporting policies).
Mutual and Investment Fund Management
Since 1980, we have provided mutual fund management services through Banchile Administradora General de Fondos S.A. (formerly Banchile Administradora de Fondos Mutuos S.A.). As of December 31, 2021, according to data published by the Chilean Association of Mutual Funds, Banchile Administradora General de Fondos S.A. was the largest mutual fund manager in Chile, managing approximately 24.3% of all Chilean mutual funds’ assets. Also, as of December 31, 2021, Banchile Administradora General de Fondos S.A. operated 56 mutual funds and had Ch$9,916,505 million in assets under management owned by 373,277 corporate and individual investors. As of the same date, Banchile Administradora General de Fondos S.A. operated 40 public investment funds. Banchile managed Ch$1,407,801 million in net assets associated with these public investment funds on behalf of 1,582 participants. As of December 31, 2021, Banchile managed five private investment funds of Ch$47,891 million in net assets associated with these public investment funds on behalf of 95 participants. During 2021, Banchile Administradora General de Fondos S.A. created nine new mutual funds, nine new public investment funds and one private investment fund.
The mutual and investment funds mentioned above are managed by Banchile Administradora General de Fondos S.A., but neither the Bank nor Banchile Administradora General de Fondos S.A. have ownership of these funds and, accordingly, they are not booked in our audited consolidated financial statements.
The following table sets forth information regarding the various mutual funds managed by Banchile Administradora General de Fondos S.A. as of December 31, 2021:
|As of December 31, 2021|
|Name of Fund||Type of Fund||Net Asset Value|
(in millions of Ch$)
|Alianza||Fixed income (medium/long term)||Ch$||11,566||Ch$||3,542|
|Banchile Renta Lp||Blend||136||116|
|Best Coupon Emergente||Structured||2,272||94|
|Booster Clean Energy||Structured||14,123||538|
|Capital Efectivo||Fixed income (short term)||319,893||7,434|
|Capital Empresarial||Fixed income (short term)||2,349,748||29,884|
|Capital Financiero||Fixed income (short term)||890,802||15,435|
|Corporate Dollar||Fixed income (short term)||1,360,747||32,159|
|Crecimiento||Fixed income (medium/long term)||88,491||15,105|
|Deposito Xxi||Fixed income (medium/long term)||129,413||13,044|
|Deuda Dolar||Fixed income (medium/long term)||183,858||3,729|
|Deuda Estatal Uf 3-5||Fixed income (medium/long term)||1,668||483|
|Disponible||Fixed income (short term)||305,595||48,955|
|Estrategico||Fixed income (medium/long term)||280,324||15,347|
|Fm Bch Pa Usd Mod||Blend||100,774||2,490|
|Fondo Mutuo Chile Blue Chip Index Fund||Equity||2,825||361|
|Fondo Mutuo Cobertura Deuda Global||Fixed income (medium/long term)||6,686||192|
|Global High Yield||Fixed income (medium/long term)||862||39|
|Global Mid Cap||Equity||16,008||1,555|
|Horizonte||Fixed income (medium/long term)||81,157||3,482|
|Latam Corporate Investment Grade||Fixed income (medium/long term)||36,072||1,350|
|Latam Mid Cap||Equity||6,689||2,253|
|Liquidez 2000||Fixed income (short term)||379,827||41,467|
|Port Act Agresivo||Blend||178,893||7,385|
|Port Act Controlado||Blend||307,809||14,004|
|Port Act Equilibrado||Blend||748,343||23,360|
|Port Act Moderado||Blend||928,962||25,557|
|Port Act Potenciado||Blend||426,041||13,416|
|Portafolio Activo Dolar Agresivo||Blend||3,034||110|
|Portafolio Activo Dolar Conservador||Blend||1,462||38|
|Renta Futura||Fixed income (medium/long term)||79,582||3,858|
|Retorno L.P. Uf||Fixed income (medium/long term)||27,186||1,776|
|Us Mid Cap||Equity||35,022||2,489|
|Utilidades||Fixed income (medium/long term)||186,873||7,081|
The following table sets forth information regarding the investment funds managed by Banchile Administradora General de Fondos S.A. as of December 31, 2021:
|As of December 31, 2021|
|Name of Fund||Type of Fund||Net Asset Value (in millions of Ch$)||Number of|
