UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
OR
For the fiscal year ended
OR
OR
Date of event requiring this shell company report
For the transition period from to
Commission file number
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(Exact name of Registrant as specified in its charter) |
Bank of Chile |
(Translation of Registrant’s name into English) |
Republic of Chile |
(Jurisdiction of incorporation or organization) |
Banco de Chile |
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(Address of principal executive offices) |
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(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.
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
American Depositary Shares, each representing 200 shares of common stock, without nominal (par) value (“ADSs”)
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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.
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(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:
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. ☒
If this report is an annual or transition
report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. ☐ Yes ☒
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate 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 Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Accelerated filer ☐ | Non-accelerated filer ☐ | Emerging growth company |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on
and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☐ | ☒ | Other ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ☐ Yes ☐ No
TABLE OF CONTENTS
i
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. |
● | Stricter banking regulations, particularly with regards to capital adequacy, liquidity, credit risk provisioning, consumer protection, and bankruptcy may constrain our operations and thereby adversely affect our financial condition and results of operations. |
● | Changes in tax law could adversely affect our net income and could also result in higher taxes on distributions to our foreign shareholders. |
● | 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. |
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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. |
● | 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. |
● | There are various financial and non-financial risks associated with climate change which could impact macroeconomic variables in Chile and manifest themselves differently across our risk categories in the short, medium and long terms. Physical risks from climate change include acute risks as well as consequences of chronic changes in climate. These could have adverse financial, operational and other impacts on us, both directly on our business and operations, and indirectly as a result of impacts to our customers, suppliers and other counterparties. Additionally, transition risks may arise from changes in regulations or market preferences toward low-carbon industries or sectors, which in turn could have negative impacts on asset valuation, our results of operations or our reputation. |
● | 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 laws and the pension and health system may increase uncertainty, costs and risk related to certain customers. Therefore, reforms to labor, health and pension laws as well as labor strikes or slowdowns could adversely affect our results of operations. |
● | 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 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. |
iii
FORWARD-LOOKING STATEMENTS
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 costs; |
● | 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 COVID-19 (“COVID-19”) pandemic; |
● | 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.
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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 2020, 2021 and 2022 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, 2022 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 Comisión para el Mercado Financiero (“Financial Market Commission” or “CMF”). 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.
During 2022, certain changes were introduced to the accounting plan, both in the coding and in the description of some line-tems. These changes pursue to improve the quality of financial information in order to facilitate the readability, understanding and comparability of the financial statements, along with providing the market stakeholders with more detailed information. These changes also ensure that the financial statements comply with the standards of IAS 1 and other applicable accounting standards. The main reclassifications in the Consolidated Balance sheet were: (i) assets and liabilities associated with “Derivative instruments” were separated into “Derivative financial instruments” and “Derivative Financial Instruments for hedging purposes”, (ii) debt financial instruments and mutual funds were reclassified from “Financial assets held-for-trading” to “Financial assets held-for-trading at fair value through profit or loss”, (iii) assets received in lieu of payment were reclassified from “Other assets” to “Non-current assets and disposal groups held for sale”, (iv) investment in properties were reclassified from “Investment properties” to “Other assets”, (v) short sales of shares were reclassified from “Obligations under repurchase agreements” to “Financial liabilities at amortized cost”, (vi) subordinated bonds were reclassified from “Debt financial instruments issued” to “Regulatory capital financial instruments”, (vii) goods for leasing were reclassified from “Other financial obligations” to “Other liabilities”, and (viii) provisions related to our loyalty program were reclassified from “Other Liabilities” to “Other provisions”. Likewise, in the Consolidated Income Statement, reclassifications were associated with: (i) income from investments in associates and other companies were reclassified from “Income attributable to associates” to “Operating income”, (ii) expenses for assets received in lieu of payment and income from sale of noncurrent assets were reclassified from “Other operating expenses” and “Other Operating income” to “Result from non-current assets and disposal groups held for sale not admissible as discontinued operations”, and (iii) income for recovery of expenses for credit operations of financial leasing and other operational risk events were reclassified from “Other operating income” to “Other Operating expenses”. For more information see Note 4 to our audited consolidated financial statements as of and for the year ended December 31, 2022 appearing elsewhere in this annual report.
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, 2022 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, 2022 and April 19, 2023, one UF equaled Ch$35,110.98 and Ch$35,695.08, respectively.
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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, 2022 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, 2022 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, 2022 (the latest practicable date) and April 19, 2023, the exchange rates of accounting representation were Ch$850.2 = U.S. $1.00 and Ch$794.28 = 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$859.51 = U.S.$1.00 and Ch$795.23 = 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 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. |
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These definitions for Total Capital or Regulatory Capital took effect on 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, 2022 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, 2022. 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.
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Part I
Item 1 Identity of Directors, Senior Management and Advisers
Not Applicable.
Item 2 Offer Statistics and Expected Timetable
Not Applicable.
Item 3 Key Information
RISK FACTORS
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 44 to our audited consolidated financial statements as of and for the year ended December 31, 2022 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 7.6% per year. This expansion has been primarily fostered by growth in both residential mortgage (8.8% per year on average) and commercial loans (7.8% per year on average) and, to a lesser extent, by a moderate growth in consumer loans (4.5% per year on average). Nominal average growth in residential mortgage loans has been a result of both the significant demand for housing in years preceding the pandemic, which receded significantly in the two most recent years due to the sharp increase in long-term interest rates and soaring inflation. Likewise, nominal average expansion in commercial loans has steadily decelerated over the last five years, particularly in the wholesale banking segment, firstly, due to the economic consequences of the COVID-19 pandemic and, additionally, due to the political and economic uncertainty that has reduced demand for commercial loans. Commercial loans granted to SMEs experienced an upward trend until 2019 as well as a reactivation in 2021, as a result of special government-guaranteed programs, to deal with the effects of the pandemic. However, given the prevailing economic outlook, loans to SMEs slowed down significantly in 2022, remaining almost flat. In the case of consumer loans, this lending business was significantly impacted by the effects of the pandemic, given several factors but particularly due to the liquidity surplus generated by financial support deployed by the Chilean government and congress. Accordingly, consumer loans contracted 12.9% in 2020. Thereafter, when liquidity began to decrease, the demand for loans reactivated, which coupled with our efforts to improve value offerings, resulted in expansions of 7.6% in 2021 and 17.6% in 2022. For the year ended December 31, 2022, our loan portfolio was Ch$36,726,297 million, which represented a 7.2% annual increase as compared to the Ch$34,265,873 million we recorded as of December 31, 2021. Our allowances for loans losses increased 22.0% on an annual basis from Ch$673,496 million in 2021 to Ch$821,609 million in 2022. Throughout 2022 we witnessed a normalization in expected credit losses, particularly among individuals and SMEs and, to a lesser extent, in the wholesale banking segment, from below-trend levels seen in 2021 supported by an extraordinary positive payment behavior that was the consequence of: (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, had injected approximately U.S.$52,643 million to the local economy as of March 31, 2023 according to the Chilean Superintendency of Pensions, and (iii) the improvement in unemployment figures as mobility restrictions began to be lifted. During 2022 the excess liquidity began to disappear, which coupled with the impact of both higher interest rates and, particularly, double-digit inflation that reached 12.8% (measured as CPI variation as reported by the National Institute of Statistics), reduced individuals’ disposable income and therefore payment capacity. These trends translated into higher probabilities of default and an increase in credit risk allowances. As a result, our risk-index ratio (allowances for loan losses to total loans) increased from 1.97% in 2021 to 2.24% in 2022.
1
Given these 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 unemployment 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.
Our results of operations depend on our ability to grow our loan portfolio in a credit-sustainable way. During the decade ending in 2013, the loan portfolio of the Chilean banking industry recorded double-digit growth, fostered by increased banking penetration of: (i) lower and middle income segments and (ii) small and medium-sized companies, which resulted in a marked expansion in consumer, mortgage and commercial loans. Since that time, loan growth has been more volatile reflecting increased volatility in the Chilean economy and diverse reforms on general matters, including both banking and non-banking rules. In 2020, the COVID-19 pandemic resulted in a GDP contraction of 6.1% 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 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 government support program of guaranteed loans for SMEs and middle market companies, which increased loans balances. Consumer loans, on the other hand, were substantially affected by the deteriorated macroeconomic scenario through lower disposable income and the deteriorated payment capacity of borrowers. In 2021, the local economy displayed a significant rebound, as reflected by GDP growth of 11.7%. This was principally prompted by a sharp increase of 20.8% in household consumption (supported by financial aid measures targeting people) and an expansion of 15.7% in private investment given the reactivation of projects postponed by the pandemic. In this context, the industry’s loan portfolio grew 10.1% in nominal terms, primarily driven by: (i) the real estate market continuing to be decoupled from economic fundamentals, (ii) the surge of loan balances indexed to UF as a result of higher inflation, and (iii) the effect of the government support program for SMEs launched in February 2021. All three of these factors positively impacted both residential mortgage loans and commercial loans, which increased 13.5% and 9.0% in nominal terms, respectively. To a lesser degree, higher than normal levels of household spending had a slight second-round effect on consumer loans, which increased 6.7%, mainly as a result of inflation.
In 2022 the Chilean economy displayed a sharp slowdown by recording a GDP growth of 2.4%, primarily as a consequence of the expected adjustment after a period of economic expansion prompted by non-recurrent factors seen in 2021, as mentioned above. This performance was caused by a significant deceleration of private consumption that grew only 2.9% on an annual basis, while private investment experienced a real annual increase of 2.8%. The local economic deceleration was also in part explained by the aggressive monetary policy tightening of the Chilean Central Bank, which raised the monetary policy interest rate from 4.00% in December 2021 to 11.25% in December 2022 in an attempt to control the highest inflation rate seen in almost three decades as reflected by a CPI variation of 12.8% as of December 31, 2022. In light of this economic environment, the industry’s loan portfolio grew 10.0% in nominal terms, which represents an annual contraction of 2.8% in real terms. The main underlying factors driving this trend were: (i) a real contraction of 5.7% in commercial loans, which is in line with the decrease evidenced by private investment, (ii) a steady deceleration of residential mortgage loans that grew by only 0.9% in real terms during 2022, primarily as a consequence of the prevailing scenario of higher long-term interest rates and inflation expectations that remained above the Central Bank’s target range for most of the year, coupled with stricter credit requirements set by most of the banks, including stricter loan–to–value ratios, higher monthly income, shorter financing terms and lower financial burden thresholds, and (iii) consumer loans that appeared to reactivate during the first half of 2022 but ended the year with a real expansion of only 0.4%, principally due to lower demand for loans from individuals as a result of declining consumer confidence in the face of a lackluster economic outlook, in conjunction with more prudent policies undertaken by many banking players.
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Going forward, many factors could adversely affect the growth rate of the industry and, therefore, the expansion of our loan portfolio. This includes, but is not limited to: (i) a slowdown or negative GDP growth in the Chilean economy, (ii) deceleration or contraction in household consumption or private investment spending, (iii) changes in banking customers’ payment behavior, (iv) changes in banking regulation, (v) deterioration of consumer confidence and business sentiment as a consequence of increased uncertainty regarding the economic activity or political environment, (vi) reforms to be introduced by the current administration in many fields of the economic system, including the pension, tax and health systems, among others, (vii) the new constitutional process, which, following the rejection of the first constitution draft in the referendum held on September 4, 2022, will be led by a convention comprised of citizens and experts chosen by the Congress, and which may negatively impact the economic and business environment, and (viii) 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.”
Stricter banking regulations and changes in law 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 the Basel III 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.
Impact of Basel III Implementation
In 2018, the Chilean Congress passed modifications to the General Banking Act in various sections by means of Law No. 21,130 that was enacted 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 (the implementation date was postponed from December 2020 to December 2021 in light of the impact that the COVID-19 pandemic had on the economy), (ii) introducing changes to the local regulator’s corporate governance by transferring powers formerly vested in the Superintendencia de Bancos e Instituciones Financieras de Chile (the “Superintendency of Banks and Financial Institutions” or “SBIF”) (the former banking supervisor) 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 regards to Basel III guidelines, 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 this framework. By December 2021, all the final rules related to Basel III had been issued by the CMF. However, 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.
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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 (“systemic 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.”
As of December 31, 2022 we were in full compliance of capital adequacy requirements as set forth by the following actual capital adequacy ratios:
Basel III Capital Ratio | Actual Ratio | |||
Leverage Ratio | 8.6 | % | ||
CET1 Ratio | 13.6 | |||
Tier 1 Ratio | 14.1 | |||
Total Capital Ratio | 17.9 | % |
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 would be subject to systemic buffers, which would be determined by means of the methodology defined by the CMF. On March 30, 2022 the CMF announced the systemic buffers for the six previously-determined 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% of risk-weighted assets on us, which is being 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. Accordingly, by December 2022 we were subject to a phased-in systemic buffer of 0.3125%. In addition, on December 19, 2022 the CMF announced the removal of the former requirement associated with Article 35 bis of the General Banking Act that was expected gradually decrease at a 25% rate per year beginning on December 1, 2021 while coexisting with the systemic buffer set under Basel III until November 30, 2024. Furthermore, on March 31, 2023 the CMF announced the systemic buffers that the systemically important banks must comply with, based on market data for the year ended December 31, 2022. In this announcement, the CMF reaffirmed the systemic buffer on us at the level of 1.25%, which is due to be completed on December 1, 2025, as mentioned earlier. Likewise, on January 13, 2023 we received confirmation from CMF that based on the overhaul of our Internal Capital Adequacy Assessment Process for the year ended December 31, 2021, no further capital requirements associated with Pillar 2 have been set for us.
Although based on these buffers 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.”
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Regarding banking resolution, on January 31, 2023 the CMF published a white paper “Guidelines for a new banking resolution framework and deposit insurance in Chile”. Through this document the Chilean regulator addresses the recommendations that arose from the assessment of the local financial system carried out by the International Monetary Fund and the World Bank during 2020 and 2021. In particular, the white paper describes the main legal and regulatory gaps of the current Chilean resolution regime when compared to international practices, while proposing the creation of a new agency, with financial and operating independence, in charge of both the administration and resolution of deposit insurance. In business-as-usual times, this entity should develop contingency and resolution plans for systemically-important banks. In times of crisis, this agency would be in charge of the resolution process. In addition, the paper proposes that systemically-important banks should comply with a loss absorption capital requirement of at least 1.0% of total assets in order to ensure an equity level that facilitates the stabilization scheme, including a bail-in mechanism. This capital requirement would be composed of hybrid instruments, such as perpetual bonds, similar to those computing as AT1 capital. This additional capital, however, would not be computed as part of the Total or Regulatory Capital for capital adequacy compliance, although if not fulfilled, restrictions to dividend distribution will apply for banks. Likewise, the paper discusses the key topics of an insurance deposit scheme, which should be funded by banks that apply for its use. Although the CMF has not proposed specific changes to the banking regulation in order to address these topics in the short-term, the paper was published for comment until July 31, 2023, since the local regulator expects this paper to be the basis for advancing in rule-making design that permits to ensure the continuity of critical financial services while enhancing the protection of depositors. Since the comment period is still open and no specific changes have been proposed yet we cannot assure you that the implementation of a new resolution framework will not have an impact on our profitability, since as a systemically-important bank we could be subject to further capital requirements if this or another framework is adopted by the Chilean regulator.
Regulatory Liquidity Requirements
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. Through amendments to Chapter III.B.2.1 of the Compendio de Normas Financieras (the Compendium of Financial Norms) on May 4, 2018 and March 8, 2022 the Central Bank set minimum requirements for both the LCR and the NSFR. Accordingly, the regulatory limit for LCR became 100% in June 2022 while the threshold for NSFR was also set at 100% although being phased-in over a four year period starting in June 2022 at 60% and increasing 10% on January 1 of each year until reaching 100% on January 1, 2026. Likewise, in the last amendment to the Chapter III.B.2.1 of the Compendio de Normas Financieras the Central Bank also: (i) removed the 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, and (ii) introduced specifications on the treatment of securities pledged as technical reserve (arising from demand deposits levels) in order to take them into account as high quality liquid assets. As part of the same amendment, the Central Bank established that banks are required to carry out an Internal Liquidity Adequacy Assessment Process (“ILAAP”). The final rules associated with ILAAP were published on January 16, 2023, based on which we have submitted our first ILAAP to the CMF in April 2023 as requested by the regulation. The possibility of imposing additional High Quality Liquid Assets (“HQLA”) requirements based on the information disclosed in the ILAAP will be in effect as of April 2025. As of December 31, 2022 our LCR and NSFR were 338% and 133%, respectively and we were in full compliance with the prevailing regulatory requirements. Regardless of the current levels of our main liquidity ratios, we cannot assure you that we will remain in compliance with regulatory requirements if, based on the ILAAP results, the regulator requires us to maintain greater amounts of HQLA. This could also lead us to acquire lower-margin financial instruments, which could have an adverse effect on results of operations and profitability.
Changes in Credit Risk Methodologies
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. These modifications did not have a material impact on our results of operations or financial condition either under Chilean GAAP or IFRS. More recently, on November 22, 2022 the CMF published for comment a standardized methodology to compute expected credit losses for consumer loans (including contingent loans) while allowing the use of guarantees in order to determine both the probability of default (“PD”) and the loss given default (“LGD”). Under the new method, the PD will depend on: (i) the borrowers’ indebtedness, (ii) the debtors’ borrowing trend in consumer loans, and (iii) the debtors’ overdue loans in both the bank and across the industry. In the case of the LGD, the value will depend on the level of renegotiated loans held by the debtor in the consumer loan portfolio. Before this change, expected credit losses for consumer loans (including contingent loans) were computed by using internal models developed by banks in order to estimate both the PD and the LGD for this loan portfolio. According to the CMF, the proposed method pursues to be prudential floor for internal models not approved by the CMF, although banks could use internal models as long as they comply with technical and theoretical requirements set by the CMF. Since final rules have not been released as of the date of this Annual Report, we cannot assure you that this change will not have a material impact on our results under Chilean GAAP, although it will not have any impact on our results of operations or financial condition under IFRS. Likewise, 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.
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New Legislation, Other Bills and Regulatory Guidelines affecting the Banking Business
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 increases liabilities of payment service providers (such as banks) in cases of fraudulent transactions in credit and debit cards, and in electronic funds transfers. This legislation has resulted in an increase in our liabilities towards customers due to digital fraud during recent years. 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 legislation. For further information on the obligations and liabilities imposed by, and characteristics of, this 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, 2020, 2021 and 2022—Operating Expenses”.
Law No. 21,314, which passed in 2021, among other matters, sets new rules on the application of interests and fees in relation to certain loan products. Some of the modifications introduced by this law include: (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 must enact specific regulations addressing the extent to which fees or and/or commissions may be charged on credit transactions. These ancillary regulations were issued in August 2022 but will enter into force in August 2023. Generally, these new regulations limit our ability to charge and earn certain fees or commissions on certain credits and loan products. We are reviewing and assessing how these limitations should affect the current fees or commissions charged on certain products, and determining which fees and commissions should be revised, or, if needed, eliminated. Therefore, we cannot yet determine the extent of the negative effect it will have on our results of operations.
In December 2021, Law No. 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 includes further ancillary regulation that is still pending to be implemented and/or issued, 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 introduced in recent years that are being discussed in the Chilean Congress that would modify matters related to loans and credit products, such as interest rate ceilings, prepayment fees and the possibility of capitalizing interests 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. These bills introduced during recent years, if enacted, may increase the costs of our consumer loan and mortgage products by setting higher mandatory protections for customers.
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Another pending 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. 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. Further, a bill introduced at the end of 2022 proposes to eliminate information on debtors’ behavior that occurred before the last five years, thereby limiting the available information to properly assess and evaluate the credit risks of a broad customer base. In addition, a bill presented in congress by a group of members of the parliament at the end of March 2023 precludes certain service providers from charging and indexing installments and bills to UF (inflation indexed), which in the case of banks would relate to mortgage loans granted to personal and SME banking customers. If enacted, such laws may limit the effectiveness of our credit evaluation process and the due diligence we perform over potential customers, may generate mismatches between assets and liabilities denominated in UF, as well as our asset quality, and require us to increase provisions for expected credit losses. Another bill that is currently being discussed in Congress proposes a new framework for data privacy protection, raising the standards and obligations of an array of service providers, such as banks, on that matter. This could require changes in our current procedures in order to duly comply with these standards of data privacy protection, which, in turn, may affect our results of operations if enacted.
Some of these bills are currently in the early or middle stages in the Chilean Congress, and some of them have been under discussion for several years, and 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.
Law No. 21,389, which creates an alimony debtor registry, came into effect in November 2022. This law requires banks and other financial service providers to retain amounts of credits granted to debtors that are registered in such registry, for the purpose of paying overdue alimonies. It further imposes fines on banks and financial institutions that do not consult the registry and do not withhold the amount specified. These fines amount to twice the money the bank should have withheld. Since the adoption of this law is recent, we still cannot determine or assure you whether they will affect our business due to several operational capabilities that this legislation requires from us.
Law No. 21,365 was enacted in 2021, regulating interchange fees in the payment cards 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 one appointed by each of the following institutions: The Central Bank; the CMF; the Office of National Economic Prosecution (Fiscalía Nacional Económica); and the Ministry of Finance. This committee had 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 new preliminary 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. On February 22, 2023 the technical committee determined the definitive scheme that will be applicable in Chile by defining a maximum interchange fee of 0.35% for debit cards and 0.80% for credit and prepaid cards. These new limits are to be in force in six months after their publishing in the Official Gazette, however the imposition of these new limits are still pending as the publication of the committee’s resolution was contested in court by other financial market players, and from that date current limits will converge to the new ones during a phase-in period that will take 18 months. Although we believe the transitory limits published in February 2023 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 assure you whether this new regulation will have a negative impact on the banking industry and on our results of operations in the long term or not. 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.”
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Enhanced ESG and climate change disclosure may impose additional costs on our bank.
In recent years, various 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. On October 4, 2022 the CMF published guidelines for the implementation and supervision of sustainability standards by means of section 8.2 of Norma de Carácter General N°461, which is aimed at improving the quality of information released by Chilean companies on sustainability and corporate governance matters on their annual report, which are in accordance with the guidelines of the Sustainable Accounting Standards Board. These new rules will be mandatory for banks from 2025 (fiscal year 2024) onwards. However, in our last annual report delivered in February 2023, we voluntarily complied with most of the standards and regulations required under these new rules due to the strategies, policies and procedures that we have developed and implemented during recent years. However, we cannot rule out that the adoption of new guidelines and regulations on ESG matters 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 in the future that we cannot predict now, given the still-developing and evolving regulatory environment related to ESG matters.
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, under Basel III, 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. The ability to set this additional requirement is within the purview of the CMF, although the decision to impose such additional requirements 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 31, 2023 the CMF announced the systemic buffers that must be complied with by the systemically important banks, based on market data for the year ended December 31, 2022. In summary, the CMF reaffirmed the systemic buffer on us at the level of 1.25%, which is due to be completed on December 1, 2025. As of the date of this annual report, we have not, however, 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—Stricter banking regulations and changes in law 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.
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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.
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 a number of alternative marketplaces that set and provide offerings, including temporary financing, directly to their customers or providers. These new ways of doing business are based on the disintermediation of traditional banking service providers. Accordingly, these providers represent a challenge for the traditional banking industry that may result in lowered margins in the future. 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, if any, as banks generally are. Therefore, these providers represent a challenge for the traditional banking industry that may result in lowered margins in the future. Notably, in order to address these kinds of businesses, Law No. 21,521 was enacted in January 2023 with the aim of establishing a general framework for financial services provided through technological means (including banks) in order to protect financial customers and data privacy while preserving financial stability and strengthening anti money-laundering. 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 digital payment or savings 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. In this context, competitors could adapt faster than us to these new trends, which could lead to a temporary competitive disadvantage that could translate into lower revenues or a reduced ability to raise funding from retail depositors. Since we are aware of these new trends, we have devoted efforts to adapt our organization in pursuit of enhanced flexibility to face new challenges while looking for business and technological partnerships in order to take advantage of business opportunities arising in the market while keeping our value offerings adapted to new customers’ needs. As such, we have continued to deploy our digital strategy to offer tailored services and products to customers from different income and age segments by leveraging our strategic capabilities, entering into alliances with other banking and non-banking providers, developing innovative digital solutions, and reinforcing benefits from using our payment and savings systems. 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.
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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.
Further, following the new rules issued in recent 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 market players. As of the date of this Annual Report, a significant part of transaction processing services continued to be provided in Chile by Transbank S.A., a company owned by us and ten other banks (of which we held a 26.16% direct ownership as of December 31, 2022), whereas some competitors have already begun to implement the new four-party model for their own business. A technical committee is responsible for determining the maximum interchange fees that may be charged by credit card issuers (like banks, including us) to companies that provide merchant acquiring services. Since the beginning of its functioning the technical committee has reduced the maximum interchange fees twice, which results in lower fee income for banks. For more information see Item 3. Key Information–Risk Factors–Risks Relating to our Operations and the Chilean Banking Industry–Stricter banking regulations and changes in law may constrain our operations and thereby adversely affect our financial condition and results of operations–Other Bills and Regulatory Guidelines affecting the Banking Business. On January 23, 2023 the Chilean Association of Banks and Financial Institutions (“ABIF”) announced the willingness of banks participating in the ownership of Transbank S.A. to relinquish part or total control of the company in order to promote the implementation of the four-party model across the financial system and also provided that three of the current owners (excluding us) have already developed their own acquiring companies. Based on these dynamics, net interest margins (once deducted provisions for loan losses) or fee-based income in these sub-segments could decline over time.
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 61.5% in 2017 to 62.6% in 2022. 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 13.6% of our total loan book as of December 31, 2022, which consists of companies with annual sales of up to ~UF 70,000 million (~Ch$2,460 million) and, to a much lesser extent, of lower-income individuals (approximately 1.9% of our total loan book as of December 31, 2022, which consists of individuals with monthly incomes of up 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, 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, 2022, our past-due loans (loans 90-days or more past due) amounted to Ch$432,697 million, which represented a 40.6% annual increase when compared to the Ch$307,696 million recorded in 2021. These figures translated into past-due ratios (loans 90-days or more past due over total loans) of 0.90% in 2021 and 1.18% in 2022. According to our management information systems, as of December 31, 2022 our past-due loans (loans 90-days or more past due) were composed of 88.4% 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 11.6% 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 82.7% retail banking past-due loans (90 days or more) and 17.3% wholesale banking past-due loans (90 days or more).
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Diverse economic and business dynamics contributed to the increase in both the amount of past-due loans and our past-due loans ratio in 2022 when compared to 2021. In the case of past-due loans (loans 90 days or more past due), we experienced an annual increase of approximately Ch$125,001 million in the retail banking segment that was partly offset by a decrease of Ch$4,372 million in the wholesale banking segment, in each case, as compared to 2021. The increase in the retail banking segment was primarily supported by the normalization of customers’ payment behavior after a period of non-recurrent factors particularly associated with the excess of liquidity seen in the economy during 2021 associated with pension fund withdrawals and government aid packages to support individuals, which increased disposable income throughout 2021. During that period, these factors temporarily benefited the payment behavior in both consumer and mortgage loans. During 2022, however, as the liquidity surplus began to decrease, consumer and residential mortgages past-due loans (loans 90 days or more past due) increased Ch$49,998 million and Ch$23,258 million on an annual basis, respectively. Likewise, SMEs past-due loans (loans 90 days or more past due) also increased Ch$51,745 million in 2022 when compared to 2021. This was primarily due to the low comparison base created in large part by the government-guaranteed loan program (Fogape–Reactiva), which was released in 2021 to support SME in the context of the COVID-19 pandemic. Instead, the wholesale banking segment recorded a decrease of Ch$4,372 million in commercial past-due loans (loans 90 days or more past due), a consequence of improved business conditions for companies, as mobility and commercial activity has returned to normal levels, benefiting companies’ results and credit behavior. As a result, past-due ratios (90 days or more past-due loans over total loans) increased from 1.00% in 2021 to 1.37% in 2022 in the retail banking segment while decreasing from 0.48% in 2021 to 0.41% in 2022 in the wholesale banking segment.
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 some or all these developments materialize 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 72.1% of our total operating revenues in 2022. 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.
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The average annual short-term nominal interest rate in Chile for 90 to 360 day deposits received by Chilean financial institutions was 0.86% in 2020, 1.71% in 2021, and 9.25% in 2022 (11.12% in December 2022) following the trend seen in the monetary policy interest rate, given the attempts of the Chilean Central Bank to return inflation to the medium term target range of 2.0% to 4.0%, which resulted in a monetary policy rate increasing from 4.00% in December 2021 to 11.25% in December 2022. For the same reason, the average interest rate paid by Chilean financial institutions for 90 to 360 days Chilean peso denominated deposits was 10.98% as of the three-month period ended on March 31, 2023. The average long-term nominal interest rate based on the interest rate of the ten-year bonds traded in the secondary market, issued by both the Central Bank and the Chilean Government, was 2.80% in 2020, 4.36% in 2021, and 6.26% in 2022. In 2022, long-term nominal interest rates continued to steadily increase in Chile during the first three quarters, based on various factors, including: (i) expectations of higher inflation, (ii) the uncertainty associated with the outcome of the constitutional referendum held on September 4, 2022, and (iii) various attempts coming from the Congress to approve further pension funds withdrawals. However, during the fourth quarter of the year, with 12-month inflation rates beginning to ease and the result of the constitutional referendum, longer term interest rates declined significantly. Accordingly, the interest rate of ten-year Chilean peso denominated bonds, issued by both the Central Bank and the Chilean Government, slightly decreased from 5.69% in December 2021 to 5.34% in December 2022, reaching 5.52% in March 2023. In the three-month period ended on March 31, 2023, the interest rate for the same Central Bank and Chilean Government bonds averaged 5.52%.
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 2023 was:
Year | Inflation (CPI Variation) | |||
2018 | 2.6 | % | ||
2019 | 3.0 | |||
2020 | 3.0 | |||
2021 | 7.2 | |||
2022 | 12.8 | |||
2023 (through March 31) | 1.8 | % |
Source: Chilean National Institute of Statistics
During 2022, the inflation rate, measured as CPI variation, was 12.8%. This annual increase was the consequence of many factors, although the sharp increase in household consumption in 2021 that began to decelerate during 2022, 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 energy prices worldwide, (ii) the constraints experienced in the global supply chain that translated into an overall increase in external prices, and (iii) the depreciation experienced by the Chilean peso against the U.S. dollar during most of 2022, particularly in months surrounding the constitutional referendum, when the U.S. dollar reached a highest all-time level of Ch$1.051 per U.S. dollar, which has a pass-through effect associated with the translation of imported tradable 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 associated with both an economic hedge of our equity and directional positions taken by our treasury), significant and persistent increases or decreases in inflation with respect to current levels or the target set by the Central Bank could adversely affect our net interest income, results of operations and, therefore, the value of our securities and medium-term profitability.
Additionally, measures being taken by the Central Bank to control inflation are having the effect of slowing down the Chilean economy and additional measures 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 2022, the Central Bank increased the monetary policy rate from 4.00% in December 2021 to 11.25% in December 2022. In the last meeting held in December 2022, the Central Bank pointed out that based on recent data, inflation is expected to decrease throughout 2023, which leaves room to reduce the monetary policy interest rate as long as the decreasing trend in inflation becomes steady. Nevertheless, as of the date of this annual report, the monetary policy interest rate remains at 11.25%. Since our liabilities generally re-price faster than our assets, sudden and sequential increases in short-term rates could affect our net interest margin.
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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.”
Our loan portfolio is subject to risk of prepayment, which could have an adverse effect on our results of operations.
Most of our loan portfolio is subject to risk of prepayment, which is associated with the borrowers’ or issuers’ ability to pay off an obligation prior to the maturity. Prepayment risk increases when interest rates decline, which could result in unexpected repricing of our assets that may have a material adverse effect on us if we are not able to reprice our liabilities. In the past, prepayment risk has had an adverse impact on credit card loans and residential mortgage loans by reducing the average life of these assets, which may result in mismatches with liabilities used to finance them that could be just partly offset by investment choices at lower interest rates or prepayment fees charged to borrowers. In this regard, the Chilean government is currently assessing limiting prepayment fees, which could have a negative effect on our results in an amount that we are not able to estimate yet. Accordingly, we cannot assure you that this initiative or any future changes related to prepayment fees or a decline in interest rates to the levels seen prior to 2019 will not have a material impact on our business.
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.
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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.
Moreover, 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 the FCA required the benchmark administrator to publish six GBP and JPY LIBOR settings under a synthetic methodology based on risk free rates in order to avoid disruption to legacy contracts during 2022. 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. Subsequently, on September 29, 2022 the FCA announced the decision to permanently cease the publication of synthetic LIBOR setting for one-month and six-month GBP LIBOR by the end of March 2023. Likewise, on November 23, 2022 the FCA published for comment a proposal to require the LIBOR administrator to publish one-month, three-month and six-month USD LIBOR settings under synthetic methodology until September 2024, which were formerly deemed to cease on June 30, 2023. Similarly, the LIBOR administrator was required to publish three-month GBP LIBOR setting under synthetic methodology until March 2024. On April 03, 2023 the FCA decided to require LIBOR’s administrator to continue the publication of one-month, three-month and six-month US dollar LIBOR settings until September 30, 2024, using a “synthetic” methodology while maintaining March 31, 2024 as the deadline for the publication of three-month GBP LIBOR setting under synthetic methodology. 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 we (and most of banks) 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 deemed to be an appropriate replacement for LIBOR. However, the LIBOR transition 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, since the publication of SOFR began on April 3, 2018 and 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 also 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 are in process of adapting 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.
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Moreover, the transition presents challenges related to contractual mechanisms of existing contracts that reference USD LIBOR and are governed by non-U.S. law or reference the USD LIBOR Ice Swap Rate. Certain of these legacy instruments and contracts are not covered by any legislative solution and do not provide for fallbacks to alternative reference rates, which makes it unclear what the applicable future replacement benchmark rates and associated payments might be after the current benchmark’s cessation. We may be unable to amend certain instruments and contracts due to an inability to obtain sufficient levels of consent from counterparties or security holders. Although this will depend on the precise contractual terms of the instrument, such consent requirements are often conditions of securities, such as floating rate notes. The Financial Conduct Authority (FCA), a U.K. regulator, has proposed that one-, three- and six-month USD LIBOR be published on a synthetic basis, which would only be available through September 2024.
As of December 31, 2022, 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, 2022, our on-balance assets based on LIBOR amounted to approximately U.S.$615 million and our liabilities based on LIBOR amounted to approximately U.S.$423 million. In the case of assets, as of December 31, 2022, approximately 1.0% was due to expire before June 30, 2023, while the remaining 99.0% was due to expire after June 30, 2023. As of the same date, in terms of liabilities, 24.4% is expiring before June 30, 2023 and 75.6% after that date. Most of the assets are associated with commercial credits and trade finance loans 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, 2022, off-balance sheet arrangements based on LIBOR represented a net liability exposure of approximately U.S.$422 million, of which approximately a net asset exposure of approximately U.S.$97 million is due to expire before June 30, 2023 and a net liability exposure of approximately U.S.$519 million after that date.
During 2022 most of our foreign counterparties and us moved from LIBOR to SOFR, particularly for derivative contracts set under ISDA agreements since they 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, which we completed in 2022, |
(ii) | the development of new products linked to the new reference rate, |
(iii) | the 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 successfully address the full implementation of the new reference rate to migrate all former operations based on LIBOR, and |
(vi) | the closing of 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, fully switching from LIBOR to SOFR (or other alternative benchmarks) 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.
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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 Chilean 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. Market turmoil generated by the recent bank failures in the United States, and the emergency sale of Credit Suisse, are two such examples of the exposure that we have to international financial events. Any of these factors could have a material adverse effect on our results of operations and financial condition.
In 2022, the Chilean financial market was characterized by an inverted yield curve, whereby nominal shorter term interest rates rose above nominal longer term interest rates, which was the consequence of a number of factors including, but not limited to: (i) a tighter monetary policy deployed by the Central Bank in an effort to control inflation, evidenced by the increase of the monetary policy rate seven times between December 2021 and December 2022 from 4.00% to 11.25%, (ii) the gradual removal of temporary factors that boosted GDP growth, particularly private consumption, during 2021, (iii) the expectation that inflation would take longer than the time period suggested by the Central Bank’s forecast to return to normalized levels, (iv) political uncertainty associated with both the constitutional referendum held on September 4, 2022 and the speed of implementation and depth of the reforms proposed by the administration that took office in March 2022 in many economic fields, and (v) initiatives that have arisen from time to time in Congress with the aim of approving new pension funds withdrawals. All of these factors resulted in significant increases for nominal and real interest rates, particularly for shorter terms. For instance, the average interest rates paid by Chilean banks on 90 to 360 day deposits increased from 5.06% in December 2021 to 11.12% in December 2022. Longer terms interest rates, instead, showed a mixed trend during the year by increasing steadily during the first three quarters while decreasing sharply in the fourth quarter after the constitutional referendum failed, and after inflation began to show moderate signs of easing, Thus, whereas average annual interest rates of the Central Bank’s ten-year Chilean peso denominated bonds increased from 4.36% in 2021 to 6.26% in 2022, the rates paid by the same instrument decreased slightly from 5.69% in December 2021 to 5.34% in December 2022. Likewise, the path taken by the Chilean Central Bank, similarly to most central banks worldwide, was to begin by implementing tightening cycles in order to control inflation. As an example, the Federal Reserve of the United States increased the reference rate from 0.25% in December 2021 to 4.5% in December 2022, while the European Central Bank took the monetary policy interest rate from -0.5% in December 2021 to 2.0% in December 2022. Similarly, rates of U.S. ten-year bonds increased from 1.51% in December 2021 to 3.88% in December 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, 2022, our fixed-income portfolio was composed of securities measured at fair value through profit and loss statement (including debt securities and other trading positions) amounting to Ch$3,691,070 million (approximately U.S.$ 4,341 million), financial instruments measured at fair value through other comprehensive income amounting to Ch$3,967,392 million (approximately U.S.$ 4,666 million), and financial instruments measured at amortized cost (so not affected by changes in market factors in terms of fair value adjustments) for an amount of Ch$902,355 million (approximately U.S.$1,061 million), which are mostly concentrated in bonds and notes issued by the Central Bank and the Chilean Government. Likewise, as of the same date we maintained asset and liability balances in trading and hedge accounting derivatives measured at fair value of Ch$2,987,783 million (approximately U.S.$3,514 million) and Ch$3,324,485 million (approximately U.S.$3,910 million), respectively.
The approval of an additional pension fund withdrawal, increased uncertainty regarding economic and social reforms to be implemented by Chile’s new administration, escalation or the persistence of armed conflicts in eastern Europe including the involvement of additional countries leading to a global conflict, market turmoil associated with the failure of two U.S. banks and the forced sale of Credit Suisse 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.
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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.
In addition, given recent changes in the way we provide services to our customers, which have resulted in a wide array of digital solutions ranging from refurbished websites to improved mobile applications for smartphones and tables, we are increasingly dependent on the stability of on-site servers, remote servers or cloud servers in order to provide timely and high standard services. Disruptions or interruption in connectivity could lead to a deterioration in our service quality indicators and, more specifically, customers’ complaints or legal actions. Although we strive to continually improve the stability our remote services, we cannot assure you that specific events that could affect our results of operations, financial conditions or the value of our shares and ADSs, will not take place in the future.
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.
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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.
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In the aftermath of a cyber-attack we suffered in 2018, we have continued to take steps to enhance our data security and IT infrastructure and have consistently enhanced our cybersecurity protocols, infrastructure and access-control to our networks, while simultaneously improving our capabilities on detection and management of high-risk threats. As a result, we were able to timely detect and block phishing attempts targeting clients and non-clients. In 2020, most of our staff operated remotely, which accelerated our digital transformation and posed a great cybersecurity challenge for us. In response, 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 on three main initiatives: (i) a corporate program to share the best practices to face cybersecurity threats, (ii) improved cybersecurity guidelines for selection of providers, and (iii) the enhancement of information channels by which cybersecurity threats are reported internally. During 2022, we made advances in cybersecurity standards for both our datacenters and the clouds used by the bank in order to secure the migration process of date to the could. Likewise, we implemented a new unit of Advanced Analytics & Data Science, which is in charge of keep the bank updated with the last information regarding cybersecurity intelligence. In addition, during 2022 we did not receive or identified any complaints in relation to customers’ data leaks associated with cybersecurity events.
Notwithstanding such efforts 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, 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.
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.
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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 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. 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 20.8% 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 15.7% in 2021 as compared 2020, while government spending expanded 13.8% 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.
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In 2022 the Chilean economy followed similar trends when compared to the global economy, characterized by a moderation in GDP growth, higher inflation and fiscal and monetary policy adjustments. According to statistics published by the Central Bank, the Chilean economy grew 2.4% in 2022 as compared to the 11.7% recorded in 2021, as a result of a slowdown in all GDP items as reflected by an annual growth of 2.9% in private consumption due to a sharp decline in the liquidity surplus held bu individuals, an annual expansion of 2.8% in private investment fostered by the uncertainty surrounding the economic and political outlook and an increase of 4.1% in fiscal spending due to the end of expenses related to COVID-19. Despite the lower GDP growth, inflation rose significantly during 2022, as depicted by an annual increase of 12.8% in the CPI, which is the highest level in three decades while being significantly above the monetary policy target of 3.0% defined by the Central Bank. Soaring inflation was the consequence of many factors including increased prices of volatile components of the CPI basket, as well as the depreciation of the exchange rate during most of the year, which translated into a 15.9% annual increase in the tradable goods index and a 9.0% increase in the non-tradable goods index. Core inflation, which excludes food and energy prices, rose 8.6% in 2022. The inflation increase was crucial for the Central Bank to deploy an aggressive monetary policy adjustment by raising the reference interest rate from 4.00% in December 2021 to 11.25% in December 2022. Although the Chilean Central Bank has mentioned that inflation should begin to converge to levels of around 3.6% by December 2023, there are various external factors that could keep inflation above the Central Bank’s target range, such as additional disruptions to the global supply chain due to the effects of geopolitical conflicts, increases in global energy prices and further depreciation of the Chilean peso, which should translate into higher prices for imported goods in Chile.
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 2022 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 new variant strains of the COVID-19 pandemic, the economic downturn expected for 2023 or the new constitutional process in progress, 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 could affect both consumer confidence and business sentiment, which may in turn result in lowered demand for loans and banking services. For example, the rejection of the constitution draft in September 2022 and uncertainty around the new process could exacerbate economic deterioration, which together with increasing interest rates, higher inflation and the current economic slowdown 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 2022,” “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 2022.”
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. 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, S&P 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. Moreover, on September 15, 2022 Moody’s downgraded Chile’s sovereign credit rating from A1 to A2. As a consequence, on September 20, 2022, Moody’s downgraded the credit rating of three local banks (including us) by one notch from A1 to A2, though improving our intrinsic (BCA) rating from baa1to a3. While Chile’s current long-term debt credit ratings remain investment grade, these credit ratings may deteriorate further and adversely affect our credit rating.
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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 lagging effects of the COVID-19 pandemic on the global and the local economies, (iii) potential changes to be introduced in the fiscal policy or long-term government spending by the current or future government administrations in Chile, (iv) further social demands leading to increasing fiscal spending, (v) deterioration in Chile’s terms of trade following the evolution of energy and commodity prices, (vi) reforms to be proposed or introduced by the current administration to modify the characteristics of the current economic and financial system, and (vii) 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.
Changes in tax law could adversely affect our net income and could also result in higher taxes on distributions to our foreign shareholders.
In recent years, there have been various changes in, and attempts to modify, the Chilean tax regime. At the end of 2021, the Government submitted two bills to the Congress. The first one established 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 several tax exemptions including the following measures: (i) the taxation of any type of service with VAT unless expressively exempted, starting on 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, which was reversed in February 2023 under Law No. 21,540 (so in practice did not go into effect), (iii) a single tax of 10% on capital gains produced by the sale of actively traded stocks for sales performed on or after September 1, 2022, which will not apply to local or foreign institutional investors, including us, (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.
These changes could have a negative effect on the Bank as well as a negative effect on our clients and by extension on our business with those clients. The changes in the VAT applicable to services and the increase in the rate of wealth tax on real estate, may result in higher operating expenses for the Bank since VAT will be levied on services that were formerly exempt from that tax and we may not be able to totally offset the VAT credit generated with VAT applying to our services. Similarly, taxes on real estate could result in higher rental cost associated with our nationwide branch network and headquarters as lessors may increase costs. Likewise, changes in tax benefits associated with the real estate and construction industries have 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, which is deemed to be an institutional investor, and (iv) higher taxes to be paid by investors who hold shares issued by us, among other factors. 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.
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The current administration announced several reforms to our tax regime, which resulted in the submission of a tax bill to the Congress in July 2022. This bill was intended to increase tax collection in order to finance various social initiatives including minimum guaranteed pensions, improve social programs benefiting lower income population, among other public policies. However, the bill was rejected by the Lower House on March 8, 2023 in the initial legislative procedure. As of the date of this Annual Report, the Ministry of Finance is negotiating a wide range tax agreement with diverse political forces in order to design a new tax reform to be presented to the Congress. Accordingly, we cannot rule out that a new tax reform may eventually be enacted, and as such,impact the Chilean economy and the business outlook, the banking business, our results of operations and the taxes paid by us or our local and foreign shareholders in the future.
Climate change presents various financial and non-financial risks to us and our customers that are not directly observable and, therefore, are difficult to mitigate in advance.
Climate change presents various financial and non-financial risks to us, our customers and clients. It poses both immediate and long-term risks, which are expected to increase over time. Climate risks may be of two types: (i) physical risks (related to the direct physical effects of climate change), and (ii) transition risks (related to regulatory, market, technological, stakeholder and legal changes from a transition to a low-carbon economy).
Physical risks from climate change include acute risks, such as more intense storms and floods, as well as consequences of chronic changes in climate, like rising sea levels, prolonged droughts and systemic changes to geographies and any other resulting in population migration. Such physical risks could have adverse financial, operational and other impacts on us, both directly on our business and operations, and indirectly as a result of impacts to our customers, suppliers and other counterparties. These impacts may include destruction, damage or impairment of properties, infrastructure and other assets, business continuity breaches, massive staff absence, disruptions to supply chains, reduced availability of goods or increase in the cost of insurance. Physical risks can also impact the credit risk of our loan or investment portfolio due to damage of customers’ assets pledged as collateral to us or derive in increased liquidity risk if physical destruction produces liquidity shortage in capital markets due to disruptions in communication networks, among other sources of financial risks.
Transition risks may arise from changes in regulations or market preferences toward low-carbon industries or sectors, which in turn could have negative impacts on asset valuation, our results of operations or our customers’ reputation that may negatively affect their financial condition and payment capacity. Failure to adequately recognize transition risks in developing and executing our business strategy could lead to market share loss, decreased revenues and higher expected credit losses and increased cost of funds. Moreover, banking regulators and others are increasingly focusing on the issue of climate risk at financial institutions, both directly and in relation with their customers. Legislative and regulatory changes and uncertainties regarding climate-related risk management and disclosures are likely to result in higher regulatory, compliance, reputational and other risks and costs for us.
Even as some regulators seek to require disclosure of climate-related information, our ability to comply with such requirements and conduct more robust climate-related risk analyses may be hampered by lack of information and reliable data. Data on climate-related risks is still limited in availability, often based on unverified figures or sources, collected and reported on a lag, and variable in quality. Likewise, since modeling capabilities to analyze climate-related risks and their impacts to financial institutions are in first stages of development, and to date those tools are still under continuing improvement and revision, the severity of the impacts of the climate change on banking business may not be predictable and, therefore, may challenge the effectiveness of our risk management strategies to mitigate our climate risk exposure. Thus, our failure to detect the aforementioned conditions or to identify other risks related to climate change, could materially affect our financial condition, business and results of operations.
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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, 2021 and December 31, 2022, the value of the U.S. dollar relative to the Chilean peso increased by approximately 1.1%, as compared to the increase of 19.5% recorded in the period from December 31, 2020 to December 31, 2021. 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 not classified as hedge accounting, that hedge most of our exposure to foreign currency. As of December 31, 2022, 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$5,861 million (amounting to approximately U.S.$6.9 million as of December 31, 2022), or 0.16% 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.
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Our business growth, asset quality and profitability may be affected by political, legal and economic uncertainty, as well as social developments 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. In addition, in recent years we have seen a surge in certain violent crimes and insecurity in Chile, some of them related to drug trafficking, which have raised concerns among the population and the Chilean Government. Accordingly, the Congress has approved new legal bodies and the current administration is deploying focused plans aimed at reinforcing public security. Although public disorder due to events occurred in October 2019 have consistently declined, we cannot assure you that the social unrest will not reappear in Chile or violent crimes and insecurity will not increase in the 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.
Another measure agreed by the government and the Congress to tackle the political crisis initiated in 2019 was a process to draft a new constitution to replace the current one dating from 1980. The entity in charge of the drafting and proposal of the project of new constitution was composed by 155 members elected through national elections. The entire process lasted approximately two years and the project of new constitution drafted by this entity was ultimately rejected by a relevant majority of 61.86% of the Chilean voters in a national referendum held in September 4, 2022. Following this outcome, the Chilean congress agreed to start over a constitutional process by setting certain basic principles and standards that the new constitution must incorporate and defining a new constitutional process, which will be carried out through the interaction of two constitutional bodies: (i) a Commission of Experts composed of 24 members elected by the Congress and (ii) a Constitutional Council composed of 50 members to be appointed by national elections to be held in May 2023. Further, the process includes another body, the Admissibility Technical Committee composed of 14 expert lawyers appointed by the congress, whose sole purpose is to solve any dispute between the latter bodies, related to provisions that may contravene the basic principles and standards that the new constitution must include. The Commission of Experts was installed on March 6, 2023 and must prepare a preliminary draft of a new constitution that will be proposed to the Constitutional Council. The Commission of Experts will be entitled to participate in the Constitutional Council without voting rights. The Constitutional Council will be in charge of discussing and generating a final draft by approving each provision included in it and the draft as a whole by three fifths vote of its membership in five months after receiving the draft. A national referendum scheduled to be held in December, 2023 must ratify or reject the new constitutional draft. However, it is not known whether the new draft of a constitution, which is issued out of this process, will be approved, we cannot rule out that economic growth and investment in Chile, and consequently our results of operations or financial condition, may be adversely affected in the meantime due to the uncertainty. In the meantime, the current constitution will remain in effect.
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Further, there can be no assurance as to the policies and reforms that the current government and the Congress (both elected in December, 2021) may propose or take, while their impact on Chile’s economic and fiscal situation, growth, stability, outlook are still uncertain. Likewise, it not yet possible to predict to the effects that any such policies or reforms may have on our business, financial condition and results of operations.
Reforms to labor laws, the pension system and the health system 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.”
A bill has been under consideration in the Chilean Congress aimed at gradually reducing, over a five-year period, the maximum working hours applicable to employees from 45 to 40 hours per week. This bill has been approved by both the Lower Chamber and the Senate and will be enacted as law soon. Likewise, another bill still under discussion seeks to modify Chilean labor laws by increasing the participation of employees in companies’ profits and the way that this participation is calculated. These laws 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 Government presented a bill to reform the pension system in November, 2022. This bill has yet to be discussed in the Congress. Among other matters, this bill includes the following: (i) an increase of minimum monthly guaranteed pensions from Ch$194,000 (U.S.$228 as of December 31, 2022) to Ch$250,000 (U.S.$294 as of December 31, 2022); (ii) requires the employer to fund an additional 6% contribution to every employee for the purpose of creating a new social insurance plan; (iii) reforms the current private pension funds managers by creating a public entity in charge of managing the pensions that will compete with new private institutions in charge such management; (iii) establishes the exclusive right of the public entity to manage the additional 6% of new social insurance payment; (iv) modifies the system of fees that managers can charge; etc. Given the uncertainty regarding the approval by the Congress of these reforms presented by the Government, or any major changes that may change this bill during its discussion period (if discussed) in the Congress, 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 pension schemes, as a result of the COVID-19 pandemic, three consecutive pension fund withdrawals amounting to approximately U.S.$52,643 million and one withdrawal from life annuities (rentas vitalicias) amounting to approximately U.S.$1,100 million have been permitted by the Chilean Congress as of March 31, 2023. In late 2021, a fourth extraordinary withdrawal from the pension funds was rejected by the Senate and in April 2022, two projects pursuing further withdrawals from the pension funds were also rejected by the Chilean Congress. Recently, in April 2023, new bills allowing pension funds withdrawals were introduced in the Chilean Congress and are currently under discussion. As such, we cannot rule out that these bills, or other withdrawals that may be proposed in the future, could be approved.