|Rem. F.I. Small Cap||Public||66,605||17|
|Rem. F.I.($) Latam Small Mid Cap||Public||4,102||4|
|Rem. F.I. Banchile Rentas Inmobiliarias I||Public||125,516||93|
|Rem. F.I. Latam Corp.High Yield||Public||9,714||111|
|Rem F.I. ($) Renta Habitacionales||Public||4,076||54|
|Remu F.I. ($) Deuda Chilena||Public||233,608||245|
|Rem. F.I. Deuda Global||Public||38,619||96|
|Rem Fi Inmobiliario VIII||Public||1,988||4|
|Rem F.I. Market Plus Global||Public||214,897||49|
|Rem F.I. Market Plus Eeuu||Public||95,496||27|
|Remu F.I. Usa Equity||Public||35,121||9|
|Remu F.I. Europe Equity||Public||2,075||7|
|Remu F.I. Emerging Equity||Public||13,272||1|
|Remu F.I. Deuda Alto Rendimiento||Public||52,516||23|
|Remu Fi Desarr.Y Rtas.Resid.||Public||10,505||281|
|Remu F.I Inver. Inmobiliario IX||Public||18,106||300|
|Remu F.I Marketplus Europa||Public||21,792||9|
|Remu F.I United States Propert||Public||5,381||19|
|Remu Fi Marketplus Emergente||Public||34,406||18|
|Remu Fi ($) Desarrollo Inmobiliario Peru-Colombia||Public||26,570||14|
|Remu Fi European Value Partners II||Public||2,921||3|
|Remu Fi Infraestructura Chile I||Public||70,823||9|
|Remu Fi ($) Inmobiliario X||Public||48,875||8|
|Remu Fi ($) Edr Fund Emerging Credit||Public||7,036||4|
|Remu Fi (Us$) Privado F2||Private||7,992||6|
|Remu Fi ($) Banchile Oro||Public||1,928||6|
|Remu Fi (Us$) Ag Direct Lendin||Public||3,756||5|
|Remu Fi ($) Global Real Estate||Public||38,658||12|
|Remu Fi ($) Marketplus Japón||Public||2,312||3|
|Remu Fip (Us$) Allvp III||Private||2,693||10|
|Remu Fip (Us$) Rentas Perú I||Private||8,335||1|
|Remu Fi ($) Banchile Equity Tr||Public||1,646||2|
|Remu Fi ($) Inmobiliario XI||Public||23,826||18|
|Remu Fi (Us$) Energias Renovab||Public||1,772||38|
|Remu Fi (Eur$) Axon Aurora I||Public||2,159||43|
|Remu Fi (Us$) Banchile Ag Dl Iv||Public||6,025||1|
|Remu Fi (Us$) Banchile Real Estate Usa I||Public||55,742||2|
|Remu Fi ($) Banchile Deuda Dol||Public||35,648||8|
|Remu Fi ($) Banchile Proyeccio||Public||29,414||1|
|Remu Fi (Us$) Private Opportun||Public||9,361||1|
|Remu Fi (Us$) Pe Secondary Deal I||Public||7,085||4|
|Rem.($) F.I. Chile Blend||Public||32,898||11|
|Rem. (Us$) F.I.P. Rentas Inmob||Private||9,974||49|
|Rem. F.I.($) Banch. Plusvalia Eficiente||Public||11,549||22|
As of December 31, 2021, Banchile Administradora General de Fondos S.A. had equity of Ch$37,571 million and, for the year ended December 31, 2021, net income of Ch$25,241 million, which represented 3.2% of our 2021 consolidated net income (under the bank’s internal reporting policies).
We provide insurance brokerage services to our customers through Banchile Corredores de Seguros Limitada (Banchile Corredores de Seguros LTDA.). In 2000, we began to offer life insurance policies associated with consumer loans and non-credit related insurance to our individual customers and the general public. As of December 31, 2021, Banchile Corredores de Seguros Limitada had equity of Ch$10,222 million and, for the year ended December 31, 2021 it recorded net income of Ch$6,909 million, which represented 0.9% of our 2021 consolidated net income (under the bank’s internal reporting policies). According to data published by the CMF, as of December 31, 2021, Banchile Corredores de Seguros Limitada had a 5.0% market share in the total amount of life and casualty insurance policies (in Chilean pesos) sold by insurance brokerage companies in Chile, excluding life annuities.
Additionally, in January 2019 we signed a long-term partnership with Chubb Seguros Chile S.A. and Chubb Seguros de Vida Chile S.A., local subsidiaries of Chubb Limited, by which Chubb became our exclusive provider of life and non-life insurances to be distributed by our insurance brokerage subsidiary. For non-life products, the partnership became effective in June 2019, and for life products, it became effective in January 2020. The partnership does not include life and non-life insurance products that in accordance with local regulation must be publicly auctioned.
Financial Advisory Services
We provide financial advisory and other investment banking services to our customers through Banchile Asesoría Financiera S.A. The services offered by Banchile Asesoría Financiera S.A. are primarily targeted to our corporate customers and include advisory services concerning mergers and acquisitions, restructuring, project finance and strategic alliances. As of December 31, 2021, Banchile Asesoría Financiera S.A. had equity of Ch$3,291 million and, for the year ended December 31, 2021, recorded net income of Ch$2,112 million, which represented 0.3% of our 2021 consolidated net income (under the bank’s internal reporting policies).
We used to offer investment products to meet the needs of institutional investors, such as private pension funds and insurance companies, through Banchile Securitizadora S.A. In the past, this subsidiary securitized financial assets and issued debt instruments with credit ratings that could be traded in the Chilean marketplace, backed by a bundle of revenue producing assets of the client company. On February 4, 2021, we began a voluntary and anticipated dissolution process for Banchile Securitizadora S.A. as approved by the subsidiary’s shareholders during the extraordinary meeting held on the same date. The dissolution was approved by the CMF and the process of liquidation is still in progress. As of December 31, 2021, Banchile Securitizadora S.A. had equity of Ch$14 million and, for the year ended December 31, 2021, the subsidiary reported a net loss of Ch$129 million (under bank’s internal reporting policies).
Socofin S.A. provides judicial and extra judicial loan collection services to the Bank. As of December 31, 2021, Socofin S.A. had equity of Ch$1,511 million and, for the year ended December 31, 2021, and recorded a net loss of Ch$93 million (under the bank’s internal reporting policies).
Distribution Channels and Electronic Banking
Our distribution network provides integrated financial services and products to our customers through a wide range of channels. The network includes ATMs, branches, internet-based banking platforms, mobile banking applications and call centers.
As of December 31, 2021, we had a network of 272 retail branches throughout Chile. Our branch system serves as a distribution network for all of the products and services offered to our customers. Our full-service branches accept deposits, cash withdrawals, offer the full range of our retail banking products, such as consumer loans, credit cards, mortgage loans and current accounts, and provide financial and non-financial information to current and potential customers. As of December 31, 2021, we had 1,761 ATMs that were part of a larger network of 7,553 ATMs operating in Chile, of which 4,775 ATMs operate under a network managed by Redbanc S.A.
We also offer electronic banking services to our customers 24 hours a day through our website, www.bancochile.cl, which has tailored homepages for the different segments we serve. Thus, by accessing our website, our individual customers may execute electronic money transfers, access their account balances, pay utilities bills, apply for loans, make time deposits, purchase insurance premiums, invest in mutual funds, and so on. On the other hand, our corporate homepage offers a broad range of services, including the payment of bills, electronic fund transfers, non-charge orders, as well as a wide variety of account inquiries. These services include our office banking service, Banconexion Web for Enterprises, which enables our corporate customers to perform all of their banking transactions from their offices. Our homepage also offers products with exclusive benefits provided by our customer loyalty marketing programs, which enhance our relationships with customers. Through the jointly administered website of Banchile Administration General de Fondos and Banchile Corredora de Bolsa, our mutual funds and securities brokerage subsidiaries, respectively, we also provide customers interested in investing and saving their funds with an internet-based platform on which they can trade stocks and currencies, make time deposits and take positions in mutual funds, foreign stock markets, investments funds and derivatives. Our foreign trade customers can rely on our international business homepage, www.bancochile.com, which enables them to inquire about the status of their foreign trade transactions and perform transactions, such as opening letters of credit, recording import collection and hedging on instructions and letters of credit.
Also, we provide our customers with access to a 24-hour phone-bank through which they can access account information and execute certain transactions. This service, through which we receive nearly 371,793 calls per month on average, has enabled us to develop customer loyalty campaigns, sell financial products and services, answer specialized inquiries and receive and resolve complaints by customers and non-customers.
Lastly, over the last years we have devoted efforts to enhance our mobile banking platforms by developing and launching diverse applications, including the mobile applications MiBanco, MiBanconexion, MiPago, and MiBeneficio. Similarly, we launched MiCuenta, MiPass, and MiSeguro. MiBanco is a mobile banking platform that enables our customers to perform most of the operations they can execute on our website, such as accessing their account balances, making bill payments and electronic money transfers, carrying out cash advances from credit cards to checking accounts. MiBanconexion is an application designed for treasury managers of companies or entrepreneurs, which allows our customers to make massive transfers, pay their use of credit lines and check movements in their demand account, among other functionalities. MiPago is a specialized mobile application that permits requests for reimbursements from other Banco de Chile’s customers and performs the transaction by generating and scanning a QR code, which reinforces the security standards for these types of operations. MiCuenta is a mobile application that enables users to make monthly payments associated with utility bills and other types of services. MiPass is a password-generating application that, among other features, allows users to set a list of money transfer recipients to make transfers without requiring another password-generating device. Also, we continued to expand our digital banking offerings by launching the new mobile application called MiInversion. This application serves as a portfolio management mobile platform for retail customers by enabling them to manage their investments in equity, fixed-income and mutual funds. Furthermore, we added new functionalities to these mobile applications by incorporating an on/off service for credit and debit cards in case of theft, misplacement or other security issues detected by the user, authorization of web transactions with MiPass, biometric access to MiBanco and MiBanconexion, through fingerprint, onsite payment in shops and commerce through MiPago, among other features. Likewise, we also added new functionalities by expanding our RedGiro service to permit our clients to perform transactions through their smartphones and added new functionalities to MiInversion, through which our customers are able to invest in time deposits while exchanging foreign currency. As of 2021, we have continued enhancing our mobile applications by improving existing functionalities.