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Uncertainty on the future of the Chilean pension system remains, given that successive government administrations have not been able to reach an agreement with the Chilean Congress on the amount by which pensions to be received by Chilean pensioners are to be increased. 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. Such an occurrence may exacerbate political uncertainty and continued economic volatility. 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 could be further restrictions to our access to long-term financing, compelling us to seek alternative funding sources in Chile and abroad, which may bear higher 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.
In addition, the Government has announced its intention to introduce changes to the Chilean health system by enhancing the role of the public health providers while severely modifying the role of or potentially removing the private health institutions (also known as ISAPRES) from the Chilean health system. In addition, ISAPRES have experienced financial instability during recent years due to several decisions of the Chilean Supreme Court prohibiting them to raise or adjust prices of health plans offered to private health users. This may result in diverse impacts ranging from a decrease in the quality of services provided to private health users, financial distress of ISAPRES and deteriorated financial condition of private health providers that strongly relies on financing and services provided to ISAPRES’ users. Although we do not have material exposure to the Chilean private health system, we cannot rule out that the credit quality of some of our debtors belonging to that sector, or debtors participating in other sectors, whose activity depends on business with the former, such as real estate, construction, general services, among others, could deteriorate in the future.
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 which have the potential to 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 and decreased liquidity in fixed income markets, 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- and long-term effects they will have on international trade, travel, employee productivity, securities markets, and other economic activities that may continue to have a destabilizing effect on financial markets and economic activity. Although in most countries some of the restrictions listed above have been relaxed, others 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.
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In Chile, since the first cases of COVID-19 were detected in March 2020, the Chilean Government has taken diverse measures in order to control its spread. This included, among other measures partial or total lockdowns with varying levels of severity and length. In the fourth quarter of 2020, the process of vaccination helped to decrease contagion and to start lifting lockdowns, a process that continued in 2021. The rate of contagion has since fluctuated as a result of the appearance of new variants. During 2022, however, given the high rate of vaccination, health authorities have not raised new concerns regarding new contagion waves while withdrawing certain sanitary measures like the use of mask. According to the Chilean Ministry of Health, as of December 31, 2022, approximately 91.1%, 89.1%, 81.8% and 60.9% of the total population had received at least one dose, two doses and third and fourth booster doses of the vaccine, respectively. As vaccinations have appeared 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 the restriction scenario (lockdown) to the opening scenario, 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. As of the date of this annual report, Chile is on an opening scenario in which the use of mask is only compulsory at health services, no mobility pass is required, there are no restrictions of maximum capacity neither in closed nor in opened locations, and massive events like sports, concerts or festivals are not restricted. From a macroeconomic point of view, these measures and the positive advance in the control of the pandemic contributed to the reactivation of some sectors of the Chilean economy in 2022, such as services. This factor helped to mitigate contractions in other economic sectors in 2022 in the context of the slowdown experienced by the Chilean economy after a period of significant growth in 2021, prompted by external and non-recurrent factors. All in all, during 2022 Chile’s GDP increased 2.4%, as a consequence of an important slowdown in household consumption that managed to grow 2.9%, mainly due to reduced liquidity among individuals after a period of high spending motivated by 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. Likewise, the fiscal spending that increased 4.1% only due to a decline in financial aid to individuals while private investment grew 2.8%. If the vaccination and spread trends do not continue or reverse, or if new variants appear to be resistant to the currently existing vaccines, the health authority could impose new restrictions, such as country-wide lockdowns, 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 ushered in 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 or the appearance of other kinds of diseases or viruses that threaten to become a pandemic 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 fixed-income trading portfolio, trading derivatives 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, for instance, 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 2022, our results of operations and financial condition reflected the dynamics of the local economy and the banking system after the worst of the pandemic appears to have been overcome and market factors appear to reflect the aftermaths of many aid measures taken by authorities during the pandemic. From the perspective of loan growth, in 2022 we recorded an annual expansion of 7.2%, driven by increases of 17.6% and 10.4% in consumer and residential mortgage loans that permitted to soften a slowdown in commercial loans that managed to grow 3.2%. Growth in residential mortgage and commercial loans was primarily prompted by inflation, since demand for loans declined and offer conditions tightened in the context of economic slowdown. Furthermore, in the case of commercial loans, the end of the Fogape-Reactiva program that was present in 2021 also contributed to the slowdown. Consumer loans, instead, displayed real positive growth (well above inflation) as a result of our efforts to reactivate the product and also due to the decrease observed in the level of liquidity among individuals. From the funding perspective, since short-term interest rates increased sharply in 2022 due to the measures adopted by the Central Bank to combat inflation generated –in part– by boosted consumption in 2021 prompted by aid measures to deal with the economic effects of the COVID-19 pandemic, demand deposits balances recorded a significant decrease of 26.7% in year-end balances, given the higher opportunity cost for depositors of handling funds in non-interest bearing current account in a scenario of high interest rates and high inflation. As a result, financing needs were covered with time deposits that increased 57.1% in year-end balances. Likewise, by the end of the year we decided to raise long-term funding in the local market in anticipation of increased competition in the future when most of banks will need to raise funds in order to pay off the FCIC (Funding Conditional to the Increase in Loans) provided by the Central Bank in the context of the COVID-19 pandemic, which amounted to Ch$4,348,400 million for us and is due to expire in March and July 2024. From the capital adequacy perspective, we continued to maintain a strong equity base in 2022, as reflected by a CET1 ratio that increased from 12.9% to 13.6% and a BIS ratio that increased from 17.2% to 17.9% between December 2021 and December 2022 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.
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In terms of results, our net income was Ch$1,445,801 million in 2022 as compared to the Ch$1,056,317 million recorded in 2021. The main driver of this change was the significant increase in net interest income as a result of both the positive effect of double-digit inflation on the contribution of the UF net asset exposure we hold in our balance sheet and the positive impact of higher interest rate on the contribution of demand deposits to our funding cost. These effects were partly offset by an increase in expected credit losses due to normalized credit risk indicators that translated into higher probabilities of default and the increment in operating expenses, mainly associated with inflation-indexed costs.
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 long-term effects on our business, operations, or the global economy as a whole. Any future developments continue to be uncertain, including 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’s impact is ultimately contained and economic activity recovers to pre-COVID-19 pandemic levels.
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 19, 2023, 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 51.15% 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 2022, a daily average volume of approximately 154,039 of our American Depositary Receipts (“ADRs”) and a daily average turnover of approximately U.S.$3.0 million 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 19, 2023, approximately 48.85% 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.
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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, due to both a low comparison base and also due to the positive impact of aggressive monetary and fiscal packages. In 2022, instead, the global economy showed signs of deceleration after a period of significant growth due to external factors. Thus, according to the International Monetary Fund, global GDP is estimated to have expanded 3.4% in 2022, down from the 6.2% recorded in 2021, whereas GDP of developed economies is estimated to have increased 2.7%, down from 5.4% in 2021, mainly explained by the sharp slowdown displayed by the United States and the European Union. Economic growth in developing countries coupled to this trend by expanding 3.9% in 2022 in comparison with the 6.7% increase in 2021, largely pulled by the deceleration occurred in the Chinese economy.
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The global economy was marked by three major trends in 2022: (i) the rise in inflation to the highest levels in decades, (ii) the monetary tightening cycle undertaken by several central banks to cope with global rise in inflation, and (iii) geopolitical issues in Easter Europe. Global inflation reached 8.8% in 2022, well above the targets set by central banks, as a consequence of several factors including: (i) fiscal stimulus that translated into government spending implemented during the COVID-19 pandemic, (ii) an increase in liquidity generated by the measures implemented by the Central Banks (such as leading interest rates to lowest levels in decades) to counteract the effects of the pandemic, and (iii) the disruption in the supply chain by the COVID-19 pandemic and subsequently by geopolitical conflicts. In this context, inflation was above the monetary policy target levels of most of the Central Banks in 2022, rising 6.5% in the U.S. and 9.2% in the Eurozone. To face this challenge, several central banks deployed tightening policies. As an example, the US Federal Reserve performed an adjustment cycle in March 2022 by taking the Federal Funds Rate from 0.25% to 4.5% in December 2022. A similar trend took place in the Eurozone, where the monetary tightening process led to an interest rate increase from -0.5% in July 2022 to 2.0% in December 2022. In addition, the geopolitical conflict between Russia and Ukraine has generated a negative impact on global growth while increasing inflationary pressures, mainly via an increase in energy prices. There is consensus that the global economy will experience a below-trend level of growth in 2023 (2.9% according to the International Monetary Fund) while returning to potential growth in 2024. Likewise, the market expectations consider that both the lower economic dynamism and a normalized level of commodity prices (energy and food) could contribute to a reduced rate of inflation while allowing Central Banks to ease monetary policies. Nonetheless, depending on how long the global economy takes to return to average growth and also how persistent are the factors mentioned above, monetary easing policies could be delayed, which could be a source of instability worldwide that may result in lower GDP growth for developed and emerging economies. Furthermore, the impact on global macroeconomic performance may be adversely affected by current turmoil in global banking industry, after the collapse of two U.S. banks and the forced sale of Credit Suisse.
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, armed conflicts in the Middle East and Asia, the ongoing tensions between the U.S. and different countries including Iran, China and Russia, 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 continues to threaten to become global as other countries continue to provide assistance, is another source of instability that is affecting the global economic environment. As of December 31, 2022, 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, and consequently negatively affect us.
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.
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.
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Item 4 Information on the Company
History and Development of the Bank
Overview
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 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:
(i) | retail banking; |
(ii) | wholesale banking; |
(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.
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According to the CMF, under Chilean GAAP, as of December 31, 2022, we ranked first in the Chilean banking industry in terms of net income attributable to equity holders with a market share of 26.1%. 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 16.3%, the largest provider of commercial loans with a market share of 16.6%, the second largest provider of consumer loans with a market share of 18.0% and the third largest private sector bank in terms of residential mortgage loans with a market share of 15.2%. As for liabilities, excluding operations of subsidiaries abroad, we were the second largest private bank in Chile in terms of current accounts and demand deposit balances (net of clearance) with a market share of 19.8% and, more importantly, we ranked first in current account balances held by individuals with a market share of 23.9%, both as reported by the CMF and as of December 31, 2022. Lastly, according to the Chilean Association of Mutual Funds, as of December 31, 2022, we were the largest provider of mutual funds management services in Chile with a market share of 22.2%.
As of December 31, 2022, we had:
● | total assets of Ch$55,108,854 million (approximately U.S.$ 64,818.7 million); |
● | total loans of Ch$36,726,297 million (approximately U.S.$ 43,197.2 million), before deducting allowances for loan losses; |
● | total deposits of Ch$27,951,142 million (approximately U.S.$ 32,876.0 million), of which Ch$13,592,155 million (approximately U.S.$ 15,987.0 million) correspond to current account and demand deposits; |
● | equity (including net income, non-controlling interest and provisions for minimum dividends) of Ch$5,431,435 million (approximately U.S.$ 6,388.4 million); |
● | net income of Ch$1,445,801 million (approximately U.S.$ 1,700.5 million); and |
● | market capitalization of approximately Ch$8,889,503 million (approximately U.S.$ 10,455.8 million). |
As of December 31, 2022, we had 12,550 employees and delivered financial products and services through a nationwide distribution network of 266 branches and 1,696 ATMs. Our ATMs are part of a larger network of 7,438 ATMs operating in Chile, of which 4,699 ATMs operate under a network managed by Redbanc S.A., a company we partly own along with eight other private sector banks.
History
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 two brand names, namely, “Banco de Chile” (which operates throughout Chile) and “Banco Edwards-Citi” (which is primarily oriented to higher income segments).
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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 Return-on-Average-Equity (“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 Consultores Asociados de Marketing Cadem S.A., or “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).
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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. During 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 17.2% and 12.9%, 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.
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The year ended on December 31, 2022 was a very successful period for us. Under Chilean GAAP, as reported by the CMF, we led the industry by far in both net income and profitability by achieving a 26.1% market share in net income attributable to equity holders, based on a 77.8% increase in net income (under Chilean GAAP) and a return on average equity (ROAE) of 31.5% (attributable to equity holders). Our performance in results was primarily the consequence of increased operating revenues that benefited from both temporary positive impacts that arose from higher than expected inflation, increasing interest rates and still high levels of liquidity in the banking system, as well as a successful management of our Treasury business including both the administration of balance sheets gaps, the management of our trading and investment portfolios and also in the sales and structuring business. In addition, we were able to maintain a solid position in total loans by ranking second in the industry in total loans. In this regard, worth noting was the gain we achieved in market share in consumer by increasing from 17.4% in December 2021 to 18.0% in December 2022, which demonstrated the effectiveness of new commercial strategies and specific plans aimed at improving efficiency and productivity in loan origination by means of new ways to contact customers. In addition, we continued to deploy our digital transformation strategy by developing new digital-based products and services while improving existing functionalities, including: (i) the introduction of a digital current accounts and credit card for individuals, (ii) the release of FAN Emprende, a digital demand account for SMEs, start-ups and entrepreneurs, (iii) the launch of FAN Clan a digital onboarding demand account for teenagers, which aims to promote long-term relationships, and (iv) new functionalities for our wide array of tailored applications and websites. Likewise, we managed to consolidate FAN account as one of the market-leading digital accounts in the market that achieved one million users by adding approximately 350,000 new FAN users in 2022. Together with these efforts, in 2022 we were able to improve value offerings in many lending products and services like consumer loans, trade finance loans, leasing loans and insurance by leveraging on improved CRM tools and advanced commercial analytics. Similarly, through the development of more adaptable and flexible current account plans we managed to attract approximately 118,000 new current account holders in 2022, which permitted us both to continue ranking first in current accounts held by individuals with a market share of 23.9% and ranking second in demand deposits by achieving a 19.9% market share in December 2022. Our excellent financial results also enabled us to enhance our capital base as reflected by a Total Capital or Regulatory Capital and CET1 ratios of 17.9% and 13.6%, respectively, as of December 31, 2022, which placed us as the leading local bank in terms of capital adequacy as of the same date.
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.
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.
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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 formerly), 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.
Technological Projects
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.
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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.
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In 2022 we continued to enchance our technological infrastructure, improve the stability of our systems while supporting the deployment of our digital transformation strategy through the development of new products, services and applications. In terms of new products and services, we developed and launched the first digital current account for individuals, which may be fully opened online in three steps, while also introducing a new digital account for SMEs and entrepreneurs (FAN Emprende) that permits full access to digital channels. Likewise, we developed FAN Clan, a 100% digital demand account for teenagers, whose digital functionalities allow the users to customize the account by choosing different avatars to interact with. In addition, we launched a renewed MiInversión application for smartphones, which allows investors to check their balances, amounts invested and profitability earned during the period while taking new investment and savings products. Similarly, we improved functionalities in both MiBanco and MiPago applications, including a QR code for cash withdrawals and taking products online, which coupled with the Paga2 application that permits our and Banco Scotiabank’s customers to perform money transfers with no charges by using their mobile phone numbers. Furthermore, we enhanced functionalities of the MIBanconexion application for companies including the electronic payment of bills, multiproduct remote authorization, online credit payment and a dashboard for the management of electronic money transfers. We also introduced improvements to our customer websites for individuals and companies by allowing customers to perform a wider bundle of operations online. Given our purpose of improving contact channels, during 2022 we also worked in conjunction with local communities to expand our network of ATMs in non-covered sectors across the country. From the infrastructure and cybersecurity point of view, in 2022 we renovated the whole telecommunication network in order to make it conmpatible with new technological requirements of other platforms, consolidated a 99.9% uptime in both web login and electronic money transfers, decreased the response time to address critical events by 50% while reinforcing the monitoring system of fraud and anti money laundering. Also, we implemented Data Decoupling architecture that provides real-time access to information through cloud data warehouse, which also challenged us to deploy new cybersecurity infrastructure oriented to our multi-cloud strategy.
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.”
Capital Expenditures
The following table sets forth our capital expenditures in each of the three years ended December 31, 2020, 2021 and 2022:
For the Year Ended December 31, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
BANK’S INTERNAL REPORTING POLICIES: | (in millions of Ch$) | |||||||||||
Computer equipment | Ch$ | 20,658 | Ch$ | 22,367 | Ch$ | 9,823 | ||||||
Furniture, machinery and installations | 1,510 | 2,349 | 2,090 | |||||||||
Real estate | 6,303 | 9,477 | 6,041 | |||||||||
Vehicles | — | — | 752 | |||||||||
Subtotal | 28,471 | 34,193 | 18,706 | |||||||||
Software | 18,631 | 30,222 | 56,891 | |||||||||
Total | Ch$ | 47,102 | Ch$ | 64,415 | Ch$ | 75,597 |
Our budget for capital expenditures for 2023 amounts to approximately Ch$112,979 million, of which expenditures in information technology investments represent 79.5%, while infrastructure projects represent the remaining 20.5%. 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, 54.1% corresponds to new and ongoing IT projects 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 45.8% budgeted for IT expenditures, 26.1% is intended for the renewal of our technological infrastructure, which includes further optimization of our nationwide ATM network, 15.9% relates to the development of applications in order to provide us with digital alternatives to meet customers’ needs, another 2.2% is aimed at supporting regulatory compliance requirements and the remaining 1.7% consists of investments in technological equipment and system improvements to be carried out by certain subsidiaries.
Our 2023 infrastructure expenditures budget includes disbursements associated with the implementation of a new service model (25.4%), general maintenance investments (21.5%), the refurbishment of our branch network (20.4%), renovation and restoration of our corporate buildings (10.9%), other initiatives related to enchacing support infrastructure and IT tools for regulatory compliance requirements (10.4%), initiatives related to security expenditures (6.9%), and improvement of the conditions of recreational facilities (4.5%).
All of the aforementioned investments have been or will be made in Chile.
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BUSINESS OVERVIEW
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 129 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 2022, we received various distinctions due to our strong brand recognition within the banking industry. Among these awards, we ranked second in corporate reputation among local banks, according to a study conducted by MERCO. Likewise, Global Finance and The European magazines recognized us as the Best Bank and the Bank of the Year in Chile, respectively. Furthermore, according to studies conducted by GFK Adimark, we ranked first in top of mind with a 88.9% (including “Banco de Chile” and “Banco Edwards | Citi” brand names) of spontaneous mentions for the year ended December 31, 2022, nearly 41.6%, on average, above our main peers.
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, 2022 | ||||||
Market Share | Market Position | |||||
Commercial Loans(1) | 16.6 | % | 1st | |||
Current Accounts Balances held by Individuals | 23.9 | 1st | ||||
Mutual Funds (Assets Under Management) | 22.2 | 1st | ||||
Net Fees and Commissions Income | 21.5 | 1st | ||||
Net Income of Securities Brokerage Subsidiary (2) | 21.9 | % | 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. |
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Through our history, we have been able to maintain a leading position in the wholesale banking segment, which characterized us in the past, by continuously improving our products and services and supplementing them with comprehensive and tailored service models that allow us to successfully meet our customers’ needs while maintaining long-term relationships with major local and multinational companies that operate in Chile. 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 the last decade we have also achieved significant market share in the retail banking segment through diverse value offerings intended to cover our target demographics and enterprises. Therefore, 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 many banking products and services, such as commercial loans, fees and commissions and demand deposits held by individuals, among others.
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, 2022, according to our management information system, we had 1,377,614 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, 2022, we had 1,149,450 current accounts holders, 269,922 time deposit holders, 112,578 saving account holders. Similarly, as of December 31, 2022, we were the largest privately-owned bank in terms of number of borrowers with a 17.3% market share associated with 1,128,456 debtors, according to data published by the CMF. As of the same date, according to the CMF, we had 1,609,994 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, 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, 2022, we had a nationwide branch network of 266 branches, the second largest in Chile among private sector banks, according to information published by the CMF. This network is composed of 232 branches under our “Banco de Chile” brand name and 34 branches under our “Banco Edwards Citi” 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, 2022, we had 1,696 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 2022, transactions (monetary and non-monetary) carried out by customers and non-customers through mobile applications or internet-based platforms jointly increased 21.4%, which compares to a 3.3% decrease in transactions performed in branches and ATMs.
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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 as a result of the COVID-19 pandemic’s mobility restrictions. 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
Based on this strategy, in recent years we have implemented several advances in both the back and front office aimed at improving customer experience by expanding digital channels while 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, digital transformation has become a crucial goal across the Bank, which has led us to work on developing a talent and digital culture in order to bolster our capabilities while emboldening innovation in all aspects of the banking business with a front-to-end approach by adopting new work methodologies such as agile.
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. In 2022, we continued to bolster our mobile applications by various means, including: (i) the design and release of the renewed MiInversion application that includes new functionalities and ways to access to investment balances, to take positions in new investment or saving choices, among others, (ii) the improvement of MiBanco and MiPago applications by developing a QR code for cardless cash withdrawals from ATMs and launching the Paga2 widget that permits transactions between our customers and Scotiabank’s ones, and (iii) the renovation of Banconexion application for companies by permiting multiproduct authorization and online payment of services while providing a dashboard for managing electronic transfers and credit payments.
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With the same purpose, in 2020 we launched FAN Account, a fully digital onboarding demand account, which as of December 31, 2022, has reached one million customers, most of them with no previous relation with us. Throughout 2021 we continued to increase the functionality of the FAN Account in order to improve customer experience and promote loyalty, including whole access to Banco de Chile’s customers ecosystem of benefits and attributes. In 2022, we continued to reinforce the scope of the FAN account by widening the array of tailored offerings to target specific segments. In this regard, we launched FAN Emprende, a full digital demand account oriented to SMEs, start-ups and entrepreneurs that provide these customers with full access to our digital channels and segment’s benefits. Likewise, we introduced FAN Clan, a 100% digital onboarding demand account for teenagers ranging from 14 to 17 years, which customizes the interaction with the customer through various avatars while permitting them to access benefits and discounts included in our loyalty program. In addition, during 2022 we launched a new digital account and credit card for individuals while introducing a digital demand account for companies.
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.
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, 2022, with a 23.9% 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 second bank in Chile in terms of total balances of non-interest bearing current accounts and demand deposits representing 19.9% of the industry (net of clearing), as reported by the CMF. Our total balances of current accounts and demand deposits represented 24.2% of our funding structure as of December 31, 2022 (under Chilean GAAP), as compared to the 20.5% 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 43.6% of our total liabilities (excluding equity) as of December 31, 2022. This 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 approximately 78.9% as of December 31, 2022.
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 2022 we reactivated our long-term debt placements by the end of the year, particularly in the local market. 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 a normalization in funding from demand deposits and more competition for long-term funding once the FCIC provided by the Central Bank in the context of the COVID-19 expires for all banks in 2024. As such, we will continue monitoring market opportunities in order to take advantage of our superior credit rating within Chile and Latin America. In 2022 we carried out the following debt placements: (i) Ch$1,088,897 million in the local market with maturities ranging from 11 to 19 years, (ii) Ch$51,710 million in Peru with a 20-year maturity, and (ii) Ch$215,249 million in commercial paper.
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.
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Prudent Risk Management & Superior Asset Quality
Of the Chilean financial institutions, we have among 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, 2022, we had a delinquency ratio (loans 90 days or more past due as a percentage of total loans) of 1.08% which was well below the industry average delinquency ratio of 1.79% 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, 2022, we had a coverage ratio (allowances for loan losses over loans 90 days or more past due) of 197.3%, which was well above the industry average coverage ratio of 140.4% as of the same date (excluding Banco de Chile). Over the last few 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 2022, given the prevailing uncertainty regarding the political, economic and social outlook, as well as the expected normalization in credit risk indicators after a period of extraordinary positive payment behavior prompted by non-recurrent factors like a liquidity surplus among individuals, we focused on monitoring the evolution of the main indicators at a detailed level while increasing the level of additional provisions from Ch$540 billion in December 2021 to Ch$700 billion (under Chilean GAAP) in December 2022 in order to anticipate further credit deterioration in specific economic sectors.
International Coverage
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
Mission
‘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.
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Vision
‘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:
Corporate Values
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.
● | Integrity |
● | Commitment |
● | Respect |
● | Loyalty |
● | Prudence |
● | Responsibility |
● | Justice |
Purpose
‘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.’
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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.
Commitments
We aim to satisfy the expectations of the following stakeholders by:
● | Our Customers |
● | Seeking to be the bank with the best service quality, offering innovative, simple, safe and secure products and services designed to meet the needs and aspirations of each segment, with timely, agile and proactive service, thus building trusting and long-term relationships. |
● | Having customer service channels that are always available, allowing fluid and timely communication. |
● | Relying on collaborators with a vocation for customer service and digital knowledge. |
● | Our Employees |
● | Offering development and growth opportunities based on merit. |
● | Providing competitive compensation and economic and welfare benefits. |
● | Seeking to promote a respectful, nice and collaborative work environment in a place that has the appropriate technological tools and infrastructure. |
● | Building a homogeneous and distinctive culture, based on corporate commitments and values through participation in social activities, to become a corporation recognized as the best place to work and the best banking team in Chile. |
● | Our Community |
● | Being convinced that our success is linked to the sustainable development of the country and the community. |
● | Being committed to our community every day by supporting various initiatives to overcome adversity through the development of internal policies and being present in emblematic solidarity crusades. |
● | Being committed to respect for diversity and inclusion, entrepreneurship, care for the environment and criteria of equity and governance. |
● | Our Shareholders |
● | Rewarding our shareholders’ trust by maximizing the value of the Company, with responsibility, prudence and a long-term business vision. |
● | Implementing our strategy through appropriate risk management and a culture of operational excellence and a culture of operational excellence that while enabling us to project the Corporation’s sustainable sustainable leadership of the Corporation. |
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Strategic Priorities
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 continues to be 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, 2022, the loan book of the Chilean banking industry (excluding operations of subsidiaries abroad) represented 85.8% of Chilean GDP. As of the same date, mortgage and consumer loans represented 28.5% and 10.6%, respectively. On the other hand, according to the CMF, as of December 31, 2022, we had market shares of 15.2% and 18.0% in residential mortgage loans and consumer loans, respectively, both behind the market leader by 5.8% and 1.1% 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.
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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 2022 |
(1) | Reinforcement of FAN Account Cluster |
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 enhanced 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. In 2022, we widened the scope of FAN account by creating tailored solutions for SMEs and young people. Thus, we created: (i) FAN Emprende, which is a full digital account for SMEs, starpt-ups and entrepreneurs that allows access to our digital channels and benefits by enabling customers to perform transactions online while having no requisits for opening, and (ii) FAN Clan that targets teenagers from 14 to 17 years and promotes financial inclusion by offering benefits that are part of our loyalty program through a customized digital environment.
Based on these advantages, as of December 31, 2022 we had been able to attract new customers through FAN Account by reaching approximately 350,000 new users during the year while achieving a total amount of one million users.
(2) | 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.
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In 2022, we continued to enhance our set of mobile applications. For instance, we launched a renewed MiInversión application that allows customers to access simply and securely to saving and investment products, take positions in diverse instruments fully online, review account balances, invested amounts and profitability of positions while supporting customer in planning investment strategies. Similarly, in personal banking, we implemented further functionalities to MiBanco and MiPago applications, including the launch of a QR code for cardless cash withdrawals, the possibility of taking products online such as credits or insurances, which coupled with the implementation of Paga2 widget in alliance with Scotibank. We also improved the Banconexion application for companies, which enables customers to perform diverse transactions such as payment of services and credits and payments of bills while managing the authorization of electronic transfers. Regarding customers’ websites in 2022 we introduced improvements to both personal banking’s and companies’ sites. In the case of personal banking we improved the website by: (i) enhancing the gadget for reviewing residential mortgage loans balances and scheduled payments, and (ii) optimizing the consumer loan simulator and online origination, among other functionalities. In the case of the companies’ website Banconexion 2.0 we released new functionalities that permit customers to: (i) assing nicknames to the accounts managed by the user, (ii) perform cross-border payment orders, (iii) renovate IRS mandate, and (iv) execute multiproduct authorizations.
As a result of these efforts, in 2022 we were once again recognized as the most Innovative Digital Bank of the Year in Chile by The European magazine.
(3) | Revised Value Offerings for Diverse Products and Segments |
Based on our firm conviction that designing tailored and customized value offerings will allow us to both maintain long-run relationships with customers while sustaining profitable growth by means of differentiating us from competition. Accordingly, during 2022 we continued to develop and enhance products and services in order to satisfy increasing requirements from customers, among which we may highlight: (i) the improvement of our plans of current accounts by making them simpler and more flexible by creating three alternatives (“Valle”, “Cordillera” and “Oceano”) to meet the needs of different types of customers while delivering the benefits of our loyalty program, (ii) the reinforcement of customer proximity by improving diverse benefits such as alliances and discounts included in the loyalty program, (iii) the development of new services for SMEs including currency trading through Banconexión 2.0, cross-border payment orders and the update of IRS and UAF forms online in Banconexion 2.0, (iv) the enhancement of consumer loans value offerings by promoting the use of payment channels like credit cards and preapproved programs based on advanced analytics, and (iv) the revision of value offerings to promote specific products for companies like financial leasing, factoring and trade finance loans.
Based on these developments, we managed to achieved annual increments of 30.4%, 29.3% and 10.5% in balances of trade finance loans, factoring and financial leasing between December 2021 and December 2022. Similarly, we grew 17.5% in overall balances of consumer loans on an annual basis while Also, we were able to maintain our market-leading position in demand deposits held by individuals by achieving a 23.9% market share as of December 31, 2022.
(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 2022 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 ranked first among our main banking peers in terms of the preferred bank to switch into with a 26.8% of positive mentions for the year ended December 31, 2022, nearly 17.5%, on average, above our main peers.
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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 75.3% as of December 31, 2022, according to a syndicated study conducted by Procalidad. This has also been supported by an average voluntary attrition rate of 2.6% for year ended December 31, 2022, which compares to the 2.2% attrition rate recorded in 2021 and the 2.6% average attrition rate posted sequentially between 2018 and 2020, 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 2022, 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 2022 |
(1) | Cost Control: New Purchase Model |
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. As part of these initiatives, during 2022 we consolidated the our internal purchase model that is managed by our Corporate Purchase Unit. This model is based on diverse protocols that pursue to optimize the cost-benefit of corporate purchases and recruitment of external advisory, which considers the following phases: (i) definition of the need that must be satisfied, (ii) assessment and management of the purchase request, (iii) definition of the purchase strategy to optimize the cost-benefit relationship, (iv) market research based on technical specification set by the user, (v) negotiation and results managed by the purchase unit, and (vi) setting of contracts with the selected provider, which is led by our legal team. As part of the deployment of this strategy, in 2022 our purchase unit introduced a world-class tool by means of which all purchase processes are centralized in order to obtain the best bid from providers for products and services requested by Bank’s users based on standardized requirements that are autioned through an electronic real-time system. Through this tools, we managed to complete 73 negotiations in diverse expenses categories, requested by different banking units, during 2022.
In 2022, our cost base recorded a 14.2% nominal annual increase when compared to 2021, which represents a small real annual increase (excluding the effect of inflation) of 0.8% in the same period. The main source of increase in nominal terms was the 13.3% increase in inflation (measured as UF variation) in 2022, that negatively impacted cost items indexed to inflation such as salaries, IT related expenses, external advisory, rentals and marketing expenses. These factors, however, were to some extenet offset by our cost control policies, including organizational restructure and our new purchase process as mentioned above. 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 39.6% in 2021 to 31.9% in 2022, mostly explained by the sharp increase in operating revenues due to non-recurrent factors. Based on this cost-to-income ratio we led the industry in terms of efficiency in 2022. For more information, see “Item 5. Operating and Financial Review and Prospects—Results of Operations for the Years Ended December 31, 2020, 2021 and 2022—Operating Expenses.”
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The previously mentioned achievements have allowed us to improve certain ratios such as loans per employees and loans per branches while keeping operating expenses to total loans below 3.0%, as displayed in the following table, as of the dates indicated:
For the Year Ended December 31, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
BANK’S INTERNAL REPORTING POLICIES: | (in millions of Ch$) | |||||||||||
Operational Ratios | ||||||||||||
Loans per Branch (Millions of Ch$) | 92,626 | 125,942 | 138,069 | |||||||||
Loans per Employee (Millions of Ch$) | 2,355 | 2,789 | 2,926 | |||||||||
Expenses to Total Loans (%) | 2.9 | % | 2.6 | % | 2.7 | % |
(2) | Productivity Initiatives |
During 2022 we continued to promote productivity in all aspects of the banking business. Thus, we carried out specific plans to improve productivity in loan origination in personal banking through advanced analytics and risk intelligence by setting tailored offerings while improving the rate of customer contact by account officers. Later on, we expanded the scope of this strategy in SME banking in order to promote borrowing from this segment of customers.
In addition we have promoted the use of new collaborative structures and methodologies, which are faster, more efficient and more adapted to the needs of specific users, which has enabled us to improve the time-to-market of diverse intitiatives oriented to both customers and the enhancement of internal processes.
Based on these intitiatives, we were able to increase the consumer loan origination by 45% in 2022 when compared to 2021 while maintaining the account manager headcount stable in the same period. Similarly, we managed to increase monthly loan origination in SME banking by 25% in the 4Q22 when compared to the same period of 2021.
(3) | 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 2022, 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 former 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 266 branches as of December 31, 2022. 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 several 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 optimization in headcount from 13,562 employees in 2019 to 12,550 employees in December 2022, which represents a 7.5% decrease.
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● | 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 2022 |
Our solid corporate governance, which is oriented to reinforcing our ESG strategy, has allowed us to achieve significant advances in these matters and we have been recognized on that front. During 2022, we ranked as the third most responsible company in Chile in environmental, social and governance matters by the ESG Responsibility Ranking conducted by Merco. Likewise, we obtained the highest rating in Chile (lowest risk) among banks in the Sustainalytics ESG Risk Rating. These recognitions are in addition to the A rating we received in 2021 from a prestigious international index that assesses diverse categories associated with ESG. We believe these recognitions reflect the strong accomplishments we have attained over recent years in ESG related matters, given our firm commitment to the community, the environment and our way of doing business.
The above has been the result of diverse initiatives we have successfully deployed over recent years, in which we have also achieved significant accomplishments in 2022, as follows:
(1) | “Blue Commitment” Program |
In May 2022, we launched the “Comnpromiso Azul” (Blue Commitment) Program, which is a roadmap on environmental and climate change matters. This program is composed of diverse initiatives that have allowed us to take concrete actions in order to: (i) reduce our carbon footprint, (ii) take steps in sustainable finance, and (iii) contribute to people, the whole community and the environment. In addition, during 2022 we released the campaign “Ser Azul está en Nuestra Naturaleza” (Being Blue is in Our Nature), aimed at raising awareness of our commitment to the environment among employees in order to promote their participation in this purpose, including diverse commitments associated with: (i) enhancing electromobility through purchases with our credit cards, (ii) boosting the use of clean energies by promoting the purchase of solar panels and ecoefficient air conditioner equipment, (iii) supporting SMEs through the PYMEs para Chile Program, and (iv) investing in eco friendly investment funds through the Banchile-Blackrock ESG offering, among other initiatives.
On governance matters, we created the Sustainability Committee, which is composed of members of senior management and aims to boost our ESG strategy by means of analyzing and proposing action plans to address the new challenges and opportunities that arise on these matters. In addition, we focused on promoting cultural change through the development of specific environmental and sustainable finance training activities for different groups of employees. In the same line, we carried out several volunteer programs called “Cuadrilla Azul” (Blue Crew) focused on environmental care. Through this initiative we were able to reforest a surface equivalent to 200,000 square meters, which will: (i) allow the capture of 10,000 ton of CO2, (ii) benefit around 40 animal species, (iii) make possible the creation of resting and nesting spots for more than 50 bird species, (iv) benefit bee farmers in Maule, Ñuble, Los Ríos and Los Lagos regios, and (v) promote educational tourism, environmental research, and the recovery of degraded soils.
We also continued to develop actions for the management and reduction of the main consumption and recycling indicators, by means of which we were able to: (i) meet our internal goal of energy consumption by reaching 32.2 GWh in 2022, (ii) reduce our direct GHG emissions from 1,326 MTCO2e to 1,248 MTCO2e between 2021 and 2022, (iii) decrease the total consumption of water from 257 in 2021 to 224 thousands of m3 in 2022, and (iv) the use of paper from 277 metric ton in 2021 to 258 metric ton in 2022. These achievements are notable when taking into consideration that in 2022 we returned to an almost full on-site operation as compared to 2021 when we were still in an hybrid remote and on-site scheme.
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(2) | Sustainable Financing Framework |
We promote a culture of sustainability through internal policies, mechanisms and processes that progressively incorporate ESG principles in our management. In August 2022, we implemented a Sustainable Financing Framework as part of our Sustainability Strategy. Through this program we reaffirm our commitment to the development of Chile and its population. This framework was developed in line with the International Capital Markets Association (ICMA) 2021 Sustainable Bond Guidelines, the 2021 Green Bond Principles (GBP), the 2021 Social Bond Principles (SBP), the Loan Market Association (LMA) 2021 Green Lending Principles and the 2021 Social Lending Principles.
This program establishes eligibility criteria in eight social and environmental fields and is a reference for any green, social or sustainable financing. In the conext of this framework we may issue green bonds aimed at financing loans and projects that generate positive environmental or social impacts, including: (i) SMEs, microbusinesses and women-owned businesses, (ii) financial education, (iii) basic infrastructure, (iv) social housing, (v) energy efficiency, (vi) renewable energy, (vii) sustainable buildings, and (viii) clean transportation. The framework was developed in collaboration with BNP Paribas, as Sustainability Structuring Agent, and received a Second Party Opinion (SPO) validated by Sustainalytics.
(3) | Entrepreneurship Support |
During 2022, we carried out diverse initiatives to support entrepreneurship in the conext of the slowdown experienced by the local economy in order to accompany our customers to reactivate commercial activity. To achieve this goal we launched the “PYMES para Chile” (SMEs for Chile) Program, which pursues to offer Chilean microbusinesses, small and medium-sized companies the opportunity to strengthen their businesses by means of the support of various strategic alliances, proven experts in different entrpreneurship fields and tools that contribute to improve management practices, increase sales and promote entrepreneurship among our customers and non-customers. By being part of the SMEs for Chile Program, customers and non-customers may access benefits and initiatives such as financial education for SMEs, training workshops, expert advisory, competitive funding, networking events and special discounts. More than 168,000 microbusinesses, small and medium-sized companies were benefited by this program in 2022.
In the context of this program, for the seventh year in a row we held the National Entrepreneur Challenge Constest, an initiative that seeks to promote the development of micro-entrepreneurs and SMEs throughout the country, in association with Desafio Levantemos Chile. More than 30,000 entrepreneurs registered in the contest in 2022, of which 32 are runner-ups and the winners will be known in the first half of 2023. The contest has cash prizes and provides companies with training activities on various topics such as budgeting, work methodologies, saving alternatives, investment choices and responsible financial indebtedness. 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 runner-ups, in addition to the cash prizes, have access to mentoring to build their pitch with the support of experts and participation in an open television program. Also, at the end of this version, a Blue Commitment award will be granted to the entrepreneurs who are generating a positive social or environmental impact.
Also, as part of our Digital Transformation strategy, we have put at disposal of our SME customers new digital demand accounts while improving functionalities of the Banconexion application that enables companies to perform transactions, have access to a dashboard that permits to manage electronic payments and transfers, execute cross-border payment orders online and perform foreign currency transactions.
(4) | “Women who Inspire” Program |
The “Mujeres que Inspiran” (Women who Inspire) Program promotes gender equality, education, employment and the development of local economies through women who lead their communities. Through this program we pursue to have a positive impact on the development of the country and its population, in which different areas of the Bank participates as volunteers. During 2022, 40 women were awarded as microentrepreneurs or leaders of social organizations that have marked their communities through sustainable initiatives in the social, environmental and economic fields. Based on this recognition, they received mentoring and specialized training provided by volunteer mentors from Banco de Chile, on topics that include accounting and leadership, in addition to provide them with financial resources and technological tools like tables and internet connection.
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This program was distinguished with the CONECTA 2022 Entrepreneurial Recognition from Pacto Global Chile of the United Nations, which highlights business initiatives that impact the 17 Sustainable Development Goals and contribute to the 2030 Agenda. We were the only bank participating in this version, which resulted in receiving the recognition in the Interconnection category.
(5) | 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, in which 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. In 2022, approximately 35 schools were benefited throughout Chile, which permitted us to train approximately 2,266 students and 41 teachers in diverse matters related to informed behavior, financial responsibility and recommendations for savings practices. As part of this program, Banco de Chile volunteers also participate by providing entrepreneurs with financial education and welfare knowledge through interactive workshops that promote an informed, responsible and secure behavior on these matters. Approximately 1,781 entrepreneurs, microbusinesses, migrants and students from diverse universities, schools and regions were part of this initiative.
Based on these and other achievements, in 2022 we were recognized as the best bank in financial inclusion by The European magazine.
(6) | Disability Inclusion |
During 2022 we continued to promote our Inclusion, No Discrimination and Respect to the Diversity Policy across the corporation. This policy is intended to improve our knowledge of physical disability, discrimination and diversity while developin develop higher sensitivity with respect to these matters.
Our commitment to disabled people is permanent. In 2022 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. During this version more than 10,000 of our employees participated as volunteers in Teleton’s campaign. We have been supporting the Teleton Foundation since its establishment 44 years ago, supporting disabled athletes and artists, and we continued to make significant monetary donations to the Foundation.
Likewise, we sponsor paraolympic sportsmen and sportswomen while organizing sporting events for disabled people like the Chilean Open WheelChair Tennis Tournament.
Additionally, in 2022 we held the fifth consecutive season of Expo Inclusión, an inclusive recruitment fair through which we aim to strengthen our commitment to support people with disabilities. During this version the fair was focused on promoting education, knowledge of inclusive technologies and employability of disabled people and their relationship with organizations that participated in the event.
Also, in 2022 we implemented a program of funding aimed at providing resources to finance initiatives and projects supporting environmental care, entrepreneurship or inclusion through diverse alliances with social organizations. Through this program, 33 projects were carried out in different regions of Chile, which allowed us to actively engage with the community, foundations and schools, benefiting 3,914 people with disabilities, migrants and senior citizens by sponsoring their life projects.
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● | Teamwork |
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 2022 |
(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 2022, we ranked first among banks in the general ranking of “Merco Talento Chile 2022”, as in the last nine editions, which awarded us as the best banking 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.
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Ownership Structure
The following diagram shows our share ownership structure as of April 19, 2023:
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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, 2020, 2021 and 2022—Business Segments” and “Item 5. Operating and Financial Review and Prospects—Operating Results—Results of Operations for the Years Ended December 31, 2020, 2021 and 2022—Summary of Differences between Internal Reporting Policies and IFRS” for a description of the most significant differences between our internal reporting policies and IFRS. During 2022, certain changes were introduced to the accounting plan, both in the coding and in the description of some line-tems, which resulted in certain reclassifications in the balance sheet. For more information see Presentation of Financial Information section and Note 4 to our audited financial statements for the years ended December 31, 2021 and 2022 appearing elsewhere in this Annual Report.
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 subsidiary became officially dissolved on July 19, 2022.
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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, 2022, allocated among our principal business segments:
For the Year Ended December 31, 2022 | ||||||||||||
Total Loans | % Participation in Total Loans | Income before Income Tax(1) | ||||||||||
BANK’S INTERNAL REPORTING POLICIES: | (in millions of Ch$, except percentages) | |||||||||||
Retail banking | Ch$ | 22,955,034 | 62.6 | % | Ch$ | 766,259 | ||||||
Wholesale banking | 13,731,449 | 37.4 | 716,886 | |||||||||
Treasury and money market operations | — | — | 97,698 | |||||||||
Operations through subsidiaries | 8,321 | 0.0 | 104,349 | |||||||||
Other (adjustments and eliminations) | — | — | — | |||||||||
Total | Ch$ | 36,694,804 | 100.0 | % | Ch$ | 1,685,192 |
(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, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
BANK’S INTERNAL REPORTING POLICIES: | (in millions of Ch$) | |||||||||||
Retail banking | Ch$ | 1,219,063 | Ch$ | 1,375,007 | Ch$ | 1,788,443 | ||||||
Wholesale banking | 478,117 | 601,258 | 1,008,418 | |||||||||
Treasury and money market operations | 69,565 | 48,332 | 110,547 | |||||||||
Operations through subsidiaries | 177,953 | 196,425 | 229,767 | |||||||||
Other (adjustments and eliminations) | (21,480 | ) | (21,998 | ) | (21,382 | ) | ||||||
Total Operating Revenues | Ch$ | 1,923,218 | Ch$ | 2,199,024 | Ch$ | 3,115,793 |
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, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
BANK’S INTERNAL REPORTING POLICIES: | (in millions of Ch$) | |||||||||||
Chile | Ch$ | 1,944,698 | Ch$ | 2,221,022 | Ch$ | 3,137,175 | ||||||
Banking operations | 1,766,745 | 2,024,597 | 2,907,408 | |||||||||
Operations through subsidiaries | 177,953 | 196,425 | 229,767 | |||||||||
Foreign operations | ― | ― | ― | |||||||||
Operations through subsidiaries | ― | ― | ― | |||||||||
Other (adjustments and eliminations) | (21,480 | ) | (21,998 | ) | (21,382 | ) | ||||||
Total Operating Revenues | Ch$ | 1,923,218 | Ch$ | 2,199,024 | Ch$ | 3,115,793 |
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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, 2022:
For the Year Ended December 31, 2022 | ||||||||||||||||
BANK’S INTERNAL REPORTING POLICIES: | Commercial Loans | Mortgage Loans | Consumer
Loans | Total
Loans | ||||||||||||
(in millions of Ch) | ||||||||||||||||
Individuals (Personal Banking) | Ch$ | 2,661,030 | Ch$ | 10,544,916 | Ch$ | 4,757,884 | Ch$ | 17,963,830 | ||||||||
Small & Medium Enterprises | 3,912,700 | 848,757 | 229,747 | 4,991,204 | ||||||||||||
Retail Banking | 6,573,730 | 11,393,673 | 4,987,631 | 22,955,034 | ||||||||||||
Corporate Banking | 5,784,251 | — | 5 | 5,784,256 | ||||||||||||
Special Businesses | 2,527,262 | — | 173 | 2,527,435 | ||||||||||||
Large Companies | 5,392,145 | 22,481 | 5,132 | 5,419,758 | ||||||||||||
Wholesale Banking | 13,703,658 | 22,481 | 5,310 | 13,731,449 | ||||||||||||
Subsidiaries | 8,321 | — | — | 8,321 | ||||||||||||
Total | Ch$ | 20,285,710 | Ch$ | 11,416,154 | Ch$ | 4,992,940 | Ch$ | 36,694,804 |
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, 2022, our retail banking segment managed 266 branches operating under our “Banco de Chile” and “Banco Edwards-Citi” brand. As of December 31, 2022, loans granted by our retail banking segment amounted to Ch$22,955,034 million and represented 62.6% of our total loans as of the same date.
In terms of composition, as set forth in the following table, as of December 31, 2022 our retail segment’s loan portfolio was principally focused on residential mortgage loans, which represented 49.6% of the segment’s loan book. The remaining loans were distributed between commercial loans (28.6%) and consumer (21.7%).
As of December 31, 2022 | ||||||||
BANK’S INTERNAL REPORTING POLICIES: | (in millions of Ch$, except percentages) | |||||||
Commercial loans | ||||||||
Commercial credits | Ch$ | 5,813,934 | 25.3 | % | ||||
Leasing contracts | 527,404 | 2.3 | ||||||
Other loans | 232,392 | 1.0 | ||||||
Total Commercial Loans | 6,573,730 | 28.6 | ||||||
Residential Mortgage Loans | 11,393,673 | 49.6 | ||||||
Consumer Loans | ||||||||
Installment loans | 3,114,363 | 13.6 | ||||||
Credit cards | 1,619,618 | 7.1 | ||||||
Lines of credit and other loans | 253,649 | 1.1 | ||||||
Total Consumer Loans | 4,987,631 | 21.7 | ||||||
Total | Ch$ | 22,955,034 | 100.0 | % |
We serve the retail market through our Retail Banking Segment, which is responsible for offering financial services to individuals and microentrepreneurs, as well as small and medium sized companies with annual sales of up to UF 70,000 (~Ch$2,460 million as of December 31, 2022). This area manages our branch network operating under the brand names “Banco de Chile” and “Banco Edwards Citi” and had 266 branches as of December 31, 2022. For purposes of personal banking, the Individuals and SME Area maintains a segmentation to provide costumers of all income segments from Consumer Finance 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.
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The strategy followed by our Retail Banking Segment 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 2022, the Retail Banking Segment focused on targeted growth opportunities while developing new business solutions and benefits for its clients in order to improve our customers’ experience. Accordingly, in 2022 this business unit recorded a 25% growth in personal banking customers (number of individuals), which was prompted by the upgrade in segmented value propositions that split into two customer clusters composed of transactional (retail, young and traditional) and relational (preferential and private) customers. Likewise, we introduced tailored offerings for both digitally-oriented customers and customers which prefer traditional channels. Moreover, this business segment achieved a 7.2% increase in checking account customers in 2022, which was in part the consequence of revised current account plans that became simpler, more flexible and more connected to the benefits of the loyalty program.
Also, during fiscal year 2022, this segment managed to achieve significant advances in diverse areas in personal banking, including (i) a 35.4% increase in credit card related loans, which allowed us to gain significant market share, (ii) an annual increase in payment channel transactionality, as reflected by a 32.8% and a 26.5% rise in purchases with both credit and debit cards, respectively, which was coupled with increases of 9.4% and 17.2% in the total stock of credit and debit cards issued issued in 2022 when compared to 2021, (iii) an increase of 8.3% in consumer installment loans that enabled us to achieve a market share of 20.6%, and (iv) the consolidation of FAN Account, which reached more than one million customers in 2022, by means of improving the quality of products and strengthening the relationship with customers.
In regards to SME banking, during 2022, this business unit focused on supporting customers with comprehensive value offerings. Amid clear signs of an economic slowdown, the access to financing and financial support became a main priority for SME customers. For this reason, the digital solution launched in May 2020 that enables customers to apply for loans was strengthened. In addition, we launched the FAN Emprende Account, which targets entrepreneurs, start-ups and SME customers by taking advantage of digital transformation, since it is a 100% digital onboarding demand account. Also we strengthened the benefits associated with our loyalty program for SMEs through alliances and discounts on products and services for their businesses, such as machinery suppliers, car sale companies, telecommunications providers, training, among others.
Also, in SME banking we managed to rank first in total loans when compared to our main peers, based on sustained growth in service quality and standing out among peers in customer relations as “the bank that supports SMEs and entrepreneurs”.
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In 2022, the Retail Banking Segment also achieved significant increases in lending and saving products. In this regard, throughout the year the segment’s customer base grew by approximately 57,732 new current account holders.
As of December 31, 2022, the Retail Banking Segment served 1,337,404 core customers (those holding a current account or a loan outstanding) of which 1,189,742 were individuals and 147,662 were small and medium sized Chilean companies. This customer base resulted jointly in total loans granted to 1,117,187 borrowers, which included 137,610 residential mortgage loans debtors, 132,194 commercial loan debtors, 490,884 utilized lines of credit and 356,499 installment loans.
As of December 31, 2022, 78.3% of our loans managed by this area were granted to individuals, which represents Ch$17,963,830 million. As of the same date, Ch$4,991,204 million (21.7% of loans granted to retail banking clients) were granted to SMEs.
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.
Installment Loans
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 46 months.
As of December 31, 2022, we had Ch$3,114,454 million in installment loans granted by the Bank as a whole, which accounted for 62.4% of our total 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, 2022, we had outstanding residential mortgage loans of Ch$11,416,154 million (under internal reporting policies considering the Bank as a whole), which represented 31.1% of our total loan book as of the same date. According to information published by the CMF, as of December 31, 2022, we were Chile’s third largest private sector bank in terms of year-end mortgage loans balances, accounting for approximately 15.2% 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, 2022, the average residual maturity of our residential mortgage loan portfolio was 16.1 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 past 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, 2022, 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.