The following table sets forth information regarding the evolution of the number of transactions carried out by customers and non-customers in our diverse distribution channels, as of December 31, 2019, 2020 and 2021:
|For the Year Ended December 31,||% Increase (Decrease)|
|(in millions of transactions)|
|BANK’S MANAGEMENT INFORMATION SYSTEM|
The Chilean market for banking and other financial services is highly and increasingly competitive and consists of various market sectors. The most important sector is commercial banking with total loans (excluding operations of subsidiaries abroad) representing 85% of the Chilean GDP as of December 31, 2021. As of the same date, the Chilean banking industry consisted of 17 banks, 16 of which were private sector banks and one state-owned bank, namely, Banco del Estado. As of December 31, 2021, the six largest Chilean banks accounted for approximately 86.7% of all outstanding loans granted by Chilean financial institutions (excluding operations of subsidiaries abroad): Banco Santander—Chile (17.9%), Banco de Chile (16.7%), Banco de Crédito e Inversiones (“BCI”) (14.3%), Scotiabank Chile (14.1%), Banco del Estado (13.8%) and Itaú-Corpbanca (9.8%).
We face significant and increasing competition in all market segments in which we operate. As a comprehensive commercial bank that offers a wide range of services to all types of enterprises and individual customers, we deal with a variety of competitors, ranging from large private sector commercial banks to more specialized entities, such as “niche” banks. In addition, we face competition from other types of lenders, such as non-banking leasing, crowdfunding, factoring and automobile financing companies, especially in credit products, mutual funds, pension funds and insurance companies within the market for savings products and insurance companies in the market for mortgage loans. Likewise, other non-traditional providers of financial services have emerged over the last years, such as e-commerce, local and foreign fintech companies, Telecom companies, like internet and mobile phone providers, and more recently some marketplaces that may set and provide offerings, in the form of temporary financing, directly to their customers or providers. Furthermore, in recent years and given the outstanding credit rating held by the country, as well as the liquidity observed in overseas markets, local middle market, corporations and multinational branches in Chile have increasingly replaced loans rendered by local banks with off-shore long-term debt. In addition, we face competition from other types of competitors, such as leasing, factoring and automobile financing companies (especially in lending products), as well as mutual funds, pension funds and insurance companies, within the market for savings and mortgage loans. Nevertheless, banks continue to be the main suppliers of leasing, factoring and mutual funds, while the insurance brokerage business has become an important component of the value offerings provided by banks.
Within the local banking industry, our primary competitors are the main private sector commercial banks in Chile, namely, Banco Santander—Chile, BCI, Scotiabank Chile, and Itaú-Corpbanca. Nevertheless, we also face competition from Banco del Estado, a state-owned bank, which has a larger customer base than we do. Banco del Estado, which operates under the same regulatory regime as Chilean private sector banks, was the fifth largest bank in Chile as of December 31, 2021, with outstanding total loans of Ch$28,258,859 million, representing a 13.8% market share (excluding operations of subsidiaries abroad), according to data published by the CMF.
In the retail market, we compete with other private sector Chilean banks, as well as with Banco del Estado, which has a large individual customer base. Among private sector banks, we believe our strongest competitors in this market are Banco Santander—Chile, Scotiabank Chile and BCI, as these banks have developed diversified business strategies focused on both small and medium-sized companies and lower to middle income segments of the Chilean population. In addition, we believe our strongest competitors in the high-income individual segment are Banco Santander—Chile, Banco Bice and Banco Security, as these banks rely on specialized business models that provide wealth management and traditional banking services, as we do.