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The following table sets forth the composition of our residential mortgage loan portfolio by product type:
As of December 31, 2022 | ||||||||
BANK’S INTERNAL REPORTING POLICIES: | (in millions of Ch$,
except percentages) | |||||||
Secured Residential Mortgage Loans(1) | ||||||||
Loans financed with Mortgage Bonds | Ch$ | 3,892 | 0.03 | % | ||||
Mutuos Hipotecarios | 11,412,262 | 99.97 | ||||||
Total Secured Residential Mortgage Loans | Ch$ | 11,416,154 | 100.00 | % |
(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, 2022 residential mortgage loans related to Mutuos Hipotecarios represented 99.97% of our total residential mortgage loan portfolio, while the remaining 0.03% corresponded to mortgage loans financed with Mortgage Bonds. As of the same date, the Mutuos Hipotecarios portfolio had an average origination period of 16.1 years (the period from the date when the loans were granted to the specified date). Conversely, as of December 31, 2022, loans financed with Mortgage Bonds had an average origination period of 4.6 years (the period from the date when the loans were granted). In terms of credit risk, in 2022, loans related to Mutuos Hipotecarios, as well as those financed with Mortgage Bonds, had low gross (before recoveries) credit risk ratios of -0.21% and 0,09%, respectively. It is important to mention that the residential mortgage loan portfolio financed with Mortgage Bonds is annually decreasing 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 us.
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.
Credit–granting Requirements | ||||
Requirements (in millions of Ch$, except percentages) | ||||
Loan–to–Value Ratio | ≤ 80% | > 80% | ||
New Customers(1) | ||||
Employed | ||||
Years employed | ≥ 1 year | ≥ 1 year | ||
Monthly Income | ≥ Ch$0.5 | ≥ Ch$2.1 | ||
Self-Employed | ||||
Years Employed(2) | ≥ 2 years | ≥ 2 years | ||
Monthly Income | ≥ Ch$0.5 | ≥ Ch$2.1 | ||
New Customers with a University degree(3) | ||||
Employed | ||||
Years employed | ≥ 1 year | ≥ 1 year | ||
Monthly Income | ≥ Ch$0.5 | ≥ Ch$0.9 | ||
Self-Employed | ||||
Years Employed(2) | ≥ 2 years | ≥ 2 years | ||
Monthly Income | ≥ Ch$0.5 | ≥ Ch$0.9 |
(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. |
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.
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During 2022, only 0.7% of the residential mortgage loans granted to our customers financed between 90% and 100% of the property value. Similarly, during 2022, loans financing between 75% and 90% of the property appraised value represented 45% of these loans, loans financing between 50% and 75% of the property value represented 43.8% of these loans, and loans financing less than 50% of the property value represented 10.5% 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 0.7% in 2022.
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, 2022 | ||||||||||||
Outstanding Balance | LTV(2)(3) | % of Bank’s Total Loans | ||||||||||
BANK’S INTERNAL REPORTING POLICIES: | (in millions of Ch$, except percentages) | |||||||||||
Secured Loans(1) | ||||||||||||
Residential Mortgage Loans | Ch$ | 11,416,154 | 67.8 | % | 31.1 | % | ||||||
Other than mortgage loans | 1,199,297 | 22.1 | 3.3 | |||||||||
Total Secured Loans | Ch$ | 12,615,451 | 74.9 | % | 34.4 | % |
(1) | Corresponds to the Bank’s total secured loans and not only those associated with the Retail Banking Segment. |
(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, 2022 | ||||||||
BANK’S INTERNAL REPORTING POLICIES: | (in millions of Ch$, except percentages) | |||||||
Secured Other-than-Mortgage Loans(1) | ||||||||
Consumer Loans | Ch$ | 819,410 | 68.3 | % | ||||
Credit Cards | 326,982 | 27.3 | ||||||
Credit Lines | 52,904 | 4.4 | ||||||
Total Secured Other-than-Mortgage Loans | Ch$ | 1,199,297 | 100.0 | % |
(1) | Corresponds to the Bank’s total secured Other-than-Mortgage Loans and not only those associated with the Retail Banking Segment. |
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.
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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.
Credit Cards
As of December 31, 2022, 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, 2022, 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, 2022, 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 services related to payment transactions support. As of December 31, 2022, Transbank S.A. had 11 shareholders (including us) and as of the same date, our equity ownership in Transbank S.A. was 26.16%.
Also, in order to promote the four-party model in the credit card business by increasing competition in the processing market, on November 29, 2021, the shareholder banks of Nexus S.A., including us, sold 100% of the respective shares that each held in Nexus. On September 30, 2022, after being approved by the CMF and the National Economic Prosecutor, the transaction was officially closed and the full control of Nexus was taken by the acquirer. Accordingly, Banco de Chile, together with the rest of the shareholder banks, ceased to be shareholders of Nexus on the same date.
As of December 31, 2022, we had 1,397,135 valid credit card accounts, with 1,609,994 credit cards issued to individuals and small and medium sized companies (according to the CMF), held by 1,186,328 customers. Total charges on our credit cards during 2022 amounted to approximately Ch$6,791,999 million, with Ch$6,300,298 million corresponding to purchases in Chile and abroad and Ch$491,702 million corresponding to cash withdrawals both within Chile and abroad. The amount of purchases made by our customers accounted for 17.4% of the total purchase volume of banks’ credit cards in 2022, according to statistics provided by the CMF. Similarly, our market share in terms of cash withdrawals and automatic bill charges were 13.8% and 17.3% as of the same date, according to the CMF.
As of December 31, 2022, our credit card loans to individuals and small and medium sized companies amounted to Ch$1,619,618 million and represented 32.5% of our retail market business segment’s consumer loans.
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We believe that the Chilean market for credit cards has attractive growth potential, especially among lower- and middle-income customer segments, where banking penetration is still low. Likewise, fees associated with credit cars should continue to decline due to increasing competition from 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. Also, 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. In this context, a technical committee is responsible for determining the maximum interchange fees that may be charged by credit card issuers (such as banks, including us) to companies that provide merchant acquiring services. Since its inception functioning the technical committee has reduced the maximum interchange fees twice, which results in lower fee income for banks. For more information see Item 3. Key Information–Risk Factors–Risks Relating to our Operations and the Chilean Banking Industry–Stricter banking regulations and changes in law may constrain our operations and thereby adversely affect our financial condition and results of operations–Other Legal and Regulatory Requirements.
As of the date of this annual report, 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
Commercial credits granted by our Retail Banking Segment 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, 2022, our Retail Banking Segment had outstanding commercial loans of Ch$5,813,934 million, representing 25.3% of the retail banking segment’s total loans and 15.8% of our total loans as of the same date.
Leasing Contracts
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, 2022, our Retail Banking Segment had outstanding leasing contracts of Ch$527,404 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, 2022, the Retail Banking Segment had approximately 996,069 approved lines of credit to individual customers and small and medium sized companies. Also, the unit had outstanding advances to 490,884 individual customers and small and medium sized companies that totaled Ch$252,612 million, or 1.1% of the retail banking segment’s total loans and 0.7% 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.
Debit Cards
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 2022, 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, 2022, according to the CMF, we held a 11.3% market share of debit card transactions, which corresponds to approximately 340 million transactions throughout the year, according to the CMF.
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Deposit Products
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 560 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.
During the COVID-19 pandemic, particularly in 2020 and 2021, we experienced a significant increase in demand deposit balances, which was aligned with historically low interest rates, whichreflected the decisions made by the Central Bank in order to promote liquidity in the banking system and the whole economy by keeping the reference rate at 0.5% during 15 months starting April 2020, leading depositors to prefer liquidity over profitability and, therefore, moving from time deposits to demand deposits. This effect, together with an extraordinary increase in liquidity prompted by pension funds withdrawals, as permitted by the Chilean Congress, resulted in annual expansions of 33.9% and 22.3% in 2020 and 2021, respectively, in year-end demand deposit balances. Once the worst of the pandemic was over, the boost in household spending caused by the liquidity surplus seen in the economy, in conjunction with other external factors, had a direct impact on inflation, which increased 7.2% in 2021 and 12.8% in 2022. As a result, the Central Bank then adopted an aggressive monetary policy intended to dampen inflation by constraining the money supply in the economy through consecutive hikes in the monetary policy interest rate, which increased form 0.5% in July 2021 to 4.00% in December 2021 and to 11.25% in December 2022. As a consequence of both the higher opportunity cost of funds and the loss in purchasing power due to inflation, depositors began to move from demand deposits to short-term time deposits, which resulted in a decline of 27.8% in year-end total demand deposit balances for us in 2022. . These trends were reflected in the Retail Banking Segment where, based on our management information system, annual average balances of current accounts and demand deposits managed by our Retail Banking Segment increased by 42.9% in 2021 and declined by 12.5% in 2022.
Wholesale Banking Segment
Our wholesale banking segment serves the needs of corporate customers. In 2022, this business segment recorded annual operating revenues of approximately Ch$1,008,418 million, which represented 32.1% of our total operating revenues. Also, for the year ended December 31, 2022 this segment recorded an income before income tax of Ch$716,886 million, which represented 41.3% of our consolidated income before income tax. As of December 31, 2022, loans granted by this business segment amounted to Ch$13,731,449 million and represented 37.4% of our total loan portfolio.
The following table sets forth the composition of our portfolio of loans to the wholesale market in accordance with our internal reporting policies, as of December 31, 2022:
As of December 31, 2022 | ||||||||
BANK’S INTERNAL REPORTING POLICIES: | (in millions of Ch$, except percentages) | |||||||
Commercial credits | Ch$ | 10,204,713 | 74.3 | % | ||||
Foreign trade loans | 1,561,738 | 11.4 | ||||||
Leasing loans | 1,253,990 | 9.1 | ||||||
Factoring loans | 569,923 | 4.2 | ||||||
Other loans | 141,086 | 1.0 | ||||||
Total | Ch$ | 13,731,449 | 100.0 | % |
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As of December 31, 2022, we had 11,168 debtors out of a total of 30,308 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, 2022, loans granted by our wholesale banking segment were mainly related to:
● | financial services (approximately 19.6% of all loans granted by this business segment); |
● | manufacturing (approximately 10.7% of all loans granted by this business segment); |
● | construction (approximately 9.5% of all loans granted by this business segment); |
● | commerce and trade (approximately 9.3% of all loans granted by this business segment); |
● | communication and transportation (approximately 7.8% of all loans granted by this business segment); |
● | agriculture, forestry and fishing (approximately 6.0% of all loans granted by this business segment); |
● | community, social and personal services (approximately 2.5% of all loans granted by this business segment); |
● | utilities (approximately 1.9% of all loans granted by this business segment); and |
● | mining (approximately 1.4% 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, three 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.
Corporate Area
The Corporate Area provides banking products and services to corporations with annual sales exceeding UF 3.0 million (approximately Ch$105,300 million as of December 31, 2022). 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.
As of December 31, 2022, the Corporate Area had approximately 1,006 debtors out of a total of approximately 4,173 core customers (those holding either a current account or a loan with us). Also, this area managed total outstanding loans of Ch$5,784,256 million, which represented 15.8% of our total loan book as of the same date.
The following table sets forth the composition of our Corporate Area’s loan portfolio in accordance with our internal reporting policies, as of December 31, 2022:
As of December 31, 2022 | ||||||||
BANK’S INTERNAL REPORTING POLICIES: | (in millions of Ch$, except percentages) | |||||||
Commercial credits | Ch$ | 4,549,243 | 78.6 | % | ||||
Foreign trade loans | 682,976 | 11.8 | ||||||
Factoring loans | 134,251 | 2.3 | ||||||
Leasing loans | 347,252 | 6.0 | ||||||
Other loans | 70,535 | 1.2 | ||||||
Total | Ch$ | 5,784,256 | 100.0 | % |
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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, 2022, we were party to approximately 9,905 payment service contracts and approximately 873 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, 2022, joint volumes associated with collection and payment agreements increased by approximately 15.9% when compared to 2021.
In order to provide highly competitive and differentiated services, in conjunction with our Treasury and Money Market Operations segment, our Corporate Area offers to its customer diverse solutions to over their liquidity, short-term loans and hedging needs. 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.
In 2022, the business area focused on the offering of traditional and specialized financing loans for corporate customers, in addition to leasing loans, trade finance loans and factoring products. The Corporate Area grew 13.2% in total loans, mainly as a result of increases year over year of 9.0% in commercial credits, 45.0% in trade finance loans and 46.1% factoring loans. This growth was principally driven by revised value offerings oriented to adjust products to specific customers’ needs by means of specific initiatives supported by business intelligence tools. In relation to transactional services, this area experienced significant improvement in payments and collections, associated with specific agreement with corporate customers to pay services provided by them (or payroll) or collecting payments from their customers.
In addition, the Corporate Area offers specialized services of assets custody and financial advisory in diverse matters such as capital increases, purchase and sale of shares, private equity placements, public share offerings, mergers and acquisitions, capital markets, initial public offerings and bond placements. Thus, in 2022 the Corporate Area benefited from cross-selling, such as investment banking services offered through our investment banking subsidiary (Banchile Asesoría Financiera). During 2022, revenues from this subsidiary increased 74.2% when compared to 2021, having participated in some of the largest transactions in the local market, particularly in some of those associated with mergers and acquisitions. 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 fourth consecutive year.
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.
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As of December 31, 2022, our Special Businesses Area had approximately 761 borrowers out of a total of 7,238 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$2,527,435 million, which represented 6.9% of our total loans.
The following table displays the loan portfolio composition of the Special Businesses Area, in accordance with our internal reporting policies, as of December 31, 2022:
As of December 31, 2022 | ||||||||
BANK’S INTERNAL REPORTING POLICIES: | (in millions of Ch$, except percentages) | |||||||
Commercial credits | Ch$ | 2,406,086 | 95.2 | % | ||||
Leasing loans | 67,179 | 2.7 | ||||||
Other loans | 54,170 | 2.1 | ||||||
Total | Ch$ | 2,527,435 | 100.0 | % |
During 2022 the Special Businesses Area continued to deploy a differentiation strategy focused on 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 (mutual funds management) and Banchile Corredora de Bolsa (securities brokerage) in order to offer a wide array of wealth management services and products based on our knowledge of our customers. The Special Businesses Area recorded an annual decrease of 3.1% in total loans during 2022, particularly concentrated in commercial credits.
Large Companies Area
Our Large Companies Area provides companies, with annual sales that range from UF 70,000 (approximately Ch$2,460 million as of December 31, 2022) to UF 3.0 million (approximately Ch$105,300 million as of December 31, 2022), 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.
As of December 31, 2022, we had 9,330 large company debtors out of a total of 18,824 core customers (those holding either a current account or a loan with us). Loans granted by the Large Companies Area amounted to Ch$5,419,758 million as of the same date, which represented 14.8% of our total loans.
The following table sets forth the loan portfolio composition of the Large Companies Area, in accordance with our internal reporting policies, as of December 31, 2022:
As of December 31, 2022 | ||||||||
BANK’S INTERNAL REPORTING POLICIES: | (in millions of Ch$, except percentages) | |||||||
Commercial credits | Ch$ | 3,249,382 | 60.0 | % | ||||
Leasing loans | 1,052,560 | 19.4 | ||||||
Foreign trade loans | 873,324 | 16.1 | ||||||
Factoring loans | 178,884 | 3.3 | ||||||
Other loans | 65,608 | 1.2 | ||||||
Total | Ch$ | 5,419,758 | 100.0 | % |
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.
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In 2022, the Large Companies Area prioritized a customer centric approach in order to maintain a market-leading position in commercial loans while providing more diverse lending products to customers in a context of an economic slowdown. Based on these efforts, the Large Companies Area managed to increase total loans by 2.4%. This advance was mainly supported by significant expansions of 24.2% and 13.5% in trade finance and leasing loans, respectively, which allowed the Area to offset a 5.1% decline in commercial credits. The positive evolution in trade finance and leasing loans was helped by our revised value offerings aimed at improving the fit with our customers’ needs by designing tailored contractual terms. , the contraction in commercial credits was the consequence of both the economic slowdown that reduced demand for loans while making credit requirements stricter and also due to a high comparison base given the positive impact of Fogape-Reactiva loans (government-guaranteed loans) in 2021.
Our factoring and leasing businesses are part of the Large Companies Area. During 2022, we posted an annual increase of 29.3% and 10.1% in year-end balances of factoring and leasing loans, respectively, for the Bank as a whole. The foreign trade business is also managed by our Large Companies Area, although balances and results are allocated to different business areas depending on the customer who performs the transaction. During 2022, the foreign trade business recorded a 30.4% increase in loan balances for the Bank as a whole, mainly associated with revised value offerings that pursue to reactivate the product as mentioned above.
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 2022, 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 2022, we carried out the following debt placements:
● | Approximately Ch$1,088,897 million (denominated in UF) within the local market. These debt placements had maturities ranging from 11 to 19 years, while bearing premium spreads over the relevant benchmark. |
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● | We also carried out a debt placement in the international capital markets for Ch$51,670 in Peru with a 20-year maturity, taking advantage of our higher credit rating within Chile and the Latin American region, which enabled us to benefit from liquidity and lower interest rates. This placement was accompanied by a cross currency swap hedge arrangement 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 2022, we issued a total amount of approximately Ch$215,249 million. As of December 31, 2022, we had an outstanding balance of approximately Ch$108,182 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, 2022, we have established a network of approximately 600 foreign banks, among which we maintained credit relationships with approximately 120 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$110,547 million in 2022, which was Ch$62,215 million higher than the amount recorded in 2021. This performance was based on a proactive management of our trading and investment portfolios that benefited from changes in market factors such as inflation and interest rates, which was coupled with higher gains from the management of the intra-day FX position amid increased volatility in the exchange rate.
Regarding the management of our securities portfolio, as of December 31, 2022, the portfolio amounted to Ch$8,560,817 million and was composed of financial instruments measured at fair value through other comprehensive income that totaled Ch$3,967,392 million, securities held for trading amounting to Ch$3,691,070 million and financial instruments at amortized cost (held-to-maturity) totaling Ch$902,355 million. As for the type of instruments included in our securities portfolio, as of December 31, 2022, 72.7% consisted of securities issued by the Central Bank and the Chilean Government, 21.8% consisted of securities issued by local financial institutions, and 5.5% consisted of securities issued by non-financial Chilean corporate issuers, foreign issuers and other securities. Our investment strategy is designed to supplement our expected profitability, risks and economic variable projections while adhering to the regulatory guidelines and internal limits defined by our finance committee. In this regard, neither proprietary trading nor speculation on equity holdings are business goals for us and, therefore, equity instruments only represented 0.07% of our investment portfolio as of December 31, 2022.
Operations through Subsidiaries
We have made several strategic long-term investments in financial services companies that are engaged in activities complementary to our commercial banking activities. In making these investments our goal is to develop a comprehensive financial group capable of meeting the diverse financial needs of our current and potential clients by offering traditional banking products and specialized financial services through our different subsidiaries.
The following table sets forth information with respect to our financial services subsidiaries in accordance with our internal reporting policies as of December 31, 2022:
As of December 31, 2022 | ||||||||||||
BANK’S INTERNAL REPORTING POLICIES | Assets | Equity | Net Income | |||||||||
(in millions of Ch$) | ||||||||||||
Banchile Corredores de Bolsa S.A. | Ch$ | 837,082 | Ch$ | 156,330 | Ch$ | 42,409 | ||||||
Banchile Administradora General de Fondos S.A. | 61,355 | 40,877 | 29,965 | |||||||||
Banchile Corredores de Seguros Ltda. | 22,419 | 5,637 | 7,414 | |||||||||
Banchile Asesoria Financiera S.A. | 6,007 | 4,699 | 4,521 | |||||||||
Socofin S.A. | 11,243 | 2,102 | 591 | |||||||||
Total | Ch$ | 938,106 | Ch$ | 209,645 | Ch$ | 84,900 |
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The following table sets forth information with respect to our ownership interest in our financial services subsidiaries as of December 31, 2022:
Ownership Interest | ||||||||||||
BANK’S INTERNAL REPORTING POLICIES | Direct (%) | Indirect (%) | Total (%) | |||||||||
Banchile Corredores de Bolsa S.A. | 99.70 | % | 0.30 | % | 100.00 | % | ||||||
Banchile Administradora General de Fondos S.A. | 99.98 | 0.02 | 100.00 | |||||||||
Banchile Corredores de Seguros Ltda. | 99.83 | 0.17 | 100.00 | |||||||||
Banchile Asesoria Financiera S.A. | 99.96 | — | 99.96 | |||||||||
Socofin S.A. | 99.00 | % | 1.00 | % | 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, 2022, 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$7,541,634 million, which represented a 10.8% market share within the Chilean stock market.
Also, as of December 31, 2022, Banchile Corredores de Bolsa S.A. had equity amounting to Ch$156,330 million and, for the year ended December 31, 2022, recorded net income of Ch$42,409 million, which represented 3.3% of our consolidated net income for that period (under the bank’s internal reporting policies).
Mutual and Investment Fund Management
Since 1980, we have provided mutual fund management services through Banchile Administradora General de Fondos S.A. (formerly Banchile Administradora de Fondos Mutuos S.A.). As of December 31, 2022, according to data published by the Chilean Association of Mutual Funds, Banchile Administradora General de Fondos S.A. was the largest mutual fund manager in Chile, managing approximately 22.2% of all Chilean mutual funds’ assets. Also, as of December 31, 2022, Banchile Administradora General de Fondos S.A. operated 57 mutual funds and had Ch$ 9,170,710 million in assets under management owned by 362,591 corporate and individual investors. As of the same date, Banchile Administradora General de Fondos S.A. operated 56 public investment funds. Banchile managed Ch$1,456,456 million in net assets associated with these public investment funds on behalf of 1,632 participants. As of December 31, 2022, Banchile managed 5 private investment funds of Ch$59,418 million in net assets associated with these private investment funds on behalf of 94 participants. During 2022, Banchile Administradora General de Fondos S.A. created seven new mutual funds and 16 new public investment funds. No private investment funds were created in 2022.
The mutual and investment funds mentioned above are managed by Banchile Administradora General de Fondos S.A., but neither the Bank nor Banchile Administradora General de Fondos S.A. have ownership of these funds and, accordingly, they are not booked in our audited consolidated financial statements.
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The following table sets forth information regarding the various mutual funds managed by Banchile Administradora General de Fondos S.A. as of December 31, 2022:
As of December 31, 2022 | ||||||||||
Name of Fund | Type of Fund | Net Asset Value (in millions of Ch$) | Number of Investors | |||||||
Alianza | Fixed income (medium/long term) | 31,945 | 3,529 | |||||||
Asia | Equity | 4,317 | 1,189 | |||||||
Asiatico Accionario | Equity | 10,858 | 1,290 | |||||||
Banchile Agresivo | Blend | 3,154 | 1,090 | |||||||
Banchile Conservador | Blend | 2,194 | 1,072 | |||||||
Banchile Moderado | Blend | 2,550 | 1,020 | |||||||
Banchile Renta Lp | Fixed income (medium/long term) | 7,983 | 1,606 | |||||||
Banchile-Acciones | Equity | 30,466 | 7,648 | |||||||
Capital Empresarial | Fixed income (short term) | 2,170,175 | 30,412 | |||||||
Capital Financiero | Fixed income (short term) | 1,086,345 | 21,095 | |||||||
Corporate Dollar | Fixed income (short term) | 1,502,571 | 37,397 | |||||||
Crecimiento | Fixed income (medium/long term) | 237,434 | 19,654 | |||||||
Depósito Plus X | Structured | 33,450 | 808 | |||||||
Depósito Plus XI | Structured | 21,786 | 366 | |||||||
Depósito Plus XII | Structured | 36,157 | 721 | |||||||
Deposito XXI | Fixed income (medium/long term) | 144,937 | 12,304 | |||||||
Deuda Dolar | Fixed income (medium/long term) | 157,607 | 3,127 | |||||||
Deuda Estatal UF 3-5 | Fixed income (medium/long term) | 8,304 | 843 | |||||||
Disponible | Fixed income (short term) | 249,176 | 50,716 | |||||||
Emerging | Equity | 5,861 | 1,701 | |||||||
Emerging Market | Equity | 6,409 | 676 | |||||||
Estrategia Agresiva | Blend | 6,137 | 809 | |||||||
Estrategia Cons | Blend | 13,183 | 1,652 | |||||||
Estrategia Moderada | Blend | 24,744 | 1,862 | |||||||
Estrategico | Fixed income (medium/long term) | 641,535 | 21,908 | |||||||
Estructurado Dólar | Structured | 36,842 | 706 | |||||||
Estructurado UF V Chile | Structured | 40,530 | 1,054 | |||||||
Europa Desarrollada | Equity | 9,192 | 1,616 | |||||||
Fm Bch Pa Usd Mod | Blend | 56,843 | 1,696 | |||||||
Fondo Mutuo Banchile Depósito Plus IX | Structured | 88,640 | 1,840 | |||||||
Fondo Mutuo Chile Blue Chip Index Fund | Equity | 2,277 | 381 | |||||||
Fondo Mutuo Cobertura Deuda Global | Fixed income (medium/long term) | 1,285 | 179 | |||||||
Global Dollar | Equity | 17,988 | 629 | |||||||
Global High Yield | Fixed income (medium/long term) | 631 | 53 | |||||||
Global Mid Cap | Equity | 7,810 | 1,052 | |||||||
Horizonte | Fixed income (medium/long term) | 103,028 | 3,783 | |||||||
Inversion Brasil | Equity | 3,404 | 845 | |||||||
Inversion China | Equity | 6,310 | 1,076 | |||||||
Inversion USA | Equity | 59,737 | 3,896 | |||||||
Inversiones Alternat | Blend | 130 | 145 | |||||||
Japón Accionario | Equity | 896 | 430 | |||||||
Latam Corporate Investment Grade | Fixed income (medium/long term) | 23,534 | 1,084 | |||||||
Latam Mid Cap | Equity | 5,729 | 2,159 | |||||||
Liquidez 2000 | Fixed income (short term) | 311,848 | 40,677 | |||||||
Port Act Agresivo | Blend | 91,657 | 4,823 | |||||||
Port Act Controlado | Blend | 277,015 | 11,236 | |||||||
Port Act Equilibrado | Blend | 363,787 | 14,060 | |||||||
Port Act Moderado | Blend | 504,072 | 16,610 | |||||||
Port Act Potenciado | Blend | 180,204 | 7,903 | |||||||
Portafolio Activo Dolar Agresivo | Blend | 6,102 | 177 | |||||||
Portafolio Activo Dolar Conservador | Blend | 6,449 | 110 | |||||||
Renta Futura | Fixed income (medium/long term) | 77,923 | 3,615 | |||||||
Retorno L.P. UF | Fixed income (medium/long term) | 60,497 | 2,844 | |||||||
Selección Acciones Chilenas | Equity | 31,081 | 240 | |||||||
U.S. Dollar | Equity | 31,825 | 1,074 | |||||||
Us Mid Cap | Equity | 19,941 | 1,557 | |||||||
Utilidades | Fixed income (medium/long term) | 304,226 | 10,546 | |||||||
Total | Ch$ | 9,170,710 | 362,591 |
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The following table sets forth information regarding the investment funds managed by Banchile Administradora General de Fondos S.A. as of December 31, 2022:
As of December 31, 2022 | ||||||||||||
Name of Fund | Type of Fund | Net Asset Value (in millions of Ch$) | Number of Investors | |||||||||
Rem. F.I. Small Cap | Public | 66,449 | 16 | |||||||||
Remu Fi ($) Banchile Marketplus Tecnologia | Public | 660 | 3 | |||||||||
Remu Fi ($) Banchile Blackrock Esg | Public | 9,565 | 5 | |||||||||
Remu Fi (Us$) Allvp IV | Public | 0 | 0 | |||||||||
Remu Fi ($) Banchile Global Megatendencias | Public | 70 | 2 | |||||||||
Remu Fi ($) Banchile Marketplus UK | Public | 250 | 2 | |||||||||
Remu ($) Banchile Blackrock Japón | Public | 0 | 1 | |||||||||
Remu (Us$) Blackrock Private Opportunities V | Public | 0 | 0 | |||||||||
Rem. F.I.($) Latam Small Mid Cap | Public | 3,089 | 3 | |||||||||
Remu F.I. Europe Equity | Public | 953 | 7 | |||||||||
Remu F.I. Usa Equity | Public | 12,682 | 10 | |||||||||
Rem F.I. Market Plus Global | Public | 123,113 | 45 | |||||||||
Rem F.I. Market Plus EEUU | Public | 67,655 | 24 | |||||||||
Remu F.I. Emerging Equity | Public | 3,442 | 2 | |||||||||
Remu F.I Marketplus Europa | Public | 6,827 | 5 | |||||||||
Remu Fi Marketplus Emergente | Public | 27,867 | 19 | |||||||||
Remu Fi ($) Banchile Oro | Public | 2,576 | 7 | |||||||||
Remu Fi ($) Global Real Estate | Public | 16,492 | 12 | |||||||||
Remu Fi ($) Marketplus Japón | Public | 2,011 | 3 | |||||||||
Remu Fi ($) Banchile Equity Tr | Public | 654 | 3 | |||||||||
Remu Fi ($) Banchile Deuda Dol | Public | 9,223 | 4 | |||||||||
Remu Fi ($) Banchile Proyección | Public | 33,421 | 2 | |||||||||
Remu Fi ($) Banchile Proyección UF Plus II | Public | 28,883 | 46 | |||||||||
Rem.($) F.I. Chile Blend | Public | 32,572 | 9 | |||||||||
Rem. F.I. Latam Corp.High Yield | Public | 6,740 | 93 | |||||||||
Remu F.I. ($) Deuda Chilena | Public | 287,689 | 254 | |||||||||
Rem. F.I. Deuda Global | Public | 24,767 | 71 | |||||||||
Remu F.I. Deuda Alto Rendimiento | Public | 22,684 | 19 | |||||||||
Remu Fi ($) Edr Fund Emerging Credit | Public | 3,108 | 4 | |||||||||
Remu Fi (Us$) Banchile Ag Dl IV | Public | 10,011 | 1 | |||||||||
Remu Fi (Us$) Banchile Real Estate USA I | Public | 98,959 | 4 | |||||||||
Remu Fi (Us$) Banchile F2 Vc III | Public | 537 | 4 | |||||||||
Remu Fi (Us$) Private Opportun | Public | 7,826 | 1 | |||||||||
Remu Fi (Us$) Pe Secondary Deal I | Public | 5,226 | 4 | |||||||||
Remu Fi (Us$) F2 Vc Select Fund I | Public | 707 | 4 | |||||||||
Remu Fi (Us$) Real Estate Usa II | Public | 38,645 | 4 | |||||||||
Remu Fi (Us$) Schroder Private Equity Evergreen | Public | 6,540 | 2 | |||||||||
Remu ($) Deuda Privada I | Public | 43,953 | 2 | |||||||||
Remu Fi (Eur$) Axon Aurora II | Public | 0 | 0 | |||||||||
Remu (Us$) Fi Pe Secondary Deal II | Public | 24,098 | 7 | |||||||||
Remu Fi (Us$) Vc Allvp IV | Public | 71 | 3 | |||||||||
Rem. F.I.($) Banch. Plusvalia Eficiente | Public | 11,726 | 23 | |||||||||
Rem. F.I. Banchile Rentas Inmobiliarias I | Public | 143,036 | 94 | |||||||||
Rem F.I. ($) Renta Habitacionales | Public | 4,813 | 54 | |||||||||
Rem Fi Inmobiliario VIII | Public | 1,108 | 4 | |||||||||
Remu Fi Desarr.Y Rtas.Resid. | Public | 28,280 | 286 | |||||||||
Remu F.I Inver. Inmobiliario IX | Public | 15,416 | 300 | |||||||||
Remu F.I United States Propert | Public | 5,015 | 19 | |||||||||
Remu Fi ($) Desarrollo Inmobiliario Peru-Colombia | Public | 13,979 | 15 | |||||||||
Remu Fi European Value Partners II | Public | 5,159 | 6 | |||||||||
Remu Fi Infraestructura Chile I | Public | 76,924 | 10 | |||||||||
Remu Fi ($) Inmobiliario X | Public | 54,186 | 8 | |||||||||
Remu Fi (Us$) Ag Direct Lendin | Public | 6,364 | 6 | |||||||||
Remu Fi ($) Inmobiliario XI | Public | 54,292 | 19 | |||||||||
Remu Fi (Us$) Energias Renovab | Public | 3,190 | 39 | |||||||||
Remu Fi (Eur$) Axon Aurora I | Public | 2,953 | 42 | |||||||||
Rem.($)F.I.P. Inmob.Capitolio | Private | 21,626 | 29 | |||||||||
Remu Fip (Us$) Rentas Perú I | Private | 12,239 | 1 | |||||||||
Remu Fi (Us$) Privado F2 | Private | 11,282 | 6 | |||||||||
Remu Fip (Us$) Allvp III | Private | 3,036 | 10 | |||||||||
Rem. (Us$) F.I.P. Rentas Inmob | Private | 11,235 | 48 | |||||||||
Total | Ch$ 1,515,874 | 1,726 |
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As of December 31, 2022, Banchile Administradora General de Fondos S.A. had equity of Ch$40,877 million and, for the year ended December 31, 2022, net income of Ch$29,965 million, which represented 2.3% of our 2022 consolidated net income (under the bank’s internal reporting policies).
Insurance Brokerage
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, 2022, Banchile Corredores de Seguros Limitada had equity of Ch$5,637 million and, for the year ended December 31, 2022 it recorded net income of Ch$7,414 million, which represented 0.6% of our 2022 consolidated net income (under the bank’s internal reporting policies). According to data published by the CMF, as of December 31, 2022, Banchile Corredores de Seguros Limitada had a 3.2% market share in the total amount of life and casualty insurance policies (in Chilean pesos) sold by insurance brokerage companies in Chile, including life annuities.
Since 2019 we have partnered with Chubb Seguros Chile S.A. and Chubb Seguros de Vida Chile S.A., local subsidiaries of Chubb Limited, as 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, 2022, Banchile Asesoría Financiera S.A. had equity of Ch$4,699 million and, for the year ended December 31, 2022, recorded net income of Ch$4,521 million, which represented 0.3% of our 2022 consolidated net income (under the bank’s internal reporting policies).
Collection Services
Socofin S.A. provides judicial and extra judicial loan collection services to the Bank. As of December 31, 2022, Socofin S.A. had equity of Ch$2,102 million and, for the year ended December 31, 2022, and recorded a net income of Ch$591 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, 2022, we had a network of 266 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, 2022, we had 1,696 ATMs that were part of a larger network of 7,438 ATMs operating in Chile, of which 4,699 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.
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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 363,192 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 2022, 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, 2020, 2021 and 2022:
| For the Year Ended December 31, | % Increase (Decrease) | ||||||||||||||||||
BANK’S MANAGEMENT INFORMATION SYSTEM | 2020 | 2021 | 2022 | 2020/2021 | 2021/2022 | |||||||||||||||
(in millions of transactions) | ||||||||||||||||||||
Teller | 20.4 | 18.9 | 18.0 | (7.3 | )% | (5.0 | )% | |||||||||||||
ATMs | 106.6 | 114.7 | 111.2 | 7.6 | (3.0 | ) | ||||||||||||||
Website | ||||||||||||||||||||
Monetary Transactions | 56.5 | 61.8 | 65.5 | 9.4 | 5.9 | |||||||||||||||
Non-monetary transactions | 391.5 | 404.4 | 494.1 | 3.3 | 22.2 | |||||||||||||||
Mobile Banking | 61.5 | 89.6 | 115.0 | 45.6 | 28.3 | |||||||||||||||
Total | 636.6 | 689.5 | 803.8 | 8.3 | % | 16.3 | % |
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Competition
Overview
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 85.8% of the Chilean GDP as of December 31, 2022. 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, 2022, the six largest Chilean banks accounted for approximately 86.5% of all outstanding loans granted by Chilean financial institutions (excluding operations of subsidiaries abroad): Banco Santander—Chile (17.2%), Banco de Chile (16.3%), Scotiabank Chile (14.7%), Banco de Crédito e Inversiones (“BCI”) (14.3%), Banco del Estado (13.9%) and Itaú-Corpbanca (10.1%).
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. Furthermore, in recent years and given the high 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.
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. These new ways of doing business are based on the disintermediation of traditional banking service providers while not being subject to the same capital requirements that banks are. Therefore, these providers represent a challenge for the traditional banking industry that may result in lowered margins in the future. In order to address these kinds of businesses, Law No. 21,521 was enacted in January 2023 with the aim of establishing a general framework for financial services provided through technological means (including banks) in order to protect financial customers and data privacy while preserving financial stability and strengthening anti money-laundering. For more information see Item 4. Information on the Company–Regulation and Supervition–Fintech Law.
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, 2022, with outstanding total loans of Ch$31,368,758 million, representing a 13.9% 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 and Banco Bice, as these banks rely on specialized business models that provide wealth management and traditional banking services, as we do.
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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 2.4% as of December 31, 2022, 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, 2022, consumer loans granted by Banco Falabella and Banco Ripley represented 13.6% and 3.4%, 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, Scotiabank Chile and Itaú-Corpbanca. 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, 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 believe that we are currently large enough to compete effectively in all of our target markets and are making our best efforts to effectively operate within this competitive environment, we acknowledge that our net income may decrease as a result of increasing competition.
Balance Sheet
The following table sets forth certain statistical information on the Chilean financial system as of December 31, 2022, according to information published by the CMF under Chilean GAAP:
As of December 31, 2022 | ||||||||||||||||||||||||||||||||
Assets | Loans(1)(2) | Deposits(2) | Equity(3) | |||||||||||||||||||||||||||||
CHILEAN GAAP: | Amount | Share | Amount | Share | Amount | Share | Amount | Share | ||||||||||||||||||||||||
(in millions of Ch$, except percentages) | ||||||||||||||||||||||||||||||||
Private sector banks | Ch$ | 339,625,685 | 85.6 | % | Ch$ | 193,871,822 | 86.1 | % | Ch$ | 137,012,128 | 80.6 | % | Ch$ | 24,875,684 | 89.4 | % | ||||||||||||||||
Banco del Estado | 57,090,786 | 14.4 | 31,368,758 | 13.9 | 32,882,716 | 19.4 | 2,951,654 | 10.6 | ||||||||||||||||||||||||
Total banking system | Ch$ | 396,716,471 | 100.0 | % | Ch$ | 225,240,580 | 100.0 | % | Ch$ | 169,894,844 | 100.0 | % | Ch$ | 27,827,338 | 100.0 | % |
Source: CMF
(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. |
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Loans and Deposits
a. | Total Loans |
We had total loans of Ch$36,694,804 million as of December 31, 2022, 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:
Total Loans(1)(2) | ||||||||||||
CHILEAN GAAP: | As of December 31, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Banco Santander–Chile | 18.5 | % | 17.9 | % | 17.2 | % | ||||||
Banco de Chile | 16.6 | 16.7 | 16.3 | |||||||||
Scotiabank Chile | 13.7 | 14.1 | 14.7 | |||||||||
Banco de Crédito e Inversiones | 14.3 | 14.3 | 14.3 | |||||||||
Itaú-Corpbanca | 9.8 | 9.8 | 10.1 | |||||||||
Total market share | 72.9 | % | 72.9 | % | 72.6 | % |
Source: CMF
(1) | Allowances for loan losses not deducted. |
(2) | Excludes operations of subsidiaries abroad. |
b. | Total Deposits |
We had total deposits (including demand deposits and time deposits) of Ch$27,540,373 million as of December 31, 2022, 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, 2020, 2021 and 2022 on a consolidated basis, according to information published by the CMF under Chilean GAAP:
Total Deposits(1) | ||||||||||||
CHILEAN GAAP: | As of December 31, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Banco de Chile | 16.1 | % | 17.2 | % | 16.2 | % | ||||||
Banco Santander–Chile | 16.8 | 17.4 | 15.9 | |||||||||
Banco de Crédito e Inversiones | 13.3 | 14.2 | 14.8 | |||||||||
Scotiabank Chile | 10.5 | 10.4 | 11.2 | |||||||||
Itaú-Corpbanca | 9.3 | 8.4 | 8.8 | |||||||||
Total market share | 66.0 | % | 67.6 | % | 67.0 | % |
Source: CMF
(1) | Excludes operations of subsidiaries abroad. |
c. | Demand Deposits |
We had demand deposits of Ch$13,383,232 million as of December 31, 2022, 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:
Demand Deposits(1) | ||||||||||||
CHILEAN GAAP: | As of December 31, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Banco Santander–Chile | 19.9 | % | 20.9 | % | 20.9 | % | ||||||
Banco de Chile | 20.8 | 21.6 | 19.8 | |||||||||
Banco de Crédito e Inversiones | 13.5 | 14.7 | 14.7 | |||||||||
Scotiabank Chile | 9.3 | 8.4 | 7.5 | |||||||||
Itaú-Corpbanca | 5.4 | 5.4 | 5.6 | |||||||||
Total market share | 69.0 | % | 71.0 | % | 68.6 | % |
Source: CMF
(1) | Excludes operations of subsidiaries abroad. |
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d. | Time Deposits |
We had time deposits of Ch$14,157,141 million as of December 31, 2022, 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:
Time Deposits(1) | ||||||||||||
CHILEAN GAAP: | As of December 31, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Banco de Crédito e Inversiones | 13.2 | % | 13.7 | % | 14.9 | % | ||||||
Banco de Chile | 11.6 | 12.2 | 13.8 | |||||||||
Scotiabank Chile | 11.5 | 12.6 | 13.6 | |||||||||
Banco Santander–Chile | 13.8 | 13.5 | 12.6 | |||||||||
Itaú-Corpbanca | 13.0 | 11.7 | 10.9 | |||||||||
Total market share | 63.1 | % | 63.6 | % | 65.9 | % |
Source: CMF
(1) | Excludes operations of subsidiaries abroad. |
Credit Quality and Risk Management
a. | Risk Index |
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, 2020, 2021 and 2022, according to information published by the CMF under Chilean GAAP:
Allowances to Total Loans(1) | ||||||||||||
CHILEAN GAAP: | As of December 31, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Scotiabank Chile | 2.00 | % | 1.54 | % | 1.80 | % | ||||||
Banco de Crédito e Inversiones | 2.22 | 1.84 | 1.90 | |||||||||
Banco de Chile | 2.41 | 2.10 | 2.12 | |||||||||
Banco Santander—Chile | 2.84 | 2.62 | 2.68 | |||||||||
Itaú-Corpbanca | 3.99 | 3.22 | 2.71 | |||||||||
Financial system | 2.73 | % | 2.39 | % | 2.48 | % |
Source: CMF
(1) | Includes operations of subsidiaries abroad. |
b. | Non-Performing Loans |
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, 2020, 2021 and 2022 on an individual basis, according to information published by the CMF under Chilean GAAP:
Past-due loans to Total Loans(1) | ||||||||||||
CHILEAN GAAP: | As of December 31, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Banco de Chile | 0.97 | % | 0.85 | % | 1.08 | % | ||||||
Banco de Crédito e Inversiones | 0.96 | 0.75 | 1.18 | |||||||||
Scotiabank Chile | 1.38 | 0.88 | 1.38 | |||||||||
Banco Santander-Chile | 1.40 | 1.21 | 1.85 | |||||||||
Itaú-Corpbanca | 1.51 | 1.25 | 1.97 | |||||||||
Financial system | 1.43 | % | 1.14 | % | 1.70 | % |
Source: CMF
(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. |
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c. | Additional Allowances |
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) | ||||||||||||
CHILEAN GAAP: | As of December 31, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Banco de Chile | Ch$ | 320,252 | Ch$ | 540,252 | Ch$ | 700,252 | ||||||
Banco de Crédito e Inversiones | 160,176 | 350,143 | 415,022 | |||||||||
Banco Santander–Chile | 126,000 | 258,000 | 293,000 | |||||||||
Itaú-Corpbanca | 137,848 | 133,323 | 175,501 | |||||||||
Scotiabank Chile | 84,808 | 185,761 | 164,249 | |||||||||
Financial System | Ch$ | 1,480,042 | Ch$ | 2,273,943 | Ch$ | 2,802,674 |
Source: CMF
(1) | Includes operations of subsidiaries abroad. |
Capital Adequacy
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, 2020, 2021 and 2022 according to information published by the CMF under Chilean GAAP:
Capital and Reserves(1)(2) | ||||||||||||
CHILEAN GAAP: | As of December 31, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Banco de Crédito e Inversiones | Ch$ | 3,671,402 | Ch$ | 4,135,802 | Ch$ | 4,200,903 | ||||||
Banco de Chile | 3,483,430 | 3,753,988 | 3,969,050 | |||||||||
Banco Santander - Chile | 3,205,703 | 2,862,744 | 3,567,665 | |||||||||
Itaú-Corpbanca | 3,240,890 | 3,083,336 | 3,016,488 | |||||||||
Scotiabank Chile | Ch$ | 2,205,564 | Ch$ | 2,376,634 | Ch$ | 2,705,818 |
Source: CMF
(1) | Capital and Reserves equals to total equity attributable to equity holders before provisions for minimum dividends and net income for the period. |
(2) | Includes operations of subsidiaries abroad. |
b. | Average Equity |
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) | ||||||||||||
CHILEAN GAAP: | As of December 31, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Banco de Crédito e Inversiones | Ch$ | 3,949,083 | Ch$ | 4,130,622 | Ch$ | 4,606,052 | ||||||
Banco de Chile | 3,615,815 | 3,940,115 | 4,479,043 | |||||||||
Banco Santander - Chile | 3,564,560 | 3,401,664 | 3,714,490 | |||||||||
Itaú-Corpbanca | 2,836,422 | 2,481,405 | 3,247,714 | |||||||||
Scotiabank Chile | Ch$ | 2,303,704 | Ch$ | 2,521,180 | Ch$ | 2,716,331 |
Source: CMF
(1) | Includes operations of subsidiaries abroad. |
(2) | Average total equity attributable to equity holders for the year ended December 31, 2020, 2021 and 2022. |
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c. | Basel Ratio |
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) | ||||||||||||
CHILEAN GAAP: | Year Ended December 31, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Banco de Chile | 16.0 | % | 17.2 | % | 17.9 | % | ||||||
Banco Santander–Chile | 15.4 | 15.2 | 17.8 | |||||||||
Itaú-Corpbanca | 13.6 | 16.2 | 15.3 | |||||||||
Scotiabank Chile | 13.2 | 13.0 | 13.5 | |||||||||
Banco de Crédito e Inversiones | 13.4 | 13.5 | 13.0 | |||||||||
Financial system | 14.7 | % | 14.8 | % | 15.6 | % |
Source: CMF
(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. |
d. | CET1 Ratio |
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) | ||||||||||||
CHILEAN GAAP: | Year Ended December 31, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Banco de Chile | 12.2 | % | 12.9 | % | 13.6 | % | ||||||
Banco Santander–Chile | 10.3 | 9.2 | 11.1 | |||||||||
Itaú-Corpbanca | 8.4 | 11.5 | 10.4 | |||||||||
Scotiabank Chile | 10.1 | 10.1 | 10.3 | |||||||||
Banco de Crédito e Inversiones | 10.9 | 10.0 | 9.4 | |||||||||
Financial system | 10.7 | % | 10.6 | % | 11.2 | % |
Source: CMF
(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, 2020, 2021 and 2022, according to information published by the CMF under Chilean GAAP:
Net Income(1)(2) | ||||||||||||
CHILEAN GAAP: | Year Ended December 31, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Banco de Chile | 39.3 | % | 21.4 | % | 26.1 | % | ||||||
Banco de Crédito e Inversiones | 26.9 | 14.1 | 15.2 | |||||||||
Banco Santander—Chile | 43.9 | 20.9 | 15.0 | |||||||||
Scotiabank Chile | 23.4 | 11.5 | 9.0 | |||||||||
Itaú-Corpbanca | (78.5 | ) | 7.5 | 8.0 | ||||||||
Total Market Share | 55.0 | % | 75.4 | % | 73.4 | % |
Source: CMF
(1) | Includes operations of subsidiaries abroad. |
(2) | Net income attributable to equity holders. |
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b. | Operating Revenues |
The following table sets forth the market shares in terms of operating revenues for private banks as of December 31, 2020, 2021 and 2022, on a consolidated basis, according to information published by the CMF under Chilean GAAP:
Operating Revenues(1) | ||||||||||||
CHILEAN GAAP: | Year Ended December 31, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Banco de Chile | 16.3 | % | 16.9 | % | 19.0 | % | ||||||
Banco de Crédito e Inversiones | 17.2 | 16.4 | 16.5 | |||||||||
Banco Santander—Chile | 17.0 | 17.3 | 13.7 | |||||||||
Scotiabank Chile | 10.7 | 10.3 | 8.8 | |||||||||
Itaú-Corpbanca | 9.1 | 10.0 | 8.8 | |||||||||
Total Market Share | 70.3 | % | 70.8 | % | 66.8 | % |
Source: CMF
(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) | ||||||||||||
CHILEAN GAAP: | Year Ended December 31, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Banco de Chile | 22.2 | % | 20.1 | % | 21.5 | % | ||||||
Banco Santander–Chile | 13.6 | 14.9 | 16.5 | |||||||||
Banco de Crédito e Inversiones | 16.5 | 15.2 | 14.8 | |||||||||
Scotiabank Chile | 8.9 | 8.4 | 8.1 | |||||||||
Itaú-Corpbanca | 7.2 | 7.0 | 7.0 | |||||||||
Total Market Share | 68.5 | % | 65.7 | % | 67.9 | % |
Source: CMF
(1) | Includes operations of subsidiaries abroad. |
d. | Operating Margin |
The following table sets forth the operating margins for private banks as of December 31, 2020, 2021 and 2022, on a consolidated basis, according to information published by the CMF under Chilean GAAP:
Operating Margin(1)(2) | ||||||||||||
CHILEAN GAAP: | Year Ended December 31, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Banco de Chile | 5.1 | % | 5.4 | 6.9 | % | |||||||
Banco Santander—Chile | 5.0 | 5.3 | 4.5 | |||||||||
Banco de Crédito e Inversiones | 4.5 | 4.4 | 4.5 | |||||||||
Itaú-Corpbanca | 3.8 | 4.8 | 4.4 | |||||||||
Scotiabank Chile | 4.4 | 4.6 | 4.2 | |||||||||
Financial System average | 4.8 | % | 5.0 | % | 5.3 | % |
Source: CMF
(1) | Includes operations of subsidiaries abroad. |
(2) | Operating income divided by average interest earning assets. |
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Profitability Ratios
a. | Return on Capital and Reserves (year-end balance) |
The following table sets forth our return attributable to equity holders on capital and reserves and the returns attributable to equity holders on capital and reserves of our principal private sector competitors and the Chilean banking industry as a whole, in each case as of December 31, 2020, 2021 and 2022, according to information published by the CMF under Chilean GAAP:
Return on Capital and Reserves(1)(2) | ||||||||||||
CHILEAN GAAP: | Year Ended December 31, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Banco de Chile | 13.3 | % | 21.1 | % | 35.5 | % | ||||||
Banco Santander–Chile | 16.1 | 27.1 | 22.7 | |||||||||
Banco de Crédito e Inversiones | 8.6 | 12.6 | 19.5 | |||||||||
Scotiabank Chile | 12.5 | 17.9 | 18.0 | |||||||||
Itaú-Corpbanca | (28.6 | ) | 9.0 | 14.4 | ||||||||
Financial System average | 5.5 | % | 16.9 | % | 22.1 | % |
Source: CMF
(1) | Corresponds to net income attributable to equity holders divided by the year-end balance of Capital and Reserves attributable to equity holders. |
(2) | Includes operations of subsidiaries abroad. |
b. | Return on Average Equity (ROAE) Attributable to Equity Holders |
The following table sets forth our return on average equity and the returns on average equity of our principal private sector competitors and the Chilean banking industry as a whole, in each case as of the dates indicated, according to information published by the CMF under Chilean GAAP:
Return on Average Equity (1)(2) | ||||||||||||
CHILEAN GAAP: | Year Ended December 31, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Banco de Chile | 12.8 | % | 20.1 | % | 31.5 | % | ||||||
Banco Santander–Chile | 14.5 | 22.8 | 21.8 | |||||||||
Scotiabank Chile | 12.0 | 16.8 | 17.9 | |||||||||
Banco de Crédito e Inversiones | 8.0 | 12.6 | 17.8 | |||||||||
Itaú-Corpbanca | (32.6 | ) | 11.2 | 13.4 | ||||||||
Financial System average | 5.4 | % | 16.5 | % | 21.0 | % |
Source: CMF
(1) | Corresponds to net income attributable to equity holders divided by the average balance of Total Equity attributable to equity holders. |
(2) | Includes operations of subsidiaries abroad. |
c. | Return on Average Assets (ROAA) Attributable to Equity Holders |
The following table sets forth our return on average assets and the returns on average assets of our principal private sector competitors and the Chilean banking industry as a whole, in each case as of the dates indicated, according to information published by the CMF under Chilean GAAP:
Return on Average Assets (1)(2) | ||||||||||||
CHILEAN GAAP: | Year Ended December 31, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Banco de Chile | 1.0 | % | 1.7 | % | 2.7 | % | ||||||
Banco Santander–Chile | 0.9 | 1.3 | 1.2 | |||||||||
Scotiabank Chile | 0.7 | 1.1 | 1.1 | |||||||||
Banco de Crédito e Inversiones | 0.6 | 0.9 | 1.1 | |||||||||
Itaú-Corpbanca | (2.5 | ) | 0.8 | 1.1 | ||||||||
Financial System average | 0.4 | % | 1.1 | % | 1.4 | % |
Source: CMF
(1) | Corresponds to net income attributable to equity holders divided by the average balance of Total Assets. |
(2) | Includes operations of subsidiaries abroad. |
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Operating Efficiency
a. | Operating Expenses |
The following table sets forth the market shares in terms of operating expenses for private sector banks as of December 31, 2020, 2021 and 2022, on a consolidated basis, according to information published by the CMF under Chilean GAAP:
Operating Expenses(1) | ||||||||||||
CHILEAN GAAP: | As of December 31, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Scotiabank Chile | 8.7 | % | 10.1 | % | 9.0 | % | ||||||
Itaú-Corpbanca | 24.3 | 11.8 | 11.4 | |||||||||
Banco Santander—Chile | 12.6 | 15.1 | 14.5 | |||||||||
Banco de Chile | 13.1 | 14.7 | 15.0 | |||||||||
Banco de Crédito e Inversiones | 15.5 | 17.4 | 19.4 | |||||||||
Total Market Share | 74.1 | % | 69.1 | % | 69.3 | % |
Source: CMF
(1) | Includes operations of subsidiaries abroad. |
b. | Efficiency Ratio (Cost-to-income Ratio) |
The following table sets forth the efficiency ratios of the largest private Chilean banks as of December 31, 2020, 2021 and 2022, according to information published by the CMF under Chilean GAAP:
Efficiency Ratio(1)(2) | ||||||||||||
CHILEAN GAAP: | As of December 31, | |||||||||||
2020 | 2021 | 2022 | ||||||||||
Banco de Chile | 45.4 | % | 39.6 | % | 31.9 | % | ||||||
Scotiabank Chile | 45.8 | 44.6 | 41.8 | |||||||||
Banco Santander–Chile | 42.0 | 39.4 | 42.8 | |||||||||
Banco de Crédito e Inversiones | 50.9 | 48.1 | 47.9 | |||||||||
Itaú-Corpbanca | 151.6 | 53.5 | 52.1 | |||||||||
Financial System average | 56.6 | % | 45.3 | % | 40.6 | % |
Source: CMF
(1) | Operating expenses divided by operating revenues. |
(2) | Includes operations of subsidiaries abroad. |
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REGULATION AND SUPERVISION
General
In Chile, only banks may maintain current accounts for their customers and, together with certain other specific non-banking financial institutions, may accept time deposits. The main authorities regulating financial institutions in Chile are the CMF and the Central Bank. Chilean banks are primarily subject to the General Banking Act and secondarily, to the extent not inconsistent with that law, the provisions of the Chilean Corporations Law governing publicly listed corporations, except for certain provisions that are expressly excluded. The Chilean banking regulatory system dates to 1925 and has been characterized by periods of substantial regulation and government intervention, as well as periods of deregulation. The most recent period of deregulation commenced in 1975 and culminated in the adoption of a series of amendments to the General Banking Act. In 2004, amendments to the General Banking Act granted additional powers to banks, including general underwriting powers for new issuances of certain debt and equity securities and the power to create subsidiaries to engage in activities related to banking, such as brokerage, investment advisory, mutual fund services, investment fund management, factoring, securitization products and financial leasing services. Prior to 2006, banks had the option of distributing less than 30% of their earnings as dividends in any given year, subject to approval of the holders of at least two-thirds of the bank’s common stock. In 2006, however, the General Banking Act was amended to eliminate this alternative. During the last years, several modifications to the General Banking Act were issued with the purpose of implementing the Basel III guidelines. For more information on recent modifications to the General Banking Act see “Item 4. Information on the Company—Regulation and Supervision—Modifications to the General Banking Act”.