Historically, commercial banks in Chile have competed in the retail market against each other, and finance companies and department stores, with the latter two having traditionally been focused on consumer loans to low and middle-income segments. However, finance companies gradually disappeared between the 1990s and 2000s, as most of them merged into the largest commercial banks that dominate the Chilean banking industry today. Also, by the end of 1990s, the Chilean financial industry witnessed the rise of non-traditional banking competitors, such as large department stores. During the 2000s, these players gained increasing significance in the consumer lending sector, as they were permitted to issue financial products such as credit cards. Currently, there are two consumer-oriented banks affiliated with Chile’s largest department stores: Banco Falabella and Banco Ripley. Although these banks had a combined market share (excluding operations of subsidiaries abroad) of only 2.3% as of December 31, 2021, according to the CMF, the presence of these banks is likely to make consumer banking more competitive over the next few years, especially within the lower income segment. As of December 31, 2021, consumer loans granted by Banco Falabella and Banco Ripley represented 13.4% and 3.1%, respectively, of the total consumer loans rendered by the industry (excluding operations of subsidiaries abroad).
In the wholesale market, we believe our strongest competitors are also Banco Santander—Chile, BCI, Itaú-Corpbanca and Scotiabank Chile. Similarly, we believe these banks are our most significant competitors in the small and medium sized companies’ business segment.
We also compete, mainly through our subsidiaries, with companies that offer non-banking specialized financial services in the high-income individuals segment and the middle market and corporate segment such as Larrain Vial, BTG Pactual, Moneda Asset and CrediCorp (formerly IM Trust), whose core businesses are stock brokerage, financial advisory and wealth management services. Other Chilean commercial banks also compete in these markets of specialized financial services, but they are less focused on such businesses.
The Chilean banking industry has experienced increased levels of competition in recent years from domestic as well as foreign banks. This phenomenon has triggered a consolidation wave within the industry and the creation of more comprehensive banking entities that participate in most of our markets. Consequently, banks’ strategies have been increasingly focused on reducing costs and improving efficiency standards in order to compete effectively with the larger banks. Although we are making our best efforts in order to operate within this competitive environment, we acknowledge that our income may decrease as a result of increasing competition.
Mergers and Acquisitions
Regarding mergers and acquisitions events in the local banking industry, most of these transactions have involved international players seeking to participate in the local market.
In recent years, for example, in 2013 Corpbanca’s controlling shareholders announced their intention to sell part of their stake to a local or international player. On January 29, 2014, Corpgroup (the controlling shareholder of Corpbanca) accepted the bid of Brazil’s Itaú Unibanco, through which Itau merged its own Chilean and Colombian subsidiaries with Corpbanca. The merger was approved by the former SBIF in September 2015 and Banco Itaú Chile became Banco Itaú-Corpbanca. The merged company started operations on April 1, 2016. As of December 31, 2021, the merged bank, which adopted the brand name Banco Itaú Corpbanca, had a 9.8% market share, excluding operations of subsidiaries abroad.
In addition, consolidation and overseas expansion has emerged as a means of inorganic growth for local banks. For example, in 2012, Corpbanca, ranked fourth among Chilean private sector banks in terms of total loans as of December 31, 2011, acquired a former Santander Group’s subsidiary in Colombia and consolidated its balance sheet and results of operations beginning May 31, 2012. Also, by the end of 2012, Corpbanca made a bid for acquiring Helm Bank in Colombia. According to publicly available information, the bid process was completed and fully authorized by the former SBIF in July 2013 and Corpbanca started to consolidate the balance sheet of this new subsidiary beginning August 31, 2013. Given the merger between Banco Itaú Chile and Corpbanca in 2016, assets held by former Corpbanca subsidiaries in Colombia were integrated into the merged bank. Hence, as of December 31, 2021, loans associated with Banco Itaú-Corpbanca’s operations in Colombia amounted to Ch$4,773,752 million and represented 2.1% of the industry’s total loans.
Similarly, by the end of May 2013, BCI—the third largest private sector bank in Chile in terms of total loans as of December 31, 2021, with a 14.3% market share (excluding operations of subsidiaries abroad)—announced the acquisition of the City National Bank (CNB), headquartered in the United States. According to public information published by the former SBIF, the process was fully authorized and completed in October 2015. BCI started to consolidate the balance sheet on the same date. Furthermore, in December 2017, BCI—through CNB—announced its intention to acquire the 100% of Totalbank (based in the United States) shares from Banco Santander for an amount of approximately U.S.$530 million. This acquisition was formally completed in June 2018, resulting in BCI recording a notable increase in its international presence in terms of total loans. As of December 31, 2021, loans associated with BCI’s operation in the United States amounted to Ch$11,637,496 million and represented 5.3% of the industry’s total loans.
On December 5, 2017, it was publicly announced that BBVA formally accepted Scotiabank Chile’s bid to acquire 68.2% of BBVA Chile shares for an amount of approximately U.S.$2,200 million. In January 2018, Scotiabank requested the former SBIF’s authorization for this transaction, which was granted in March 2018. The merger was completed in September 2018 after receiving the approval of the former SBIF at the end of August 2018. As of December 31, 2021, the market share of the merged bank in terms of total loans was 14.1%, excluding foreign subsidiaries.