Due to the integration and replacement of the SBIF into the CMF in June 2019, references herein that formerly applied to the SBIF will be mentioned hereinafter, interchangeably, as the “CMF”, “regulator”, “banking regulator” or “Chilean regulator”. For more information regarding the legal amendments that led to the replacement of the SBIF by the CMF, see both “Item 4. Information on the Company—Regulation and Supervision—The Financial Market Commission (CMF)” and “Item 4. Information on the Company—Regulation and Supervision—Modifications to the General Banking Act”.
The Central Bank
The Central Bank is an autonomous legal entity created under the framework of the Chilean Constitution. It is subject to its Ley Orgánica Constitucional (the “Organic Constitutional Law”) and the current Chilean Constitution. To the extent not inconsistent with its Organic Constitutional Law or the current Chilean Constitution, the Central Bank is also subject to general laws applicable to the private sector, but is not subject to the laws applicable to the public sector. The Central Bank is directed and administered by a board of directors composed of five members appointed by the President of Chile, subject to Senate approval.
The legal purpose of the Central Bank is to maintain the stability of the Chilean peso, control inflation and the orderly functioning of Chile’s internal and external payment systems. The Central Bank’s powers include setting reserve requirements, regulating the amount of money and credit in circulation, and establishing regulations and guidelines regarding financial companies, foreign exchange (including the Formal Exchange Market) and bank deposit-taking activities.
The Financial Market Commission (CMF)
In accordance with modifications introduced in January 2019 to the General Banking Law, the CMF took over the authority previously vested on the SBIF and replaced it as the Chilean banking regulator in June 2019. For more information on such replacement and further amendments introduced to the General Banking Act, see “Item 4. Information on the Company—Regulation and Supervision—Modifications to the General Banking Act”.
The CMF was established in January 2018, pursuant to Law No. 21,000 to replace the SVS and the SBIF. Specifically, the CMF must regulate, oversee, sanction and manage the operation, stability and development of the Chilean financial market by easing the participation of market agents while keeping public trust. In order to do so, the CMF must have an overall and systemic vision by protecting interests of investors and insured agents. The CMF also can impose sanctions on the supervised entities.
The CMF is a professional and technical institution, led by a board of five members whose chairman is appointed by the Chilean Government. The CMF framework includes a special financial prosecutor who is responsible for identifying, investigating, and prosecuting potential infringements of the rules that govern the markets and industries regulated by the CMF. In addition to the powers formerly vested on both the SBIF and the SVS, the CMF has additional powers that should improve the supervision of the Chilean financial markets while providing due process for regulated companies by incorporating new tools that promote the cooperation of companies purportedly involved with infringements of applicable rules.
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Since the beginning of 2021, the CMF’s internal structure has been moving towards a “twin peaks” system, following recommendations from the International Monetary Fund. This means that the CMF’s structure since January 2021 is divided into two sections depending on the supervisory and regulatory objects. One of these sections exclusively addresses prudential and solvency regulation and supervision that seeks to oversee, while the other focuses on market conduct regulation and supervision in order to ensure transparency and integrity of capital markets as well as the protection of financial customers.
The CMF’s powers include the authority to require information of banking transactions of specific persons, even those subject to secrecy or confidentiality provisions; interception of all kind of communications and requesting telecommunication companies any communication transmitted or received by them, and order other public agencies to provide background information, even when such information is confidential or classified. These measures, among others, are subject to control and prior authorization of the Santiago Court of Appeal.
The CMF currently oversees the Chilean Financial Market (comprised of publicly traded companies, banks and financial institutions, insurance companies, insurance brokers, mutual funds and investment funds). As mentioned, based on several modifications to the General Banking Law, the CMF assumed the supervision and regulation of banking activities by replacing and assuming the powers of the SBIF.
Regarding the specific powers of the CMF related to banking regulation, this entity authorizes the creation of new banks and has broad powers to interpret and enforce legal and regulatory requirements applicable to banks and financial institutions. Furthermore, in cases of noncompliance with its legal and regulatory requirements, the CMF has the ability to impose sanctions. In extreme cases, it can appoint, with the prior approval of the board of directors of the Central Bank, a provisional administrator to manage a bank. It also has the mandate to approve any amendment to a bank’s bylaws or any increase in its capital.
The CMF examines all banks, usually at least once a year or more often if necessary under certain circumstances. Banks are required to submit unaudited financial statements to the CMF on a monthly basis and to publish their unaudited financial statements at least four times a year in a newspaper of national circulation. A bank’s financial statements as of December 31 of each year must be audited and submitted to the CMF together with the opinion of its independent auditors. Also, banks are required by the CMF to include in mid-year financial statements (as of June 30 of every fiscal year) an auditor’s review statement in accordance with Chilean GAAP). Likewise, banks are required to accompany their interim quarterly financial statements by a management commentary. In addition, banks are required to provide extensive information regarding their operations at various periodic intervals to the CMF by means of specialized reports associated with business-related risks, products, transactions, distribution channels, among others.
Any person wishing to acquire, directly or indirectly, 10% or more of the share capital of a bank must obtain prior approval from the CMF. Without such approval, the holder will not have the right to vote such shares. The CMF may only refuse to grant its approval based on specific grounds set forth in the General Banking Act.
According to Article 35 of the General Banking Act, the prior authorization of the CMF is required for each of the following:
● | the merger of two or more banks; |
● | the acquisition of all or a substantial portion of a bank’s assets and liabilities by another bank; |
● | the control by the same person, or controlling group, of two or more banks; or |
● | a substantial increase in the share ownership of a bank by a controlling shareholder of that bank. |
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Such prior authorization may be granted or rejected by the CMF, which is further authorized to set rules or specific requirements on that regard.
Pursuant to the regulations of the CMF, the following ownership disclosures are required:
● | banks must disclose to the CMF the identity of any person owning, directly or indirectly, 5% or more of its shares; |
● | holders of ADSs must disclose to the depositary the identity of beneficial owners of ADSs registered under such holders’ names; |
● | the depositary must disclose to the bank the identity of beneficial owners of ADSs which the depositary has registered, and the bank, in turn, must disclose to the CMF the identity of the beneficial owners of the ADSs representing 5% or more of such bank’s shares; and |
● | bank shareholders who individually hold 10% or more of a bank’s capital stock and who are controlling shareholders must periodically inform the CMF of their financial condition. |
All of our subsidiaries operating under the brand name Banchile are also supervised by the CMF.
Some of the amendments to the General Banking Act introduced in January 2019 are regulations still in the process of being implemented by the CMF and/or the Central Bank. For more information on the timeframe for such implementation see “Item 4. Information on the Company—Regulation and Supervision—Modifications to the General Banking Act.”
On December 20, 2019, the CMF published Circular No. 2,243, which updates the instructions to the Compendium of Accounting Standards. The changes pursued to achieve greater convergence with IFRS, as well as an improvement in the quality of financial information, to contribute to the financial stability and transparency of the banking system. The main changes introduced to the Compendium of Accounting Standards were related to: (i) the incorporation of IFRS 9 with the exception of the chapter on impairment of loans classified as “financial assets at amortized cost”, (ii) changes in the presentation of the financial statements due to the adoption of IFRS 9 in replacement of IAS 39, (iii) a new presentation for the Statement of Other Comprehensive Income, the Statement of Changes in Equity, and guidelines for presenting financing and investment activities in the Statement of Cash Flows, (iv) the incorporation of a “Management Commentary” in interim and annual financial statements in accordance with the IASB Practice Document No. 1, (v) modifications to some notes to the financial statements, (vi) changes in coding of accounts as well as in their description, (vii) changes to the criteria for suspending the accrual of interests when any credit or an installment become overdue 90 days or more, and (viii) the adaptation of limitations and precisions to the use of IFRS contained in Chapter A-2 of the Compendium of Accounting Standards.
All the new standards were to be applicable as of January 1, 2021, with a transition date on January 1, 2020, and the change of criteria for the suspension of the recognition of interest income on an accrual basis as provided in Chapter B-2 of the CNCB, were to be adopted no later than January 1, 2021. However, due to the COVID-19 pandemic, the CMF issued Circular No. 2,249 on April 20, 2020, by which these updates were to become applicable in January 2022 with a transition date on January 1, 2021, and the change of criteria for the suspension of the recognition of interest income on an accrual basis as provided in Chapter B-2 of the Compendium of Accounting Standards must be adopted no later than January 2022. The effects of the application of the suspension rule of interest and readjustments when any credit or one of its payments presents a default greater than 90 days did not have a significant impact on our results of operations or financial condition under Chilean GAAP.
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On October 7, 2021, the CMF published some adjustments and updates to the Compendium of Accounting Standards, which became effective on January 1, 2022, and to the reporting system by which this information must be submitted to the CMF. Among other matters, this update includes the accounting information required to prepare Chilean banks’ financial statements consistent with Basel III guidelines. In addition, some of the instructions of the Compendium of Accounting Standards have been clarified, mainly regarding the application of the following IFRS rules: (i) IFRS 9, on the accounting treatment of instruments that may qualify as additional Tier 1 and Tier 2 capital, (ii) IFRS 8, on the mistakes associated with events of operational risk, and (iii) IFRS 37, on the determination of provisions due to operational risk. Amendments to Chapter B-1 of the Compendium of Accounting Standards, on the aggregate exposure of commercial loans became effective on July 1, 2022. During 2020 and 2021, we deployed human and technical resources through diverse IT projects that aimed to address all the requirements associated with the adoption of the new Compendium of Accounting Standards by modifying our core accounting, transactional and reporting systems. Based on these efforts, as of the date of this annual report we are in full compliance with the guidelines established by the CMF through the new Compendium of Accounting Standards. In addition, we did not experience material impacts on our results of operations or financial condition due to the adoption of the new Compendium of Accounting Standards under Chilean GAAP.
Limitations on Types of Activities
Chilean banks can only conduct those activities expressly allowed by Article 69 of the General Banking Act, including among others, opening bank accounts, bond issuance, consumer and commercial (secured or unsecured) loan placements, consumer mortgages, engaging in financial derivatives, factoring and leasing activities, accepting deposits and, subject to certain limitations, making investments and performing financial services. Investments are restricted to real estate for the bank’s own use, gold, foreign exchange and debt securities. Through subsidiaries, banks may also engage in other specific financial service activities such as securities brokerage services, mutual fund management, investment fund management, foreign capital fund management, financial advisory, securitization and factoring activities. Subject to specific limitations and the prior approval of the CMF and the Central Bank, Chilean banks may own majority or non-controlling interests in foreign banks. The CMF and the Central Bank are allowed by the General Banking Act to dictate and issue ancillary regulation stating additional requirements for certain activities in which banks can engage.
Deposit Guarantee
According to the General Banking Act, local or foreign currency denominated deposits at banks or financial companies are insured as described below.
The Chilean Government guarantees up to 100% of the principal amount of the following deposits:
● | deposits in current accounts; |
● | deposits in savings accounts of demand deposits; |
● | other demand deposits; and |
● | deposits in savings accounts with unlimited withdrawals. |
The General Banking Act contemplates a current deposit guarantee for time deposits such that the principal amount of time deposits would be 100% guaranteed by the Chilean Government with a limit of UF 200 per person (approximately Ch$7.0 million or U.S.$8,259.5 as of December 31, 2022) in a single bank and UF 400 per person (approximately Ch$14.0 million or U.S.$16,518.9 as of December 31, 2022) in the Chilean banking system as a whole.
Reserve Requirements
Deposits are subject to a reserve requirement of 9.0% for demand deposits and 3.6% for time deposits (with terms of less than one year). The Central Bank has statutory authority to increase these percentages to as much as 40% for demand deposits and as much as 20% for time deposits, to implement monetary policy.
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In addition, Chilean banks must hold a certain amount of assets in cash or highly liquid instruments. This reserve requirement, also known as “technical reserve”, is equal to the amount by which the daily balance of demand deposits, net of clearing, exceeds 2.5 times the amount of the bank’s Total Capital or Regulatory Capital. Deposits payable on demand include the following:
● | 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 unconditionally payable immediately. |
As of December 31, 2022, we fully complied with these reserve requirements.
In accordance with the General Banking Act, if a Chilean bank or a foreign bank operating in Chile is defined to be a domestic-systemically important bank by the new regulator, it may be subject to one or a combination of additional restrictions, including but not limited to, more restrictive reserve requirements associated with the “technical reserve”. In this regard, the new banking framework establishes that under certain conditions a systemically important bank may be required to hold assets in cash or highly liquid instruments for the amount by which the daily balance of deposits payable on demand, net of clearing, exceeds 1.5 times the amount of the bank’s Total Capital or Regulatory Capital, instead of 2.5 times as requested for any bank. On November 2, 2020, the CMF published the final regulation that establishes the methodology for determining systemically important banks in Chile under the Basel III framework.. On March 31, 2021, the CMF announced that six local banks (including us) were designated as systemically important banks. Based on modifications to the Basel III phase-in period due to the the COVID-19 pandemic, the systemic buffer and related measures, if any, commenced at zero in December 2021 and became effective in December 2022. For more information on this regulation and, further, the implementation of the systemic buffer see “Item 4. Information on the Company—Regulation and Supervision—Modifications to the General Banking Act.” and “Item 4. Information on the Company—Regulation and Supervision—Capital Adequacy Regulations.”
Minimum Capital
Under Article No. 50 of the General Banking Act, a bank must have a minimum paid in capital and reserves of UF 800,000 (Ch$28,089 million or U.S.$33.0 million as of December 31, 2022). If the paid-in capital and reserves decrease below that amount, that bank will be compelled to cover that deficit in a timeframe no longer than one year, which could be extended by the CMF under certain circumstances. If not addressed, the CMF could revoke such a bank’s authorization to operate.
In accordance with Article No. 51 of the General Banking Act, a bank may begin its operations with 50% of the previously mentioned amount, with no specific timeframe for the establishment of the remaining amount. However, as long as the bank does not reach the amount of minimum capital, it would be required to hold further Common Equity Tier 1 capital for an amount representing 2.0% of its risk-weighted assets in addition to the 4.5% required for all banks plus any capital buffer defined by the regulation. This additional amount of Common Equity Tier 1 capital will be reduced to 1.0% as a percentage of its risk-weighted assets when the bank’s paid in capital and reserves reach at least UF 600,000 (Ch$21,067 million or U.S.$ 24.8 million as of December 31, 2022).
As of December 31, 2022, Banco de Chile fully complied with such minimum capital requirements.
For more information of capital requirements for local banks see “Item 4. Information on the Company—Regulation and Supervision—Modifications to the General Banking Act.”
Modifications to the General Banking Act
In 2017, certain modifications to the General Banking Act were initiated by a bill sent to Congress by the Ministry of Finance. The bill was passed by Congress on October 3, 2018 and, following that, Law No. 21,130 (Modernization of Banking Legislation) was enacted on December 27, 2018 and published on January 12, 2019.
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The legal framework incorporated by this amendment to the General Banking Act (Decreto con Fuerza de Ley No. 3) addresses four main topics on banking regulation and supervision, as follows:
● | Adoption of Basel III guidelines on capital adequacy. Under this modification, new minimum capital requirements levels in line with the main standards of Basel III Pillar 1 which must be fulfilled by Chilean banks, considering a phased-in transition from Basel I lasting four years after the specific regulatory framework is issued by the regulator. Likewise, the new legal framework establishes additional potential capital requirements associated with Pillar 2 of Basel III for those Banks having objective deficiencies in terms of coverage and management of banking-related risks. The phase-in period for the transition from Basel I to Basel III was expected to be completed in four years after the new specific banking framework was issued by the regulator, which was originally expected to start in December 2020, when capital requirements would be in place. However, in light of the COVID-19 pandemic in Chile, in March 2020 the CMF introduced modifications to the Basel III initial schedule by postponing Basel III requirements associated with risk-weighted assets from December 2020 to December 2021. Similarly, the phase-in periods for the systemic and conservation buffers were delayed by one year, and commenced in December 2021, with the systemic buffer commencing at zero in December 2021, which could gradually increase overtime with the exception of those banks that already had an additional capital requirement according to Article 35 bis of the General Banking Act. Also, adjustments to CET1 Capital were postponed one year, and commenced in December 2022 at 15%. |
According to the phase-in period set in the modifications, within the 18 months following the integration of the former SBIF into the CMF, specific regulation for the implementation of Basel III must be issued by the CMF. Since May 2019, the CMF began the publication for comment in respect of their rulemaking on a diverse and wide array of topics associated with Basel III. By December 2021, all the final rules had been issued by the CMF. The rules already in place are part of the Recopilación Actualizada de Normas (RAN) Compendium of the CMF and relate to:
a. | The guidelines for calculation and composition of Total Capital or Regulatory Capital for banks (RAN 21-1), are as follows: |
1. | CET1 Capital: 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 Capital that (for compliance with minimum levels) must equal to at least 4.5% of risk-weighted assets; |
2. | AT1 Capital: 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 are not taken into consideration for these purposes; |
3. | Tier 1 Capital or T1: the sum of CET1 and AT1; |
4. | Tier 2 Capital: is comprised of (i) subordinated bonds of up to 50% of CET1 Capital, 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 methodology or 0.625% if computed through internal methodologies (if approved by the CMF). Tier 2 capital may represent (for compliance of minimum levels) up to 2.0% of risk-weighted assets, once fulfilled the Tier 1 Capital minimum requirements; |
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b. | Conditions to be fulfilled for the issuance of financial instruments representing AT1 Capital (RAN 21-2), while permitting a temporary substitution of AT1 Capital with T2 Capital of up to 1.5% of risk weighted assets starting December 1, 2020, decreasing by 0.5% per year until reaching zero (December 1, 2023); |
c. | Conditions to be fulfilled for the issuance of financial instruments representing Tier 2 capital (RAN 21-3), to be computed as part of Total Capital or Regulatory Capital; |
d. | A comprehensive framework for determination of credit risk-weighted assets for banks under both a standardized methodology and internal models (RAN 21-6); |
e. | A standardized framework for determining market risk-weighted assets for the trading book (RAN 21-7). The framework does not consider internal models or fundamental review of the trading book, which would be analyzed by the CMF in the future; |
f. | A standardized methodology for determining operational risk-weighted assets of banks (RAN 21-8), with no ability to apply internal models; |
g. | Additional requirements of CET1 capital for banks (RAN 21-12), including both the conservation buffer equivalent to 2.5% of risk-weighted assets and the countercyclical buffer of up to 2.5% of risk-weighted assets. The conservation buffer commenced on December 1, 2021 at 0.625% and will increase at a 25% annual rate of the total amount until reaching 2.5% in December 1, 2024. The methodology to activate or deactivate the countercyclical buffer, to be defined by the Central Bank and monitored by the CMF, is still pending. When imposed, banks will have a timeframe of six months to comply with the additional requirement associated with the countercyclical buffer; |
h. | A methodology for determining systemically important banks or groups of banks (RAN 21-11), including a relationship between the qualifications obtained by means of the methodology and the corresponding capital requirement. This capital requirement could range from 1.0% to 3.5% of risk-weighted assets and it should be met with CET1, while imposed by the CMF in agreement with the Central Bank. The characteristic of systemically important bank could also translate into add-ons to the leverage ratio requirement and other restrictions, such as an increase in reserve requirements (from the excess of demand deposit balances over 2.5 times the Total Capital or Regulatory Capital to 1.5 times the Total Capital or Regulatory Capital) and a decrease in the portion of interbank loans that a systemically important bank can have (from 30% to 20%), among others; |
i. | A framework for the calculation of leverage ratio (RAN 21-30), which considers a minimum level of 3.0% on total risk assets, although add-ons could be imposed by the CMF to systemically important banks for an amount of up to 50% of the systemic buffer imposed for CET1, T1 and Total Capital or Regulatory Capital indicators; |
j. | The Pillar 2 framework (RAN 21-13 and amendments to the current RAN 1-13) for the regulatory review process, which establishes a set of requirements associated with the infrastructure, processes and governance that banks should comply with in order to ensure proper capital and risk management protocols. Pillar 2 includes other-than-Pillar-1 risks to be addressed by banks, such as interest rate risk of the banking book (IRRBB), concentration risk, strategic risk and reputational risk, among others, that the bank could consider relevant. Also, Pillar 2 incorporates the obligation for banks to carry out stress tests for relevant risk while incorporating their results for capital management purposes. Under Pillar 2, a bank will be subject to closer supervision as long as it is defined as an “atypical” bank, i.e. if its long-term IRRBB exceeds 15% of the Tier 1 capital. Also, Pillar 2 empowers the CMF to impose additional capital requirements of up to 4.0% of risk-weighted assets if it believes that a bank presents signs of a weak risk management approach or insufficient risk coverage. New regulatory reports associated with Pillar 2 matters, such as IRRBB and credit risk concentration began to be submitted to the CMF commencing in November 2022; and |
k. | Pillar 3 disclosure requirements related to information to be disclosed by banks in relation to their risk and capital management, which will be filed on a quarterly basis, in conjunction with financial statements, or separately. In the case of Pillar 3 disclosures, they are due to commence in April 2023 with a portion of the required quantitative disclosures associated with the three-month period ended March 31, 2023. Remaining disclosures must be published in July 2023, October 2023 and January 2024 (annual report). Although not associated with Pillar 3, the CMF has also reinforced its current information system, defining new reports on Basel III metrics, most of them commencing July 2021. |
l. | Limits to significant exposures (Article N°84 of General Banking Act) through RAN 12-16 modified in November 2021 |
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● | Changes to the governance of the banking regulator. According to these modifications and timeframe for implementation, the SBIF was abolished and all of its powers, authority and personnel were transferred to the CMF. The CMF oversees the local banking business. This means that the local supervision model changed from a specific regulator to an integrated supervision model where the regulator’s oversight extends to the financial market as a whole, including the securities market, insurance companies and brokers and the banking industry. For further information on the description of this new banking regulator, see “Item 4. Information on the Company—Regulation and Supervision—The Financial Market Commission.” |
● | Establishment of a new banking resolution regime for the Chilean banks in the case of insolvency. The new banking framework outlines specific actions to be taken under scenarios of insolvency or signs of financial distress. In this regard, the General Banking Act, as modified, establishes the possibility of undertaking an early regularization plan in case of signs of financial weakness, capitalization in the form of loans to be granted by other banks or forced liquidation in case of insolvency. For each scenario, the appointment of a delegated inspector, a provisional administrator or a liquidator, among other elements, are introduced. For further information on the description of this new regime, see “Item 4. Information on the Company—Regulation and Supervision—Legal Provisions Regarding Banking Institutions with Economic Difficulties.” |
● | The modifications to the General Banking Act also address other matters such as increased deposit insurance for time deposits, stricter requirements for members of banks’ boards of directors, changes in relation to confidential information of bank customers, among others. With regards to confidentiality of customers, certain conditions of access to information subject to banking secrecy are required, upon special request of the Financial Analysis Unit (responsible for watching anti-money laundering activities) in the case of an investigation or prosecution. |
On January 31, 2023 the CMF published for public comment a working paper addressing “Guidelines for a new baking resolution framework and deposit insurance in Chile”. The period for comment expires in July 2023. For further 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 of operations.”
Capital Adequacy Regulations
Beginning December 1, 2021 all the requirements related to the adoption of Basel III framework became required for all Chilean banks, although considering the phase-in process for the adoption of diverse matters including: (i) adjustments to Common Equity Tier 1 Capital and risk-weighted assets, (ii) the requirement of buffers such as the conservation buffer and the systemic buffer, among other topics.
According to the General Banking Act, each bank should comply with the following capital requirements as a percentage of its risk-weighted assets, net of required allowances:
● | Common Equity Tier 1 Capital (CET1) above 4.5% of risk-weighted assets; |
● | Tier 1 Capital = CET1 Capital + Additional Tier 1 Capital (AT1) above 6.0% of risk-weighted assets; |
● | Tier 1 + Tier 2 above 8.0% of risk-weighted assets; |
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● | Conservation Buffer of 2.5% of risk-weighted assets, to be fulfilled in a four-year period starting December 1, 2021 at 0.625% and increasing by the same amount on a yearly basis; |
● | Countercyclical Buffer of up to 2.5% of risk-weighted assets, to the extent applicable; to be fulfilled in a six-month timeframe. |
● | Domestic-Systemically Important Banks (D-SIB) Buffer in the range of 1.0% to 3.5% of risk-weighted assets, to be fulfilled at 25% rate every year starting December 1, 2021, to the extent applicable (nevertheless, given the COVID-19 contingency, the starting date was postponed to December 1, 2022); |
● | Pillar 2 Buffer of up to 4.0% of risk-weighted assets, to the extent applicable, to be fulfilled in a six-month timeframe. |
Banks should also comply with a leverage ratio, meaning CET1 Capital of at least 3% of their total risk assets, net of required allowances. If a bank is defined as a domestic-systemically important bank, the threshold for the leverage ratio could be subject to further requirement of up to 50% of the systemic buffer imposed over risk-weighted assets but over total risk assets.
These thresholds, with exception of Pillar 2, will be required to be fulfilled with CET1 capital. However, the Pillar 2 buffer, if any, could be met with CET1 capital, AT1 capital (perpetual bonds or preferred stocks) or Tier 2 Capital (subordinated bonds or disclosed reserves) according to the bank’s actual capital structure. The adoption of these regulatory thresholds was initially to be phased-in during a four-year period starting December 1, 2020. However, as a result of the COVID-19 pandemic, the phase-in period was postponed twelve months, starting December 1, 2021.
Furthermore, in accordance with the modifications to the General Banking Act, the authorization and/or report from the Central Bank will be necessary for the implementation of several Basel III capital adequacy guidelines set forth in these modifications, such as the systemic buffer (to be defined by the CMF once agreed with the Central Bank) and the countercyclical buffer, which will rely on a methodology defined by the Central Bank while its activation will be in agreement with the CMF. On the other hand, Pillar 2 buffers, if any, will be defined exclusively by the CMF with agreement of the council.
For more information on the composition of capital tiers and guidelines associated with calculation of risk-weighted assets and buffers, see “Item 4. Information on the Company—Regulation and Supervision—Modifications to the General Banking Act.”
In accordance with Article No. 35 bis of the General Banking Act, under the former capital regulation, some banks could have been required to fulfill stricter thresholds in terms of capital adequacy. This was the case for us, as we were subject to a Total Capital or Regulatory Capital (or Total Capital) ratio of at least 10% on risk-weighted assets, 2% over the 8% required for any bank. With the transition to Basel III, this buffer was replaced by the systemic buffer, which domestic-systemically important banks could be subject to. Therefore, the former requirement expired on December 1, 2021, at a rate of 25% per year. On March 30, 2022 the CMF announced the systemic buffers for the six previously-determined 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, commencing December 1, 2022 and which will continue to be gradually introduced over a four-year period at an annual and cumulative rate of 25% every year, completing the 1.25% (if maintained unchanged) on December 1, 2025. During the phase-in period, we must comply with the aggregate amount of the new Basel III systemic buffer (in the portion defined by the gradual implementation) and the remaining Article 35 bis buffer until extinguished. However, on December 19, 2022, through Circular N°2328 that introduced modification to RAN 12-14, the CMF removed the additional capital requirement associated with Article No. 35 for those banks that are subject to. Accordingly, as the date of this annual report, in terms of systemic buffers, we are subject to the Basel III systemic buffer. Accordingly, by December 2022 we were subject to a phased-in systemic buffer of 0.3125%. On March 31, 2023 the CMF announced the systemic buffers that must be complied with by D-SIB banks, based on market data for the year ended December 31, 2022. The CMF reaffirmed the systemic buffer on us at the level of 1.25%, which is due to be completed on December 1, 2025. Accordingly, as of the date of this annual report we continued to be subject to a phased-in systemic buffer of 0.3125% until November 30, 2023, which will increase to 0.625%, 0.9375% and 1.25% on December 1, 2023, 2024 and 2025, respectively.
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As of December 31, 2022 and as of the date of this annual report, Banco de Chile is in full compliance with all capital adequacy requirements. For further information on the types and levels of capital CET1, Tier 1, Tier 2 and Total Capital we hold, our capital ratios and compliance, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital Adequacy Requirements.”
Market Risk Regulations
Classification of Financial Instruments
In June 2006, the banking regulator introduced new regulations in relation to: (i) the valuation process of debt instruments and (ii) the measurement and reporting of counterparty credit risk generated by derivative transactions. Prior to June 2006, the banking regulator allowed banks to classify debt instruments for accounting and business purposes as either “Trading” or “Held-to-Maturity” only. Starting in June 2006, a new alternative classification was added (“Available-for-Sale”). However, given the new Compendium of Accounting Standards in effect since January 1, 2022, the former Available-for-Sale classification became the new line-item known as Financial Assets measured at Fair Value through Other Comprehensive Income (“FVTOCI”), although principles are the same as those for the former Available-for-Sale category. Likewise, former “Held-to-Maturity” classification became the new line-item known as Financial Assets measured at Amortized Cost”. In both cases, the change was aligned with IFRS as issued by the IASB.
Market Risk-Weighted Assets
As part of the new regulations associated with the implementation of Basel III, the standardized model for measuring the price risk of the trading book was modified by the CMF and began to be reported by banks for market risk and capital management purposes beginning in July 2021 through report R07 while being utilized to measure risk-weighted assets for market risk starting December 1, 2021. The new guidelines, as appearing in RAN 21-7, introduced more definitions to precisely distinguish the trading and the banking book while the new standardized model incorporated certain methodological changes and revised treatments while adding further trading exposures when compared to the former model used since 2005. Thus, the new standardized model continues to determine general interest rate risk, foreign exchange or FX risk (taken in both their trading and banking books) and option risk, to the extent applicable, while adding specific interest rate risk for the fixed-income portfolio (issuer risk), commodity risk and stock market risk (including stocks, indices and funds). The outcome of the application of the new standardized model delivers the Exposure to Market Risk (EMR), which is multiplied by 12.5 to compute the market risk-weighted assets that are part of the total risk-weighted assets over which Chilean banks are required to maintain minimum amounts of CET1, Tier 1 Capital, and Total Capital as defined in “Item 4. Information on the Company—Regulation and Supervision—Capital Adequacy Requirements.”
According to the RAN 21-7, the trading book is composed of portfolios of debt and equity instruments that have a liquid secondary market and therefore their valuation is at market prices and the corresponding profit and losses impact is representative of market conditions. In addition, all derivative transactions, options, FX mismatches and positions in mutual funds, investment funds and stock indices are also part of the trading book, to the extent applicable. The accrual book comprises all of the asset and liability balance sheet items that are not part of the trading book.
As of December 31, 2022, we had the following exposure to market risk and market risk-weighted assets in our trading book:
As
of | ||||
Exposure to Market Risk (EMR) | Ch$ | 109,229 | ||
Market Risk-Weighted Assets (EMR x 12.5) | Ch$ | 1,365,367 |
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Interest Rate Risk of the Banking Book
The interest rate risk of the banking book is measured against a self-imposed (internal) limit equal to 25% of the 12-month rolling net interest income in the case of short-term (12 months) interest rate risk of the banking book and 30% of the Total Capital or Regulatory Capital in the case of the long-term (until full maturity) interest rate risk of the banking book. Since 2005, through RAN 12-21, the CMF provides a standardized methodology to measure the interest rate risk of the banking book, on and individual basis, although some behavioral models are allowed in order to treat some business topics.
Aligned with the implementation of the Basel III, the CMF proposed a revised standardized methodology for this purpose, which is contained in the RAN 21-13 as part of the Pillar 2 guidelines. As requested by the CMF, the previous standardized model defined in the RAN 12-21 will remain in place until April 30, 2023. In November 2022, the new standardized model began to be reported to the CMF through report R13, on both an individual and a consolidated basis. Under this new methodological framework, the interest rate risk of the banking book is measured against a self-imposed (internal) limit, on an individual and consolidated basis, equal to 25% of the 12-month rolling net interest income in the case of short-term (12 months) interest rate risk of the banking book and 30% of the Total Capital or Regulatory Capital in the case of the long-term (until full maturity) interest rate risk of the banking book. Based on the outcome of the long-term interest rate risk of the banking book, the CMF determines whether a bank is “atypical” if this measure exceeds 15% of the Tier 1 Capital. If atypical, a bank should be subject to further and closer supervision. Likewise, if the CMF determines that an atypical bank presents evident deficiencies in risk or capital management, the bank will be subject to additional capital requirements as defined in RAN 21-13.
As of December 31, 2022, we had the following exposure to market risk and market risk-weighted assets in our trading book:
As
of | ||||
Short-Term Interest Rate Risk (∆NII) | Ch$ | 73,336 | ||
Inflation-Indexation Risk | 134,874 | |||
Long-Term Interest Rate Risk (∆EVE) | Ch$ | 1,061,877 |
Counterparty Credit Risk for Derivative Positions
Abstractly speaking, the counterparty credit risk for derivative transactions, for regulatory purposes, must be measured and reported as:
Derivatives Counterparty Credit risk | = |
Current Mark-to-Market (if positive) |
+ |
Credit Risk Factor (%) |
* | Notional Amount |
The Current Mark-to-Market (“CMTM”) of the transaction, if positive, reflects the amount of money owed by the counterparty to us at a specific date, e.g. the amount the counterparty would pay us if the transaction were unwound as of that date. As we are interested in measuring the maximum amount of money that the customer would owe us within the life of the transaction, the maximum potential future value of the transaction is added to the CMTM. This potential value is measured as the Credit Risk Factor multiplied by the Notional Amount involved in the transaction. Hence, the Credit Risk Factor reflects the potential value that the transaction may hold for us (under some confidence level) within its remaining tenor. The regulator determines the Credit Risk Factor depending on the market factors involved in the respective transactions and the remaining tenor by considering three categories (interest rates, FX rates, and equity prices). In addition, banks usually develop their own Credit Risk Factors models to assess credit risk not only under regulatory guidelines. Netting and credit mitigation schemes, such as recouping, early termination, margins, etc. have been allowed by regulators so that banks can better manage their credit risk while including them (netting in particular) to measure credit risk for regulatory purposes.
In 2018 amendments to RAN 12-1 and 12-3 were introduced by the CMF in order to set specific guidelines for calculation of risk-weighted assets associated with derivative instruments for capital adequacy purposes, specifically for those derivative contracts cleared and settled through a Central Counterparty Entity (CCP). Likewise, the amendments include general clarifications on the treatment of operations with intermediate settlement and the calculation of guarantees. In brief, the regulatory amendment establishes a risk-weighting of 2% over the amount of Derivatives Credit Risk, as defined above for regulatory purposes, for those derivative contracts cleared through a CCP. Also, due to the original interbank nature of the derivative instruments cleared in a CCP, exposures to CCPs are subject to a credit concentration limit of 30% of the Total Capital or Regulatory Capital, as defined above.
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Liquidity Risk Regulations
The guidelines for measuring liquidity risk are mainly focused on constructing an expected cash flow analysis for the following 30 and 90 days, broken down by currency. Net outflows may not exceed the amount of our Basic Capital (CET1 Capital) for the following 30 days or two times that amount for the following 90 days. Subject to approval of the CMF, the cash flow analysis may include behavioral run-off assumptions for some specific liability balance sheet items (demand deposits, time deposits, etc.) and behavioral roll-over assumptions for some asset items of the consolidated statement of financial position (loans, etc.). This guidance is also known as the C46 index, effective since 2015.
In March 2016, the Chilean regulator began to require C47 and C48 reports for informational purposes only (no limits were required at that point). The C47 report focuses on liabilities analysis from the concentration, maturity and renewal perspectives. On the other hand, the C48 report gauges LCR and NSFR, aligned with the Basel framework for these purposes. Also, 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) by which this regulator outlines the main guidelines for banks to follow in order to measure and control their liquidity position. This amendment was primarily focused on establishing 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).
Aligned with this new framework, on October 2, 2018 amendments to Chapter 12-20 of Recopilación Actualizada de Normas (which addresses the management and measurement of banks’ liquidity position) were published by the banking regulator for comment while establishing a new report on liquidity matters (C49) intended to refine the measurement of the LCR and the NFSR as defined by the current C48 report. Overall, the new framework: (i) introduced adjustments to the formulae used to compute high-quality-liquid-assets for the LCR, (ii) clarified the treatment of derivatives on the measurement of a bank’s liquidity position, (iii) widened the extent of some liability concentration metrics and (iv) specified that only accrued interest, rather than total interest, must be considered for the NSFR calculation, among other topics. On December 28, 2018 Circular No. 3,585 was endorsed by circular No. 3,644 by which the regulator established April 4, 2019 as the date that Chilean banks must start the submission of C49 report and comply with the LCR limit of 60% determined by the Central Bank. Even though the C49 report was expected to replace the C48 report in the short-term, they continued to be jointly submitted, as the regulator is still calibrating both reports. As of the date of this annual report, there is no certainty as to when the C48 report would be removed by the CMF.
On March 8, 2022, the Chilean Central Bank published the final rule, previously shared for public comment, 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 reserve” in order to take them into account as high quality liquid assets and (v) confirmation on the submission of the ILAAP starting April 2023, among other topics. Following this change, on June 6, 2022 the CMF introduced modifications to RAN 12-20 through Circular No. 2,314 in order to adopt the changes proposed by the Central Bank on liquidity management matters as mentioned above. Likewise, the CMF suppressed the following liquidity reporting requirements commencing on June 1, 2022: (i) the C46 index report for contractual cashflows, and (ii) the C48 report (LCR / NSFR) that was replaced by the C49 report as formerly expected.
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Therefore, as of the date of this annual report we are subject to the following liquidity regulatory limits:
● | For C46 index, mismatches between modeled cash inflows and cash outflows over 30-day period in foreign currency must not exceed one time the amount of Common Equity Tier 1 Capital). |
● | For the C47 report there is no regulatory limit, as it only characterizes the liability structure of banks. |
● | For C49 report, the LCR must exceed the regulatory limit of 100% which commenced in June 2022. |
● | For C49 report, the NSFR must exceed the regulatory limit of 70% in which commenced in January 2023 (previously 60%, since June 2022), which will increase 10% per year until reaching 100% in January 2026. |
As of December 31, 2022, the Bank fully complied with all minimum liquidity requirements.
Lending Limits
Under the General Banking Act, Chilean banks are subject to certain lending limits, including the following material limits:
● | A bank may not extend to any entity or individual, directly or indirectly, unsecured credit in an amount that exceeds 10% of the bank’s Total Capital or Regulatory Capital, or in an amount of up to 30% of its Total Capital or Regulatory Capital if the excess over 10% is secured by certain assets with a value equal to or higher than such excess. |
● | In the case of loans associated with financing for infrastructure projects built through the concession mechanism, the 10% ceiling for unsecured credits is raised to 15% of the bank’s Total Capital or Regulatory Capital if secured by a pledge over the concession, or if granted by two or more banks or financial companies which have executed a credit agreement with the builder or holder of the concession. |
● | A bank may not extend loans in an aggregate amount exceeding 30% of its Total Capital or Regulatory Capital to a group of persons or entities belonging to the same holding group (grupo empresarial) as defined in the Securities Market Act. |
● | A bank may not extend loans to another financial institution subject to the General Banking Act in an aggregate amount exceeding 30% of its Total Capital or Regulatory Capital. |
● | A bank may not extend to any individual or entity that is, directly or indirectly, related to the ownership or management of the bank, credit under more favorable terms with respect to repayment conditions, interest rates or collateral than those granted to third parties in similar transactions. The aggregate amount of such credits granted to related persons may not exceed 5% of the bank’s Total Capital or Regulatory Capital. The 5% unsecured ceiling is raised to 25% of the bank’s Total Capital or Regulatory Capital if the excess over 5% is secured by certain assets with a value equal to or higher than such excess. In any case, the aggregate amount of these credits granted by the bank may not exceed the bank’s Total Capital or Regulatory Capital. |
● | A bank may not directly or indirectly grant a loan, the purpose of which is to allow an individual or entity to acquire shares of the lender bank. |
● | A bank may not lend, directly or indirectly, to a director or any other person who has the power to act on behalf of the bank. |
● | A bank may not grant loans to related parties (including holders of more than 1% of its shares or 5% of its shares if these are actively traded stocks) on more favorable terms than those generally offered to non-related parties. Loans granted to related parties are subject to the limitations above. The aggregate amount of loans to related parties may not exceed a bank’s Total Capital or Regulatory Capital. |
As of December 31, 2022, the Bank fully complied with the lending limits established by the General Banking Act.
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Classification of Banks
The CMF regularly examines and evaluates each bank’s solvency and credit management process, including its compliance with loan classification guidelines. On the basis of this evaluation, it classifies banks into various categories.
Solvency and Management
Banks are classified into categories “I” through “V” based upon their solvency and management ratings. This classification is confidential.
Category I: | This category is reserved for financial institutions that have been rated level A in terms of solvency and management. |
Category II: | This category is reserved for financial institutions that have been rated (i) level A in terms of solvency and level B in terms of management, (ii) level B in terms of solvency and level A in terms of management, or (iii) level B in terms of solvency and level B in terms of management. |
Category III: | This category is reserved for financial institutions that have been rated (i) level B in terms of solvency and level B in terms of management for two or more consecutive review periods, (ii) level A in terms of solvency and level C in terms of management, or (iii) level B in terms of solvency and level C in terms of management. |
Category IV: | This category is reserved for financial institutions that are rated level A or B in terms of solvency and have been rated level C in terms of management for two or more consecutive review periods. |
Category V: | This category is reserved for financial institutions that have been rated level C in terms of solvency, irrespective of their rating level of management. |
A bank’s solvency may be classified in level A, B or C in accordance with the following:
● | Level A (solvency): when a bank’s Regulatory Capital (or Total Capital) to risk weighted assets ratio (including additional tier 1 Capital associated with conservation buffer) is equal to or greater than 10.5% and, when applicable, the additional requirements of systemic and countercyclical buffers and Pillar 2 buffer. Likewise, the common equity tier 1 to risk weighted assets ratio must be 7.0% or higher and, when applicable, the additional requirements of systemic and countercyclical buffers and Pillar 2 buffer. Finally, the ratio between the common equity tier 1 and total assets must be 3% or higher, and, when applicable, the domestic, systemic buffers. |
● | Level B (solvency): bank that meets requirements for common equity tier 1 capital and Regulatory Capital (or Total Capital), but does not meet the additional requirements stated for Level A (solvency). |
● | Level C (solvency): bank that meets neither Common Equity Tier 1 Capital nor Regulatory Capital (or Total Capital) requirements as required by the General Banking Act. |
With respect to a bank’s management rating, level A banks are those that are not rated as level B or C. Level B banks display some weakness in corporate governance, internal controls, IT security, information systems for decision making, timely follow-up of risks private risk rating or ability to manage contingency scenarios. Level C banks display significant deficiencies in the matters previously mentioned
The above-mentioned requirements are set forth in both the General Banking Act and the Chapter 1-13 of the Recopilación Actualizada de Normas of the CMF (the Revised Compilation of Norms). The latter further states an array of requirements, guidelines and good practices to be considered by banks in the management of business continuity risks, considering the volume and complexity of their operations. The corresponding adherence to these practices will be considered in the management evaluation “Solvency and Management Classification” carried out by the CMF.
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Obligations Denominated in Foreign Currencies
Foreign currency-denominated obligations of Chilean banks are subject to two requirements:
● | a reserve requirement of 9.0% for demand deposits and 3.6% for time deposits (see “—Reserve Requirements”); and |
● | net foreign currency outflows may not exceed the amount of the Common Equity Tier 1 Capital for the next 30 days as measured by the C46 index. |
Capital Markets
Under the General Banking Act, banks in Chile may purchase, sell, place, underwrite and act as paying agents with respect to certain debt securities. Likewise, banks in Chile may place and underwrite certain equity securities. Bank subsidiaries may also engage in debt placement and dealing, equity issuance advice and securities brokerage, as well as mutual fund and investment fund administration, factoring, investment advisory services and merger and acquisition services. The CMF regulates these subsidiaries.
Provisions on Banking Institutions with Economic Difficulties
The General Banking Act provides that if specified adverse circumstances exist at any bank, it must promptly inform the CMF and must shortly present them an early regularization plan duly approved by its board of directors. If the plan is approved by the CMF, which may also require additional measures, the bank must report periodically to the regulator regarding the implementation of such plan. All the communications between a bank with economic difficulties and the CMF regarding this matter are reserved. If, among the measures addressed by the early regularization plan, a capital increase is required, the board of directors must call for an extraordinary shareholders meeting setting forth the conditions of such capital increase, which must be approved by the banking regulator. Another measure that may be included in the early regularization plan is that the bank may receive a loan of up to three-year term from other bank(s). The terms and conditions of such loan must be approved by the board of directors of both banks, as well as by the banking regulator, but need not be submitted to the borrowing bank’s shareholders for their approval. A creditor bank may not grant such interbank loans to an insolvent bank in an amount exceeding 25% of the creditor bank’s Regulatory Capital (or Total Capital). Such loan may only be repaid if the borrowing bank complies with certain capital requirements. If this loan is not repaid timely, the General Banking Law provides the possibility that such loan may be capitalized by the lending banks in the form of equity of the borrowing bank.
The CMF may further impose certain prohibitions to banks with economic difficulties such as prohibitions on granting loans to related parties, renewing any loan in excess of 180 days, releasing guarantees, acquiring or selling certain assets, granting unsecured loans, investing in any securities other than instruments issued by the Central Bank or by the Chilean Treasury, among others. Furthermore, if the bank with economic difficulties does not present an early regularization plan (or if it is unfulfilled or breached by this bank, among other reasons provided by the General Banking Act), the banking regulator may appoint a delegate inspector to oversee the bank’s operations or a provisional administrator (appointment to be approved by the Central Bank as well) who will take over the powers and authority of the bank’s board of director and chief executive officer; however, the provisional administrator authority is limited to the extent provided by the General Banking Act and should always be in line with the interests of depositors, creditors and those of the general public related to financial stability.
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Dissolution and Liquidation of Banks
The banking regulator may establish that a bank should be liquidated for the benefit of its depositors or other creditors when the bank does not have the necessary solvency to continue its operations. In which case, the CMF must revoke the bank’s authorization to exist and order its mandatory liquidation, subject to the agreement of the Central Bank. The General Banking Act establishes certain criteria by which it will be deemed that a bank does not have the necessary solvency or that the safety of its depositors may be jeopardized, such as when it does not reach certain minimum or Regulatory Capital (or Total Capital) thresholds, upon aggregate and consecutive losses, when urgency credits with the Central Bank are due and when it has suspended the repayment of its obligations. The resolution of the banking regulator must state the reason for ordering the liquidation and must name a liquidator. When a liquidation is declared, all current accounts, other demand deposits received in the ordinary course of business, other deposits unconditionally payable immediately or that have a maturity of no more than 30 days, and any other deposits and receipts payable within 10 days of its maturity date, are required to be paid by using the bank’s existing funds, its deposits with the Central Bank, or its investments in instruments that represent its reserves. If these funds are insufficient to pay these obligations, the liquidator may seize the bank’s remaining assets, as needed. If necessary, and in specified circumstances, the Central Bank will lend the bank the funds necessary to pay these obligations. Any such loans are preferential to any claims of other creditors of the liquidated bank.
On January 31, 2023 the CMF published for public comment a working paper addressing “Guidelines for a new baking resolution framework and deposit insurance in Chile”. The period for comment expires in July 2023. For further 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 of operations.”