In addition, in recent years, some of our banking competitors have acquired the lending business of certain non-banking credit card issuers, primarily related to credit cards, as permitted by the Chilean regulator since 2018. For example, on December 19, 2017, BCI agreed to acquire Walmart Chile Servicios Financieros for an amount of approximately U.S.$148 million. Walmart Chile Servicios Financieros managed two types of credit cards and had approximately 1.4 million credit card holders. The former SBIF approved this acquisition in November 2018. Similarly, on May 31, 2018, Promotora CMR Falabella S.A. merged into Banco Falabella. By means of this acquisition, Banco Fallabella added approximately 1.2 million credit account holders. The former SBIF approved this transaction in October 2018 and the integration process was fully completed in December 2018. As a result, as of December 31, 2018, Banco Falabella became the largest bank in Chile in terms of issued credit cards.
On March 27, 2019 Banco Santander Chile announced that it had entered into an agreement with SKBergé Financiera S.A. to acquire a 49% of the ownership of Santander Consumer Chile S.A. for an amount of approximately Ch$59,063.5 million. Furthermore, on August 27, 2019, Banco Santander Chile’s controlling shareholders agreed at an extraordinary meeting to purchase an additional 2% of the ownership of Santander Consumer Chile S.A. for approximately Ch$3,100 million from Banco Santander S.A. (Spain), which is its parent company. Both transactions were approved by the CMF on November 15, 2019. The equity sale was completed on November 28, 2019. As a result of this transaction (51% equity shares of Santander Consumer Chile S.A), Banco Santander Chile entered into the auto-finance business and, since December 2019, has consolidated its balance sheet and results of operations into the bank. According to Banco Santander Chile, Ch$451 billion of consumer loans were added to its loan book as a result of this transaction.
In 2021, there were no changes in the industry’s composition.
Changes in Banking Players
During 2014 the Chilean banking industry witnessed the entry of new market players and changes in the ownership structure of certain competitors. By the end of August 2014, Banco International announced the intention of Inversiones la Construcción (“ILC”) to take control of the bank by acquiring a 50.1% stake from the controlling shareholder, “Baninter”. Banco Internacional is a small bank within the Chilean banking industry and is mostly focused on the wholesale banking segment. As of December 31, 2021, Banco Internacional’s loan book represented 1.1% of the total outstanding loans of the industry (excluding operations of subsidiaries abroad).
Furthermore, on May 30, 2014, the former SBIF authorized the existence and approved the bylaws of “Banco BTG Pactual Chile.” This bank, a Chilean subsidiary of Brazil-based bank BTG Pactual, was already operating in the Chilean financial industry since 2012, providing stock brokerage, mutual funds management and investment banking services. Banco BTG Pactual Chile received the final authorization to operate as a commercial bank on December 31, 2014 and officially started its commercial operations on January 23, 2015. As of December 31, 2021, the loan book of Banco BTG Pactual Chile represented only 0.7% of the total outstanding loans of the industry (excluding operations of subsidiaries abroad).
In 2016, Deutsche Bank Chile closed its operations in many Latin American countries including Chile. Deutsche Bank’s participation in the Chilean Banking industry accounted for 0.5% in terms of total assets as of December 31, 2015. Similarly, in 2018, the former SBIF approved Banco de la Nación Argentina’s request to close its business in Chile.
On the other hand, it is worth noting that since 2014 two Chinese banks have requested SBIF authorizations for starting operations in Chile. In May 2016, the China Construction Bank Corporation received final approval from the former SBIF to open a branch in Chile under the brand name “China Construction Bank, Agencia en Chile”. This was the first branch established by this bank in Latin America. Similarly, in November 2016, the Bank of China received provisional authorization and installation authorization from the former SBIF to open a branch in Chile under the brand name “Bank of China Limited”. Finally, on March 13, 2018 the former SBIF definitively authorized Bank of China to start operations in Chile under the brand name “Bank of China Limited”.
In March 2019, the Bank of Tokyo-Mitsubishi UFJ (“MUFG Bank, Ltd.”) informed the Chilean regulatory authorities that it would be ceasing its banking activities after 38 years of operation in Chile. According to the company, the decision was made for strategic reasons.
In December 2021, the CMF approved the termination of the banking license of Banco do Brasil S.A.’s business in Chile as requested by the bank in May 2021. Banco do Brasil S.A. had presence in the local banking industry since 1963, ending 58 years of operation in Chile.
We expect these trends of increasing competition and consolidation to continue, particularly in connection with the formation of new large financial groups and the creation of new niche banks. Although we believe that we are currently large enough to compete effectively in all of our target markets, any further consolidation in the Chilean financial services industry may adversely affect our competitive position. We are working on developing and enhancing our competitive strengths to ensure our sustainability.
Below there is a set of tables and figures for the years ended December 31, 2019, 2020 and 2021 that show our position within the Chilean financial industry. The market information is set forth under Chilean GAAP as published by the CMF and—unless otherwise indicated—excludes data related to operations of subsidiaries abroad.
The following table sets forth certain statistical information on the Chilean financial system as of December 31, 2021, according to information published by the CMF under Chilean GAAP:
|As of December 31, 2021|
|(in millions of Ch$, except percentages)|
|Private sector banks||Ch$||307,867,306||85.2||%||Ch$||176,439,887||86.2||%||Ch$||128,501,487||79.9||%||Ch$||22,549,027||91.0||%|
|Banco del Estado||53,586,003||14.8||28,258,859||13.8||32,278,607||20.1||2,237,907||9.0|
|Total banking system||Ch$|
|(1)||Loans to customers. Interbank loans are not included.|
|(2)||Excludes operations of subsidiaries abroad.|
|(3)||For purposes of this table, equity includes capital and reserves, net income for the period and provisions for minimum dividends.|
Loans and Deposits
We had total loans of Ch$34,256,184 million as of December 31, 2021, according to information published by the CMF under Chilean GAAP. The following table sets forth our market share and the market share of our principal private sector competitors in terms of total loans, as of the dates indicated, according to information published by the CMF under Chilean GAAP:
|As of December 31,|
|Banco de Chile||16.5||16.6||16.7|
|Banco de Crédito e Inversiones||14.0||14.3||14.3|
|Total market share||72.6||%||72.9||%||72.9||%|
|(1)||Allowances for loan losses not deducted.|
|(2)||Excludes operations of subsidiaries abroad.|
We had total deposits (including demand deposits and time deposits) of Ch$27,682,797 million as of December 31, 2021, according to information published by the CMF under Chilean GAAP. The following table sets forth the market shares in terms of total deposits for private banks as of December 31, 2019, 2020 and 2021 on a consolidated basis, according to information published by the CMF under Chilean GAAP:
|As of December 31,|
|Banco de Chile||15.9||16.1||17.2|
|Banco de Crédito e Inversiones||13.4||13.3||14.2|
|Total market share||66.6||%||66.0||%||67.6||%|
|(1)||Excludes operations of subsidiaries abroad.|
We had demand deposits of Ch$18,542,791 million as of December 31, 2021, according to information published by the CMF under Chilean GAAP. The following table sets forth the market shares in terms of demand deposits for private banks as of the dates indicated, on a consolidated basis, according to information published by the CMF under Chilean GAAP:
|As of December 31,|
|Banco de Chile||22.6||%||20.8||%||21.6||%|
|Banco de Crédito e Inversiones||13.3||13.5||14.6|
|Total market share||71.6||%||69.0||%||71.0||%|
|(1)||Excludes operations of subsidiaries abroad.|
We had time deposits of Ch$9,140,006 million as of December 31, 2021, according to information published by the CMF under Chilean GAAP. The following table sets forth the market shares in terms of time deposits for private banks as of the dates indicated, on a consolidated basis, according to information published by the CMF under Chilean GAAP:
|As of December 31,|
|Banco de Crédito e Inversiones||13.4||%||13.2||%||13.7||%|
|Banco de Chile||12.2||11.6||12.2|
|Total market share||63.8||%||63.1||%||63.6||%|
|(1)||Excludes operations of subsidiaries abroad.|
Credit Quality and Risk Management
The following table sets forth the ratio of allowances to total loans of the largest private banks in Chile and of the Chilean financial system as a whole (including such banks) as of December 31, 2019, 2020 and 2021, according to information published by the CMF under Chilean GAAP:
Allowances to Total Loans(1)
|As of December 31,|
|Banco de Crédito e Inversiones||1.97||2.22||1.84|
|Banco de Chile||2.28||2.41||2.10|
|(1)||Includes operations of subsidiaries abroad.|
The following table sets forth the ratio of past-due loans (90 days or more) over total loans for the largest private banks in Chile as of December 31, 2019, 2020 and 2021 on an individual basis, according to information published by the CMF under Chilean GAAP:
Past-due loans to Total Loans(1)
|As of December 31,|
|Banco de Crédito e Inversiones||1.36||%||1.18||%||0.84||%|