Investments in Foreign Securities
Under current Chilean banking regulations, banks in Chile may grant loans to foreign individuals and entities and invest in certain foreign currency securities. Chilean banks may only invest in equity securities of foreign banks and certain other foreign companies which may be affiliates of the bank or which would support the bank’s business if such companies were incorporated in Chile. Banks in Chile may also invest in debt securities traded in formal secondary markets. Such debt securities shall qualify as (i) securities issued or guaranteed by foreign sovereign states or their central banks or other foreign or international financial entities, and (ii) bonds issued by foreign companies. Such foreign currency securities must have a minimum rating as indicated in the table below and, if the investments in these securities and the loans referred to above exceed 70% of the Regulatory Capital (or Total Capital) of the bank, an allowance for 100% of the excess shall be established:
Rating Agency | Short Term | Long Term | ||
Moody’s Investor Service (Moody’s) | P2 | Baa3 | ||
Standard and Poor’s (S&P) | A2 | BBB– | ||
Fitch Rating Service (Fitch) | F2 | BBB– | ||
Dominion Bond Rating Service (DBRS) | R2 | BBB(low) |
A Chilean bank may invest in securities having a minimum rating as follows, provided that if the total amount of these investments and the loans referred to above exceed 20% (or 30% in certain cases) of the Regulatory Capital (or Total Capital) of the bank, an allowance of 100% of the excess shall be established by the bank:
Rating Agency | Short Term | Long Term | ||
Moody’s Investor Service (Moody’s) | P2 | Ba3 | ||
Standard and Poor’s (S&P) | A2 | BB– | ||
Fitch Rating Service (Fitch) | F2 | BB– | ||
Dominion Bond Rating Service (DBRS) | R2 | BB(low) |
However, a Chilean bank may invest in securities up to an additional amount of 70% of the bank’s Regulatory Capital (or Total Capital) without having to establish an additional allowance, if such securities have a minimum rating of:
Rating Agency | Short Term | Long Term | ||
Moody’s Investor Service (Moody’s) | P1 | Aa3 | ||
Standard and Poor’s (S&P) | A1+ | AA– | ||
Fitch Rating Service (Fitch) | F1+ | AA– | ||
Dominion Bond Rating Service (DBRS) | R1(high) | AA(low) |
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Subject to specific conditions, a bank may grant loans in U.S. dollars to subsidiaries or branches of Chilean companies located abroad, to companies listed on foreign stock exchanges located in countries with an international risk rating no less than BB- or its equivalent and, in general, to individuals and entities residing or domiciled abroad.
Internationalization of the Chilean peso
In recent years, the Central Bank has enacted regulation with the purpose of internationalizing our local currency, the Chilean peso. Until recently, the Chilean peso was used only in the local market. These regulations include a rule issued in December 2020, by virtue of which certain offshore transactions denominated in Chilean pesos shall be allowed. For instance, since March 2021, Chilean banks may: (i) execute off-shore derivative transactions settled or paid in Chilean pesos; (ii) open and maintain Chilean peso denominated current accounts to non-Chilean residents and (iii) grant off-shore loans denominated in Chilean pesos to non-Chilean residents. Likewise, since September 2021, Chilean residents are permitted to make Chilean peso denominated foreign deposits or investments and to grant loans, make capital contributions and other investments abroad, all denominated in Chilean pesos.
Management of Information of Interest to the Market, Financial Information and Pillar 3 Information
In order to ensure compliance with the provisions of the Ley de Mercado de Valores No. 18,045 (the Chilean “Securities Market Law”) and further specific regulations, our board of directors has approved the Manual for the Management of Information of Interest to the Market (the “Manual”).
The Manual’s main objective is to provide timely disclosure of our policies and internal regulations in connection with the disclosure of information to the public and the systems that have been implemented by us. In addition, these policies and internal regulations establish codes of conduct that our employees and other persons with access to certain information must comply with in order to protect information related to us.
The Manual is available to the general public on our web page at www.bancochile.cl.
In addition, through RAN 21-20 associated with the Pillar 3 requirements of Basel III, the CMF establishes that local banks must have an internal policy pursuing to verify the information to be disclosed to the market. Through this policy, banks should guarantee that Pillar 3 information to be disclosed has at least been subject to the same degree of internal review and the same internal control process than financial information.
In this regard, according to the RAN 21-20, the board of directors and the senior management are responsible for establishing and maintaining an effective internal control structure for information to be disclosed by the bank while also ensuring and certifying that the information has been reviewed in accordance with the guidelines defined by the CMF and prepared under the internal control processes approved by the board.
Our board of directors has approved a corporate Financial Information Disclosure Policy that covers requirements of the RAN 21-20, best market practices and other reporting requirements related to financial information as requested by the CMF. This policy, defines the general guidelines and criteria to be followed by our bank in the disclosure of financial information, as well as the mechanisms for verifying the consistency and integrity of such information, responsibilities of the main participants in such process to ensure the quality and integrity of the information disclosed to the market, to minimize risks of incompleteness, inaccuracy or inadequacy of the information.
Prevention of Money Laundering and the Financing of Terrorism
Law No. 19,913, enacted in 2003, created the Financial Analysis Unit and established specific regulation regarding money laundering. The CMF issues further regulations governing the requirements applicable to banks with respect to prevention of money laundering and terrorism financing. The regulations, as amended, are aimed at incorporating international AML and terrorism financing laws to the Chilean banking industry. Pursuant to these regulations, the CMF requires that banks implement an Anti-Money Laundering and Terrorism Financing system based mainly on the “know your customer” and source of wealth concepts. Moreover, these policies and procedures must be approved by the board of directors of each bank and must consider the volume and complexity of its operations and other related parties.
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Based on these requirements, a Customer Identification Program (as part of the Anti-Money Laundering and Terrorism Financing system) is needed to enable a bank to establish the reasonable belief that it knows the true identity of its customers. In general, the program includes controls and procedures to:
● | properly identifying customers, including their background, source and amount of funds, country of origin and other risk factors; |
● | identifying and monitoring what the CMF has defined as politically exposed persons (“PEPs”) both within Chile and abroad; and |
● | ensuring a safe and suitable account opening process, with different documentation requirements needed for different types of accounts and products. |
The Anti-Money Laundering and Terrorism Financing system required by local regulations must also include the following components:
● | AML policies and procedures aimed at preventing a bank from being used as an intermediary to carry out money laundering operations; |
● | appointment of a compliance officer on a senior management level who is responsible for coordinating and monitoring day-to-day AML compliance; |
● | establishment of an AML Committee for the purposes of planning and coordinating compliance with AML policies and procedures; |
● | use of software tools to detect, monitor and report unusual operations related to transactions made by customers on different products; |
● | implementation of personnel selection policies and a training program, in order to prevent money laundering; |
● | establishment of a Code of Conduct in order to, among other things, guide employee behavior and prevent possible conflicts of interest; and |
● | independent testing by the compliance department, which must be conducted by a bank’s internal audit department. |
Among other regulations of the CMF related to PEPs, it is requires to banks to keep specific PEPs policy and procedures in place to grant certain loans to PEPs, as well as to carry out controls procedures associated with service providers when PEPs are involved therewith. As such, our board of directors has approved related policies that have been duly implemented by our bank.
Prevention, Detection and Prosecution of Corruption.
Law No. 21,121, which came into force on November 20, 2018, amends the Criminal Code, Law No. 20,393 on Criminal Liability of Legal Entities, and Law No. 19,913 that creates the Financial Analysis Unit and deals with Money Laundering, addresses business-to-business bribery and discretion abuse, increasing prison time and pecuniary penalties and criminalizing corruption and unfair administration affecting private individuals and companies, among other matters. For the first time, our legislation criminalizes the behavior of private businesses with the aim of regulating transparency between them, without the need for a public official to participate in the crime, and with a very wide range of alternatives that could configure the crime. Particularly, with respect to the crime of unfair administration, this law incorporates a penalty for anyone who, being responsible for the management of third party assets, commits abusive acts or omissions that damage the owner of those assets.
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Consumer-Oriented Regulation
During the last decade, a wide array of legislation has been enacted with the purpose of enhancing consumer rights.
Law No. 21,081 enacted in 2019 strengthens consumer protection, granting new powers to SERNAC in matters of oversight. Likewise, fines are increased and the authority of SERNAC is reinforced in the scope of collective actions and collective voluntary procedures. Among other matters that affect banks as financial services providers are:
● | SERNAC inspectors shall be empowered to request the assistance of public force to be granted by local courts, in the event that the provider does not provide access to its facilities to SERNAC. |
● | SERNAC is granted authority to initiate collective voluntary procedures. |
● | Fines for adhesion contract infringement and misleading advertising are increased to up to 1,500 UTM (Unidades Tributarias Mensuales) which, as of December 31, 2022, would amount to approximately Ch$91.7 million (approximately U.S.$107,898.7). |
● | For the determination of fines, within the framework of collective actions, mitigating and aggravating circumstances and the number of affected consumers will be weighted. In case of full and effective compensation damages for all consumers, a lump sum will be applied as a fine, which may not exceed 30% of the sales of the product or service line made in the period of the infringement, or double the economic benefit obtained as a result of it. In any case, the fine may not exceed 45,000 UTA (Unidades Tributarias Anuales) for each event, which as of December 31, 2022 amounted to approximately Ch$33,024.8 million (approximately U.S.$38.8 million). |
● | In collective lawsuits, in addition to the material damage, moral damage may be also sought, and the judge may establish a common minimum amount. |
● | The court is empowered to increase the amount of the compensation granted by 25% in case of aggravating circumstances, established in the Consumer Protection Law. |
Law No. 20,009 establishes certain liabilities of payment service providers (such as banks) and their customers, was modified in 2020, setting high standards that banks must comply with in cases of fraudulent transactions carried out with payment cards (i.e., credit or debit cards), including electronic means. According to this law, debits to payment cards unrecognized by the customer, must be returned to the cardholder’s account. This legislation provides that, if such unrecognized debits amount up to UF 35 (equivalent to Ch$1.2 million as of December 31, 2022), the payment service provider must return these funds to the cardholder’s account within five business days. If unrecognized debits exceeds UF 35, the payment service provider has seven more days to return the excess of UF 35. However, in this case, the payment service provider may retain such excess on the grounds of having sufficient evidence to establish that the customer acted with fraud orgross negligence, in which case the payment service provider will be required to prove this in court. Also, this law prohibits payment service providers to offer fraud insurance for such cards. It further establishes obligations for the payment service provider to take adequate measures to protect the payment services in case of unlawful acts, holding them liable for damages caused by security and protection deficiencies in their technological systems through which such services are provided. Accordingly, this law establishes that certain fraudulent transactions with payments cards and electronic payments (such as forgery of credit or debit cards, sale of forged or stolen cards and/or its data, impersonation of a card/accountholder, etc.) are constitutive of crimes subject to prison and fines up to threefold the fraudulent transaction. It also grants the Chilean public prosecutors broad powers to investigate when such frauds are suspected to be related to organized crime. Some of the effects that this new regulation has caused since its publication are: (i) banks’ liabilities towards clients in cases of fraudulent transactions carried out with credit or debit cards, including those by electronic means, have increased; (ii) litigation and related costs have increased; (iii), thresholds and evidentiary standards were raised in litigation to determine the liability of the customer. For more information on this specific regulation and other bills currently being discussed in the Chilean Congress, and laws recently enacted, related to consumer protection, see “Item 3. Key Information—Risk Factors—Risks Relating to our Operations and the Chilean Banking Industry—Stricter regulations may constrain our operations and thereby adversely affect our financial condition and results.”
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During 2020, the Chilean Congress passed a law known as “Financial Portability,” which aims to simplify the bank switching process for individual customers and SMEs of certain products, while also reducing the costs and time associated with the process. In summary, all banking customers holding: (i) a savings account, (ii) a demand account, (iii) electronic checks, (iv) a line of credit, (v) credit or debit cards, (vi) time deposits, (vii) mutual funds, (viii) consumer loans, (ix) auto-finance loans, (x) residential mortgage loans, or (xi) a combination of these products, are able to transfer such services to other financial service providers in order to improve the financial terms of any banking product or a group of products, such as interest rates, tenors and related benefits. The bank switching process is managed by the provider receiving the new customer.
Fintech Law
In January 2023, Law No. 21,521, the “Fintech Law”, was enacted. The general purpose of this law is to establish a general framework to encourage the provision of financial services through technological means by an array of providers (including banks), promoting financial inclusion and innovation, competition in the financial markets, protection of the clients of financial products and services, adequate protection of the data processed, preservation of financial integrity and stability, and strengthening anti money-laundering legislation. The Fintech Law, together with the adoption of several amendments to relevant laws of Chilean financial institutuion regulation, sets out the general rules for crowdfunding platforms, alternative transaction systems, credit and investment advisory services, custody of financial instruments, and order routing and intermediation of financial instruments, that has to be complemented with the extensive regulations that the CMF must issue during the following months. For this purpose, the CMF has established a schedule for implementing Fintech Law, which includes several roundtables with market agents. Also, Law No. 21,521 expressly recognizes that banks may provide the services of order routing, investment advice, intermediation and custody of financial instruments under the legal and regulatory framework governing banks and without the need to be registered in the Registry of Financial Service Providers created by this law.
The Fintech Act also creates the “Open Finance System” that allows the exchange of client information between different providers of financial services, such as banks, using remote and automated access interfaces that channels interconnection and direct communication among the participating institutions of the system, subject to the security standards and regulations provided by the Fintech Act and the rules the CMF must issue.
Maximum Legal Interest Rates
Maximum interest rates are regulated by Law No. 20,715, enacted in 2013. This legislation affects all Chilean businesses that charge interests (including all banks, department stores and any other commerce or financial provider) on loans up to UF 200 (approximately Ch$7.0 million or U.S.$8,259.5 as of December 31, 2022), including installment loans, credit cards and credit lines related loans, as well as overdue loans. This regulation established among other things, a new methodology for calculating the maximum legal interest rate for loans –not indexed to inflation– longer than a 90-day term, which resulted in a reduction of the maximum legal interest rate applicable to such debtors.
We cannot rule out that new limits to the maximum interest rates may be imposed to local banks or foreign banks operating in Chile in the future. Furthermore, as of the date of this annual report, amendments to this legislation are under discussion in the Chilean Congress. For further information, see “Item 3. Key Information—Risk Factors—Risks Relating to our Operations and the Chilean Banking Industry—Restrictions imposed by banking regulations may constrain our operations and thereby adversely affect our financial condition and results.”
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Credit Risk Provisioning
On July 6, 2018 the banking regulator published a set of amendments (Circular No. 3,638) to Chapter B-1 of Compendio de Normas Contables introducing changes to provisioning rules for commercial loans evaluated on a group basis. From the banking regulator’s point of view, these new rules are aimed at supplementing the changes introduced in 2014 (Circular No. 3,573 mentioned above) by establishing a standardized methodology to compute minimum acceptable level of loan loss allowances for commercial loans evaluated on a group basis that banks should recognize on their balance sheet. The new framework is composed of three methods depending on the type of loans, as follows: (i) leasing loan allowances will be set by taking into account delinquency the type of asset underlying the contract and the ratio of present value to book value, (ii) student loan allowances will be based on the type of loan (government-backed or not), if the loan is callable or not and delinquency, and (iii) other commercial loan allowances will be set based on delinquency, guarantees backing the loan and the loan to guarantee ratio. In addition, the new set of rules also addressed other topics related to loan provisioning, including (i) a minimum risk index of 0.5% for other-than-past-due loans that a bank must hold on an individual basis and on a consolidated basis considering both operations in Chile and abroad, (ii) the establishment that allowances for leasing residential loans must be in consistency with residential mortgage loans managed by the same bank, and (iii) that non-performing residential mortgage loans will drag into the same condition other credits owed by the same debtor for provisioning purposes. The new provisioning criteria became effective in July 2019 and had no material impact on our results of operations.
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 by introducing the precise treatment for certain sub-segments of the group-based evaluated portfolio. The final ruling was published on August 19, 2021 with no major changes in comparison with the formerly proposed modifications. These modifications did not have a material impact on our financial results in either Chilean GAAP or IFRS.
On November 22, 2022 the CMF published for comment a standardized methodology to compute expected credit losses for consumer loans (including contingent loans) while allowing the use of guarantees in order to determine both the probability of default and the loss given default for that portfolio under Chilean GAAP (with no impact under IFRS). For further 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 of operations.”
Modifications to Tax Legislation
Since 2014, the tax system has been subject to relevant modifications and reforms. The 2014 tax reform (Law No. 20,780) aimed to gradually increase the first category tax or corporate tax rate between 2014 and 2018 while establishing two alternative tax regimes from 2017 onwards: (i) the Semi-Integrated Regime and (ii) the Attribution Regime. In February 2016, a new tax law was enacted (Law No. 20,899), aiming to simplify the 2014 reform by limiting the possibility of choosing between the two alternative tax regimes. In fact, according to this amendment to the Chilean tax system, publicly traded companies are only subject to the Semi-Integrated Regime. Consequently, the statutory corporate tax rate for Banco de Chile was 25.5% in 2017 and 27.0% from 2018 onwards. The tax reform also affects the taxes levied on dividends received by investors that hold shares of common stock or ADS from 2017 onwards. Under the Semi-Integrated Regime, holders of shares or ADS pay taxes on the dividends effectively received from the company (withholding tax of 35% for foreign investors and a general regime tax for local investors). Foreign investors from Double Taxation Avoidance Treaty (“DTAT”) countries are able to use 100% of the corporate tax paid by the company as a tax credit. However, local investors and holders from non-DTAT countries are permitted to use only 65% of the corporate tax paid by the company as a tax credit.
However, in order to provide evidence of their tax residence, foreign holders of our ADSs or of our shares of common stock must send to Banco de Chile a certificate of residence issued by their local tax authority. This certificate must be legalized or apostilled and valid at the moment of the distribution of dividends, otherwise the Tax credit will be 65%.
In addition, Law No. 20,899 permits investors to use 100% of the corporate tax paid by the company as a tax credit, if investors reside in countries that were part of DTAT before January 1, 2017, even though the DTAT was not in force from 2017 onwards. However, this special treatment only applied until December 31, 2019.
Consequently, Law No. 21,047 enacted on November 23, 2017 extended the previously mentioned exemption until December 31, 2021, with regard to DTAT signed through January 1, 2019 and pending to enter into force as of December 31, 2021. Finally, Law No. 21,210 published in February 2020, further extended this exemption to Double Taxation Treaties signed through January 1, 2020, including the treaty signed with the United States, until 2026.
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Based on the above, the effective tax rate paid by local (individual) investors or foreign holders from non-DTAT countries would increase up to 44.45%. This would be the effect of adding together both taxes paid by the company on earnings before distributing dividends and taxes paid by this type of investor when receiving those dividends, given the inability to use 100% of the corporate tax expense as tax credit.
During 2018 the Chilean Government sent a bill to the Chilean congress, which was intended to modernize the Chilean tax system by introducing a set of technical adjustments in order to simplify the current tax system, while incorporating new regulations related to the integration of the whole tax system and introducing new taxes on digital services, among other topics. The bill, however, was not passed by the Chilean Congress. Moreover, following the social unrest which occurred in Chile during late 2019, the Ministry of Finance reformulated the former bill in order to address social demands, by increasing tax collection, while resigning to certain elements originally proposed by the Chilean Government, with the purpose of reaching an agreement in the Congress. As a result of the latter, Law No. 21,210, which modernizes the local tax system, was enacted and became law during February 2020. This new law mainly focused on: (i) entrepreneurship promotion measures by providing SMEs with a special tax regime based on total integration and a statutory tax rate of 25%, as opposed to large companies and corporations, which will continue to be subject to a semi-integrated system while bearing a statutory corporate tax rate of 27%, (ii) initiatives promoting private investment by introducing instantaneous or accelerated depreciation for fixed-assets, reducing the time frame to receive reimbursements of VAT paid on fixed-assets, (iii) reductions or exemptions of property taxes paid by elderly people and low income pensioners; (iv) increasing taxes paid by high-income individuals by means of adding a new tax bracket of 40%, and raising taxes on properties that exceed U.S.$500,000 in assessed value, (v) incorporating a regional green tax of 1% levied on investment projects exceeding U.S.$10 million in capital expenditures that were subject to environmental approval, (vi) lowering tax benefits on capital gains obtained in stock markets, (vii) creating a Taxpayer Protection & Advisory Agency, which aims to be a counterpoint to the Chilean Internal Revenue Service on taxation matters, and (viii) introducing a digital approach, which considers both the compulsory use of electronic bill and invoices, aimed at reducing tax evasion, and the imposition of VAT on digital services. In addition, this law maintains Stock dividends (distributions of fully paid-in shares) free of tax for the shareholders at the moment of distribution. Nevertheless, capital gains associated with the sale of shares formerly received as stock dividends are subject to the general tax regime. Therefore, foreign investors will be subject to Chilean Withholding Tax on capital gains arising as a consequence of the sale of shares received as stock dividends. Law No. 21,210 established that shares will have no acquisition cost for tax purposes and will not be eligible for sale under Article 107 of the Chilean Income Tax Law, being the total amount of the sale price affected by the general tax regime.
On September 2, 2020, Law No 21,256 was enacted establishing additional tax measures as part of the emergency plan for economic reactivation following the COVID-19 pandemic. Among others, the main measures included in this law were: (i) temporary reduction of the statutory corporate tax rate to 10% for SMEs for the business years 2020, 2021 and 2022, (ii) refund of accumulated VAT for purchases and/or services acquired between January and May 2020 by SMEs, and (iii) a temporary additional accelerated depreciation for fixed assets newly and imported acquired between June 1, 2020 and December 31, 2022, for all types of companies.
In February 2022, Law No. 21,420 was enacted with the purpose of increasing tax collection by an amount equivalent to 0.7% of GDP in order to finance the universal guaranteed pension for individuals belonging to the bottom 80% of the population by income. The main tax measures included in this law are: (i) the taxation of any type of service with VAT, unless expressively exempted, starting on 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, although it was reversed on February 2023 under Law No. 21,540 (so never went into effect), (iii) a 10% tax on capital gains produced by the sale of actively traded stocks for sales performed on or after September 1, 2022, which will not apply to local or foreign institutional investors (including us), (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.
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For more information on current bills being discussed in the Chilean Congress addressing taxation, see “Item 3. 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 for additional information in the Chilean Tax framework, see “Item 10. Additional Information—Taxation—Chilean Tax Considerations.”
Bankruptcy Law
Chilean Bankruptcy Law aims to promote agreements and avoid liquidations became effective. Among the main changes introduced by this law is Article 57, which is intended to protect debtors and provides that, during a 30-day term beginning on the date of the appointment of observers:
(i) | the creditors of a debtor may not request its liquidation; |
(ii) | no proceeding seeking the issuance of a warrant of attachment, execution or similar process may be initiated against a debtor; |
(iii) | no proceeding seeking the restitution of leased assets may be initiated against a debtor; |
(iv) | all proceedings referred to in (ii) and (iii) directly above will be suspended, as well as the term of the statute of limitations; |
(v) | all the agreements entered into by a debtor will remain valid and effective and its payments terms and conditions will remain in force. Consequently, these agreements may not be early terminated without the consent of the debtor nor be enforced, even if the commencement of a reorganization proceeding under the Bankruptcy Law constitutes an event of default under such agreement. Thus, any guarantees granted to secure the obligations of the debtor may not be enforced; and |
(vi) | if a debtor forms part of a public registry as a contractor or service provider, and it is in compliance with its obligations with the relevant principal, it cannot be excluded from such public registry and may not be prohibited from participating in any relevant bidding process. |
Reporting of Operational and Cybersecurity Incidents
According to Chapter 20-8 of Recopilación Actualizada de Normas, banks must report immediately to the CMF certain types of significant operational incidents in order to keep the regulator properly informed. For purposes of the regulation, an operational incident is deemed significant if the event affects the business continuity, information security or reputation of the bank.
During 2018, the regulator introduced modifications to the regulation associated with the management of operational risk by supplementing Chapters 1-13 and 20-8 of Recopilación Actualizada de Normas with specific guidelines on cybersecurity matters. Under this amendment, the CMF widens its scope of supervision by incorporating cybersecurity matters through the continuous assessment of banks’ critical technological infrastructure that exposes banks to risks of data integrity, data availability and confidentiality of clients’ information. Also, a dedicated digital platform was created, through which banks should report directly to the regulator within a 30-minute time frame the occurrence of an incident and requires the appointment of the bank’s representative to be in charge of the communication with the CMF for these purposes. Similarly, banks are required to timely inform customers and users about cybersecurity incidents affecting quality and continuity of services, as well as incidents that are publicly known. In addition, under these guidelines, banks are compelled to maintain an alert system at an industry level in order to share information about incidents and measures that should be taken in order to mitigate widespread impact.
Volcker Rule
The Volcker Rule became effective during 2015 in the United States as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act. Among other topics, the Volcker Rule limits proprietary trading and positions taken by banks in covered funds by establishing specific conditions for carrying out these activities. Also, this regulation establishes specific corporate governance measures for conducting these businesses to avoid conflict of interest and high-risk trading strategies by banks.
Section No. 619 of the Volcker Rule is applicable to Citigroup. Since we and our subsidiaries are considered to be Citigroup’s subsidiaries for purposes of this rule, during 2015 we comprehensively revised our internal policies and procedures to establish, maintain, enforce, test and modify our Volcker Rule Compliance Program to enable Citigroup to comply with its regulatory requirements. The new requirements and amendments introduced to the Volcker Rule during 2019, to the extent applicable, have been implemented into our Volcker Rule Compliance Program within the required time periods.
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ORGANIZATIONAL STRUCTURE
The following diagram presents our current corporate structure, including our subsidiaries and their respective direct ownership interests, as of April 19, 2023:
All of the subsidiaries presented above have their jurisdiction of incorporation in the Republic of Chile. See “—Business Overview—Principal Business Activities—Operations through Subsidiaries” for more information on our subsidiaries.
On February 4, 2021, we began a voluntary and accelerated 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 subsidiary was officially dissolved on July 19, 2022.
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PROPERTY, PLANT AND EQUIPMENT
We are based in Chile and own the building located at Paseo Ahumada 251, Santiago, Chile, that is approximately 77,500 square meters and serves as the headquarters for the Bank and its subsidiaries. In addition, we own both office and parking space in four other buildings located at Huerfanos 740, Agustinas 733, Andrés Bello 2687 and El Bosque 500, Santiago, Chile where the remainder of our executive offices are located. The total area we own in these buildings is equivalent to approximately 46,300 square meters.
As of December 31, 2022, we owned the properties on which 148 of our full-service branches and other points of sale are located (approximately 109,125 square meters of office space). Also, as of December 31, 2022, we had leased office space for 116 of our full-service branches with office space of approximately 39,021 square meters. Lastly, the 2 remaining branches and other points of sale were managed through a combined model by which part of the branch surface is owned and the remaining branch surface is under a leasing contract. Also, in some cases, we entered into special partnership agreements with the property’s owners.
We also own properties throughout Chile for back office and administrative operations, as well as for storage of documents and other purposes. We believe that our facilities are adequate for our present needs and suitable for their intended purposes.
As of December 31, 2022, we also owned approximately 134,250 square meters in mainly recreational physical facilities in Chile, which we use to assist our employees in maintaining a healthy work and life balance and which we use for incentive and integration activities.
Our 2023 infrastructure expenditures budget includes disbursements associated with the implementation of a new service model (25.4%), general maintenance investments (21.5%), the refurbishment of our branch network (20.4%), renovation and restoration of our corporate buildings (10.9%), other initiatives related to enchacing support infrastructure and IT tools for regulatory compliance requirements (10.4%), initiatives related to security expenditures (6.9%), and improvement of the conditions of recreational facilities (4.5%).
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SELECTED STATISTICAL INFORMATION
The following information is included for analytical purposes and should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2022 appearing elsewhere in this annual report and “Item 5. Operating and Financial Review and Prospects.”
Average Balance Sheets, Interest Earned on Interest Earning Assets and Interest Paid on Interest Bearing Liabilities
The average balances for interest-earning assets and interest-bearing liabilities, including interest and readjustments received and paid, were calculated on the basis of our daily balances and on the basis of monthly balances for our subsidiaries. These average balances are presented in Chilean pesos (Ch$), in UF and in foreign currencies (principally the U.S. dollar). The UF is an inflation-indexed Chilean monetary unit of account with a value in Chilean pesos which is linked to, and which is adjusted daily to reflect changes in, the CPI of the Chilean National Institute of Statistics.
The nominal interest rate has been calculated by dividing the amount of interest and inflation adjustment gain or loss during the period by the related average balance, both amounts expressed in Chilean pesos.
Foreign exchange gains or losses on foreign currency-denominated assets and liabilities have not been included in interest revenue or expense. Interest received on past-due loans includes interest on such loans from the original maturity date.
Included in cash and due from banks are current accounts maintained in the Central Bank and overseas banks. Such assets have a distorting effect on the average interest rate earned on total interest earning assets because of balances maintained in:
● | the Central Bank, only the portion that is legally required to be held for liquidity purposes earns interest; and |
● | overseas banks earn interest on certain accounts in certain countries. |
Consequently, the average interest earned on such assets is comparatively low. These deposits are maintained by us in these accounts to comply with statutory requirements and to facilitate international business, rather than to earn income.
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The following tables set forth, by currency of denomination, average balances and, where applicable, interest amounts and nominal rate for our assets and liabilities under IFRS for the years ended December 31, 2020, 2021 and 2022:
For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
2020 | 2021 | 2022 | ||||||||||||||||||||||||||||||||||
IFRS: | Average Balance | Interest | Average | Average Balance | Interest | Average Nominal Rate (2) | Average Balance | Interest | Average Nominal Rate (2) | |||||||||||||||||||||||||||
(In millions of Ch$, except percentages) | ||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||
Interest earning assets | ||||||||||||||||||||||||||||||||||||
Cash and due from Banks | ||||||||||||||||||||||||||||||||||||
Ch$ | Ch$ | ― | Ch$ | ― | Ch$ | ― | % | Ch$ | ― | Ch$ | ― | ― | % | Ch$ | ― | Ch$ | ― | ― | % | |||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | 1,117,631 | 5,551 | 0.50 | 1,099,387 | 775 | 0.07 | 1,170,612 | 11,605 | 0.99 | |||||||||||||||||||||||||||
Total | 1,117,631 | 5,551 | 0.50 | 1,099,387 | 775 | 0.07 | 1,170,612 | 11,605 | 0.99 | |||||||||||||||||||||||||||
Financial Investments | ||||||||||||||||||||||||||||||||||||
Ch$ | 3,875,777 | 35,019 | 0.90 | 5,158,059 | 70,727 | 1.37 | 5,728,568 | 391,265 | 6.83 | |||||||||||||||||||||||||||
UF | 470,582 | 17,011 | 3.61 | 619,017 | 55,976 | 9.04 | 1,290,482 | 177,731 | 13.77 | |||||||||||||||||||||||||||
Foreign currency | 77,691 | 2,890 | 3.72 | 10,581 | 105 | 0.99 | 168,532 | 3,739 | 2.22 | |||||||||||||||||||||||||||
Total | 4,424,050 | 54,920 | 1.24 | 5,787,657 | 126,808 | 2.19 | 7,187,582 | 552,735 | 7.97 | |||||||||||||||||||||||||||
Loans in advance to Banks | ||||||||||||||||||||||||||||||||||||
Ch$ | 1,677,319 | 6,826 | 0.41 | 2,766,249 | 17,353 | 0.63 | 1,837,196 | 150,160 | 8.17 | |||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | 297,226 | 4,983 | 1.68 | 271,134 | 1,960 | 0.72 | 300,033 | 4,567 | 1.52 | |||||||||||||||||||||||||||
Total | 1,974,545 | 11,809 | 0.60 | 3,037,383 | 19,313 | 0.64 | 2,137,229 | 154,727 | 7.24 | |||||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||||||||||||||
Ch$ | 8,575,948 | 409,304 | 4.77 | 10,138,902 | 415,403 | 4.10 | 9,958,172 | 489,067 | 4.91 | |||||||||||||||||||||||||||
UF | 6,275,327 | 279,478 | 4.45 | 6,234,862 | 455,601 | 7.31 | 6,880,080 | 1,052,861 | 15.30 | |||||||||||||||||||||||||||
Foreign currency | 2,472,405 | 74,832 | 3.03 | 2,251,039 | 46,707 | 2.07 | 3,144,109 | 117,366 | 3.73 | |||||||||||||||||||||||||||
Total | 17,323,680 | 763,614 | 4.41 | 18,624,803 | 917,711 | 4.93 | 19,982,361 | 1,659,294 | 8.30 | |||||||||||||||||||||||||||
Consumer Loans | ||||||||||||||||||||||||||||||||||||
Ch$ | 4,062,452 | 528,154 | 13.00 | 3,852,841 | 439,235 | 11.40 | 4,455,451 | 612,944 | 13.76 | |||||||||||||||||||||||||||
UF | 86,638 | 5,113 | 5.90 | 68,802 | 7,373 | 10.72 | 59,169 | 9,614 | 16.25 | |||||||||||||||||||||||||||
Foreign currency | 29,528 | ― | ― | 36,657 | ― | ― | 54,880 | ― | ― | |||||||||||||||||||||||||||
Total | 4,178,618 | 533,267 | 12.76 | 3,958,300 | 446,608 | 11.28 | 4,569,500 | 622,558 | 13.62 | |||||||||||||||||||||||||||
Residential mortgage loans | ||||||||||||||||||||||||||||||||||||
Ch$ | 33,716 | 468 | 1.39 | 37,087 | 526 | 1.42 | 44,509 | 748 | 1.68 | |||||||||||||||||||||||||||
UF | 9,186,710 | 519,803 | 5.66 | 9,818,906 | 917,926 | 9.35 | 10,774,506 | 1,662,786 | 15.43 | |||||||||||||||||||||||||||
Foreign currency | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Total | 9,220,426 | 520,271 | 5.64 | 9,855,993 | 918,452 | 9.32 | 10,819,015 | 1,663,534 | 15.38 | |||||||||||||||||||||||||||
Repurchase agreements | ||||||||||||||||||||||||||||||||||||
Ch$ | 51,467 | 1,406 | 2.73 | 71,515 | 1,756 | 2.46 | 45,077 | 4,142 | 9.19 | |||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Total | 51,467 | 1,406 | 2.73 | 71,515 | 1,756 | 2.46 | 45,077 | 4,142 | 9.19 | |||||||||||||||||||||||||||
Other assets | ||||||||||||||||||||||||||||||||||||
Ch$ | 68,013 | 1,889 | 2.78 | 53,105 | 1,825 | 3.44 | 68,866 | 5,529 | 8.03 | |||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | 439,551 | 2,240 | 0.51 | 177,965 | 143 | 0.08 | 264,975 | 4,927 | 1.86 | |||||||||||||||||||||||||||
Total | 507,564 | 4,129 | 0.81 | 231,070 | 1,968 | 0.85 | 333,841 | 10,456 | 3.13 | |||||||||||||||||||||||||||
Total interest earning assets | ||||||||||||||||||||||||||||||||||||
Ch$ | 18,344,692 | 983,066 | 5.36 | 22,077,758 | 946,825 | 4.29 | 22,137,839 | 1,653,855 | 7.47 | |||||||||||||||||||||||||||
UF | 16,019,257 | 821,405 | 5.13 | 16,741,587 | 1,436,876 | 8.58 | 19,004,237 | 2,902,992 | 15.28 | |||||||||||||||||||||||||||
Foreign currency | 4,434,032 | 90,496 | 2.04 | 3,846,763 | 49,690 | 1.29 | 5,103,141 | 142,204 | 2.79 | |||||||||||||||||||||||||||
Total | Ch$ | 38,797,981 | Ch$ | 1,894,967 | 4.88 | % | Ch$ | 42,666,108 | Ch$ | 2,433,391 | 5.70 | % | Ch$ | 46,245,217 | Ch$ | 4,699,051 | 10.16 | % |
(1) | Interest earned includes interest accrued on trading securities. |
(2) | Average nominal interest rate includes the effect of inflation indexation on UF-denominated assets. |
112
For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
2020 | 2021 | 2022 | ||||||||||||||||||||||||||||||||||
IFRS: | Average Balance | Interest | Average Nominal | Average Balance | Interest | Average Nominal | Average Balance | Interest | Average Nominal | |||||||||||||||||||||||||||
(In millions of Ch$, except percentages) | ||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||
Non-interest earning assets | ||||||||||||||||||||||||||||||||||||
Cash and due from banks | ||||||||||||||||||||||||||||||||||||
Ch$ | Ch$ | 1,197,286 | ― | ― | Ch$ | 1,242,870 | ― | ― | Ch$ | 1,404,525 | ― | ― | ||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | 217,725 | ― | ― | 471,078 | ― | ― | 772,306 | ― | ― | |||||||||||||||||||||||||||
Total | 1,415,011 | ― | ― | 1,713,948 | ― | ― | 2,176,831 | ― | ― | |||||||||||||||||||||||||||
Transactions in the course of collection | ||||||||||||||||||||||||||||||||||||
Ch$ | 332,797 | ― | ― | 336,610 | ― | ― | 268,685 | ― | ― | |||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | 241,992 | ― | ― | 250,925 | ― | ― | 320,592 | ― | ― | |||||||||||||||||||||||||||
Total | 574,789 | ― | ― | 587,535 | ― | ― | 589,277 | ― | ― | |||||||||||||||||||||||||||
Allowances for loan losses | ||||||||||||||||||||||||||||||||||||
Ch$ | (804,710 | ) | ― | ― | (660,051 | ) | ― | ― | (780,718 | ) | ― | ― | ||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Total | (804,710 | ) | ― | ― | (660,051 | ) | ― | ― | (780,718 | ) | ― | ― | ||||||||||||||||||||||||
Derivatives | ||||||||||||||||||||||||||||||||||||
Ch$ | 3,124,051 | ― | ― | 2,072,621 | ― | ― | 2,915,445 | ― | ― | |||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | 351,611 | ― | ― | 216,836 | ― | ― | 336,893 | ― | ― | |||||||||||||||||||||||||||
Total | 3,475,662 | ― | ― | 2,289,457 | ― | ― | 3,252,338 | ― | ― | |||||||||||||||||||||||||||
Investments in Other Companies | ||||||||||||||||||||||||||||||||||||
Ch$ | 56,909 | ― | ― | 46,570 | ― | ― | 55,630 | ― | ― | |||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | 101 | ― | ― | 52 | ― | ― | 25 | ― | ― | |||||||||||||||||||||||||||
Total | 57,010 | ― | ― | 46,622 | ― | ― | 55,655 | ― | ― | |||||||||||||||||||||||||||
Intangible assets | ||||||||||||||||||||||||||||||||||||
Ch$ | 93,273 | ― | ― | 99,876 | ― | ― | 115,119 | ― | ― | |||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Total | 93,273 | ― | ― | 99,876 | ― | ― | 115,119 | ― | ― | |||||||||||||||||||||||||||
Fixed assets | ||||||||||||||||||||||||||||||||||||
Ch$ | 221,724 | ― | ― | 223,100 | ― | ― | 215,367 | ― | ― | |||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Total | 221,724 | ― | ― | 223,100 | ― | ― | 215,367 | ― | ― | |||||||||||||||||||||||||||
Lease assets | ||||||||||||||||||||||||||||||||||||
Ch$ | 137,606 | ― | ― | 111,126 | ― | ― | 99,052 | ― | ― | |||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Total | 137,606 | ― | ― | 111,126 | ― | ― | 99,052 | ― | ― |
113
For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
2020 | 2021 | 2022 | ||||||||||||||||||||||||||||||||||
IFRS: | Average Balance | Interest | Average Nominal Rate (2) | Average Balance | Interest | Average Nominal Rate (2) | Average Balance | Interest | Average Nominal Rate (2) | |||||||||||||||||||||||||||
(In millions of Ch$, except percentages) | ||||||||||||||||||||||||||||||||||||
Current tax assets | ||||||||||||||||||||||||||||||||||||
Ch$ | ― | ― | ― | ― | ― | 58,087 | ― | ― | ||||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Total | ― | ― | ― | ― | ― | ― | 58,087 | ― | ― | |||||||||||||||||||||||||||
Deferred tax assets | ||||||||||||||||||||||||||||||||||||
Ch$ | 260,193 | ― | ― | 211,210 | ― | ― | 304,764 | ― | ― | |||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Total | 260,193 | ― | ― | 211,210 | ― | ― | 304,764 | ― | ― | |||||||||||||||||||||||||||
Other assets | ||||||||||||||||||||||||||||||||||||
Ch$ | 260,356 | ― | ― | 349,746 | ― | ― | 457,140 | ― | ― | |||||||||||||||||||||||||||
UF | 23,721 | ― | ― | 13,792 | ― | ― | 20,312 | ― | ― | |||||||||||||||||||||||||||
Foreign currency | 8,103 | ― | ― | 17,689 | ― | ― | 25,495 | ― | ― | |||||||||||||||||||||||||||
Total | 292,180 | ― | ― | 381,227 | ― | ― | 502,947 | ― | ― | |||||||||||||||||||||||||||
Total non-interest earning assets | ||||||||||||||||||||||||||||||||||||
Ch$ | 4,879,485 | ― | ― | 4,033,678 | ― | ― | 5,113,096 | ― | ― | |||||||||||||||||||||||||||
UF | 23,721 | ― | ― | 13,792 | ― | ― | 20,312 | ― | ― | |||||||||||||||||||||||||||
Foreign currency | 819,532 | ― | ― | 956,580 | ― | ― | 1,455,311 | ― | ― | |||||||||||||||||||||||||||
Total | 5,722,738 | ― | ― | 5,004,050 | ― | ― | 6,588,719 | ― | ― | |||||||||||||||||||||||||||
Total Assets | ||||||||||||||||||||||||||||||||||||
Ch$ | 23,224,177 | 983,066 | ― | 26,111,436 | 946,825 | ― | 27,250,935 | 1,653,855 | ― | |||||||||||||||||||||||||||
UF | 16,042,978 | 821,405 | ― | 16,755,379 | 1,436,876 | ― | 19,024,549 | 2,902,992 | ― | |||||||||||||||||||||||||||
Foreign currency | 5,253,564 | 90,496 | ― | 4,803,343 | 49,690 | ― | 6,558,452 | 142,204 | ― | |||||||||||||||||||||||||||
Total | Ch$ | 44,520,719 | Ch$ | 1,894,967 | ― | Ch$ | 47,670,158 | Ch$ | 2,433,391 | ― | Ch$ | 52,833,936 | Ch$ | 4,699,051 | ― |
(1) | Interest earned includes interest accrued on trading securities. |
(2) | Average nominal interest rate includes the effect of inflation indexation on UF-denominated assets. |
114
For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
2020 | 2021 | 2022 | ||||||||||||||||||||||||||||||||||
IFRS: | Average Balance | Interest Accrued (1) | Average Nominal Rate (2) | Average Balance | Interest Accrued (1) | Average Nominal Rate (2) | Average Balance | Interest Accrued (1) | Average Nominal Rate (2) | |||||||||||||||||||||||||||
(In millions of Ch$, except percentages) | ||||||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||
Interest bearing liabilities | ||||||||||||||||||||||||||||||||||||
Savings accounts and time deposits | ||||||||||||||||||||||||||||||||||||
Ch$ | Ch$ | 7,378,261 | Ch$ | 65,163 | 0.88 | % | Ch$ | 6,064,623 | Ch$ | 41,415 | 0.68 | % | Ch$ | 8,441,458 | Ch$ | 704,924 | 8.35 | % | ||||||||||||||||||
UF | 1,115,280 | 43,775 | 3.93 | 954,030 | 88,694 | 9.30 | 1,622,083 | 240,462 | 14.82 | |||||||||||||||||||||||||||
Foreign currency | 1,363,824 | 13,204 | 0.97 | 1,448,855 | 1,643 | 0.11 | 1,633,001 | 26,975 | 1.65 | |||||||||||||||||||||||||||
Total | 9,857,365 | 122,142 | 1.24 | 8,467,508 | 131,752 | 1.56 | 11,696,542 | 972,361 | 8.31 | |||||||||||||||||||||||||||
Repurchase agreements | ||||||||||||||||||||||||||||||||||||
Ch$ | 271,707 | 1,845 | 0.68 | 139,331 | 940 | 0.67 | 181,091 | 15,810 | 8.73 | |||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | 9,120 | 8 | 0.09 | 1,269 | ― | ― | 3,357 | 34 | 1.01 | |||||||||||||||||||||||||||
Total | 280,827 | 1,853 | 0.66 | 140,600 | 940 | 0.67 | 184,448 | 15,844 | 8.59 | |||||||||||||||||||||||||||
Borrowings from financial institutions | ||||||||||||||||||||||||||||||||||||
Ch$ | 2,048,309 | 10,425 | 0.51 | 3,923,552 | 20,439 | 0.52 | 4,349,164 | 22,387 | 0.51 | |||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | 1,176,994 | 17,405 | 1.48 | 497,295 | 2,943 | 0.59 | 693,877 | 15,026 | 2.17 | |||||||||||||||||||||||||||
Total | 3,225,303 | 27,830 | 0.86 | 4,420,847 | 23,382 | 0.53 | 5,043,041 | 37,413 | 0.74 | |||||||||||||||||||||||||||
Debt issued | ||||||||||||||||||||||||||||||||||||
Ch$ | 9,095 | 434 | 4.77 | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
UF | 7,181,164 | 363,013 | 5.06 | 7,021,429 | 618,355 | 8.81 | 7,403,280 | 1,105,550 | 14.93 | |||||||||||||||||||||||||||
Foreign currency | 1,529,017 | 36,643 | 2.40 | 1,470,272 | 34,312 | 2.33 | 2,092,918 | 58,852 | 2.81 | |||||||||||||||||||||||||||
Total | 8,719,276 | 400,090 | 4.59 | 8,491,701 | 652,667 | 7.69 | 9,496,198 | 1,164,402 | 12.26 | |||||||||||||||||||||||||||
Commercial Papers | ||||||||||||||||||||||||||||||||||||
Ch$ | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | 219,046 | 3,899 | 1.78 | 359,836 | 1,223 | 0.34 | 133,208 | 1,293 | 0.97 | |||||||||||||||||||||||||||
Total | 219,046 | 3,899 | 1.78 | 359,836 | 1,223 | 0.34 | 133,208 | 1,293 | 0.97 | |||||||||||||||||||||||||||
Lease Liabilities | ||||||||||||||||||||||||||||||||||||
Ch$ | 133,514 | 2,532 | 1.90 | 107,048 | 1,978 | 1.85 | 94,063 | 1,865 | 1.98 | |||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Total | 133,514 | 2,532 | 1.90 | 107,048 | 1,978 | 1.85 | 94,063 | 1,865 | 1.98 | |||||||||||||||||||||||||||
Other financial obligations | ||||||||||||||||||||||||||||||||||||
Ch$ | 104,056 | 1,029 | 0.99 | 39,298 | 311 | 0.79 | 43,950 | 1,278 | 2.91 | |||||||||||||||||||||||||||
UF | 29,882 | 630 | 2.11 | 31,954 | 1,967 | 6.16 | 35,218 | 5,752 | 16.33 | |||||||||||||||||||||||||||
Foreign currency | 52,199 | 2 | 0.00 | 105,253 | 228 | 0.22 | 121,325 | 544 | 0.45 | |||||||||||||||||||||||||||
Total | 186,137 | 1,661 | 0.89 | 176,505 | 2,506 | 1.42 | 200,493 | 7,574 | 3.78 | |||||||||||||||||||||||||||
Total interest bearing liabilities | ||||||||||||||||||||||||||||||||||||
Ch$ | 9,944,942 | 81,428 | 0.82 | 10,273,852 | 65,083 | 0.63 | 13,109,726 | 746,264 | 5.69 | |||||||||||||||||||||||||||
UF | 8,326,326 | 407,418 | 4.89 | 8,007,413 | 709,016 | 8.85 | 9,060,581 | 1,351,764 | 14.92 | |||||||||||||||||||||||||||
Foreign currency | 4,350,200 | 71,161 | 1.64 | 3,882,780 | 40,349 | 1.04 | 4,677,686 | 102,724 | 2.20 | |||||||||||||||||||||||||||
Total | Ch$ | 22,621,468 | Ch$ | 560,007 | 2.48 | % | Ch$ | 22,164,045 | Ch$ | 814,448 | 3.67 | % | Ch$ | 26,847,993 | Ch$ | 2,200,752 | 8.20 | % |
(1) | Interest accrued includes interest accrued on trading securities. |
(2) | Average nominal interest rate includes the effect of inflation indexation on UF-denominated liabilities. |
115
For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
2020 | 2021 | 2022 | ||||||||||||||||||||||||||||||||||
IFRS: | Average Balance | Interest Accrued (1) | Average Nominal Rate (2) | Average Balance | Interest Accrued (1) | Average Nominal Rate (2) | Average Balance | Interest Accrued (1) | Average Nominal Rate (2) | |||||||||||||||||||||||||||
(In millions of Ch$, except percentages) | ||||||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||
Non-interest bearing liabilities | ||||||||||||||||||||||||||||||||||||
Current account and demand deposits | ||||||||||||||||||||||||||||||||||||
Ch$ | Ch$ | 10,709,744 | ― | ― | Ch$ | 14,181,137 | ― | ― | Ch$ | 12,520,106 | ― | ― | ||||||||||||||||||||||||
UF | 376,918 | ― | ― | 455,067 | ― | ― | 258,423 | ― | ― | |||||||||||||||||||||||||||
Foreign currency | 1,795,965 | ― | ― | 2,412,623 | ― | ― | 2,772,459 | ― | ― | |||||||||||||||||||||||||||
Total | 12,882,627 | ― | ― | 17,048,827 | ― | ― | 15,550,988 | ― | ― | |||||||||||||||||||||||||||
Transactions in the course of payment | ||||||||||||||||||||||||||||||||||||
Ch$ | 533,216 | ― | ― | 531,175 | ― | ― | 334,405 | ― | ― | |||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | 210,173 | ― | ― | 211,664 | ― | ― | 312,494 | ― | ― | |||||||||||||||||||||||||||
Total | 743,389 | ― | ― | 742,839 | ― | ― | 646,899 | ― | ― | |||||||||||||||||||||||||||
Derivatives | ||||||||||||||||||||||||||||||||||||
Ch$ | 3,147,528 | ― | ― | 2,079,304 | ― | ― | 3,017,595 | ― | ― | |||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | 405,774 | ― | ― | 240,301 | ― | ― | 289,612 | ― | ― | |||||||||||||||||||||||||||
Total | 3,553,302 | ― | ― | 2,319,605 | ― | ― | 3,307,207 | ― | ― | |||||||||||||||||||||||||||
Current tax liabilities | ||||||||||||||||||||||||||||||||||||
Ch$ | 4,512 | ― | ― | 8,426 | ― | ― | 32,532 | ― | ― | |||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Total | 4,512 | ― | ― | 8,426 | ― | ― | 32,532 | ― | ― | |||||||||||||||||||||||||||
Deferred tax liabilities | ||||||||||||||||||||||||||||||||||||
Ch$ | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Total | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Provisions | ||||||||||||||||||||||||||||||||||||
Ch$ | 190,675 | ― | ― | 154,878 | ― | ― | 381,331 | ― | ― | |||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | ― | ― | ― | ― | ― | ― | 14,126 | ― | ― | |||||||||||||||||||||||||||
Total | 190,675 | ― | ― | 154,878 | ― | ― | 395,457 | ― | ― | |||||||||||||||||||||||||||
Other liabilities | ||||||||||||||||||||||||||||||||||||
Ch$ | 468,568 | ― | ― | 557,590 | ― | ― | 689,363 | ― | ― | |||||||||||||||||||||||||||
UF | 501 | ― | ― | 546 | ― | ― | 464 | ― | ― | |||||||||||||||||||||||||||
Foreign currency | 79,452 | ― | ― | 93,953 | ― | ― | 116,047 | ― | ― | |||||||||||||||||||||||||||
Total | 548,521 | ― | ― | 652,089 | ― | ― | 805,874 | ― | ― | |||||||||||||||||||||||||||
Equity | ||||||||||||||||||||||||||||||||||||
Ch$ | 3,976,225 | ― | ― | 4,579,449 | ― | ― | 5,246,986 | ― | ― | |||||||||||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Foreign currency | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Total | 3,976,225 | ― | ― | 4,579,449 | ― | ― | 5,246,986 | ― | ― | |||||||||||||||||||||||||||
Total non-interest bearing liabilities and equity | ||||||||||||||||||||||||||||||||||||
Ch$ | 19,030,468 | ― | ― | 22,091,959 | ― | ― | 22,222,318 | ― | ― | |||||||||||||||||||||||||||
UF | 377,419 | ― | ― | 455,613 | ― | ― | 258,887 | ― | ― | |||||||||||||||||||||||||||
Foreign currency | 2,491,364 | ― | ― | 2,958,541 | ― | ― | 3,504,738 | ― | ― | |||||||||||||||||||||||||||
Total | 21,899,251 | ― | ― | 25,506,113 | ― | ― | 25,985,943 | ― | ― | |||||||||||||||||||||||||||
Total liabilities and equity | ||||||||||||||||||||||||||||||||||||
Ch$ | 28,975,410 | 81,428 | ― | 32,365,811 | 65,083 | ― | 35,332,044 | 746,264 | ― | |||||||||||||||||||||||||||
UF | 8,703,745 | 407,418 | ― | 8,463,026 | 709,016 | ― | 9,319,468 | 1,351,764 | ― | |||||||||||||||||||||||||||
Foreign currency | 6,841,564 | 71,161 | ― | 6,841,321 | 40,349 | ― | 8,182,424 | 102,724 | ― | |||||||||||||||||||||||||||
Total | Ch$ | 44,520,719 | Ch$ | 560,007 | ― | Ch$ | 47,670,158 | Ch$ | 814,448 | ― | Ch$ | 52,833,936 | Ch$ | 2,200,752 | ― |
(1) | Interest accrued includes interest accrued on trading securities. |
(2) | Average nominal interest rate includes the effect of inflation indexation on UF-denominated liabilities. |
116
Interest Earning Assets and Net Interest Margin
The following table sets forth, by currency of denomination, the levels of our average interest earning assets and net interest, and illustrates the comparative margins obtained, for the years ended December 31, 2020, 2021 and 2022:
For the Year Ended December 31, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
IFRS: | (in millions of Ch$, except percentages) | |||||||||||
Total average interest earning assets | ||||||||||||
Ch$ | Ch$ | 18,344,692 | Ch$ | 22,077,758 | Ch$ | 22,137,839 | ||||||
UF | 16,019,257 | 16,741,587 | 19,004,237 | |||||||||
Foreign currency | 4,434,032 | 3,846,763 | 5,103,141 | |||||||||
Total | 38,797,981 | 42,666,108 | 46,245,217 | |||||||||
Net interest earned (including interest earned on trading securities)(1) | ||||||||||||
Ch$ | 901,638 | 881,742 | 907,591 | |||||||||
UF | 413,987 | 727,860 | 1,551,228 | |||||||||
Foreign currency | 19,335 | 9,341 | 39,480 | |||||||||
Total | Ch$ | 1,334,960 | Ch$ | 1,618,943 | Ch$ | 2,498,299 | ||||||
Net interest margin, nominal basis(2)(3) | ||||||||||||
Ch$ | 4.91 | % | 3.99 | % | 4.10 | % | ||||||
UF | 2.58 | 4.35 | 8.16 | |||||||||
Foreign currency | 0.44 | 0.24 | 0.77 | |||||||||
Total | 3.44 | % | 3.79 | % | 5.40 | % |
(1) | Net interest earned is defined as interest revenue earned less interest expense incurred. |
(2) | Net interest margin, nominal basis is defined as net interest earned divided by average interest earning assets. |
(3) | Net interest margin includes the effect of inflation indexation on UF- denominated assets and liabilities. |
117
Changes in Net Interest Income—Volume and Rate Analysis
The following tables compare, by currency of denomination, changes in our net interest income between 2020 and 2021, as well as 2021 and 2022, caused by (i) changes in the average volume of interest earning assets and interest bearing liabilities and (ii) changes in their respective nominal interest rates. Volume and rate variances were calculated based on movements in average balances over the period and changes in nominal interest rate, average interest earning assets and average interest bearing liabilities. The net change attributable to changes in both volume and rate has been allocated proportionately to the change in volume and the change in rate. Also, the rate effect on assets and liabilities includes the impact of inflation indexation on assets UF-denominated assets and liabilities.
Increase
(Decrease) from 2020 to 2021 due to changes in | Net
Change from 2020 to | Increase
(Decrease) from 2021 to 2022 due to changes in | Net
Change from 2021 to | |||||||||||||||||||||
IFRS: | Volume | Rate | 2021 | Volume | Rate | 2022 | ||||||||||||||||||
(in millions of Ch$) | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Interest earning assets | ||||||||||||||||||||||||
Cash and due from banks | ||||||||||||||||||||||||
Ch$ | Ch$ | ― | Ch$ | ― | Ch$ | ― | Ch$ | ― | Ch$ | ― | Ch$ | ― | ||||||||||||
UF | ― | ― | ― | ― | ― | ― | ||||||||||||||||||
Foreign currency | (89 | ) | (4,687 | ) | (4,776 | ) | 53 | 10,777 | 10,830 | |||||||||||||||
Total | (89 | ) | (4,687 | ) | (4,776 | ) | 53 | 10,777 | 10,830 | |||||||||||||||
Financial investments | ||||||||||||||||||||||||
Ch$ | 13,924 | 21,784 | 35,708 | 8,665 | 311,873 | 320,538 | ||||||||||||||||||
UF | 6,764 | 32,201 | 38,965 | 82,145 | 39,610 | 121,755 | ||||||||||||||||||
Foreign currency | (1,506 | ) | (1,279 | ) | (2,785 | ) | 3,356 | 278 | 3,634 | |||||||||||||||
Total | 19,182 | 52,706 | 71,888 | 94,166 | 351,761 | 445,927 | ||||||||||||||||||
Loans in advance to bank | ||||||||||||||||||||||||
Ch$ | 5,740 | 4,787 | 10,527 | (7,732 | ) | 140,539 | 132,807 | |||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ||||||||||||||||||
Foreign currency | (404 | ) | (2,619 | ) | (3,023 | ) | 229 | 2,378 | 2,607 | |||||||||||||||
Total | 5,336 | 2,168 | 7,504 | (7,503 | ) | 142,917 | 135,414 | |||||||||||||||||
Commercial loans | ||||||||||||||||||||||||
Ch$ | 68,652 | (62,553 | ) | 6,099 | (7,526 | ) | 81,190 | 73,664 | ||||||||||||||||
UF | (1,814 | ) | 177,937 | 176,123 | 51,606 | 545,654 | 597,260 | |||||||||||||||||
Foreign currency | (6,233 | ) | (21,892 | ) | (28,125 | ) | 23,443 | 47,216 | 70,659 | |||||||||||||||
Total | 60,605 | 93,492 | 154,097 | 67,523 | 674,060 | 741,583 | ||||||||||||||||||
Consumer loans | ||||||||||||||||||||||||
Ch$ | (26,260 | ) | (62,659 | ) | (88,919 | ) | 74,816 | 98,893 | 173,709 | |||||||||||||||
UF | (1,226 | ) | 3,486 | 2,260 | (1,146 | ) | 3,387 | 2,241 | ||||||||||||||||
Foreign currency | ― | ― | ― | ― | ― | ― | ||||||||||||||||||
Total | (27,486 | ) | (59,173 | ) | (86,659 | ) | 73,670 | 102,280 | 175,950 | |||||||||||||||
Residential mortgage loans | ||||||||||||||||||||||||
Ch$ | 48 | 10 | 58 | 115 | 107 | 222 | ||||||||||||||||||
UF | 37,998 | 360,125 | 398,123 | 96,898 | 647,962 | 744,860 | ||||||||||||||||||
Foreign currency | ― | ― | ― | ― | ― | ― | ||||||||||||||||||
Total | 38,046 | 360,135 | 398,181 | 97,013 | 648,069 | 745,082 | ||||||||||||||||||
Repurchase agreement | ||||||||||||||||||||||||
Ch$ | 504 | (154 | ) | 350 | (861 | ) | 3,247 | 2,386 | ||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ||||||||||||||||||
Foreign currency | ― | ― | ― | ― | ― | ― | ||||||||||||||||||
Total | 504 | (154 | ) | 350 | (861 | ) | 3,247 | 2,386 | ||||||||||||||||
Other Assets | ||||||||||||||||||||||||
Ch$ | (461 | ) | 397 | (64 | ) | 673 | 3,031 | 3,704 | ||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ||||||||||||||||||
Foreign currency | (868 | ) | (1,229 | ) | (2,097 | ) | 104 | 4,680 | 4,784 | |||||||||||||||
Total | (1,329 | ) | (832 | ) | (2,161 | ) | 777 | 7,711 | 8,488 | |||||||||||||||
Total interest earning assets | ||||||||||||||||||||||||
Ch$ | 62,147 | (98,388 | ) | (36,241 | ) | 68,150 | 638,880 | 707,030 | ||||||||||||||||
UF | 41,722 | 573,749 | 615,471 | 229,503 | 1,236,613 | 1,466,116 | ||||||||||||||||||
Foreign currency | (9,100 | ) | (31,706 | ) | (40,806 | ) | 27,185 | 65,329 | 92,514 | |||||||||||||||
Total | Ch$ | 94,769 | Ch$ | 443,655 | Ch$ | 538,424 | Ch$ | 324,838 | Ch$ | 1,940,822 | Ch$ | 2,265,660 |
118
Increase
(Decrease) from 2020 to 2021 due to changes in | Net
Change from 2020 to | Increase
(Decrease) from 2021 to 2022 due to changes in | Net
Change from 2021 to | |||||||||||||||||||||
IFRS: | Volume | Rate | 2021 | Volume | Rate | 2022 | ||||||||||||||||||
(in millions of Ch$) | ||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Interest bearing liabilities | ||||||||||||||||||||||||
Savings accounts and time deposits | ||||||||||||||||||||||||
Ch$ | Ch$ | (10,445 | ) | Ch$ | (13,303 | ) | Ch$ | (23,748 | ) | Ch$ | 22,378 | Ch$ | 641,131 | Ch$ | 663,509 | |||||||||
UF | (7,157 | ) | 52,076 | 44,919 | 82,078 | 69,690 | 151,768 | |||||||||||||||||
Foreign currency | 775 | (12,336 | ) | (11,561 | ) | 235 | 25,097 | 25,332 | ||||||||||||||||
Total | (16,827 | ) | 26,437 | 9,610 | 104,691 | 735,918 | 840,609 | |||||||||||||||||
Repurchase agreements | ||||||||||||||||||||||||
Ch$ | (893 | ) | (12 | ) | (905 | ) | 364 | 14,506 | 14,870 | |||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ||||||||||||||||||
Foreign currency | (4 | ) | (4 | ) | (8 | ) | ― | 34 | 34 | |||||||||||||||
Total | (897 | ) | (16 | ) | (913 | ) | 364 | 14,540 | 14,904 | |||||||||||||||
Borrowing from financial institutions | ||||||||||||||||||||||||
Ch$ | 9,763 | 251 | 10,014 | 2,193 | (245 | ) | 1,948 | |||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ||||||||||||||||||
Foreign currency | (7,094 | ) | (7,368 | ) | (14,462 | ) | 1,564 | 10,519 | 12,083 | |||||||||||||||
Total | 2,669 | (7,117 | ) | (4,448 | ) | 3,757 | 10,274 | 14,031 | ||||||||||||||||
Debt issued | ||||||||||||||||||||||||
Ch$ | (217 | ) | (217 | ) | (434 | ) | ― | ― | ― | |||||||||||||||
UF | (8,249 | ) | 263,591 | 255,342 | 35,325 | 451,870 | 487,195 | |||||||||||||||||
Foreign currency | (1,386 | ) | (945 | ) | (2,331 | ) | 16,538 | 8,002 | 24,540 | |||||||||||||||
Total | (9,852 | ) | 262,429 | 252,577 | 51,863 | 459,872 | 511,735 | |||||||||||||||||
Commercial Papers | ||||||||||||||||||||||||
Ch$ | ― | ― | ― | ― | ― | ― | ||||||||||||||||||
UF | ― | ― | ― | ― | ― | ― | ||||||||||||||||||
Foreign currency | 1,608 | (4,284 | ) | (2,676 | ) | (1,132 | ) | 1,202 | 70 | |||||||||||||||
Total | 1,608 | (4,284 | ) | (2,676 | ) | (1,132 | ) | 1,202 | 70 | |||||||||||||||
Lease Liabilities | ||||||||||||||||||||||||
Ch$ | (491 | ) | (63 | ) | (554 | ) | (251 | ) | 138 | (113 | ) | |||||||||||||
UF | ― | ― | ― | ― | ― | ― | ||||||||||||||||||
Foreign currency | ― | ― | ― | ― | ― | ― | ||||||||||||||||||
Total | (491 | ) | (63 | ) | (554 | ) | (251 | ) | 138 | (113 | ) | |||||||||||||
Other financial obligation | ||||||||||||||||||||||||
Ch$ | (544 | ) | (174 | ) | (718 | ) | 41 | 926 | 967 | |||||||||||||||
UF | 47 | 1,290 | 1,337 | 220 | 3,565 | 3,785 | ||||||||||||||||||
Foreign currency | 4 | 222 | 226 | 39 | 277 | 316 | ||||||||||||||||||
Total | (493 | ) | 1,338 | 845 | 300 | 4,768 | 5,068 | |||||||||||||||||
Total interest bearing liabilities | ||||||||||||||||||||||||
Ch$ | (2,827 | ) | (13,518 | ) | (16,345 | ) | 24,725 | 656,456 | 681,181 | |||||||||||||||
UF | (15,359 | ) | 316,957 | 301,598 | 117,623 | 525,125 | 642,748 | |||||||||||||||||
Foreign currency | (6,097 | ) | (24,715 | ) | (30,812 | ) | 17,244 | 45,131 | 62,375 | |||||||||||||||
Total | Ch$ | (24,283 | ) | Ch$ | 278,724 | Ch$ | 254,441 | Ch$ | 159,592 | Ch$ | 1,226,712 | Ch$ | 1,386,304 |
119
Financial Investments
Financial assets held for trading at Fair value through profit or loss:
The following table sets forth a breakdown of instruments classified as financial assets held for trading at Fair value through profit or loss, included in our investment portfolio:
As of December 31, | Weighted Average Nominal Rate (1) as of December 31, | |||||||||||
IFRS: | 2021 | 2022 | 2022 | |||||||||
(in millions of Ch$) | % | |||||||||||
Instruments issued by the Chilean Government and the Central Bank of Chile: | ||||||||||||
Debt financial instruments from the Central Bank of Chile | Ch$ | 3,297,100 | Ch$ | 3,014,768 | 11.09 | % | ||||||
Bonds and Promissory notes from the General Treasury of the Republic | 175,022 | 44,524 | 5.83 | |||||||||
Other fiscal debt financial instruments | ― | ― | ― | |||||||||
Other instruments issued in Chile: | ||||||||||||
Debt financial instruments from other domestic banks | 265,820 | 374,453 | 8.43 | |||||||||
Bonds and trade effects from domestic companies | ― | ― | ― | |||||||||
Other debt financial instruments issued in the country | ― | ― | ― | |||||||||
Instruments issued by foreign institutions: | ||||||||||||
Financial instruments from foreign governments or Central Banks | ― | ― | ― | |||||||||
Financial debt instruments from other foreign governments and fiscal entities | ― | ― | ― | |||||||||
Debt financial instruments from other foreign banks | ― | ― | ― | |||||||||
Bonds and trade effects from foreign companies | ― | ― | ― | |||||||||
Mutual fund investments: | ||||||||||||
Funds managed by related companies | 125,145 | 250,337 | 11.28 | |||||||||
Funds managed by third-party | ― | ― | ― | |||||||||
Equity instruments | ||||||||||||
Domestic equity instruments | 3,062 | 2,357 | ― | |||||||||
Foreign equity instruments | ― | 3,261 | ― | |||||||||
Loans originated and acquired by the entity | ||||||||||||
Loans and advances to banks | ― | ― | ― | |||||||||
Commercial loans | ― | ― | ― | |||||||||
Residential mortgage loans | ― | ― | ― | |||||||||
Consumer loans | ― | ― | ― | |||||||||
Others | 10,546 | 1,370 | ― | |||||||||
Total | Ch$ | 3,876,695 | Ch$ | 3,691,070 | 10.75 | % |
(1) | Weighted Average Nominal Rate is calculated as the sum of total accrued interests for the type of security divided by the average balance for the same type of security during the reported period. |
Under “Other instruments issued in Chile” are included instruments sold under repurchase agreements to clients and financial institutions by an amount of Ch$208,330 million as of December 31, 2022 (Ch$84,969 million in December 2021). Under “Instruments issued by the Chilean Government and Central Bank of Chile” are maintained instruments to comply with the requirements for the constitution of technical reserve for an amount equivalent to Ch$3,288,800 million as of December 31, 2021.
120
Investment Portfolio:
The detail of instruments classified as financial assets at Fair Value through Other Comprehensive Income and as Financial Instruments at Amortized Cost is as follows:
Financial Assets at Fair Value through Other Comprehensive Income
As of December 31, | Weighted Average Nominal Rate (1) as of December 31, | |||||||||||
IFRS: | 2021 | 2022 | 2022 | |||||||||
(in millions of Ch$) | % | |||||||||||
Debt instruments at fair value through OCI | ||||||||||||
Instruments issued by the Chilean Government and the Central Bank of Chile: | ||||||||||||
Debt financial instruments from the Central Bank of Chile | Ch$ | 102 | Ch$ | ― | ― | % | ||||||
Bonds and Promissory notes from the General Treasury of the Republic | 2,480,423 | 2,254,578 | 8.51 | |||||||||
Other fiscal debt financial instruments | 8,325 | 4,279 | 4.25 | |||||||||
Other instruments issued in Chile: | ||||||||||||
Debt financial instruments form other domestic banks | 538,486 | 1,494,914 | 9.45 | |||||||||
Bonds and trade effects from domestic companies | 27,473 | 45,994 | 4.17 | |||||||||
Other debt financial instruments issued in the country | ― | ― | ― | |||||||||
Instruments issued by Foreign Institutions: | ||||||||||||
Financial instruments form foreign Central Banks | ― | ― | ― | |||||||||
Financial instruments form foreign governments and fiscal entities | ― | 42,017 | 4.03 | |||||||||
Debt financial instruments from other foreign banks | ― | 125,610 | 5.92 | |||||||||
Bonds and trade effects from foreign companies | ― | ― | ― | |||||||||
Other debt financial instruments issued abroad | ― | ― | ― | |||||||||
Equity instruments at fair value through OCI: | ||||||||||||
Equity instruments issued in Chile | 5,499 | 5,700 | ― | |||||||||
Equity instruments issued by foreign institutions | 866 | 845 | ― | |||||||||
Total | Ch$ | 3,061,174 | Ch$ | 3,973,937 | 5.12 | % |
(1) | Weighted Average Nominal Rate is calculated as the sum of total accrued interests for the type of security divided by the average balance for the same type of security during the reported period. |
The portfolio of Financial Assets at Fair Value through Other Comprehensive Income included net unrealized losses of Ch$45,468 million and unrealized gains of Ch$268 million as of December 31, 2021 and 2022, respectively, both before taxes, in each case recorded in other comprehensive income within equity.
121
Financial Instruments at Amortized Cost
As of December 31, | Weighted Average Nominal Rate (1) as of December 31, | |||||||||||
IFRS: | 2021 | 2022 | 2022 | |||||||||
(in millions of Ch$) | % | |||||||||||
Financial Instruments at Amortized Cost | ||||||||||||
Instruments issued by the Chilean Government and Central Bank of Chile: | ||||||||||||
Debt financial instruments from the Central Bank of Chile | Ch$ | ― | Ch$ | ― | ― | % | ||||||
Bonds and promissory notes from the General Treasury of the Republic | 839,744 | 902,355 | 1.60 | |||||||||
Other fiscal debt financial instruments | ― | ― | ― | |||||||||
Other instruments issued in Chile: | ||||||||||||
Debt financial instruments from other domestic banks | ― | ― | ― | |||||||||
Bonds and trade effects from domestic companies | ― | ― | ― | |||||||||
Other debt financial instruments issued in the country | ― | ― | ― | |||||||||
Instruments issued Abroad: | ||||||||||||
Debt financial instruments from foreign Central Banks | ― | ― | ― | |||||||||
Debt financial instruments from foreign goverments and fiscal entities | ― | ― | ― | |||||||||
Debt financial instruments from other foreing banks | ― | ― | ― | |||||||||
Bonds and trade effects from foreign companies | ― | ― | ― | |||||||||
Other debt financial instruments issued abroad | ― | ― | ― | |||||||||
Accumulated Impairment Value of Financial Assets at Amortized Cost Debt Financial Instruments: | ||||||||||||
Financial assets with no significant increase in credit risk since initial recognition (phase 1) | ― | ― | ― | |||||||||
Financial assets with a significant increase in credit risk since initial recognition, but without credit impairment (phase 2) | ― | ― | ― | |||||||||
Financial assets with credit impairment (phase 3) | ― | ― | ― | |||||||||
Total | Ch$ | 839,744 | Ch$ | 902,355 | 1.60 | % |
(1) | Weighted Average Nominal Rate is calculated as the sum of total accrued interests for the type of security divided by the average balance for the same type of security during the reported period. |
The fair value of our portfolio of financial instruments at amortized cost was Ch$764,528 million and Ch$836,527 million as of December 31, 2021 and 2022, respectively.
122
Maturity of Financial Investments:
The maturities of financial assets held for trading at fair value through profit or loss, financial assets at fair value through other comprehensive income and financial assets at amortized cost as of December 31, 2021 and 2022 were, as follows:
As of December 31, 2021 | ||||||||||||||||||||||||||||||||||||
Due within 1 year | Weighted Average Nominal Rate | Due after 1 year but within 5 years | Weighted Average Nominal Rate | Due after 5 year but within 10 years | Weighted Average Nominal Rate | Due after 10 years | Weighted Average Nominal Rate | Total | ||||||||||||||||||||||||||||
(millions of Ch$, except percentages) | ||||||||||||||||||||||||||||||||||||
Financial assets held for trading: | ||||||||||||||||||||||||||||||||||||
Instruments issued by the Chilean Government and the Central Bank of Chile: | ||||||||||||||||||||||||||||||||||||
Debt financial instruments from the Central Bank of Chile | Ch$ | 3,297,100 | 3.87 | % | Ch$ | ― | ― | % | Ch$ | ― | ― | % | Ch$ | ― | ―% | Ch$ | 3,297,100 | |||||||||||||||||||
Bonds and Promissory notes from the General Treasury of the Republic | 175,022 | 3.83 | ― | ― | ― | ― | ― | ― | 175,022 | |||||||||||||||||||||||||||
Other fiscal debt financial instruments | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Other instruments issued in Chile: | ― | ― | ― | ― | ― | ― | ||||||||||||||||||||||||||||||
Debt financial instruments from other domestic banks | 265,820 | 3.38 | ― | ― | ― | ― | ― | ― | 265,820 | |||||||||||||||||||||||||||
Bonds and trade effects from domestic companies | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Other debt financial instruments issued in the country | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Instruments issued by foreign institutions: | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||||
Financial instruments from foreign governments or Central Banks | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Financial debt instruments from other foreign governments and fiscal entities | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Debt financial instruments from other foreign banks | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Bonds and trade effects from foreign companies | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Mutual fund investments: | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||||
Funds managed by related companies | 125,145 | 3.96 | ― | ― | ― | ― | ― | ― | 125,145 | |||||||||||||||||||||||||||
Funds managed by third-party | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Equity instruments | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||||
Domestic equity instruments | 3,062 | ― | ― | ― | ― | ― | ― | ― | 3,062 | |||||||||||||||||||||||||||
Foreign equity instruments | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Loans originated and acquired by the entity | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||||
Loans and advances to banks | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Commercial loans | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Residential mortgage loans | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Consumer loans | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Others | 10,546 | ― | ― | ― | ― | ― | ― | ― | 10,546 | |||||||||||||||||||||||||||
Total | Ch$ | 3,876,695 | 3.82 | % | Ch$ | ― | ― | % | Ch$ | ― | ― | % | Ch$ | ― | ― | % | Ch$ | 3,876,695 |
(1) | Weighted Average Nominal Rate is calculated as the sum of total accrued interests for the type of security divided by the average balance for the same type of security during the reported period. |
123
As of December 31, 2022 | ||||||||||||||||||||||||||||||||||||
Due within 1 year | Weighted Average Nominal Rate | Due after 1 year but within 5 years | Weighted Average Nominal Rate | Due after 5 year but within 10 years | Weighted Average Nominal Rate | Due after 10 years | Weighted Average Nominal Rate | Total | ||||||||||||||||||||||||||||
(millions of Ch$, except percentages) | ||||||||||||||||||||||||||||||||||||
Financial assets held for trading: | ||||||||||||||||||||||||||||||||||||
Instruments issued by the Chilean Government and the Central Bank of Chile: | ||||||||||||||||||||||||||||||||||||
Debt financial instruments from the Central Bank of Chile | Ch$ | 3,014,768 | 11.09 | % | Ch$ | ― | ― | % | Ch$ | ― | ―% | Ch$ | ― | ― | % | Ch$ | 3,014,768 | |||||||||||||||||||
Bonds and Promissory notes from the General Treasury of the Republic | 44,524 | 5.83 | ― | ― | ― | ― | ― | ― | 44,524 | |||||||||||||||||||||||||||
Other fiscal debt financial instruments | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Other instruments issued in Chile: | ||||||||||||||||||||||||||||||||||||
Debt financial instruments from other domestic bank | 374,453 | 8.43 | ― | ― | ― | ― | ― | ― | 374,453 | |||||||||||||||||||||||||||
Bonds and trade effects from domestic companies | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Other debt financial instruments issued in the country | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Instruments issued by foreign institutions: | ― | |||||||||||||||||||||||||||||||||||
Financial instruments from foreign governments or Central Banks | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Financial debt instruments from other foreign governments and fiscal entities | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Debt financial instruments from other foreign banks | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Bonds and trade effects from foreign companies | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Mutual fund investments: | ||||||||||||||||||||||||||||||||||||
Funds managed by related companies | 250,337 | 11.28 | ― | ― | ― | ― | ― | ― | 250,337 | |||||||||||||||||||||||||||
Funds managed by third-party | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Equity instruments | ― | |||||||||||||||||||||||||||||||||||
Domestic equity instruments | 2,357 | ― | ― | ― | ― | ― | ― | ― | 2,357 | |||||||||||||||||||||||||||
Foreign equity instruments | 3,261 | ― | ― | ― | ― | ― | ― | ― | 3,261 | |||||||||||||||||||||||||||
Loans originated and acquired by the entity | ― | |||||||||||||||||||||||||||||||||||
Loans and advances to banks | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Commercial loans | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Residential mortgage loans | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Consumer loans | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Others | 1,370 | ― | ― | ― | ― | ― | ― | ― | 1,370 | |||||||||||||||||||||||||||
Total | Ch$ | 3,691,070 | 10.75 | % | Ch$ | ― | ― | % | Ch$ | ― | ― | % | Ch$ | ― | ― | % | Ch$ | 3,691,070 |
(1) | Weighted Average Nominal Rate is calculated as the sum of total accrued interests for the type of security divided by the average balance for the same type of security during the reported period. |
124
As of December 31, 2021 | ||||||||||||||||||||||||||||||||||||
Due within 1 year | Weighted Average Nominal Rate | Due after 1 year but within 5 years | Weighted Average Nominal Rate | Due after 5 year but within 10 years | Weighted Average Nominal Rate | Due after 10 years | Weighted Average Nominal Rate | Total | ||||||||||||||||||||||||||||
(millions of Ch$, except percentages) | ||||||||||||||||||||||||||||||||||||
Financial Assets at Fair Value through Other Comprehensive Income: | ||||||||||||||||||||||||||||||||||||
Instruments issued by the Chilean Government and the Central Bank: | ||||||||||||||||||||||||||||||||||||
Debt financial instruments from the Central Bank of Chile | Ch$ | 102 | 3.65 | % | Ch$ | ― | ― | % | Ch$ | ― | ―% | Ch$ | ― | ― | % | Ch$ | 102 | |||||||||||||||||||
Bonds and Promissory notes from the General Treasury of the Republic | 1,149,912 | 4.37 | 934,063 | 5.67 | 396,448 | 2.92 | ― | ― | 2,480,423 | |||||||||||||||||||||||||||
Other fiscal debt financial instruments | 4,467 | 0.75 | 3,854 | 1.55 | 4 | 2.70 | ― | ― | 8,325 | |||||||||||||||||||||||||||
Other instruments issued in Chile: | ||||||||||||||||||||||||||||||||||||
Debt financial instruments form other domestic banks | 422,437 | 5.00 | 18,661 | 3.39 | 29,466 | 2.40 | 67,922 | 3.10 | 538,486 | |||||||||||||||||||||||||||
Bonds and trade effects from domestic companies | ― | ― | 4,682 | 6.85 | 18,972 | 4.12 | 3,819 | 5.00 | 27,473 | |||||||||||||||||||||||||||
Other debt financial instruments issued in the country | ||||||||||||||||||||||||||||||||||||
Instruments issued by Foreign Institutions: | ||||||||||||||||||||||||||||||||||||
Financial instruments form foreign Central Banks | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Financial instruments form foreign governments and fiscal entities | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Debt financial instruments from other foreign banks | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Bonds and trade effects from foreign companies | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Other debt financial instruments issued abroad | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Equity instruments at fair value through OCI | ||||||||||||||||||||||||||||||||||||
Equity instruments issued in Chile | ― | ― | ― | ― | ― | ― | 5,499 | ― | 5,499 | |||||||||||||||||||||||||||
Equity instruments issued by foreign institutions | ― | ― | ― | ― | ― | ― | 866 | ― | 866 | |||||||||||||||||||||||||||
Total | Ch$ | 1,576,918 | 4.53 | % | Ch$ | 961,260 | 5.62 | % | Ch$ | 444,890 | 2.93 | % | Ch$ | 78,106 | 3.20 | % | Ch$ | 3,061,174 |
(1) | Weighted Average Nominal Rate is calculated as the sum of total accrued interests for the type of security divided by the average balance for the same type of security during the reported period. |
125
As of December 31, 2022 | ||||||||||||||||||||||||||||||||||||
Due within 1 year | Weighted Average Nominal Rate | Due after 1 year but within 5 years | Weighted Average Nominal Rate | Due after 5 year but within 10 years | Weighted Average Nominal Rate | Due after 10 years | Weighted Average Nominal Rate | Total | ||||||||||||||||||||||||||||
(millions of Ch$, except percentages) | ||||||||||||||||||||||||||||||||||||
Financial Assets at Fair Value through Other Comprehensive Income: | ||||||||||||||||||||||||||||||||||||
Instruments issued by the Chilean Government and the Central Bank: | ||||||||||||||||||||||||||||||||||||
Debt financial instruments from the Central Bank of Chile | Ch$ | ― | ― | % | Ch$ | ― | ― | % | Ch$ | ― | ― | % | Ch$ | ― | ―% | Ch$ | ― | |||||||||||||||||||
Bonds and Promissory notes from the General Treasury of the Republic | 1,153,396 | 10.92 | 653,385 | 8.25 | 447,797 | 2.69 | ― | ― | 2,254,578 | |||||||||||||||||||||||||||
Other fiscal debt financial instruments | 2,891 | 4.32 | 1,388 | 4.09 | ― | ― | ― | ― | 4,279 | |||||||||||||||||||||||||||
Other instruments issued in Chile: | ||||||||||||||||||||||||||||||||||||
Debt financial instruments form other domestic bank | 1,248,804 | 10.07 | 135,111 | 8.64 | 35,849 | 3.29 | 75,150 | 3.50 | 1,494,914 | |||||||||||||||||||||||||||
Bonds and trade effects from domestic companies | ― | ― | 8,365 | 7.49 | 21,263 | 3.53 | 16,366 | 3.29 | 45,994 | |||||||||||||||||||||||||||
Other debt financial instruments issued in the country | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Instruments issued by Foreign Institutions: | ||||||||||||||||||||||||||||||||||||
Financial instruments form foreign Central Banks | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Financial instruments form foreign governments and fiscal entities | 42,017 | 4.03 | ― | ― | ― | ― | ― | ― | 42,017 | |||||||||||||||||||||||||||
Debt financial instruments from other foreign banks | ― | ― | ― | ― | 125,610 | 5.92 | ― | ― | 125,610 | |||||||||||||||||||||||||||
Bonds and trade effects from foreign companies | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Other debt financial instruments issued abroad | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Equity instruments at fair value through OCI | ||||||||||||||||||||||||||||||||||||
Equity instruments issued in Chile | ― | ― | ― | ― | ― | ― | 5,700 | ― | 5,700 | |||||||||||||||||||||||||||
Equity instruments issued by foreign institutions | ― | ― | ― | ― | ― | ― | 845 | ― | 845 | |||||||||||||||||||||||||||
Total | Ch$ | 2,447,108 | 10.36 | % | Ch$ | 798,249 | 8.30 | % | Ch$ | 630,519 | 3.40 | % | Ch$ | 98,061 | 3.46 | % | Ch$ | 3,973,937 |
(1) | Weighted Average Nominal Rate is calculated as the sum of total accrued interests for the type of security divided by the average balance for the same type of security during the reported period. |
126
As of December 31, 2021 | ||||||||||||||||||||||||||||||||||||
Due within 1 year | Weighted Average Nominal Rate | Due after 1 year but within 5 years | Weighted Average Nominal Rate | Due after 5 year but within 10 years | Weighted Average Nominal Rate | Due after 10 years | Weighted Average Nominal Rate | Total | ||||||||||||||||||||||||||||
(millions of Ch$, except percentages) | ||||||||||||||||||||||||||||||||||||
Financial Instruments at Amortized Cost : | ||||||||||||||||||||||||||||||||||||
Instruments issued by the Chilean Government and Central Bank of Chile: | ||||||||||||||||||||||||||||||||||||
Debt financial instruments from the Central Bank of Chile | Ch$ | ― | ― | % | Ch$ | ― | ― | % | Ch$ | ― | ― | % | Ch$ | ― | ― | % | Ch$ | ― | ||||||||||||||||||
Bonds and promissory notes from the General Treasury of the Republic | ― | ― | 413,599 | 0.65 | 426,145 | 2.66 | ― | ― | 839,744 | |||||||||||||||||||||||||||
Other fiscal debt financial instruments | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Other instruments issued in Chile: | ||||||||||||||||||||||||||||||||||||
Debt financial instruments from other domestic banks | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Bonds and trade effects from domestic companies | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Other debt financial instruments issued in the country | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Instruments issued Abroad: | ||||||||||||||||||||||||||||||||||||
Debt financial instruments from foreign Central Banks | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Debt financial instruments from foreign goverments and fiscal entities | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Debt financial instruments from other foreing banks | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Bonds and trade effects from foreign companies | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Other debt financial instruments issued abroad | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Accumulated Impairment Value of Financial Assets at Amortized Cost Debt Financial Instruments: | ||||||||||||||||||||||||||||||||||||
Financial assets with no significant increase in credit risk since initial recognition (phase 1) | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Financial assets with a significant increase in credit risk since initial recognition, but without credit impairment (phase 2) | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Financial assets with credit impairment (phase 3) | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Total | Ch$ | ― | ― | % | Ch$ | 413,599 | 0.65 | % | Ch$ | 426,145 | 2.66 | % | Ch$ | ― | ― | % | Ch$ | 839,744 |
(1) | Weighted Average Nominal Rate is calculated as the sum of total accrued interests for the type of security divided by the average balance for the same type of security during the reported period. |
127
As of December 31, 2022 | ||||||||||||||||||||||||||||||||||||
Due within 1 year | Weighted Average Nominal Rate | Due after 1 year but within 5 years | Weighted Average Nominal Rate | Due after 5 year but within 10 years | Weighted Average Nominal Rate | Due after 10 years | Weighted Average Nominal Rate | Total | ||||||||||||||||||||||||||||
(millions of Ch$, except percentages) | ||||||||||||||||||||||||||||||||||||
Financial Instruments at Amortized Cost : | ||||||||||||||||||||||||||||||||||||
Instruments issued by the Chilean Government and Central Bank of Chile: | ||||||||||||||||||||||||||||||||||||
Debt financial instruments from the Central Bank of Chile | Ch$ | ― | ― | % | Ch$ | ― | ― | % | Ch$ | ― | ― | % | Ch$ | ― | ― | % | Ch$ | ― | ||||||||||||||||||
Bonds and promissory notes from the General Treasury of the Republic | ― | ― | 461,904 | 0.64 | 440,451 | 2.59 | ― | ― | 902,355 | |||||||||||||||||||||||||||
Other fiscal debt financial instruments | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Other instruments issued in Chile: | ||||||||||||||||||||||||||||||||||||
Debt financial instruments from other domestic bank | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Bonds and trade effects from domestic companies | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Other debt financial instruments issued in the country | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Instruments issued Abroad: | ||||||||||||||||||||||||||||||||||||
Debt financial instruments from foreign Central Banks | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Debt financial instruments from foreign goverments and fiscal entities | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Debt financial instruments from other foreing banks | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Bonds and trade effects from foreign companies | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Other debt financial instruments issued abroad | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Accumulated Impairment Value of Financial Assets at Amortized Cost Debt Financial Instruments: | ||||||||||||||||||||||||||||||||||||
Financial assets with no significant increase in credit risk since initial recognition (phase 1) | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Financial assets with a significant increase in credit risk since initial recognition, but without credit impairment (phase 2) | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Financial assets with credit impairment (phase 3) | ― | ― | ― | ― | ― | ― | ― | ― | ― | |||||||||||||||||||||||||||
Total | Ch$ | ― | ― | % | Ch$ | 461,904 | 0.64 | % | Ch$ | 440,451 | 2.59 | % | Ch$ | ― | ― | % | Ch$ | 902,355 |
(1) | Weighted Average Nominal Rate is calculated as the sum of total accrued interests for the type of security divided by the average balance for the same type of security during the reported period. |
128
Loan Portfolio
The following table sets forth our loans by type of loan and risk classification. All loan amounts stated below are before deduction of allowances for loan losses.
As of December 31, | ||||||||
2021 | 2022 | |||||||
(in millions of Ch$) | ||||||||
IFRS: | ||||||||
Commercial loans: | ||||||||
Commercial loans | Ch$ | 15,986,168 | Ch$ | 15,891,074 | ||||
Chilean exports foreign trade loans | 719,296 | 956,512 | ||||||
Chilean imports foreign trade loans | 2,950 | 2,715 | ||||||
Foreign trade loans between third countries | 549,459 | 698,595 | ||||||
Current account debtors | 144,010 | 175,659 | ||||||
Credit card debtors | 63,284 | 88,513 | ||||||
Factoring transactions | 486,282 | 628,546 | ||||||
Commercial lease transactions | 1,612,776 | 1,782,081 | ||||||
Student loans | 58,018 | 59,752 | ||||||
Other loans and accounts receivable | 50,089 | 25,298 | ||||||
Subtotal | 19,672,332 | 20,308,745 | ||||||
Mortgage loans: | ||||||||
Mortgage bonds | 6,084 | 3,907 | ||||||
Endorsable mortgage mutual loans | 17,784 | 14,604 | ||||||
Other mortgage mutual loans | 10,169,889 | 11,242,986 | ||||||
Other loans and accounts receivable | 152,771 | 160,825 | ||||||
Subtotal | 10,346,528 | 11,422,322 | ||||||
Consumer loans: | ||||||||
Consumer loans in installments | 2,873,304 | 3,115,069 | ||||||
Current account debtors | 172,623 | 253,409 | ||||||
Credit card debtors | 1,199,407 | 1,625,210 | ||||||
Consumer lease transactions | 509 | 503 | ||||||
Other loans and accounts receivable | 1,170 | 1,039 | ||||||
Subtotal | 4,247,013 | 4,995,230 | ||||||
Total loans | Ch$ | 34,265,873 | Ch$ | 36,726,297 |
The loan categories are as follows:
● | “Commercial Loans” are loans and accounts receivable from clients not included within the mortgage or consumer loans categories. Commercial loans are intended to meet financing needs of companies and entrepreneurs, including corporations, large companies, small and medium sized companies, microentrepreneurs and start-ups. Accordingly, commercial loans pursue to finance capital expenditures through commercial credits or leasing loans, trade finance operations, short-term financing through factoring loans and working capital needs by meas of credit lines granted to our customers. |
● | “Mortgage Loans” include mortgage loans granted to individuals to acquire, expand, repair or build a home, issued as mortgage bonds, endorsable mortgage loans or by other methods. It also includes supplementary loans for the same purposes and bridge loans granted before the mortgage loan has been settled. This subcategory also includes residential real estate lease transactions and other accounts receivable. |
● | “Consumer Loans” are all loans granted to individuals to be used for purchasing goods or services. These include different types of loans (either installments or revolving), as well as balances from credit card transactions or overdrafts on current accounts belonging to individuals. Consumer loans also include consumer lease transactions and other accounts receivable. Consumer loans do not include loans granted to finance business activities that the debtor is developing or that it may develop. |
129
Maturity and Interest Rate Sensitivity of Loans as of December 31, 2022
The following table sets forth an analysis by type and time remaining to maturity of our loans as of December 31, 2022:
Balances as of December 31, 2022 | Due within 1 month | Due after 1 month but within 6 months | Due after 6 months but within 12 months | Due after 1 year but within 3 years | Due after 3 years but within 5 years | Due after 5 years but wihtin 15 years | Due after 15 years | |||||||||||||||||||||||||
(in millions of Ch$) | ||||||||||||||||||||||||||||||||
IFRS: | ||||||||||||||||||||||||||||||||
Commercial Loans: | ||||||||||||||||||||||||||||||||
Commercial loans | Ch$ | 15,891,074 | Ch$ | 1,731,228 | Ch$ | 3,927,247 | Ch$ | 2,211,878 | Ch$ | 3,906,076 | Ch$ | 1,492,369 | Ch$ | 2,455,345 | Ch$ | 166,931 | ||||||||||||||||
Chilean exports foreign trade loans | 956,512 | 289,761 | 468,835 | 196,056 | 1,652 | 208 | ― | ― | ||||||||||||||||||||||||
Accrediting foreign trade loans negotiated in terms of Chilean imports | 2,715 | 2,715 | ― | ― | ― | ― | ― | ― | ||||||||||||||||||||||||
Chilean imports foreign trade loans | 698,595 | 133,649 | 555,789 | 9,008 | 149 | ― | ― | ― | ||||||||||||||||||||||||
Current account debtors | 175,659 | 175,659 | ― | ― | ― | ― | ― | ― | ||||||||||||||||||||||||
Credit card debtors | 88,513 | 88,513 | ― | ― | ― | ― | ― | ― | ||||||||||||||||||||||||
Factoring loans | 628,546 | 338,830 | 284,720 | 4,823 | 173 | ― | ― | ― | ||||||||||||||||||||||||
Commercial lease transactions | 1,782,081 | 54,075 | 223,411 | 235,843 | 636,813 | 287,237 | 342,357 | 2,345 | ||||||||||||||||||||||||
Student loans | 59,752 | 2,227 | 6,856 | 5,457 | 15,468 | 12,185 | 17,367 | 192 | ||||||||||||||||||||||||
Other loans and accounts receivable | 25,298 | 25,298 | ― | ― | ― | ― | ― | ― | ||||||||||||||||||||||||
Subtotal | 20,308,745 | 2,841,955 | 5,466,858 | 2,663,065 | 4,560,331 | 1,791,999 | 2,815,069 | 169,468 | ||||||||||||||||||||||||
Mortgage Loans: | ||||||||||||||||||||||||||||||||
Mortgage bonds | 3,907 | 132 | 550 | 672 | 1,758 | 200 | 595 | ― | ||||||||||||||||||||||||
Endorsable mortgage mutual loans | 14,604 | 371 | 1,464 | 1,708 | 5,575 | 3,081 | 2,389 | 16 | ||||||||||||||||||||||||
Mortgage mutual financed with mortgage bonds | ― | ― | ― | ― | ― | ― | ― | ― | ||||||||||||||||||||||||
Other residential lending | 11,242,986 | 103,194 | 288,606 | 348,752 | 1,415,836 | 1,421,368 | 5,912,892 | 1,752,338 | ||||||||||||||||||||||||
Residential lease transactions | ― | ― | ― | ― | ― | ― | ― | ― | ||||||||||||||||||||||||
Other loans and accounts receivable | 160,825 | 390 | 4,467 | 2,872 | 4,764 | 7,673 | 82,876 | 57,783 | ||||||||||||||||||||||||
Subtotal | 11,422,322 | 104,087 | 295,087 | 354,004 | 1,427,933 | 1,432,322 | 5,998,752 | 1,810,137 | ||||||||||||||||||||||||
Consumer Loans: | ||||||||||||||||||||||||||||||||
Consumer loans in installments | 3,115,069 | 146,437 | 484,504 | 504,121 | 1,415,265 | 528,384 | 35,874 | 484 | ||||||||||||||||||||||||
Current accounts debtors | 253,409 | 253,409 | ― | ― | ― | ― | ― | ― | ||||||||||||||||||||||||
Credit card | 1,625,210 | 1,625,210 | ― | ― | ― | ― | ― | ― | ||||||||||||||||||||||||
Consumer lease transactions | 503 | 20 | 108 | 111 | 239 | 25 | ― | ― | ||||||||||||||||||||||||
Other loans and accounts receivable | 1,039 | 1,039 | ― | ― | ― | ― | ― | ― | ||||||||||||||||||||||||
Subtotal | 4,995,230 | 2,026,115 | 484,612 | 504,232 | 1,415,504 | 528,409 | 35,874 | 484 | ||||||||||||||||||||||||
Total Loans | Ch$ | 36,726,297 | Ch$ | 4,972,157 | Ch$ | 6,246,557 | Ch$ | 3,521,301 | Ch$ | 7,403,768 | Ch$ | 3,752,730 | Ch$ | 8,849,695 | Ch$ | 1,980,089 |
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The following table sets forth a breakdown by variable and fixed rate of our outstanding loans due after one year as of December 31, 2022:
As of December 31, 2022 | ||||
(in millions of Ch$) | ||||
IFRS: | ||||
Variable rate | ||||
Ch$ | Ch$ | 218,366 | ||
UF | 628,600 | |||
Foreign currency | 550,091 | |||
Subtotal | 1,397,057 | |||
Fixed rate | ||||
Ch$ | 5,373,438 | |||
UF | 15,114,418 | |||
Foreign currency | 101,369 | |||
Subtotal | 20,589,225 | |||
Total | Ch$ | 21,986,282 |
Foreign Country Outstanding Loans
Our cross-border outstanding loans are principally trade-related. These loans include loans granted to foreign financial institutions and foreign corporations, some of which are guaranteed by their Chilean parent company. The table below lists under IFRS the total amounts outstanding to borrowers in certain foreign countries as of the dates indicated, and thus does not include foreign trade-related loans to domestic borrowers.
As of December 31, | ||||||||
2021 | 2022 | |||||||
(in millions of Ch$) | ||||||||
IFRS: | ||||||||
Argentina | Ch$ | – | Ch$ | – | ||||
Brazil | – | – | ||||||
Canada | – | – | ||||||
China | – | – | ||||||
Colombia | 1,282 | 1,287 | ||||||
Hong Kong | – | 19,424 | ||||||
India | – | – | ||||||
Mexico | – | – | ||||||
Netherlands | – | – | ||||||
Panama | – | – | ||||||
Peru | 6,512 | 5,465 | ||||||
Spain | 5,924 | 3,368 | ||||||
Singapore | – | – | ||||||
United Kingdom | – | – | ||||||
United States | – | – | ||||||
Total | Ch$ | 13,718 | Ch$ | 29,544 |
As December 31, 2022 and as of the date of this annual report, we did not have exposures associated with cross-border loans or contingent loans either in Ukraine or in Russia.
Credit Review Process
Credit risk is the risk that we will incur a loss because our customers or counterparties do not comply with their contractual obligations.
This risk is managed using a global, unified and forward-looking strategy, which recognizes the current and projected economic environment of the markets and segments in which our different businesses are developing and grants appropriate credit treatment to each such market or segment by using risk limits that we are willing to accept from counterparties.
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Managing credit risk is, therefore, inherent to our business and must be incorporated into each segment in which we do business. In this way, we may achieve an optimum balance between assumed risks and attained returns and properly allocate capital to each business line while complying with regulations and criteria defined by our board of directors in order to ensure that we have an appropriate capital base for potential losses that may arise from our credit exposure.
Counterparty limits are established by analyzing financial information, risk ratings, the nature of the exposure, documentation, guarantees, market conditions and the pertinent industry sector, among other factors. The process of monitoring credit quality also includes identifying in advance any possible changes in a counterparty’s payment capacity, which enables us to evaluate the potential loss from these risks and take corrective actions.
Approval Process
The Bank analyzes its loan portfolio on a segmented basis and the same approach is used for approval purposes by taking into account the characteristics of each particular targeted group of customers. Given the diversity of the bank’s loan book, we utilize different techniques in order to evaluate the credit quality, payment capacity and financial structure of every type of customer.
It is important to note that Banco de Chile organizes its lending business in two business segments, namely, retail banking and wholesale banking. Accordingly, for risk management purposes, Banco de Chile has specialized processes and knowledgeable teams for credit approval in each of these segments.
Retail Banking Segment
Credit risk assessment is carried out through automated models for personal banking and parametric models for SME banking. These models allow us to determine suitable levels of financial burden, payment capacity and desired exposure to credit risk. These are build-in models that depend on information associated with customers’ payment behavior, customers’ borrowings with other banks, similarity to the target market and income segment for personal banking. In the case of SME banking, we add information related to the customer’s main commercial activity and diverse financial information. Based on the accuracy we have achieved with these models over time, we are able to provide our commercial areas with timely responses to customer requests.
We have continued to work and focus on the improvement of our retail lending analytics process, covering several elements, such as: (i) data management and data governance, (ii) scoring and loan loss provisioning models, (iii) validation standards and procedures, and (iv) an ongoing monitoring of models and portfolios, among others. These efforts are aimed at enhancing our market-leading position in risk management matters, maintaining a competitive risk-return relationship while reinforcing our governance and regulatory compliance.
Wholesale Banking Segment
Within wholesale banking, credit risk assessment is executed by means of a case-by-case approach, which is based on subjective credit analysis supported by the judgement of specialized officers. This approach consists of a comprehensive individualized review that considers, among other factors, the credit exposure, the loan tenor, the type of loan, the customer’s financial soundness and collaterals that could be used to back the loan. All of these quantitative and objective factors are supplemented by a SWOT analysis of the customer and projections for the industry in which the company operates. This process is supported by a credit rating model that enables us to homogeneously evaluate each customer while establishing approval attributions depending on the credit exposure.
Although the Bank has dedicated monitoring teams within the loan approval areas, monitoring efforts are also carried out collectively by the credit risk and commercial areas, which track operations from application to collection, in order to avoid unexpected risks.
Also, we have set approval attributions that are limited by the total customer credit risk. We define total customer credit risk as the sum of the customer’s loans and other financial obligations in which the customer is the indebted party, the loans and other financial obligations from a third party that are guaranteed by the customer, the customer’s contingent loans and any of the customer’s credit facilities. Also, if the customer is part of an economic group, then the total customer credit risk will also include the total amount of the items described above corresponding to all the parties that make up the economic group.
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Transactions in which the total customer credit risk is more than Ch$26,333 million require approval from a credit committee, composed of three members of the board of directors and our chief executive officer. Transactions in which the total customer credit risk is equal to or less than Ch$26,333 million may be approved by other risk officers, depending on the amount involved, as follows:
Approved by | Limit in Ch$ | |
Credit committee, including members of the board of directors | Up to legal limits | |
Executive Committee (Chairman, General Manager and Wholesale Credit Risk Divisions Manager/Retail Credit Risk and Global Risk Control Division Manager) | up to Ch$26,333 million | |
Senior Risk Committee (Chairman, General Manager and Wholesale Credit Risk Divisions Manager/Retail Credit Risk and Global Risk Control Division Manager). Approved by two of the three. | up to Ch$17,555 million | |
Wholesale Credit Risk Divisions Manager, Manager of the Corporate Division/Commercial Division Manager. | up to Ch$14,044 million | |
Corporate Credit Risk Area Manager and Corporate Division Manager | up to Ch$12,289 million | |
Corporate Credit Risk Area Deputy Manager and Corporate Banking Area Manager | up to Ch$10,533 million | |
Large Companies Risk Area Deputy Manager, Large Companies Area Manager | up to Ch$7,022 million | |
Zonal Risk Manager and Large Companies Group Manager | up to Ch$3,511 million | |
Risk Officer, Large Companies Group Manager | up to Ch$2,107 million | |
Risk Department Heads | up to Ch$1,404 million | |
Zonal Managers | up to Ch$351 million |
In addition to reviewing the credit limit, the business segment extending the credit must review the terms of the loan, the interest rate and any security to be obtained.