|Banco de Chile||1.39||0.97||0.85|
|(1)||Past-due loans refer to loans 90 days or more past due, including installments that are overdue and the remaining amount of principal and interest.|
The following table sets forth the amount of additional allowances established (under Chilean GAAP) by the largest private Chilean banks as of the dates indicated, according to information published by the CMF under Chilean GAAP:
Additional Allowances (1)
|As of December 31,|
|Banco de Chile||Ch$||213,252||Ch$||320,252||Ch$||540,252|
|Banco de Crédito e Inversiones||16,692||160,176||350,143|
|(1)||Includes operations of subsidiaries abroad.|
|a.||Capital and Reserves|
The following table sets forth year-end balances of capital and reserves for the largest private banks in Chile as of December 31, 2019, 2020 and 2021 according to information published by the CMF under Chilean GAAP:
Capital and Reserves(1)(2)
|As of December 31,|
|Banco de Crédito e Inversiones||Ch$||3,510,669||Ch$||3,672,487||Ch$||4,137,202|
|Banco de Chile||3,235,676||3,483,431||3,753,989|
|Banco Santander - Chile||3,083,852||3,290,386||2,957,104|
|(1)||Capital and Reserves equals to total equity before provisions for minimum dividends and net income for the period.|
|(2)||Includes operations of subsidiaries abroad.|
The following table sets forth balances of average equity for the largest private banks in Chile as of the dates indicated, according to information published by the CMF under Chilean GAAP:
Average Equity (1)(2)
|As of December 31,|
|Banco de Crédito e Inversiones||Ch$||3,609,822||Ch$||3,950,221||Ch$||4,131,897|
|Banco de Chile||3,388,347||3,615,816||3,940,116|
|Banco Santander - Chile||3,346,831||3,645,803||3,490,776|
|(1)||Includes operations of subsidiaries abroad.|
|(2)||Average total equity for the year ended December 31, 2019, 2020 and 2021.|
The following table sets forth the BIS ratios of the largest private Chilean banks as of the dates indicated, according to information published by the CMF:
BIS Ratios (1)
|Year Ended December 31,|
|Banco de Chile||14.1||%||16.0||%||17.3||%|
|Banco de Crédito e Inversiones||12.0||13.4||13.5|
|(1)||Total Capital or Regulatory Capital divided by Risk Weighted Assets (RWA). Figures for December 2020 consider a transition to Basel III as established by the CMF while figures for 2021 consider the first application of Basel III by considering risk weighted assets for credit, market and operational risk.|
The following table sets forth the CET1 ratios of the largest private Chilean banks as of the dates indicated, according to information published by the CMF under Chilean GAAP:
CET1 Ratios (1)
|Year Ended December 31,|
|Banco de Chile||10.9||%||12.2||%||13.0||%|
|Banco de Crédito e Inversiones||10.1||10.9||10.0|
|(1)||CET1 Capital divided by Risk Weighted Assets (RWA). Figures since December 2020 consider a transition to Basel III as established by the CMF, while figures for 2021 consider the first application of Basel III by considering risk weighted assets for credit, market and operational risk.|
Operating Revenue Generation
|a.||Net Income attributable to equity holders|
The following table sets forth the market shares in net income attributable to equity holders for private sector banks as of December 31, 2019, 2020 and 2021, according to information published by the CMF under Chilean GAAP:
|Year Ended December 31,|
|Banco de Chile||23.4||%||39.3||%||21.4||%|
|Banco de Crédito e Inversiones||15.9||26.9||14.1|
|Total Market Share||76.1||%||54.9||%||75.4||%|
|(1)||Includes operations of subsidiaries abroad.|
The following table sets forth the market shares in terms of operating revenues for private banks as of December 31, 2019, 2020 and 2021, on a consolidated basis, according to information published by the CMF under Chilean GAAP:
|Year Ended December 31,|
|Banco de Chile||16.9||16.3||16.8|
|Banco de Crédito e Inversiones||15.9||17.1||16.3|
|Total Market Share||70.1||%||70.4||%||70.8||%|
|(1)||Includes operations of subsidiaries abroad.|
|c.||Fees and Commissions|
The following table sets forth the market shares in terms of revenues coming from fees and commissions for private banks as of the dates indicated, on a consolidated basis, according to information published by the CMF under Chilean GAAP:
Fees and Commissions (1)
|Year Ended December 31,|
|Banco de Chile||21.6||%||22.5||%||20.3||%|
|Banco de Crédito e Inversiones||16.6||17.0||15.4|
|Total Market Share||69.9||%||69.2||%||65.9||%|
|(1)||Includes operations of subsidiaries abroad.|
The following table sets forth the operating margins for private banks as of December 31, 2019, 2020 and 2021, on a consolidated basis, according to information published by the CMF under Chilean GAAP:
|Year Ended December 31,|
|Banco de Chile||5.7||%||5.6||%||5.3||%|