Control and Follow-up
The ongoing control and follow-up of credit risk is the basis for portfolio management and enables us to recognize risk opportunely while detecting and avoiding potential write-offs in advance. In line with the guidelines we follow for credit assessment purposes, we also utilize control and follow-up procedures in accordance with our main business segments.
Retail Banking Segment
We control credit risk in this segment by continuously monitoring customers and market trends. This approach permits us to take corrective measures and implement necessary adjustments in order to keep credit risk aligned with desired levels. In order to achieve this goal, we generate a wide set of management reports addressing the evolution of portfolio expected loss, vintage analysis, past due at the level of product and segment, in addition to approval guidelines. Further, we have developed statistical models for this segment, which are intended to support the credit assessment process. These models are continuously monitored through back-testing, variable and segmentation stability, among other techniques. This approach enables us to assure the models’ predictive capability over time.
Wholesale Banking Segment
For wholesale banking segment, we control and monitor credit quality by means of a specialized unit, which has developed diverse methodologies and tools that enable us to carry out a centralized systematic monitoring of thresholds on financial ratios, behavior variables and credit ratings. Thus, for companies reporting risk alerts, we execute a focused follow-up that allows us to take corrective measures in advance.
In addition, portfolio follow-up responsibilities include monitoring of conditions established during the assessment process, such as covenants, collateral, specific restrictions for credit approval and borrowing caps, among others.
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Analysis of Our Loan Classification
The following tables provide statistical data under IFRS regarding the classification of our loans as of the dates indicated. As discussed above, our risk analysis system requires that loans to all customers be classified.
As of December 31, 2021 | ||||||||||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | POCI | Total Loans | Classification percentage | |||||||||||||||||||
Bank’s Credit Rating: | (in millions of Ch$, except percentages) | |||||||||||||||||||||||
Commercial Loans | ||||||||||||||||||||||||
Individual | ||||||||||||||||||||||||
A1 | Ch$ | 6,605 | Ch$ | — | Ch$ | — | Ch$ | — | Ch$ | 6,605 | 0.05 | % | ||||||||||||
A2 | 1,384,897 | 2,620 | — | — | 1,387,517 | 9.51 | ||||||||||||||||||
A3 | 2,901,683 | 38 | — | — | 2,901,721 | 19.88 | ||||||||||||||||||
A4 | 2,828,834 | 129,484 | — | — | 2,958,318 | 20.27 | ||||||||||||||||||
A5 | 3,846,862 | 408,215 | 834 | — | 4,255,911 | 29.15 | ||||||||||||||||||
A6 | — | 2,721,778 | — | — | 2,721,778 | 18.64 | ||||||||||||||||||
Normal Portfolio | 10,968,881 | 3,262,135 | 834 | — | 14,231,850 | 97.50 | ||||||||||||||||||
B1 | — | 123,332 | — | — | 123,332 | 0.84 | ||||||||||||||||||
B2 | — | 29,164 | — | — | 29,164 | 0.20 | ||||||||||||||||||
B3 | — | 37,516 | — | 3 | 37,519 | 0.26 | ||||||||||||||||||
B4 | — | 7,568 | — | — | 7,568 | 0.05 | ||||||||||||||||||
Substandard Portfolio | — | 197,580 | — | 3 | 197,583 | 1.35 | ||||||||||||||||||
C1 | — | — | 36,132 | 196 | 36,328 | 0.25 | ||||||||||||||||||
C2 | — | — | 16,036 | 75 | 16,111 | 0.11 | ||||||||||||||||||
C3 | — | — | 19,001 | 17 | 19,018 | 0.13 | ||||||||||||||||||
C4 | — | — | 12,960 | 9 | 12,969 | 0.09 | ||||||||||||||||||
C5 | — | — | 41,617 | 86 | 41,703 | 0.29 | ||||||||||||||||||
C6 | — | — | 41,053 | 185 | 41,238 | 0.28 | ||||||||||||||||||
Non-Complying Portfolio | — | — | 166,799 | 568 | 167,367 | 1.15 | ||||||||||||||||||
Subtotal individual loans | 10,968,881 | 3,459,715 | 167,633 | 571 | 14,596,800 | 100.00 | ||||||||||||||||||
Group | ||||||||||||||||||||||||
Normal portfolio | 4,579,194 | 214,276 | 893 | 199 | 4,794,562 | 94.46 | ||||||||||||||||||
Non-complying portfolio | — | — | 279,420 | 1,550 | 280,970 | 5.54 | ||||||||||||||||||
Subtotal group loans | 4,579,194 | 214,276 | 280,313 | 1,749 | 5,075,532 | 100.00 | ||||||||||||||||||
Total Commercial Loans | 15,548,075 | 3,673,991 | 447,946 | 2,320 | 19,672,332 | |||||||||||||||||||
Residential Mortgage Loans | ||||||||||||||||||||||||
Group | ||||||||||||||||||||||||
Normal portfolio | 9,608,872 | 449,804 | 2,675 | — | 10,061,351 | 97.24 | ||||||||||||||||||
Non-complying portfolio | — | — | 285,143 | 34 | 285,177 | 2.76 | ||||||||||||||||||
Subtotal group loans | 9,608,872 | 449,804 | 287,818 | 34 | 10,346,528 | 100.00 | ||||||||||||||||||
Total Residential Mortgage Loans | 9,608,872 | 449,804 | 287,818 | 34 | 10,346,528 | |||||||||||||||||||
Consumer Loans | ||||||||||||||||||||||||
Group | ||||||||||||||||||||||||
Normal portfolio | 3,739,887 | 287,814 | 4,367 | 64 | 4,032,132 | 94.94 | ||||||||||||||||||
Non-complying portfolio | — | — | 213,662 | 1,219 | 214,881 | 5.06 | ||||||||||||||||||
Subtotal group loans | 3,739,887 | 287,814 | 218,029 | 1,283 | 4,247,013 | 100.00 | ||||||||||||||||||
Total Consumer Loans | 3,739,887 | 287,814 | 218,029 | 1,283 | 4,247,013 | |||||||||||||||||||
Total Individual Loans | 10,968,881 | 3,459,715 | 167,633 | 571 | 14,596,800 | 42.60 | ||||||||||||||||||
Total Group Loans | 17,927,953 | 951,894 | 786,160 | 3,066 | 19,669,073 | 57.40 | ||||||||||||||||||
Total Loans | Ch$ | 28,896,834 | Ch$ | 4,411,609 | Ch$ | 953,793 | Ch$ | 3,637 | Ch$ | 34,265,873 | 100.00 | % | ||||||||||||
Percentage Individual classified | 37.96 | % | 78.42 | % | 17.58 | % | 15.70 | % | 42.60 | % | — |
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As of December 31, 2022 | ||||||||||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | POCI | Total Loans | Classification percentage | |||||||||||||||||||
Bank’s Credit Rating: | (in millions of Ch$, except percentages) | |||||||||||||||||||||||
Commercial Loans | ||||||||||||||||||||||||
Individual | ||||||||||||||||||||||||
A1 | Ch$ | 9,378 | Ch$ | — | Ch$ | — | Ch$ | — | Ch$ | 9,378 | 0.06 | % | ||||||||||||
A2 | 1,911,198 | — | — | — | 1,911,198 | 12.36 | ||||||||||||||||||
A3 | 2,486,122 | — | — | — | 2,486,122 | 16.08 | ||||||||||||||||||
A4 | 3,174,267 | 18 | — | — | 3,174,285 | 20.52 | ||||||||||||||||||
A5 | 4,450,570 | 1,781 | — | — | 4,452,351 | 28.79 | ||||||||||||||||||
A6 | 2,904,333 | 21,107 | — | — | 2,925,440 | 18.92 | ||||||||||||||||||
Normal Portfolio | 14,935,868 | 22,906 | — | — | 14,958,774 | 96.73 | ||||||||||||||||||
B1 | — | 165,979 | — | — | 165,979 | 1.07 | ||||||||||||||||||
B2 | — | 51,990 | — | — | 51,990 | 0.34 | ||||||||||||||||||
B3 | — | 56,550 | — | 479 | 57,029 | 0.37 | ||||||||||||||||||
B4 | — | 12,086 | — | 82 | 12,168 | 0.08 | ||||||||||||||||||
Substandard Portfolio | — | 286,605 | — | 561 | 287,166 | 1.86 | ||||||||||||||||||
C1 | — | — | 43,461 | 590 | 44,051 | 0.28 | ||||||||||||||||||
C2 | — | — | 50,013 | 32 | 50,045 | 0.32 | ||||||||||||||||||
C3 | — | — | 28,522 | 32 | 28,554 | 0.18 | ||||||||||||||||||
C4 | — | — | 35,529 | 42 | 35,571 | 0.23 | ||||||||||||||||||
C5 | — | — | 14,626 | 186 | 14,812 | 0.10 | ||||||||||||||||||
C6 | — | — | 46,629 | 59 | 46,688 | 0.30 | ||||||||||||||||||
Non-Complying Portfolio | — | — | 218,780 | 941 | 219,721 | 1.41 | ||||||||||||||||||
Subtotal individual loans | 14,935,868 | 309,511 | 218,780 | 1,502 | 15,465,661 | 100.00 | ||||||||||||||||||
Group | ||||||||||||||||||||||||
Normal portfolio | 4,232,711 | 299,345 | 1,302 | 304 | 4,533,662 | 93.61 | ||||||||||||||||||
Non-complying portfolio | — | — | 308,057 | 1,365 | 309,422 | 6.39 | ||||||||||||||||||
Subtotal group loans | 4,232,711 | 299,345 | 309,359 | 1,669 | 4,843,084 | 100.00 | ||||||||||||||||||
Total Commercial Loans | 19,168,579 | 608,856 | 528,139 | 3,171 | 20,308,745 | |||||||||||||||||||
Residential Mortgage Loans | ||||||||||||||||||||||||
Group | ||||||||||||||||||||||||
Normal portfolio | 10,490,690 | 722,028 | 4,444 | — | 11,217,162 | 98.20 | % | |||||||||||||||||
Non-complying portfolio | — | — | 205,160 | — | 205,160 | 1.80 | % | |||||||||||||||||
Subtotal group loans | 10,490,690 | 722,028 | 209,604 | — | 11,422,322 | 100.00 | % | |||||||||||||||||
Total Residential Mortgage Loans | 10,490,690 | 722,028 | 209,604 | — | 11,422,322 | |||||||||||||||||||
Consumer Loans | ||||||||||||||||||||||||
Group | ||||||||||||||||||||||||
Normal portfolio | 4,304,927 | 460,669 | 3,867 | 186 | 4,769,649 | 95.48 | % | |||||||||||||||||
Non-complying portfolio | — | — | 223,800 | 1,781 | 225,581 | 4.52 | % | |||||||||||||||||
Subtotal group loans | 4,304,927 | 460,669 | 227,667 | 1,967 | 4,995,230 | 100.00 | % | |||||||||||||||||
Total Consumer Loans | 4,304,927 | 460,669 | 227,667 | 1,967 | 4,995,230 | |||||||||||||||||||
Total Individual Loans | 14,935,868 | 309,511 | 218,780 | 1,502 | 15,465,661 | 42.11 | % | |||||||||||||||||
Total Group Loans | 19,028,328 | 1,482,042 | 746,630 | 3,636 | 21,260,636 | 57.89 | % | |||||||||||||||||
Total Loans | Ch$ | 33,964,196 | Ch$ | 1,791,553 | Ch$ | 965,410 | Ch$ | 5,138 | Ch$ | 36,726,297 | 100.00 | % | ||||||||||||
Percentage Individual classified | 43.98 | % | 17.28 | % | 22.66 | % | 29.23 | % | 42.11 | % | — |
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Classification of Loan Portfolio
Information about the classification of our loan portfolio is presented in Note 11 (c) to our audited consolidated financial statements as of and for the year ended December 31, 2022 appearing elsewhere in this annual report.
Analysis of Substandard and Past-due loans
The following table analyzes our substandard loans, total past-due loans and allowances for loan losses existing at the dates indicated under IFRS.
Year Ended December 31, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
IFRS: | (in millions of Ch$, except percentages) | |||||||||||
Total Loans | Ch$ | 30,937,690 | Ch$ | 34,265,83 | Ch$ | 36,726,297 | ||||||
Impaired loans | 1,173,875 | 953,793 | 965,410 | |||||||||
Impaired loans as a percentage of total loans | 3.79 | % | 2.78 | % | 2.63 | % | ||||||
Total past-due loans | ||||||||||||
To the extent secured(2) | 58,005 | 42,873 | 36,691 | |||||||||
To the extent unsecured | 257,927 | 264,823 | 396,006 | |||||||||
Total past-due loans | 315,932 | 307,696 | 432,697 | |||||||||
Total past-due loans as a percentage of total loans | ||||||||||||
To the extent secured(2) | 0.19 | % | 0.13 | % | 0.10 | % | ||||||
To the extent unsecured | 0.83 | 0.77 | 1.08 | |||||||||
Total past-due loans as a percentage of total loans | 1.02 | 0.90 | 1.18 | |||||||||
Allowance for loan losses as a percentage of: | ||||||||||||
Total loans | 2.70 | 1.97 | 2.24 | |||||||||
Past-due loans | 264.65 | 218.88 | 189.88 | |||||||||
Unsecured past-due loans | 324.16 | % | 254.32 | % | 207.47 | % |
(1) | All references to Total Past-due loans in the table above refer as to Total Past-due loans (90 days or more) including interests and principal. |
(2) | Security generally consists of mortgages on real estate, pledges of marketable securities, letters of credit or cash. |
As of December 31, 2022, our past-due loans (loans 90-days or more past due) amounted to Ch$432,697 million, which represented a 40.6% annual increase when compared to the Ch$307,696 million recorded in 2021. These figures translated into past-due ratios (loans 90-days or more past due over total loans) of 0.90% in 2021 and 1.18% in 2022. Various economic and business dynamics contributed to the increase in both the amount of past-due loans and our past-due loans ratio in 2022 when compared to 2021, including: (i) a normalization in the credit behavior of debtors, particularly in the retail banking segment, as the liquidity surplus evidenced in 2021 explained by three consecutive pension fund withdrawals and the government aid package to support individuals began to disappear in 2022, since it was primarily used in household spending and payment of overdue financial obligations, and (ii) increased inflation, as depicted by a 12.8% annual variation in the CPI, which reduced the purchasing power of individuals and, therefore, their payment capacity as real disposable income decreased over the year. For more information, see “Item 5. Operating Financial Review and Prospects— Results of Operations for the Years Ended December 31, 2020, 2021 and 2022—Provisions for Loan Losses” and “Item 3. Key Information—Risk Factors—Our exposure to certain segments of the retail market could lead to higher levels of total past-due loans and subsequent charge offs.”
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Analysis of Allowances for Loan Losses
The following table analyzes our allowances for loan losses and changes in the allowances attributable to charge-offs, allowances established and allowances released:
As of December 31, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
IFRS: | (in millions of Ch$, except percentages) | |||||||||||
Allowances for expected credit losses at the beginning of the period | Ch$ | 649,233 | Ch$ | 836,107 | Ch$ | 673,496 | ||||||
Charge-offs | (332,978 | ) | (241,221 | ) | (265,479 | ) | ||||||
Debt Exchange | — | — | — | |||||||||
Loan portfolio acquisition | — | — | — | |||||||||
Sale of loans | (107 | ) | (15,477 | ) | (2,264 | ) | ||||||
Allowances for expected credit losses established | 519,959 | 94,087 | 416,624 | |||||||||
Foreign exchange adjustments | — | — | (768 | ) | ||||||||
Allowances for expected credit losses at the end of the period | Ch$ | 836,107 | Ch$ | 673,496 | Ch$ | 821,609 | ||||||
Allowances for expected credit losses at the end of period as a percentage of total loans | 2.70 | % | 1.97 | % | 2.24 | % | ||||||
Changes in provisions for expected credit losses as a percentage of average loans | 1.78 | 0.05 | 1.17 | |||||||||
Nonaccrual loans as a percentage of total loans | 0.00 | 0.00 | 0.00 | |||||||||
Allowance for expected credit losses as a percentage of nonaccrual loans | 11.11 | 0.00 | 48.92 | |||||||||
Ratios of charge-offs to average balance: | ||||||||||||
Commercial loans | 0.40 | 0.45 | 0.42 | |||||||||
Mortgage loans | 0.15 | 0.11 | 0.10 | |||||||||
Consumer loans | 5.99 | 3.70 | 3.73 | |||||||||
Total loans | 1.08 | % | 0.74 | % | 0.75 | % |
During 2020, the Chilean economy was affected by diverse factors. Although in the first quarter the economy experienced a moderate improvement after the social turmoil experienced during the last months of 2019, the first infections of COVID-19 in Chile (by early March) led to the cession of operations for most of the economic sectors that were intensive in social interaction, given sanitary measures taken in order to reduce viral contagion. Overall, these factors largely explained the 6.0% GDP contraction during 2020, in line with sharp decreases of 9.3% and 8.0% in investment and household spending, respectively. Consequently, our loan portfolio was greatly influenced by lower demand for loans and, therefore, posted a moderate increase of 3.0% in year-end balances. Most of this increase was related to the FOGAPE loan program, which boosted commercial loans by 8.0% at the end of the year. Similarly, residential mortgage loan balances increased by only 2.0% as real estate investment decisions were postponed in light of the current COVID-19 scenario. On the other hand, higher unemployment and the uncertain economic outlook for the coming quarters impacted the year-end balances of consumer loans that decreased 12.9%. In this context, taking into consideration the effects that the COVID-19 pandemic is expected to have on risk profiles of customers as a result of a decrease in disposable income, unemployment and weakened commercial activities for companies, our loan loss allowances increased from Ch$649,233 million in 2019 to Ch$836,107 in 2020, equivalent to an increase of Ch$186,874 million. This behavior was a result of the following drivers: (i) a net credit quality deterioration explained by worsened expectations of financial condition of our retail and wholesale banking customers due to nationwide quarantines due to COVID-19 and their impact on consumption and investment projects, which led us to adjust forecasting models for both Probabilities of Default and Loss Given Default in order to recognize more accurately and with more sensitivity the uncertainties generated by the COVID-19 pandemic and the expected impact on expected credit losses over the coming quarters and years, with a total effect of approximately Ch$151,700 million in higher provisions, and (ii) an annual increase in allowances for loan losses due to loan growth, mainly associated with the expansion of commercial loans in 2020 owing to the FOGAPE loan program, focused on SMEs. These effects were partially offset by a positive exchange rate effect on U.S. dollar-denominated loan loss allowances as a consequence of a 5.3% Chilean peso appreciation against the U.S. dollar in 2020 as compared to the 8.4% depreciation experienced in 2019. As a result, our risk index increased from 2.16% in 2019 to 2.70% at the end of 2020.
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During 2021, the Chilean economy recovered significantly from the contraction which was experienced in 2020 as a result of the COVID-19 pandemic. This recovery was reflected in the improvement of many macroeconomic metrics, including GDP, which expanded 11.7% in 2021 due to a sharp annual increase of 20.3% in household consumption. This factor was largely driven by extraordinary support measures for individuals adopted by the Chilean Government, which provided direct money transfers, and by the Chilean Congress, which approved three withdrawals from pension funds, both of which resulted in higher liquidity and disposable income of individuals. In addition, following a successful vaccination process and a decrease in rates of infection, mobility restrictions were gradually lifted in 2021, prompting a recovery in the business activity of diverse industries. Similarly, capital expenditures also improved by growing 17.6% in 2021. Based on these drivers, our loan portfolio posted an annual increase of 10.8%, which was the result annual growths of 11.8%, 10.2% and 7.6% in commercial, residential mortgage and consumer loans, respectively. The increase in commercial loans was produced, for the most part, by the renewed government-guaranteed program for SME and middle market companies in 2021 (Fogape-Reactiva) and, to a lesser extent, by the reactivation of postponed investment projects as a consequence of the pandemic in 2020. From the residential mortgage loans perspective, growth was influenced by both inflation and a demand for housing that continued to be decoupled from the economic drivers. Demand for consumer loans, however, was overall negatively affected during most of 2021 due to the excess of liquidity in the economy, which instead benefited payment behavior, although it did begin to show signs of recovery in the fourth quarter of 2021. In terms of allowances for expected credit losses, the improved macroeconomic environment and enhanced payment behavior positively impacted our forward-looking provisioning models and resulted in an annual decrease of Ch$162,611 million, from Ch$836,107 million in 2020 to Ch$673,496 million in 2021. This decline was the consequence of: (i) a decline of approximately Ch$398,529 million in gross provisions established for expected credit losses, from Ch$210,205 million established in 2020 to approximately Ch$188,324 million in 2021, due to economic growth relating to lower mobility restrictions associated with COVID-19 pandemic in 2021 as compared to 2020, benefiting both the financial condition of companies and the risk profile of individuals, and (ii) the positive effect of non-recurrent events, such as the three pension fund withdrawals and the fiscal aid package deployed by the government to address the economic effects of the COVID-19 pandemic, on individuals’ income, resulting in enhanced payment capacity of individuals and lower delinquency. These factors translated into improved parameters used in our forward-looking provisioning models, based on which we released of approximately Ch$162,018 million during 2021. Likewise, we updated the models to accurately reflect the change in the economic outlook after the pandemic, which prompted an allowance release of approximately Ch$26,308 million in 2021. In addition, as a direct consequence of the improved payment behavior of both individuals and companies, charge-offs decreased Ch$91,767 million in 2021 when compared to 2020 while recoveries increased Ch$28,646 within the same period. Based on all of these factors, our risk index decreased from 2.70% in 2020 to 1.97% in 2021.
In 2022, the Chilean economy experienced similar trends to those observed in the global economy, such as a moderation in GDP growth, increased inflation and tightening of both the monetary and fiscal policy. This behavior was reflected by an increase of 2.4% in local GDP in 2022, which compares to the 11.7% annual growth rate recorded in 2021. This economic slowdown was the consequence of a significant deceleration in fiscal spending, household consumption and investment, which increased by only 4.1%, 2.9% and 2.8%, respectively, on an annual basis. These trends, in turn, were supported by a decrease in the liquidity surplus seen in the local economy in 2021 as a consequence of policies aimed at assisting people during the most challenging times of the pandemic and, more recently, the upward trend in interest rates and inflation, which reduced both borrowing from banks and individuals’ disposable income. Likewise, private investment seemed to be affected by uncertainty regarding the economic, political and social outlooks. Deceleration in government spending was primarily the result of lower social support to mitigate the economic effects of the COVID-19 pandemic. Based on these drivers, our loan portfolio managed to grow 7.2% in 2022 on an annual basis, below inflation, which negatively compared to the 10.8% recorded in 2021. The overall increase in 2022 was mostly attributable to the effect of inflation on UF-denominated commercial and residential mortgage loans, although in real terms (i.e. excluding the effect of inflation) these lending products decreased on an annual basis given a weakened demand in the context of higher long-term interest rates and expectations on increasing inflation. On the other hand, consumer loans increased 17.6% in 2022 when compared to 2021 as a result of normalized liquidity levels among individuals, which coupled with increased commercial efforts to reactivate this lending family. In terms of allowances, the negative impact of the prevailing macroeconomic environment were reflected by our forward-looking provisioning models, which resulted in an annual increase of Ch$148,113 million in allowances for expected credit losses, from Ch$673,496 million in 2021 to Ch$821,609 million in 2022. This figure was primarily influenced by an annual advance of Ch$426,224 million in gross provisions for expected credit losses, from a release of approximately Ch$188,324 million in 2021 to an establishment of Ch$237,900 million in 2022 due to the normalization of main asset quality indicators converging to pre-pandemic levels, as a consequence of deteriorated customers’ payment capacity in 2022 when compared to 2021 that directly affected delinquency ratios at an industry level. Additionally, we also updated our provisioning models in order to take into consideration new pieces of information that provided more certainty regarding the evolution of COVID-19 pandemic and potential effects of global geopolitical conflicts, explaining a net release in allowances by Ch$9,865 million during 2022. Lastly, charge-offs had an increment of Ch$24,259 million aligned with lower level of liquidity among customers and decreased purchasing power in 2022 when compared to 2021 as a result of the effect of higher inflation. Based on all of these factors, our risk index increased from 1.97% in 2021 to 2.28% in 2022.
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For allowances for loan losses associated with impaired loans and with non-impaired loans, see Note 11(d) to our audited consolidated financial statements as of and for the year ended December 31, 2022 appearing elsewhere in this annual report.
Loans are written-off when the collection efforts have been exhausted but not later than the maximum periods as follows:
Type of Loan | Term | |
Consumer loans with or without collateral | 6 months | |
Other transactions without collateral | 24 months | |
Commercial loans with collateral | 36 months | |
Residential mortgage loans | 48 months | |
Consumer leases | 6 months | |
Other non-real estate lease transactions | 12 months | |
Real estate leases (commercial or residential) | 36 months |
The following table presents the charge-offs breakdown by loan category:
Year ended December 31, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
IFRS: | (in millions of Ch$) | |||||||||||
Commercial loans | Ch$ | 69,193 | Ch$ | 84,135 | Ch$ | 83,957 | ||||||
Mortgage loans | 13,663 | 10,712 | 11,046 | |||||||||
Consumer loans | 250,122 | 146,374 | 170,476 | |||||||||
Total | Ch$ | 332,978 | Ch$ | 241,221 | Ch$ | 265.479 |
Loan recoveries by type of loan are shown in the table below:
Year ended December 31, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
IFRS: | (in millions of Ch$) | |||||||||||
Commercial loans | Ch$ | 8,599 | Ch$ | 15,480 | Ch$ | 26,554 | ||||||
Mortgage loans | 3,377 | 7,922 | 10,481 | |||||||||
Consumer loans | 29,783 | 47,005 | 28,705 | |||||||||
Subtotal | 41,759 | 70,407 | 65,740 | |||||||||
Recoveries and sales of loan reacquired from the Central Bank | — | — | — | |||||||||
Total | Ch$ | 41,759 | Ch$ | 70,407 | Ch$ | 65,740 | ||||||
Total Recoveries as a percentage of average loans | 0.14 | % | 0.22 | % | 0.19 | % |
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The following tables classify our loan portfolio based on the borrower’s payment performance for each of the last two years:
Year ended December 31, 2021 | ||||||||||||||||
Commercial Loans | Consumer Loans | Mortgage Loans | Total | |||||||||||||
IFRS: | (in millions of Ch$) | |||||||||||||||
Past-due loans - 90 days to 6 months | Ch$ | 35,973 | Ch$ | 35,978 | Ch$ | 15,164 | Ch$ | 87,115 | ||||||||
Past-due loans - 6 months to 12 months | 66,725 | – | 15,557 | 82,282 | ||||||||||||
Past-due loans - 12 months to 24 months | 72,551 | – | 12,885 | 85,436 | ||||||||||||
Past-due loans - 24 months to 36 months | 21,294 | – | 18,759 | 40,053 | ||||||||||||
Past-due loans - 36 months to 48 months | – | – | 12,810 | 12,810 | ||||||||||||
Past-due loans | Ch$ | 196,543 | Ch$ | 35,978 | Ch$ | 75,175 | Ch$ | 307,696 |
Year ended December 31, 2022 | ||||||||||||||||
Commercial Loans | Consumer Loans | Mortgage Loans | Total | |||||||||||||
IFRS: | (in millions of Ch$) | |||||||||||||||
Past due loans - 90 days to 6 months | Ch$ | 60,203 | Ch$ | 85,876 | Ch$ | 30,861 | Ch$ | 177,040 | ||||||||
Past due loans - 6 months to 12 months | 83,044 | – | 27,533 | 110,577 | ||||||||||||
Past due loans - 12 months to 24 months | 84,213 | – | 20,696 | 104,909 | ||||||||||||
Past due loans - 24 months to 36 months | 20,828 | – | 8,589 | 29,417 | ||||||||||||
Past due loans - 36 months to 48 months | – | – | 10,754 | 10,754 | ||||||||||||
Past due Loans | Ch$ | 248,288 | Ch$ | 85,976 | Ch$ | 98,433 | Ch$ | 432,697 |
Allocation of Allowances for Loan Losses
The following tables set forth the proportions of our required allowances for loan losses attributable to our commercial, consumer and residential mortgage loans under IFRS as of the dates indicated.
As of December 31, 2021 | ||||||||||||||||
Allowance amount | Allowance amount as a percentage of loans in category | Allowance amount as a percentage of total loans | Loans in category | |||||||||||||
IFRS: | (in millions of Ch$, except percentages) | |||||||||||||||
Commercial loans | Ch$ | 318,841 | 1.62 | % | 0.93 | % | 57.42 | % | ||||||||
Consumer loans | 315,669 | 7.43 | 0.92 | 12.39 | ||||||||||||
Residential mortgage loans | 38,986 | 0.38 | 0.11 | 30.19 | ||||||||||||
Total allocated allowances | Ch$ | 673,496 | 1.97 | % | 1.97 | % | 100.00 | % |
(1) | Based on our loan classification |
As of December 31, 2022 | ||||||||||||||||
Allowance amount | Allowance amount as a percentage of loans in category | Allowance
amount as a percentage of total loans | Loans in category as percentage of total loans(1) | |||||||||||||
IFRS: | (in millions of Ch$, except percentages) | |||||||||||||||
Commercial loans | Ch$ | 321,467 | 1.58 | % | 0.88 | % | 55.30 | % | ||||||||
Consumer loans | 449,496 | 9.00 | 1.22 | 13.60 | ||||||||||||
Residential mortgage loans | 50,646 | 0.44 | 0.14 | 31.10 | ||||||||||||
Total allocated allowances | Ch$ | 821,609 | 2.24 | % | 2.24 | % | 100.00 | % |
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The following table sets forth our charge-offs for 2020, 2021 and 2022 by major economic sector and provides further detail of charge-offs that have already been described in the previous discussion of allowances for loan losses:
Year Ended December 31, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
IFRS: | (in millions of Ch$) | |||||||||||
Commercial: | ||||||||||||
Agriculture | Ch$ | 5,630 | Ch$ | 11,316 | Ch$ | 9,874 | ||||||
Mining | 687 | 658 | 1,424 | |||||||||
Manufacturing | 4,361 | 14,392 | 5,822 | |||||||||
Construction | 8,460 | 6,834 | 7,450 | |||||||||
Commerce | 17,232 | 15,530 | 16,436 | |||||||||
Transport | 4,142 | 4,350 | 10,383 | |||||||||
Financial services | 21,488 | 21,544 | 25,812 | |||||||||
Community | 7,193 | 9,511 | 6,756 | |||||||||
Subtotal: | 69,193 | 84,135 | 83,957 | |||||||||
Consumer loans | 250,122 | 146,374 | 170,476 | |||||||||
Mortgage loans | 13,663 | 10,712 | 11,046 | |||||||||
Total | Ch$ | 332,978 | Ch$ | 241,221 | Ch$ | 265,479 |
Composition of Deposits and Other Commitments
The following table sets forth under IFRS the composition of our deposits and similar commitments as of the dates indicated. See “Item 4. Information on the Company––Selected Statistical Information––Average Balance Sheets, Interest Earned on Interest Earning Assets and Interest Paid on Interest Bearing Liabilities” for the average rate paid on each of the following deposit categories.
As of December 31, | ||||||||
2021 | 2022 | |||||||
IFRS: | (in millions of Ch$) | |||||||
Current accounts | Ch$ | 15,349,224 | Ch$ | 11,172,137 | ||||
Other demand deposits | 3,193,567 | 2,420,018 | ||||||
Savings accounts | 448,257 | 407,746 | ||||||
Time deposits | 8,319,165 | 13,723,090 | ||||||
Other term balance payables | 372,584 | 228,151 | ||||||
Total | Ch$ | 27,682,797 | Ch$ | 27,951,142 |
Maturity of Deposits
The following table sets forth information regarding the currency and maturity of our deposits on December 31, 2022, expressed in percentages, under IFRS. UF-denominated deposits are similar to Chilean peso-denominated deposits in all aspects, except that the principal is readjusted periodically based on the value of the UF.
As of December 31, 2022 | ||||||||||||||||
Ch$ | UF | Foreign Currency | Total | |||||||||||||
(in percentage) | ||||||||||||||||
IFRS: | ||||||||||||||||
Demand deposits | 52.51 | % | 10.51 | % | 53.07 | % | 48.63 | % | ||||||||
Savings accounts | — | 15.44 | — | 1.46 | ||||||||||||
Time deposits: | ||||||||||||||||
Maturing within three months | 46.37 | 42.34 | 38.28 | 44.75 | ||||||||||||
Maturing after three but within six months | 0.63 | 12.45 | 7.41 | 2.78 | ||||||||||||
Maturing after six but within 12 months | 0.38 | 16.01 | 0.99 | 1.95 | ||||||||||||
Maturing after 12 months | 0.11 | 3.25 | 0.25 | 0.43 | ||||||||||||
Total time deposits | 47.49 | 74.05 | 46.93 | 49.91 | ||||||||||||
Total deposits | 100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % |
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The following table sets forth information regarding the currency and maturity of deposits in excess of U.S.$100,000 as of December 31, 2022, under IFRS.
As of December 31, 2022 | ||||||||||||||||
Ch$ | UF | Foreign Currency | Total | |||||||||||||
(in millions of Ch$) | ||||||||||||||||
IFRS: | ||||||||||||||||
Demand deposits | Ch$ | 5,041,098 | Ch$ | 41,986 | Ch$ | 1,841,051 | Ch$ | 6,924,135 | ||||||||
Savings accounts | — | 114,989 | — | 114,989 | ||||||||||||
Time deposits: | ||||||||||||||||
Maturing within three months | 5,100,283 | 784,164 | 1,195,817 | 7,080,264 | ||||||||||||
Maturing after three but within six months | 103,356 | 222,171 | 309,267 | 634,794 | ||||||||||||
Maturing after six but within 12 months | 65,747 | 336,582 | 38,308 | 440,637 | ||||||||||||
Maturing after 12 months | 22,472 | 84,061 | 9,416 | 115,949 | ||||||||||||
Total time deposits | 5,291,858 | 1,426,978 | 1,552,808 | 8,271,644 | ||||||||||||
Total deposits | Ch$ | 10,332,956 | Ch$ | 1,583,953 | Ch$ | 3,393,859 | Ch$ | 15,310,768 |
The concept of uninsured deposits does not exist under Chilean regulatory reporting requirements. However, the General Banking Act does contemplate a guarantee by the Chilean Government of time deposits up to a certain amount. For more information, see “Item 4. Information on the company––Regulation and Supervision––Deposit Insurance”.
Deposits in Foreign Countries
We also maintain deposits abroad, as needed to conduct our foreign trade transactions and manage liquidity. The table below lists the largest amounts of foreign deposits by country as of the dates indicated, under IFRS:
As of December 31, | ||||||||
IFRS: | 2021 | 2022 | ||||||
(in millions of Ch$) | ||||||||
Australia | Ch$ | 2,414 | Ch$ | 2,664 | ||||
Canada | 1,989 | 4,417 | ||||||
China | 143 | 4,668 | ||||||
Denmark | — | — | ||||||
Finland | 776 | 1,669 | ||||||
France | 1,592 | 12,345 | ||||||
Germany | 12,128 | 23,317 | ||||||
Japan. | 5,052 | 10,440 | ||||||
Mexico | 1,757 | 901 | ||||||
Netherlands | — | — | ||||||
Norway | 2,327 | 1,129 | ||||||
Peru | 175 | 118 | ||||||
Sweden | 26,746 | 2,479 | ||||||
United Kingdom | 10,790 | 24,990 | ||||||
United States | 898,914 | 1,227,307 | ||||||
Total | Ch$ | 964,803 | Ch$ | 1,316,444 |
As of December 31, 2022, and as of the date of this annual report, we do not have exposures associated with deposits either in Ukraine or in Russia.
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Short-Term Borrowings
The principal categories of our short-term borrowings are amounts borrowed under foreign trade lines of credit, domestic inter-bank loans and repurchase agreements. The table below presents the amounts outstanding, the average balance and the weighted average nominal interest rate for each period indicated by type of short-term borrowing under IFRS.
As of December 31, 2020 | ||||||||||||
Year-End Balance | Average Balance | Weighted Average Nominal Interest Rate (1) | ||||||||||
IFRS: | (in millions of Ch$, except interest rate data) | |||||||||||
Obligations by repurchase agreements and securities lending | Ch$ | 288,917 | Ch$ | 280,827 | 0.66 | % | ||||||
Central Bank borrowings | — | — | — | |||||||||
Borrowings from domestic financial institutions | 8,357 | 13,789 | 0.40 | |||||||||
Borrowings from foreign financial institutions | 550,658 | 1,177,045 | 1.48 | |||||||||
Commercial Papers | 106,060 | 219,046 | 1.78 | |||||||||
Other obligations | 166,384 | 186,137 | 0.89 | |||||||||
Total short-term borrowings | Ch$ | 1,120,376 | Ch$ | 1,876,844 | 1.33 | % |
(1) | Weighted Average Nominal Rate is calculated as the sum of total accrued interests for the type of security divided by the average balance for the same type of security during the reported period. |
As of December 31, 2021 | ||||||||||||
Year-End Balance | Average Balance | Weighted Average Nominal Interest Rate (1) | ||||||||||
IFRS: | (in millions of Ch$, except interest rate data) | |||||||||||
Obligations by repurchase agreements and securities lending | Ch$ | 95,009 | Ch$ | 140,600 | 0.67 | % | ||||||
Central Bank borrowings | 1,020,014 | 765,000 | 0.50 | |||||||||
Borrowings from domestic financial institutions | — | 3,965 | — | |||||||||
Borrowings from foreign financial institutions | 453,705 | 497,303 | 0.59 | |||||||||
Commercial Papers | 348,445 | 359,836 | 0.34 | |||||||||
Other obligations | 249,915 | 176,505 | 1.42 | |||||||||
Total short-term borrowings | Ch$ | 2,167,088 | Ch$ | 1,943,209 | 0.59 | % |
(1) | Weighted Average Nominal Rate is calculated as the sum of total accrued interests for the type of security divided by the average balance for the same type of security during the reported period. |
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As of December 31, 2022 | ||||||||||||
Year-End Balance | Average Balance | Weighted Average Nominal Interest Rate (1) | ||||||||||
IFRS: | (in millions of Ch$, except interest rate data) | |||||||||||
Obligations by repurchase agreements and securities lending | Ch$ | 216,264 | Ch$ | 184,448 | 8.59 | % | ||||||
Central Bank borrowings | — | 120,000 | 0.50 | |||||||||
Borrowings from domestic financial institutions | 2,699 | 503 | — | |||||||||
Borrowings from foreign financial institutions | 1,046,456 | 693,951 | 2.17 | |||||||||
Commercial Papers | 107,910 | 133,208 | 0.97 | |||||||||
Other obligations | 344,008 | 200,493 | 3.78 | |||||||||
Total short-term borrowings | Ch$ | 1,717,337 | Ch$ | 1,332,603 | 2.46 | % |
(1) | Weighted Average Nominal Rate is calculated as the sum of total accrued interests for the type of security divided by the average balance for the same type of security during the reported period. |
The following table presents the maximum month-end balances of our principal sources of short-term borrowings during the periods indicated:
Maximum 2020 month-end balance | Maximum 2021 month-end balance | Maximum 2022 month-end balance | ||||||||||
IFRS: | (in millions of Ch$) | |||||||||||
Investments sold under agreements to repurchase | Ch$ | 390,090 | Ch$ | 209,469 | Ch$ | 268,280 | ||||||
Central Bank borrowings | — | 1,020,014 | 920,000 | |||||||||
Borrowings from domestic financial institutions | 20,546 | 6,556 | 2,699 | |||||||||
Borrowings from foreign financial institutions | Ch$ | 1,688,503 | Ch$ | 618,461 | Ch$ | 1,144,937 |
Minimum Capital Requirements
Pursuant to the general Banking Act, local banks must comply with minimum capital requirements in relation to both total assets and risk-weighted assets (considering credit, market and operational risk). CET1 Capital should be at least equal to 3.0% of total assets, based on the leverage requirements. Likewise banks’ Total Capital or Regulatory Capital, should be at least 9.563% of their risk weighted assets, Tier 1 Capital should be at least 7.563% of their risk weighted assets and CET1 Capital should be at least 6.063% of their risk weighted assets. In addition to these requirements banks must comply with capital buffers, as mentioned in “Item 4. Information on the Company—Regulation and Supervision—Capital Adequacy Requirements”.
For more information on capital adequacy requirements, compliance and capital availability, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital Adequacy Requirements”.
Item 4A Unresolved Staff Comments
None.
Item 5 Operating and Financial Review and Prospects
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OPERATING RESULTS
Introduction
The following discussion should be read in conjunction with, and is entirely qualified by reference to, our audited consolidated financial statements as of and for the year ended December 31, 2022 appearing elsewhere in this annual report and “Item 4. Information on the Company—Selected Statistical Information.” Certain amounts (including percentage amounts) that appear in this annual report may not total due to rounding.
Unless otherwise indicated, the financial information included in this annual report with respect to 2020, 2021 and 2022 has been derived from financial statements that have been prepared in accordance with IFRS as issued by the IASB. See Note 2(a) to our audited consolidated financial statements as of and for the year ended December 31, 2022 appearing elsewhere in this annual report. IFRS differs in certain significant respects from Chilean GAAP. 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.
Overview
We are a leading bank within the Chilean financial system, providing a broad range of financial products and services to individual and corporate customers who are primarily located in Chile. Accordingly, our financial condition, results of operations and our ability to achieve our strategic business goals could be adversely affected by changes in Chile’s economic conditions and the resulting effects on macroeconomic indicators (such as interest rates, inflation and GDP growth, among others), modifications of non-economic policies implemented by the Chilean Government that can affect private sector activities, or other political and economic developments in Chile, as well as regulatory changes or administrative practices of Chilean authorities over which we have no control. See “Item 3. Key Information—Risk Factors—Risks Relating to Our Operations and the Chilean Banking Industry—The results of our operations are affected by interest rate volatility and inflation,” “Item 3. Key Information—Risk Factors—Risks Relating to Chile—Currency fluctuations could adversely affect the value of our ADSs and any distributions on the ADSs” and “Item 3. Key Information—Risk Factors—Risks Relating to Chile—Our growth and profitability depend on the level of economic activity in Chile.”
Chilean Economy
After a period of GDP deceleration between 2014 and 2017, GDP made a recovery in 2018, recording an annual growth of 4.0%, primarily due to improved confidence indices, the better economic performance of some key trade partners, and a strong recovery in private investment, which increased by 6.5% as compared to 2017, leading to favorable impact on the demand for commercial loans from corporations. To a lesser degree, household consumption experienced a 3.8% annual increase in the same period. The recovery of copper prices was a key driver of these positive figures, boosting machinery and equipment investment in the mining sector.
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In 2019, instead, the GDP expanded by only 0.7%, mainly due to the social unrest in Chile that occurred in October 2019. Prior to those events, although the Chilean economy was growing below its potential, the figures reported in the third quarter reflected an important recovery in comparison with the first two quarters. However, protests and demonstrations that followed the social turmoil resulted in a GDP contraction of 2.6% during the fourth quarter of 2019 on an annual basis, due to severe damage to private and public infrastructure, stagnation of certain economic sectors, such as commerce and entertainment, and deteriorated consumer confidence indices. These factors also affected household consumption which increased by 0.7% in 2019 in comparison with the 3.6% increase in 2018. In addition, fixed capital formation rose 4.5% as compared to 6.5% growth in 2018, mainly fostered by projects that were in pipeline.
Undoubtedly, 2020 was a very challenging year in terms of economic growth. The effects of COVID-19 on the world economy were worse than expected. According to the IMF, GDP in developed markets decreased 4.4% in 2020, while the world economy contracted by 3.0% on an annual basis. Emerging markets as a whole were less impacted by the pandemic, although their economic output decreased 1.9% in 2020. For many countries, the impact of COVID-19 on their economic growth was aligned with and dependent on the effectiveness of measures taken by its authorities aimed at controlling the pandemic, including the duration of lockdowns, mobility restrictions and fiscal support packages, among others. Amid this global downturn, the Chilean economy was also severely affected by the evolution and spread of COVID-19, which led health authorities to establish total or partial lockdowns in many districts and entire cities. Thus, during the second quarter of 2020, most of the economic activities that are highly dependent on social interaction, including services, retail, construction, nonessential manufacturing, restaurants, tourism and entertainment, were dramatically affected, translating into significant pressure on the labor market and investment projects. Overall, the Chilean economy contracted 6.1% in 2020, as a consequence of a sharp decrease of 10.8% in investment (particularly investment in infrastructure, machinery and equipment) and an 7.4% decline in household spending. Despite these negative trends, these results were better than originally expected due to the unprecedented fiscal and monetary packages as a result of diverse initiatives proposed by the Chilean Government, including: (i) direct money transfers to individuals as a way to mitigate the decrease in monthly income, (ii) a lending facility program implemented by the Central Bank to provide liquidity to local banks pursuing to preserve lending to individuals and SMEs while promoting the rescheduling of overdue installments of past-due loans, and (iii) the choice for companies to adopt a furlough scheme with workers financed through the unemployment insurance fund. These fiscal and monetary actions were supplemented by the effect of two consecutive pension fund withdrawals by individuals, as approved by the Chilean Congress during 2020 in order to face the economic aftermath of the pandemic. Furthermore, the annual contraction in investment and household consumption was partially offset by a trade balance that turned from negative in 2019 to positive in 2020 as a result of imports decreasing 12.3% while exports decreasing only 0.9%. The latter was supported by an unexpected rally in copper price (Chile’s main export product), resulting from the rebound of the Chinese economy after the first peak of the COVID-19 pandemic, and the pandemic-related supply/production restrictions, which together more than offset the decrease in exports associated with other products as a result of the pandemic.
In 2021, the Chilean economy showed a strong recovery, given both the low comparison base posed by 2020 and, more importantly, real economic growth, particularly driven by an increase in private consumption. According to figures reported by the Central Bank, GDP increased 11.7% in 2021 on an annual basis, which was primarily due to household spending increasing 20.8% as compared to 2020, principally as a result of extraordinary support measures for individuals adopted by both the Chilean Government, in the form of direct money transfers, and the Chilean Congress, which approved a total of three withdrawals from pension funds, two in 2020 and a third one in 2021, all of which had a significant impact on liquidity and disposable income of individuals. According to the Chilean Superintendency of Pensions, as of March 31, 2023 the Chilean Pension Funds managers had paid a total amount of approximately U.S.$52,643 million to pension fund participants. The higher liquidity among individuals had a direct impact on the purchasing power of individuals. Also, throughout 2021, the long-lasting mobility restrictions were gradually lifted as a significant part of the population became fully vaccinated and the contagion rates decreased steadily, reactivating diverse industries, particularly those associated with retail, mass consumption and services. As for investment expenditures (gross capital formation, namely, investment in infrastructure, machinery and equipment), overall capital expenditures also improved as depicted by a 15.7% growth in gross fixed capital formation. Similarly, government spending increased 13.8% in 2021 when compared to 2020, which was primarily fostered by increasing social demands from the Chilean population and efforts deployed by the administration to deal with the effects of the COVID-19 pandemic on the many economic sectors and for companies ranging from SMEs to large companies, as well as individuals that witnessed a sudden reduction on their monthly income. On the other hand, given the dynamics that boosted household consumption and investment, constrained inventories led the Chilean balance of trade (defined as exports minus imports) to record a deficit in 2021. Based on these trends, in 2021, the Chilean economy surpassed its pre-pandemic GDP level.
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During 2022, the Chilean economy evidenced similar trends to those of the global economy, such as a moderation in GDP growth, increased inflation and tightening in both monetary and fiscal policy. According to the Chilean Central Bank, the local economy grew 2.4% in 2022 compared to the 11.7% annual growth rate recorded in 2021. The economic slowdown was the consequence of the economy’s overheating in 2021 that was driven by non-recurrent factors, which resulted in a significant contraction in fiscal spending in 2022 and the aggressive monetary policy deployed by the Central Bank in order to cope with inflation by increasing the reference interest rate sharply throughout the year, thereby constraining lending activity in all business segments. The moderate growth in GDP was driven by a significant slowdown in household consumption, which increased 2.9% on an annual basis due to both the decrease in the liquidity surplus seen in the local economy in 2021 as a consequence of policies aimed at assisting people during the pandemic and, more recently, and the upward trend seen in interest rates and high inflation, which reduced both borrowing from banks and individuals’ disposable income. Similarly, government spending decelerated from 13.8% in 2021 to 4.1% in 2022, based on the end of extraordinary expenses associated with social support to mitigate the economic effects of the COVID-19 pandemic. Likewise, private investment recorded an annual increase of 2.8% in 2022 denoting a significant slowdown from 2021. This was the outcome of diverse factors including the level of long-term interest rates that remained high and also the political and economic uncertainty sourranding the constitutional process taking place in Chile, all factors contributing to the decision by companies to postpone long-term capital expenditures. Notwithstanding the lower GDP growth, however, inflation rose to an annualized 12.8% in 2022, measured as CPI variation, which was well above the medium-term monetary policy target of 3.0% defined by the Central Bank and representing the highest inflation rate experienced by Chile since 1991. The increase in local prices was the result of higher external prices for volatile categories, such as energy and commodities, as well as the depreciation of Chilean peso during most of 2022, which translated into a 15.9% annual increase in prices of tradable goods. Excluding food and energy prices, core inflation was also well above the target by increasein 8.6% on an annual basis. Based on the path taken by local prices, the Central Bank has attempted to constrain local consumption and money supply by increasing the monetary policy interest rate from 4.00% in December 2021 to 11.25% in December 2022, which is the highest level since 1998.
Inflation
In the past, Chile has experienced high levels of inflation that affected private consumption, consumer sentiment, financial conditions and the results of various companies. Nevertheless, since the 1990s, inflation has been maintained under control through responsible monetary policy carried out by an independent Central Bank and the adoption of a successful inflation target policy. Thus, in Chile inflation is correlated to both local economic dynamics and external factors.
During 2019, inflation remained within the Central Bank’s target range, from 2.0% to 4.0%, increasing by 3.0% as measured by the CPI. Although inflation was in the range of 2.0% to 3.0% most of the year, the social unrest in Chile during the fourth quarter of 2019 produced certain inflationary pressures as some economic sectors experienced a constraint in their productive capacity. The depreciation of 8.4% of the Chilean peso against the U.S. dollar also contributed to the increase in inflation by affecting the prices of non-durable goods and fuel. In 2020, in spite of the significant impact of the COVID-19 pandemic on household spending and unemployment rates as a result of the lockdowns determined by Chilean health authorities, CPI recorded a 12-month increase of 3.0%, which was equivalent to the target defined by the Central Bank for long-term inflation. The deflationary pressures triggered by the COVID-19 pandemic coupled with an appreciation of the Chilean peso by the end of the year, all of which was more than offset by the temporary shortfall of certain products during the peak of the COVID-19 pandemic, as many economic sectors were restricted or suspended. In 2021, CPI increased 7.2% as a result of diverse inflationary pressures coming from both the local and external fronts. From the local perspective, a high demand for durable and non-durable goods was triggered due to excess of liquidity present in the whole economy as a consequence of the effect of the three pension fund withdrawals approved by the government plus one withdrawal from life annuities (rentas vitalicias) from life insurance companies, as mentioned earlier. This excess of liquidity meant a significant improvement in individuals’ disposable income, which translated into higher than expected consumption that was not met by aggregate supply. Likewise, in 2021, the Chilean peso recorded an annual depreciation of 19.8% against the U.S. dollar, mainly attributable to the uncertainty caused by local economic events in the capital market, such as the aforesaid pension fund withdrawals, and political uncertainty associated with the presidential elections held in November and December 2021, all of which contributed to significant spikes in the prices of imported goods. From the external perspective, the sharp increase in the price of oil and also the constraints experienced in the global supply chain contributed to an increase in overall prices in the economy. In 2022, the CPI increased 12.8% as a consequence of many factors, although the sharp increase in household consumption in 2021 that began to decelerate during 2022, 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 energy prices worldwide, (ii) the constraints experienced in the global supply chain that translated into an overall increase in external prices, and (iii) the depreciation experienced by the Chilean peso against the U.S. dollar, during most of 2022, particularly in months surrounding the constitutional referendum when the U.S. dollar reached an all-time high of Ch$1.051 per U.S. dollar, which has a pass-through effect associated with the translation of imported tradable goods into Chilean pesos.
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An increase in inflation rates could adversely affect the Chilean economy and have an adverse effect on our business, financial condition and results of operations. Our results of operations reflect the effect of inflation in the following ways:
● | a substantial portion of our assets and liabilities are denominated in UFs, a unit that is indexed daily to reflect inflation recorded in the previous month, with the net gain or loss resulting from such indexation reflected in income; and |
● | the interest rates earned and paid on peso-denominated assets and liabilities to some degree reflect inflation and expectations regarding inflation. |
UF Denominated Assets and Liabilities. The UF is revalued in monthly cycles. On each day in the period beginning the tenth day of the current month through the ninth day of the next month, the nominal peso value of the UF is indexed up (or down in the event of deflation) in order to reflect each day a pro rata amount of the prior calendar month’s change in the CPI as published by the Chilean National Statistics Institute. One UF was equal to Ch$30,991.74 as of December 31, 2021 and Ch$35,110.98 as of December 31, 2022. The effect of any changes in the nominal peso value of our UF denominated assets and liabilities are reflected in our results of operations as an increase (or decrease, in the event of deflation) in interest revenue and expense. Our net interest income will be positively affected by inflation (and negatively affected by deflation) to the extent that our average UF denominated assets exceed our average UF denominated liabilities, while our net interest income will be negatively affected by inflation (and positively affected by deflation) when average UF denominated liabilities exceed our average UF denominated assets. Our average UF denominated assets exceeded our average UF denominated liabilities by Ch$8,323,985 million (U.S.$9,762.72 million) as of December 31, 2021 and Ch$9,705,081 million (U.S.$11,415.06 million) as of December 31, 2022. These figures exclude positions in hedge accounting derivatives. See “Item 4. Information on the Company—Selected Statistical Information.”
Peso-Denominated Assets and Liabilities. Interest rates in Chile tend to reflect the prevailing inflation rate and expectations regarding future inflation. The sensitivity of our peso denominated interest earning assets and interest bearing liabilities to the inflation rate may vary. See “Item 5. Operating and Financial Review and Prospects—Operating Results—Overview Interest Rates.” We maintain a substantial amount of non-interest bearing, peso denominated current accounts and other demand deposits. The ratio of such deposits to average interest bearing peso denominated liabilities was 223% during the year ended December 31, 2021 and 96% during the year ended December 31, 2022. Since a large part of such deposits are not indexed to inflation, even a slight decline in the rate of inflation may adversely affect our net interest margin on assets funded with such deposits and even a slight increase in the rate of inflation may increase the net interest margin on such assets. See “Item 4. Information on the Company—Selected Statistical Information—Interest Earning Assets and Net Interest Margin.”
Interest Rates
Interest rates earned and paid on our assets and liabilities reflect in part, inflation and expectations regarding future inflation, shifts in short-term interest rates related to the Central Bank’s monetary policies and movements in long-term real rates. The Central Bank manages short-term interest rates in order to achieve its long-term inflation target and provide the economy with financial stability.
Beginning in 2017, to anchor inflation expectations and stimulate sluggish economic demand, the Central Bank cut the reference rate from the 3.50% level at which it had ended in 2016, to 2.50% until October 2018, when it began to withdraw the monetary stimulus on the grounds of reduced output gaps, and started increasing the reference interest rate. The Central Bank maintained this view regarding inflation and expectation on economic growth until mid-2019, when it cut the reference rate to 2.50%, given an upward revision in the GDP potential growth and economic slack, both resulting in low inflationary pressures. At that point, inflation had remained in the lower boundary of the Central Banks’s target range (2.00%-4.00%). These trends persisted until the third quarter of 2019, which led the Central Bank to apply consecutive interest rate reductions of 50 basis points in September 2019 and 25 basis points in October 2019. Given the economic slowdown produced by the social turmoil that took place in Chile in October 2019, the Central Bank decided to maintain the monetary stimulus, in light of the tempered impact that social crisis had on inflation and the intervention it carried out in the local foreign exchange market in order to halt the depreciation of the Chilean peso. Consequently, the monetary policy interest rate stood at 1.75% as of December 31, 2019. The Central Bank’s view on the Chilean economy remained the same during the first two months of 2020. However, in a specially convened meeting, the Central Bank later decided to cut the monetary policy rate by 75 basis points to 1.00% on March 16, 2020, as both local and international economic activity was being negatively affected by the effects of the COVID-19 pandemic. Following the developments associated with COVID-19 and the expected effects on the local economy, the Central Bank applied a further cut of 50 basis points to the reference rate on March 31, 2020. By December 31, 2020, the reference interest rate continued to be 0.5% as a result of not only the Central Bank’s commitment to ensure liquidity in the local economy by providing low-cost funding to local banks in order to promote lending and household consumption, but also due to continued inflation within the Central Bank’s target range throughout the entire year. The monetary policy interest rate remained at 0.5% until July 2021, when the Chilean Central Bank implemented a series of increases, taking the monetary policy interest rate to 4.00% by the end of 2021, in order to control the inflationary pressures that arose in the local economy as described earlier. In 2022, the Central Bank took the monetary policy rate from 4.00% in December 2021 to 11.25% in December 2022 attempting to control increasing inflation by restricting consumption. The Central Bank has pointed out that inflation is expected to decrease in 2023, due to economic slowdown. If this trend in inflation becomes steady, the monetary policy interest rate is expected to decline as well. Nevertheless, as of the date of this annual report, the monetary policy interest rate remains at 11.25%.
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Since our liabilities generally re-price faster than our assets, changes in the rate of inflation or short-term interest rates are reflected in the nominal interest rates we pay on our liabilities before they are reflected in the nominal interest rates we earn on our assets. Accordingly, our net interest margin on assets and liabilities is usually adversely affected in the short-term by increases in short-term nominal interest rates and benefits in the short-term from decreases in short-term nominal interest rates, although the existence of non-interest bearing peso-denominated demand deposits tends to mitigate both effects. See “—Inflation—Peso-Denominated Assets and Liabilities.” In addition, because our peso-denominated liabilities have relatively short re-pricing periods, those liabilities generally are more sensitive to changes in inflation or short-term interest rates than our UF-denominated liabilities. As a result, during periods when current inflation exceeds the previous month’s inflation, customers often switch funds from peso-denominated deposits to more expensive UF-denominated deposits, thereby adversely affecting our net interest margin.
According to information published by the Central Bank, the average annual short term nominal interest rate, based on the rate paid by Chilean financial institutions for 90 to 360 days Chilean peso denominated deposits, was 0.86% in 2020, 1.71% in 2021, and 9.25% in 2022, 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 in the three-month period ended on March 31, 2023 was 10.98%.
The average annual long term nominal interest rate, based on the interest rate of the ten-year Chilean peso denominated bonds in the secondary market, issued by both the Central Bank and the Chilean Government, was 2.80% in 2020, 4.36% in 2021, and 6.26% in 2022. In 2022, long-term nominal interest rates continued to steadily increase in Chile during the first three quarters, as a result of various factors, including: (i) expectations of higher inflation in the near future, (ii) the uncertainty associated with the outcome of the constitutional referendum held on September 4, 2022, and (iii) various attempts coming from the Congress to approve further pension funds withdrawals. However, during the fourth quarter of the year, based on 12-month inflation rates that began to ease and also based on the result of the constitutional referendum, longer term interest rates declined significantly. Accordingly, the interest rate of ten-year Chilean peso denominated bonds, issued by both the Central Bank and the Chilean Government, slightly decreased from 5.69% in December 2021 to 5.34% in December 2022, reaching 5.52% in March 2023. In the three-month period ended on March 31, 2023, the interest rate for the same Central Bank and Chilean Government bonds averaged 5.52%.
Chilean Stock Market
During 2022, the S&P/CLX IPSA, a selective stock market price index composed of the 30 most traded Chilean stocks, showed an overall upward trend after a neutral behavior in 2021. As of December 30, 2022 (last trading date), the S&P/CLX IPSA reached a level of 5,261.9 points, which represented an annual increase of 22.1% as compared to the 4,308.38 points recorded as of December 30, 2021 (last trading date), according to data provided by Bloomberg. The annual growth in the S&P/CLX IPSA index was the result of many factors including: (i) the lift of almost all health and mobility restrictions on the grounds of a solid vaccination process that permitted a return to normal activity in all economic sectors, and (ii) the final outcome of the constitutional referendum in September 2022, which reduced economic and political uncertainty. These positive factors more than offset the impact of modest economic growth in 2022 and the recession expected for 2023, which however was was reflected by the S&P/CLX IPSA index in the fourth quarter of 2022. During the first quarter of 2023, the S&P/CLX IPSA has shown a moderate increase by advancing 3.7% year-to-date by reaching 5,324.6 points on March 31, 2023. This outcome has been the consequence of mixed effects, including: (i) better than expected economic performance, (ii) the negative impact of volatility in international stock markets, partly as a consequence of financial stress affecting some banks in the United States and Europe, (iii) the uncertainty produced by diverse reforms presented by the current administration and the expected path they will follow in the Congress, and (iv) the new constitutional process started after the agreement between political forces in the Congress, which is expected to finalized in December 2023 with a ratification referendum.
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Foreign Currency Exchange Rates
A portion of our assets and liabilities are denominated in foreign currencies, principally U.S. dollars. In the past, we have maintained and may continue to maintain gaps between the balances of such assets and liabilities. This gap includes assets and liabilities denominated in foreign currencies and assets and liabilities denominated in Chilean pesos that contain repayment terms linked to changes in foreign currency exchange rates. However, we generally offset this gap by taking hedging derivative positions. Because foreign currency denominated assets and liabilities, as well as interest earned or paid on such assets and liabilities and gains (losses) realized upon the sale of such assets, are translated into pesos in preparing our audited consolidated financial statements, our reported income is affected by changes in the value of the peso with respect to foreign currencies, primarily the U.S. dollar. Adjustments to U.S. dollar-indexed assets are reflected as adjustments in net interest earnings and offset results in our foreign exchange position. See “Item 3. Key Information—Risk Factors—Risks Relating to Chile—Currency fluctuations could adversely affect the value of our ADSs and any distributions on the ADSs.”
Impacts of COVID-19 in 2022
COVID-19 was first reported in China on December 31, 2019, after which it spread rapidly throughout the world, ultimately developing into a global pandemic. Countries responded by taking various measures including imposing quarantines and travel restrictions, suspending certain economic activities, and providing COVID-19 vaccines. As of the date of this annual report, although the peak of the impact appears to have passed, variant strains of the virus continue to appear, occasionally reigniting concerns related to the impact of COVID-19 on international trade, travel, employee productivity, employee illness, increased unemployment levels, securities markets, and other economic activities.
In terms of the lingering effects of COVID-19 on our results of operations and financial condition, our financial performance in 2022 was impacted by second-round effects of decisions made by authorities in the context of COVID-19 on macroeconomic variables that resulted in subdued GDP growth, increased inflation and higher interest rates rather than by the direct aftermath of the pandemic, which partly compensated some of the adverse effects in previous years. Therefore, the main drivers supporting our performance in 2022 were as follows:
● | Our loan portfolio grew 7.2% in nominal terms, which denoted negative real growth if adjusted for inflation. This performance was the consequence of: (i) nominal expansion of 17.6% in consumer loans, explained in part by lower disposable income among individuals after the liquidity surplus evidenced in 2021 due to pension funds withdrawals and increased inflation in 2022, (ii) an annual nominal expansion of 10.4% in residential mortgage loans, denoting a moderate real contraction, which is in line with lower demand for loans and stricter lending requirements given the prevailing scenario of higher interest rates and inflation, and (iii) a nominal increase of only 3.2% in commercial loans, which demonstrates a significant real decline, as a consequence of the current level of interest rates in conjunction with political uncertainty and a negative sentiment regarding the economic outlook. |
● | From the funding perspective, nominal short-term interest rates increased steadily throughout 2022 owing to the Central Bank’s attempts to curb inflation and individual liquidity surpluses declined over the year, as a result demand deposits recorded a significant decrease of 26.7% in 2022 while being primarily replaced by an increase of 57.1% in time deposits. Also, since the mid-term financing provided by the Central Bank to ensure the continuity of lending activity during the worst of the pandemic (Financing Conditional to the Increase in Loans or FCIC) is due to expire in 2024 for most of the local banking system (March and July 2024 for us) by the end of 2022 we reactivated our long-term debt placements, particularly in the local market, in order to be prepared for increased competition for funding during 2023 and 2024 when all banking players are expected to raise funding to substitute the FCIC. In addition, in the short-term, we benefited from attractive interest rates earned on high quality liquid assets, financed with these liabilities, in a context of subdued loan growth. Thus, in 2022 we placed long-term bonds –principally in the local market– for a total amount of Ch$1,140,567 million with an average maturity of 16 years. As of December 31, 2022 we had an outstanding FCIC amount of Ch$4,348,400 million of which 71.5% is due to expire in March 2024 and 28.5% in July 2024. |
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● | In terms of results, our net income was Ch$1,445,801 million, representing a 36.9% increase when compared to the Ch$1,056,317 million recorded in 2021. The main driver of this change was the annual increase of Ch$917,752 million or 41.2% in operating revenues, as a consequence of many factors, including: (i) the positive effect of higher inflation (13.3% measured as UF variation) on the contribution of our inflation-indexed asset position, (ii) an increased contribution of demand deposits to our cost of funds in the context of higher short-term interest rates that more than offset the decline in average balances. Likewise, operating revenues also benefited from increased fee income, given the lifting ofalmost all mobility restrictions and higher income from trading activities as we managed to take advantage of interest rate and exchange rate volatility with low price risk exposures. On the other hand, provisions for loan losses recorded a sharp increase of Ch$392,958 million from the Ch$19,172 million recorded in 2021, which was the result of normalized credit risk indicators of delinquency after a period when non-recurrent factors favored customers’ payment behavior during 2021. |
Likewise, as part of our commitment to our customers and Chile, in 2021 we launched the National Support Plan (“Plan Nacional de Apoyo”) for Individuals and SME customers aimed at reducing their financial burden during a specific time period of three to six months by rescheduling installments of residential mortgage loans, consumer loans, credit card billing, among other benefits. This coupled with the FOGAPE-Reactiva program, launched by the government in 2021 that was designed to achieve a prompt economic recovery by promoting borrowing from banks to SMEs and middle market companies to finance working capital, investment projects and debt restructuring. Both the FOGAPE-Reactiva and our rescheduling program concluded in 2021.
For more information regarding potential economic or regulatory factors that could affect our results of operations or financial condition, see “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.”
Critical Accounting Policies
We prepare our audited consolidated financial statements in accordance with IFRS as issued by the IASB. Note 2 of our audited consolidated financial statements as of and for the year ended December 31, 2022, which are included in this annual report, contains a summary of our significant accounting policies.
The preparation of financial statements under IFRS requires management to make certain estimates and assumptions, as some of the amounts reported in the financial statements are related to matters that are inherently uncertain or require modeling. These estimates could change from period to period, which may have a material impact on our financial condition or results of operations. Actual results may differ if conditions or underlying circumstances were to change.
The following discussion describes those areas that require considerable management judgment or involve a higher degree of complexity in the application of the accounting policies that currently affect our financial situation and results of operations.
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Allowances for Loan Losses
IFRS 9 establishes requirements for the classification and measurement of financial assets by introducing an approach based on both the business model used by the company or bank to manage financial assets and the characteristics of the assets’ contractual flows.
In terms of impairment, IFRS 9 establishes a single model to be applied to all financial instruments, which requires timely recognition of the expected credit losses (“ECLs”) by introducing a “prospective” analysis for their calculation.
For assets measured at either amortized cost or measured at fair value through other comprehensive income (“FVOCI”), including loan commitments and contingent loans, this approach requires a timely recognition of ECLs, which may be accounted as: (i) a loss allowance for assets measured at amortized cost, which is deducted from the actual balance of these assets, (ii) a liability provision for contingent loans, or (iii) a profit or loss in the income statement for financial assets that are measured at FVOCI.
IFRS 9 uses a dual approach for determining loan loss allowances depending on the stage at which the asset is classified in light of its credit risk or changes in credit risk. Thus, loan loss allowances based on ECLs may be measured by considering: (i) a 12-month time horizon or (ii) a lifetime horizon. For these purposes, assets are classified as follows:
● | Stage 1: Assets with no significant increase in risk. These are defined as financial assets that have not significantly deteriorated in terms of credit quality as compared to their credit risk evaluation when originated. In this case, ECLs are computed and recognized by considering a 12-month timeframe. This calculation also includes those assets that have been reclassified from Stage 2. |
● | Stage 2: Assets with significant increase in risk. These are defined as financial assets that show a significant increase in credit risk as compared to their credit risk evaluation when originated. In this case, ECLs are computed for the whole maturity of the financial instrument by considering lifetime expected loss. For these purposes, Stage 2 also includes those assets with credit risk improvements that have been reclassified from Stage 3. |
● | Stage 3: Assets objectively impaired. These are defined as financial assets that show objective evidence of impairment at the end of the reported period. In this case, ECLs are computed for the whole maturity of the financial instrument by considering lifetime expected loss. |
● | POCI: Purchased or Originated Credit Impaired. These are defined as financial assets that are credit impaired on initial recognition. POCI assets are recorded at fair value at original recognition and interest income is subsequently recognized based on a risk-adjusted Effective Interest Rate (“EIR”). ECLs are only recognized or released to the extent that there is a subsequent change in the expected credit losses. |
Expected Credit Losses
The expected credit loss is the probability-weighted estimate of credit losses, i.e., the present value of all cash losses. A cash loss is the difference between the cash flows that are due to an entity by contract and the cash flows that the entity expects to receive. The three main inputs used for the calculation of the expected credit loss are, as follows:
● | Probability of Default (PD): The PD is an estimate of the likelihood of a client or counterparty to fail in meeting its legal obligation of payment at a certain time horizon. The default event only occurs in the event that the asset belongs to the Bank and the counterparty has not complied with the payment of installments as agreed by contract. |
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● | Loss Given Default (LGD): The LGD is the mathematical expectation of the percentage loss that would be incurred if an asset defaults and is referred to as a percentage of the exposure at the time of default. |
● | Exposure at Default (EAD): The EAD is an estimate of the exposure at the expected date of default, which takes into account expected changes in the exposure after the reporting date, including repayments of principal and interest, whether scheduled by contract or not, expected drawdowns on committed facilities, and accrued interest on unpaid installments. |
● | Credit Conversion Factor (CCF): The CCF is the percentage amount used to estimate the EAD related to off-balance sheet assets, such as contingent loans or credit commitments. |
Also, for a further description of our policy regarding allowances for loan losses, see Note 2(i)(viii)(2) to our audited consolidated financial statements as of and for the year ended December 31, 2022 appearing elsewhere in this annual report.
Fair Value Estimates for Financial Assets and Liabilities
IFRS 13 defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. IFRS 13 seeks to increase consistency and comparability in fair value measurements and related disclosures through a ‘fair value hierarchy’. The hierarchy categorizes the inputs used in valuation techniques into three levels. The hierarchy gives the highest priority to (unadjusted) quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The Bank uses valuation techniques appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
The objective of using a valuation technique is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants and the measurement date under current market conditions. Three widely used valuation techniques are:
● | Market approach – uses prices and other relevant information generated by market transactions involving identical or comparable (similar) assets, liabilities, or a group of assets and liabilities (e.g. a business). |
● | Cost approach – reflects the amount that would be required currently to replace the service capacity of an asset (current replacement cost). |
● | Income approach – converts future amounts (cash flows or income and expenses) to a single current (discounted) amount, reflecting current market expectations about those future amounts. |
In some cases, a single valuation technique will be appropriate, whereas in others multiple valuation techniques will be appropriate. The objective of a fair value measurement is to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions. A fair value measurement requires an entity to determine all of the following:
● | the particular asset or liability that is the subject of the measurement (consistently with its unit of account). |
● | the principal (or most advantageous) market for the asset or liability. |
● | the valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs that represent the assumptions that market participants would use when pricing the asset or liability and the level of the fair value hierarchy within which the inputs are categorized. For more information regarding the accounting principles associated with the valuation of financial assets and liabilities, see Note 2(h) to our audited consolidated financial statements as of and for the year ended December 31, 2022 appearing elsewhere in this annual report. Also, for a further description of our internal fair value classification, see Note 41 to our audited consolidated financial statements as of and for the year ended December 31, 2022 appearing elsewhere in this annual report. |
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Deferred Tax Assets
The Bank records, when appropriate, deferred tax assets and liabilities for the estimated future tax effects attributable to differences between the carrying amount of assets and liabilities and their tax bases. The measurement of deferred tax assets and liabilities is based on the tax rate, in accordance with the applicable tax laws, using the tax rate that applies to the period when the deferred asset and liability will be settled. The future effects of changes in tax legislation or tax rates are recorded in deferred taxes beginning on the date on which the law is enacted or substantially enacted.
Modification of Financial Assets
Pursuant to our internal procedures, the accounting of modifications to financial assets depends on whether modifications were carried out for customers who had a deteriorated financial condition or due to commercial reasons, as follows:
● | Contractual modifications due to debtor’s financial difficulties. These modifications occur when the Bank changes originally agreed contract conditions in order to allow the customer to comply with their payment obligations. When the modification is significant, it is accounted as a write-off of the original asset and the new loan is measured at fair value, while the difference between the former and the latter asset is accounted in the profit and loss statement. Instead, when the modification is not significant, the former loan is not written off, although its amortized cost is adjusted by including the difference between the book value of the loan before the modification and the present value of the cash flows generated by the modified loan by using the effective interest rate of the former loan, which is recognized in the profit and loss statement. |
● | Contractual modifications due to commercial reasons. These modifications are associated with market conditions at the moment of the contract modification, with the purpose of retaining the customer or preserving the commercial relationship, which results in changes to the original interest rate, modifications to the contract tenor or a combination of them, in order to recognize the prevailing market conditions. These modifications are treated as a total or partial write-off of the original loan and the new loan is initially measured at fair value and at amortized cost afterwards. |
The accounting treatment of loan modifications had a no material effect on our results or financial condition neither for the year ended December 31, 2021 nor the year ended December 31, 2022.
Amendments to Financial Reporting Standards in 2022
The accounting policies followed in 2022 are consistent with those prevailing in the previous financial year. The following amendments, corresponding to IFRS enhancements, did not have any impact on our accounting policies, financial position or results of operations.
● | Amendment to IFRS 9 Financial Instruments, which clarifies the fees an entity includes when applying the “10 per cent” test in paragraph B3.3.6 of IFRS 9 when assessing whether a financial liability should be derecognized or not. An entity includes only fees paid or received between the borrower and the lender, including fees paid or received on behalf of the other. |
● | Amendment to IFRS 16 Leases that removes the reimbursement of improvements to the lessor to resolve any possible confusion regarding the treatment of lease incentives. |
● | Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which specify the costs that an entity must include when evaluating whether a contract will cause losses or not. These costs include those directly related to the contract and incremental costs of fulfilling that contract, or an allocation of other costs that directly relate to the fulfillment of contracts |
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Changes in Accounting Policies, Estimates and Disclosures
During 2022, certain changes were introduced to the accounting plan, both in the coding and in the description of some line-tems. These changes pursue to improve the quality of financial information in order to facilitate the reading, understanding and comparison of the financial statements, along with providing the market stakeholders with more detailed information. These changes also ensure that the financial statements comply with the standards of IAS 1 and other applicable accounting standards.
Main reclassifications in the Consolidated Balance sheet were:
(i) | Assets and liabilities associated with “Derivative instruments” were separated into “Derivative financial instruments” and “Derivative Financial Instruments for hedging purposes”, |
(ii) | Debt financial instruments and mutual funds were reclassified from “Financial assets held-for-trading” to “Financial assets held-for-trading at fair value through profit or loss”, |
(iii) | Assets received in lieu of payment were reclassified from “Other assets” to “Non-current assets and disposal groups held for sale”, |
(iv) | Investment in properties were reclassified from “Investment properties” to “Other assets”, (v) short sales of shares were reclassified from “Obligations under repurchase agreements” to “Financial liabilities at amortized cost”, |
(v) | Subordinated bonds were reclassified from “Debt financial instruments issued” to “regulatory capital financial instruments”, |
(vi) | Goods for leasing were reclassified from “Other financial obligations” to “Other liabilities”, and |
(vii) | Provisions related to our loyalty program were reclassified from “Other Liabilities” to “Other provisions”. |
Likewise, in the Consolidated Income Statement, reclassifications were associated with:
(i) | Income from investments in associates and other companies were reclassified from “Income attributable to associates” to “Operating income”, |
(ii) | Expenses for assets received in lieu of payment and income from sale of noncurrent assets were reclassified from “Other operating expenses” and “Other Operating income” to “Result from non-current assets and disposal groups held for sale not admissible as discontinued operations”, and |
(iii) | Income for recovery of expenses for credit operations of financial leasing and other operational risk events were reclassified from “Other operating income” to “Other Operating expenses”. |
For more information see Note 4 to our audited consolidated financial statements as of and for the year ended December 31, 2022 appearing elsewhere in this annual report.
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Results of Operations for the Years Ended December 31, 2020, 2021 and 2022
The consolidated financial information presented in this section for the years ended December 31, 2020, 2021 and 2022 has been audited and prepared in accordance with IFRS. In addition, to the extent that it is available and because we believe it is useful in analyzing our results, we have included information classified by the business segments that we use for internal reporting purposes. As mentioned earlier, information about our business segments is reported under our internal reporting policies, which differ in significant respects from IFRS.
Net Income
Some of the line-items presented below under Net Income have been reclassified to or from other line-items, as mentioned in Item 5. Operating and Financial Review and Prospects–Critical Accounting Policies–Changes in Accounting Policies, Estimates and Disclosures. Accordingly, explanations for previous years may have changed to reflect such reclassification.
The following table sets forth the principal components of our net income, as detailed in our audited consolidated financial statements for the years ended December 31, 2020, 2021 and 2022:
For the Year Ended December 31, | % Increase (Decrease) | |||||||||||||||||||
2020 | 2021 | 2022 | 2020/2021 | 2021/2022 | ||||||||||||||||
(in millions of Ch$, except percentages) | ||||||||||||||||||||
IFRS: | ||||||||||||||||||||
Net interest and UF indexation income | Ch$ | 1,316,788 | Ch$ | 1,574,022 | Ch$ | 2,266,129 | 19.5 | % | 44.0 | % | ||||||||||
Net fees and commissions income | 445,968 | 455,028 | 522,132 | 2.0 | 14.7 | |||||||||||||||
Other income (loss), net | 159,555 | 195,821 | 354,362 | 22.7 | 81.0 | |||||||||||||||
Expected credit losses | (547,106 | ) | (19,172 | ) | (412,130 | ) | (96.5 | ) | 2,049.6 | |||||||||||
Operating expenses | (870,352 | ) | (873,413 | ) | (995,483 | ) | 0.4 | 14.0 | ||||||||||||
Income before income taxes | 504,853 | 1,332,286 | 1,735,010 | 163.9 | 30.2 | |||||||||||||||
Income taxes | (103,223 | ) | (275,969 | ) | (289,209 | ) | 167.4 | 4.8 | ||||||||||||
Net income | Ch$ | 401,630 | Ch$ | 1,056,317 | Ch$ | 1,445,801 | 163.0 | % | 36.9 | % |
2021 and 2022. For the year ended December 31, 2022, our net income increased Ch$389,484 million or 36.9% from Ch$1,056,317 million in 2021 to the Ch$1,445,801 million recorded in 2022, which was mostly related to the effect of higher inflation and, to a lesser extent, to the positive effect of higher interest rates on the contribution of our demand deposits. For information on the impacts of the COVID-19 pandemic on our results of operations for the year ended December 31, 2022 please see: “Item 5. Operating and Financial Review and Prospects—Operating Results—Overview—Impacts of COVID-19 in 2022” in this annual report. In summary, the annual increase in net income was mainly supported by:
● | An annual increase of Ch$692,107 million or 44.0% in net interest and UF indexation income, from Ch$1,574,022 million in 2021 to Ch$2,266,129 million in 2022. The main explanatory factors supporting this change were: (i) higher contribution of our UF-denominated net asset exposure, resulting from higher inflation as reflected by UF variation that increased from 6.6% as of December 31, 2021 to 13.3% as of December 31, 2022, which in conjunction with an increased average UF-denominated balance sheet exposure explained nearly Ch$575,921 million of higher net interest income, (ii) an annual increment of Ch$370,866 million in the contribution of demand deposits to our funding cost because of the steady rise in both short-term interest rates –as the Chilean Central Bank continued the monetary tightening cycle by increasing the reference rate from 4.00% as of December 31, 2021 to 11.25% as of December 31, 2022– and the long-term interest rates –due to expectations on higher inflation for most of 2022 when compared to 2021– all permitting to offset the annual decline of 8.0% in average demand deposit balances, and (iii) the annual increase of Ch$17,640 million in income from loans (net of funding cost), primarily due to annual expansions of 6.5% and 9.6% in average balances of commercial and residential mortgage loans, respectively, which was partly offset by lower lending spreads in consumer loans. These effects were partly offset by: (i) an annual decline of approximately Ch$281,202 million from the management of financial gaps (term gapping and interest rates mismatches of our on-balance positions that exclude the effect of inflation) as a result of the sharp increase in interest rates throughout the year, and (ii) an annual decrease of Ch$5,279 million in credit prepayments, in line with increased interest rates and lower liquidity among customers, which jointly translated into lower incentives and capacity to refinance and prepay debt. |
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● | An increase of 81.0%, or Ch$158,541 million, in other income and loss net in 2022 when compared to 2021, from Ch$195,821 million in 2021 to Ch$354,362 million in 2022. This was principally the consequence of: (i) increased results from securities held-for-trading resulting from the upward trend in local interest rates that translated into higher gains from interest accrued and fair value adjustments these instruments, (ii) an annual increase in income from exchange, indexation and accounting hedging of foreign currency mostly associated with foreign exchange adjustments on an increased on-balance foreign exchange liability exposure due to both an appreciation of 0.3% of the Chilean peso against the U.S. dollar in 2022 as compared to the sharp depreciation of 19.8% of the Chilean peso against the U.S. dollar in 2021, and (iii) an annual increase in income attributable to investments in other companies explained by higher net income from Transbank. These effects were partly offset by: (i) lower income from trading derivatives, mostly influenced by volatility in the exchange rate during 2022 and a high comparison base given the sharp depreciation of 19.8% of the Chilean peso against the U.S. dollar in 2021, and (ii) the effect of higher inflation on inflation-indexed derivatives during the year. |
● | An annual increase in fees and commissions of approximately Ch$67,104 million or 14.7%, from Ch$455,028 million in 2021 to Ch$531,619 million in 2022. This growth was mostly explained by: (i) higher fee income from transactional services (including current accounts, overdrafts, credit lines and credit cards), which was influenced by the normalization of overall spending and transactionality across the economy as mobility restrictions were almost totally lifted in 2022, and (ii) greater fees from mutual funds management in connection with portfolio rebalancing towards equity funds (which bear higher margins), a trend that has been taking place since the the end of 2021, and the overall improvement in average margins bear by mutual funds on fixed-income securities in 2022. |
These factors were partly counterbalanced by:
● | An annual expansion of Ch$392,958 million in provisions for expected credit losses, from Ch$19,172 million in 2021 to Ch$412,130 million in 2022. This annual change was principally explained by asset quality indicators that continued to return to pre-pandemic levels, reflecting the end of most of the temporary effects that benefited both customers’ payment behavior and risk profiles in 2021, including fiscal aid packages, pension fund withdrawals –that resulted in increased disposable income among customers– and the government-guaranteed loan program. Instead, during 2022, the liquidity surplus decreased steadily while higher inflation reduced the purchasing power of customers, both leading to an increase in delinquency ratios and expected credit losses. |
● | An annual increase of Ch$122,070 million or 14.0% in operating expenses, from Ch$873,413 million in 2021 to Ch$995,483 million in 2022. This was mainly related to: (i) an annual increase in personnel expenses, due to both higher variable compensation and the recognition of the inflation effect on salaries, which were partly offset by an annual decrease in average headcount, (ii) a moderate rise in severance payments associated with organizational changes, and (ii) an annual increase in administrative expenses, mostly influenced by increased costs in IT services, particularly in software licensing and data services related to our digital transformation strategy. |
● | An annual increase of Ch$13,240 million or 4.8% in income tax, from Ch$275,969 million in 2021 to Ch$289,209 million in 2022. This figure was the consequence of: (i) the annual growth of 30.2% in income before income taxes, due to the previously mentioned drivers, and (ii) the sale of instruments measured at fair value through OCI with cumulative losses, which were not tax deductible. These effects were partly offset by the effect of higher inflation on our shareholders’ equity, which may be deducted from our taxable base. |
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2020 and 2021. For the year ended December 31, 2021, our net income increased Ch$654,687 million, or 163.0%, from Ch$401,630 million in 2020 to the Ch$1,056,317 million recorded in 2021. This increase in net income was primarily attributable to the combined effect of lower provisions for expected credit losses and higher inflation as further discussed below. For information on the impacts of the COVID-19 pandemic on our results of operations for the year ended December 31, 2021 please see: “Item 5. Operating and Financial Review and Prospects—Operating Results—Overview—Impacts of COVID-19 in 2021” in our 2021 annual report. In summary, the annual increase in net income was mainly supported by:
● | An annual decrease of 96.5%, or Ch$527,934 million, in provisions for loan losses, from Ch$547,106 million in 2020 to Ch$19,172 million in 2021. This decline was primarily a result of improved economic dynamics given the significant decrease or removal of mobility restrictions in 2021 when compared to 2020, which benefited the financial condition of credit risk profiles of companies and individuals as economic activity began to return to near normal levels. Similarly, the excess of liquidity in the economy produced by pension fund withdrawals and the fiscal aid package improved the payment capacity of personal banking customers significantly as reflected by lower delinquency ratios. These factors had a positive effect on our forward-looking provisioning models that, in conjunction with updated models for both individually-evaluated and group-based evaluated portfolio resulted in an allowance release of approximately Ch$188,324 million in 2021 that compares to allowances for expected credit losses of Ch$210,205 million established in 2020 in the context of the COVID-19 pandemic. Lower charge-offs and increased recoveries within the same period also contributed, to a lesser extent, to this result. |
● | An increase of 19.5%, or Ch$257,234 million, in net interest income on an annual basis, from Ch$1,316,788 million in 2020 to Ch$1,574,022 million in 2021. This increase was primarily due to the impact of higher inflation during this year on our UF-denominated net asset exposure, as a result of an annual UF variation of 6.61% as of December 31, 2021, when compared to 2.69% as of December 31, 2020, which led to nearly Ch$310,775 million of the increase in net interest income. To a lesser extent, the contribution of demand deposits to our funding cost increased Ch$5,772 million in 2021 when compared to 2020 given the upward trend adopted by short-term and long-term interest rates, particularly during the second half of 2021, as a consequence of higher uncertainty, expectations on higher inflation, and the withdrawal of the monetary stimulus by the Central Bank that had led the reference rate to increase from 0.5% to 4.0% between July 2021 and December 2021. These effects were partially offset by: (i) lower income from loans (net of cost of funds) by approximately Ch$29,000 million in 2021 when compared to 2020, mainly due to a change in the mix toward products with lower lending spreads such as residential mortgage loans and commercial loans granted to SMEs and middle market companies in the context of the government guaranteed program, as well as consumer loans bearing higher lending spreads that only started to reactivate by the end of 2021, (ii) lower results from the carry (net of funding cost) of fixed-income securities measured at fair value through OCI and held-to-maturity by approximately Ch$15,460 million given the aforementioned trends in interest rates, and (iii) an annual decrease of approximately Ch$ 8,100 million from the management of interest rates mismatches and term gaps (asset and liability management). |
● | An increase of 22.7%, or Ch$36,266 million, in Other Income (Loss), Net in 2021 when compared to 2020, mostly due to higher income from derivatives, which benefited from both the positive impact of the sharp 19.8% depreciation of the Chilean peso against the U.S. dollar in 2021 as compared to the appreciation of 5.3% observed for the Chilean peso against the U.S. dollar in 2020 and increased net asset average exposure to exchange rate through trading derivatives in 2021. To a lesser extent, CVA adjustments for derivatives also positively contributed to these results, when compared to 2020. Similarly, we also benefited from higher income attributable to associates due to higher income from Nexus and Transbank. The increase in net other income (loss) was to some extent offset by a net decrease in income from foreign exchange transactions associated with on-balance liability positions in foreign currency, mostly due to the sharp increase in foreign exchange rates as of December 31, 2021 as compared to 2020, which coupled with lower results from marking-to-market on fixed-income portfolios as a result of higher interest rates on both securities held for trading and securities measured at fair value through other comprehensive income. |
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● | An annual increase in fees and commissions of approximately Ch$9,060 million, or 2.0%, from Ch$445,968 million in 2020 to Ch$455,028 million in 2021. This annual increase was mostly explained by: (i) higher fees from mutual funds management due to increased assets under management and portfolio rebalancing towards equity funds bearing higher fees, and (ii) the effect that greater mobility and social interaction had on transactional services, explained by a subdued commercial activity in 2020 attributable to the COVID-19 pandemic. The magnitude of this increase was partially decreased due to the extraordinary upfront fee received by our insurance brokerage coming from our long-term partnership with an international insurance company in 2020, which increased the basis for comparison for 2021. |
These factors were partly offset by: (i) an annual increase of Ch$173,402 million in income tax, from Ch$103,223 million in 2020 to Ch$275,969 million in 2021, mostly explained by income before income taxes increasing 163.9% in 2021 when compared to 2020, and (ii) operating expenses increasing Ch$6,668 million on an annual basis, highly associated with an annual increase in IT expenses due to the implementation of both our digital transformation strategy and efficiency initiatives and higher marketing expenses in order to reinforce our brand value while supporting diverse social initiatives. These effects were partly offset by an annual decrease in personnel expenses due to decreased severance payments and decreased benefit expenses given organizational changes made during the year.
Net Interest Income
The tables included under the headings “—Interest and UF Indexation (inflation) Revenue” and “—Interest and UF (inflation) Indexation Expense” set forth information regarding our consolidated interest revenue and expenses, average interest earning assets and average interest bearing liabilities for the years ended December 31, 2020, 2021 and 2022. This information is derived from tables included elsewhere in this annual report under “Item 4. Information on the Company—Selected Statistical Information” and is qualified in its entirety by reference to such information.
For the Year Ended December 31, | % Increase (Decrease) | |||||||||||||||||||
2020 | 2021 | 2022 | 2020/2021 | 2021/2022 | ||||||||||||||||
IFRS: | (in millions of Ch$, except percentages) | % | ||||||||||||||||||
Interest and UF indexation revenue | Ch$ | 1,876,795 | Ch$ | 2,388,470 | Ch$ | 4,466,881 | 27.3 | % | 87.0 | % | ||||||||||
Interest and UF indexation expense | (560,007 | ) | (814,448 | ) | (2,200,752 | ) | 45.4 | 170.2 | ||||||||||||
Net interest and UF indexation income | Ch$ | 1,316,788 | Ch$ | 1,574,022 | Ch$ | 2,266,129 | 19.5 | % | 44.0 | % | ||||||||||
Net interest margin(1)(2) | 3.44 | % | 3.79 | % | 5.40 | % |
(1) | Net interest income divided by average interest-earning assets. The average balances for interest-earning assets, including interest readjustments, were calculated on a daily basis for the Bank’s balances and on a monthly basis for our subsidiaries’ balances. |
(2) | Net interest margin includes the interest earned on trading securities, which is accounted for under Other Income (Loss) Net. Similarly, it includes average balances of trading securities. |
2021 and 2022. For the year ended December 31, 2022 our net interest income was Ch$2,266,129 million, which represents an annual increase of 44.0% or Ch$692,107 million, as compared to the Ch$1,574,022 million recorded in 2021. The main drivers supporting the increase in net interest income were:
● | An annual increase of approximately Ch$631,789 million in income from loans (excluding the effect of inflation) mostly due to: (i) higher interest earned on commercial loans by nearly Ch$418,878 million in 2022 when compared to 2021 due to average nominal interest rates earned on loans that increased from 3.4% in 2021 to 5.2% in 2022 –aligned with both the trends adopted by local and foreign interest rates and the amortization of FOGAPE loans that carry lower than average interest rates– and a 7.3% annual expansion in average balances of commercial loans, (ii) an annual increase of Ch$173,088 million in interest earned on consumer loans supported by both average nominal interest rates that rose from 10.9% in 2021 to 13.3% in 2022 and a 15.4% annual growth in average balances, focused on credit card loans and installments loans, which was a result of several drivers including, increased productivity in loan origination, lower liquidity surplus in the economy (as support measures to deal with the economic effects of COVID-19 pandemic disappeared), and lower disposable income produced by higher inflation, and (iii) an annual increase of Ch$39,823 million in interests earned on residential mortgage loans, mostly explained by average balances growing 9.8% on an annual basis and increased average interest rates. All in all, the average interest rate earned on loans to customers (excluding the effect of inflation) increased from 4.1% for the year ended on December 31, 2021 to 5.6% for the year ended on December 31, 2022. |
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● | An annual increment of Ch$575,921 million in the contribution of our UF-denominated net asset balance sheet exposure (on and off-balance positions). This result was the consequence of both inflation (measured as UF variation) increasing from 6.6% in 2021 to 13.3% in 2022 and an annual increase recorded by our average UF-denominated net asset exposure in the banking book in 2022 when compared to 2021. |
● | An annual increase of Ch$175,718 million in interest earned on securities measured at fair value through OCI and fixed-income securities measured at amortized cost in 2022 when compared to 2021. Most of this increment had to do with the overall growth in average interest rates accrued by these instruments from 1.7% in 2021 to 5.0% in 2022 as a result of the increase in both short-term interest rates due to the tightening cycle deployed by the Central Bank to deal with inflation long-term interest rates reflecting the expected path of inflation for the coming years. The change in average interest rates explained an annual increase of Ch$145,092 million in interest income, which coupled with a 24.2% increase in average balances that explained an annual expansion of Ch$30,326 million in interest earned on fixed-income securities (excluding interest earned on held-for-trading instruments, which are registered in Other Income & Loss, net). |
● | An annual increase of Ch$142,674 million in interest revenues on loans and advances to banks, which was mainly explained by the positive effect of higher short-term interest rates (primarily as a result of the changes in the monetary policy interest rates) on overnight deposits held in the Central Bank for liquidity management purposes. This effect was to some extent counterbalanced by an annual decrease of 29.6% in average balances, which explained an annual decline of Ch$2,471 million in interest revenues on loans and advances to banks, mostly associated with a high basis for comparison as we had to comply with “technical reserve” requirements in 2021 due to unusually high levels of demand deposits. |
These factors were partially counterbalanced by:
● | An annual increase of Ch$702,697 million in interest paid on savings accounts and time deposits in 2022, mostly attributable to: (i) higher average interest rate paid on saving accounts and demand deposits in line with trends seen in local interest rates, particularly for shorter terms as explained above, which explained Ch$677,044 million of higher interest paid on these interest-bearing liabilities, and (ii) an annual growth of 38.1% in average balances of time deposits explaining higher interest paid by Ch$25,653 million, which conversely correlated with the annual decline in non-interest bearing current accounts and demand deposits as a result of interest rates and inflation that climbed well above mid-term levels, all encouraging customers to invest in interest-bearing instruments rather than demand deposits. |
● | An annual increase of Ch$36,737 million in interest paid on debt instruments (including commercial paper) in 2022. This was the result of: (i) a small rise in average interest rate paid on long-term debt instruments from 2.3% in 2021 to 2.5% in 2022 that explained Ch$19,204 million of higher interest paid on such liabilities, and (ii) an annual growth 8.8% in average balances of debt issued (including commercial paper) that resulted in further interest paid by Ch$17,533 million. The expansion in average balances, however, was principally concentrated in the last quarter of 2022, when we placed Ch$893,267 million in long-term senior bonds denominated in UF in the local market (and Ch$1,088,897 million in the whole year), in order to: (i) replace funding from demand deposits that significantly decreased over the year, and (ii) to be prepared for potential market dynamics taking place once alternative funding sources, such as the Financing Facilities Conditional on Loan Growth (“FCIC”) provided by the Central Bank, will be fully amortized by by all banks in 2024. |
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● | Interest paid on REPO instruments increasing Ch$14,905 million in 2022, which was almost entirely explained by the effect of higher interest rates accrued during the year as a consequence of the climb recorded by nominal interest rates following the Central Bank’s monetary actions. |
● | An annual increase of Ch$14,031 million in interest paid on borrowings from financial institutions. Most of the annual change was related to an annual growth in average interest rates accrued by such instruments in 2022, which explained Ch$10,733 million of higher interest paid on them. Nearly 83% of our year-end balance of borrowings from financial institutions corresponds to borrowings in local currency from the Chilean Central Bank associated with the FCIC, which accrues a flat nominal interest rate of 0.5% until its maturity. As such, the increase in average interest rates on these liabilities was principally influenced by higher foreign interest rates. To a lesser extent, the annual expansion of 14.1% in average balances explained an annual increase of Ch$3,298 million in interest paid on borrowings from financial institutions, in line with both higher average funding from the Central Bank (since we raised additional financing of Ch$1,237,811 million in the second quarter of 2021) and increased funding from foreign banks in order to replace the annual decline in Commercial Paper balances to finance Trade Finance loans. |
All in all, the effect of higher inflation on UF-denominated net asset exposure and the overall growth of local and foreign interest rates on our interest earned and paid on assets and liabilities translated into an annual increase of our net interest margin from 3.79% in 2021 to 5.40% in 2022.
2020 and 2021. For the year ended December 31, 2021 our net interest income was Ch$1,574,022 million which represents an annual increase of 19.5%, or Ch$257,234 million, as compared to the Ch$1,316,788 million recorded in 2020. The main drivers supporting the increase in net interest income were:
● | An annual increase of approximately Ch$310,775 million in the contribution of our UF-denominated net asset balance sheet exposure, including both on-balance and off-balance positions denominated in UF. This impact was the result of higher inflation (measured as UF variation) of 3.92%, from 2.69% in the year ended December 31, 2020 to 6.61% in the same period of 2021. |
● | An annual decrease of Ch$40,628 million in interest paid on saving accounts and time deposits during 2021 when compared to 2020. This behavior was mostly the consequence of: (i) a lower average interest rate paid on saving accounts and demand deposits, explaining approximately Ch$25,038 million of such decrease, and (ii) an annual decrease of approximately 14.1% in average balances in 2021 when compared to 2020, associated with lower funding needs due to the 32.3% annual increase in non-interest bearing current accounts and demand deposits prompted by excess liquidity in the economy and low interest rates, which explained Ch$15,590 million of the decrease in interest expenses paid on time deposits. |
● | An annual increase of Ch$11,988 million in interest earned on securities measured at fair value through OCI and on securities held-to-maturity fixed-income securities in 2021 when compared to 2020. This effect was mostly associated with an annual expansion of 30.8% in average balances (including the trading portfolio), which explained approximately Ch$20,040 million of the higher interest revenues. This effect was partially offset by lower average nominal and real interest rates carried by these instruments, explaining approximately Ch$8,052 million of the lower interest revenues, due to the low local interest rates for most of 2021 when compared to 2020 and the purchase of UF-denominated securities, which earn lower interest rates (excluding the effect of inflation). |
● | An annual decrease in interest paid on debt instruments (including commercial paper) by Ch$9,355 million in 2021 as compared to 2020. This behavior was primarily driven by an annual contraction in the average nominal and real interest rate paid on long-term debt instruments, explaining Ch$7,912 million of the lower interest expenses. To a lesser extent, an overall decrease of 1.0% in average balances of debt issued (including commercial paper), due to the previously mentioned annual increase in non-interest bearing current account and demand deposits, resulted in a Ch$1,443 million decrease in interest expenses. |
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● | An annual decrease in interest paid on borrowings from financial institutions by Ch$4,448 million. This was mainly the consequence of the lower average nominal and real interest rates carried by these instruments given the impact of borrowings from the Central Bank in Chile associated with the Lending Facilities Conditional on Loan Growth (“FCIC” for its acronym in Spanish) that accrues a nominal interest rate of 0.5%, which prompted a decrease in the overall average interest paid on borrowings from financial institutions by approximately Ch$14,540 million, all things equal. This effect was to some extent offset by an increase of 37.2% in average balances, from Ch$2,200,874 million in 2020 to Ch$3,020,147 million in 2021, given additional borrowings from the Central Bank in 2021 (also raised from FCIC), which explained an annual increase of Ch$10,092 million in interest expenses due to higher balances, all things being otherwise equal. |
● | An annual increase in interest revenues on loans and advances to banks of Ch$3,727 million. This was largely associated with a 53.8% annual increase in average balances, which was mostly concentrated in short-term low interest-earning assets aimed at complying with “technical reserve” requirements arising from high levels of demand deposits. For more information on technical reserves, please see “Item 4. Information on the Company—Regulation and Supervision—Reserve Requirements”. |
These positive factors were partially offset by:
● | An annual decrease of Ch$113,635 million in interest revenues earned on loans to customers (excluding the effect of inflation), mainly influenced by: (i) lower interest earned on consumer loans, which decreased Ch$92,011 million in 2021 when compared to 2020 based on both lower average nominal interest rates and a decline of 5.3% in average balances due to lower demand for loans as a result of the excess of liquidity produced by the three pension fund withdrawals and government aid packages, and (ii) an annual decline of Ch$28,061 million in interest earned on commercial loans, particularly concentrated in commercial credits, due to lower average nominal and real interest rates (excluding inflation) associated with loan growth concentrated in the government-guaranteed loan program (FOGAPE and FOGAPE Reactiva) that carries low interest rates and in spite of a 7.5% increase in average balances. These effects were partly offset by slightly higher interest revenues on residential mortgage loans by Ch$6,419 million on an annual basis, driven by average loan balances increasing 6.9% in 2021. |
On the whole, the effect of higher inflation on our net asset position in UF, which is accounted for as interest income, more than offset the lower average nominal and real rates (excluding inflation effect) earned and paid on assets and liabilities, respectively, which resulted in an increase in our net interest margin from 3.54% in 2020 to 3.89% in 2021.
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Interest Revenue
The following table sets forth information regarding our interest revenue and average interest earning assets for the years ended December 31, 2020, 2021 and 2022:
For the Year Ended December 31, | % Increase (Decrease) | |||||||||||||||||||
2020 | 2021 | 2022 | 2020/2021 | 2021/2022 | ||||||||||||||||
IFRS: | (in millions of Ch$, except percentages) | % | ||||||||||||||||||
Interest revenue | Ch$ | 1,876,795 | Ch$ | 2,388,470 | Ch$ | 4,466,881 | 27.3 | % | 87.0 | % | ||||||||||
Average interest earning assets: | ||||||||||||||||||||
Commercial loans | 17,323,680 | 18,624,803 | 19,982,361 | 7.5 | 7.3 | |||||||||||||||
Residential mortgage loans | 9,220,426 | 9,855,993 | 10,819,015 | 6.9 | 9.8 | |||||||||||||||
Consumer loans | 4,178,618 | 3,958,300 | 4,569,500 | (5.3 | ) | 15.4 | ||||||||||||||
Total loans | 30,722,724 | 32,439,096 | 35,370,876 | 5.6 | 9.0 | |||||||||||||||
Investment under resale agreements | 51,467 | 71,515 | 45,077 | 39.0 | (37.0 | ) | ||||||||||||||
Other Assets | 507,564 | 231,070 | 333,841 | (54.5 | ) | 44.5 | ||||||||||||||
Financial investments | 4,424,050 | 5,787,657 | 7,187,582 | 30.8 | 24.2 | |||||||||||||||
Loans and advance to banks | 1,974,545 | 3,037,383 | 2,137,229 | 53.8 | (29.6 | ) | ||||||||||||||
Total | Ch$ | 37,680,350 | Ch$ | 41,566,721 | Ch$ | 45,074,605 | 10.3 | % | 8.4 | % | ||||||||||
Average rates earned on total interest earning assets(1)(2): | ||||||||||||||||||||
Average nominal rates | 5.03 | % | 5.85 | % | 10.40 | % |
(1) | See “Item 4. Information on the Company—Selected Statistical Information—Average Balance Sheets, Interest Earned on Interest Earning Assets and Interest Paid on Interest Bearing Liabilities.” |
(2) | Average rates earned on interest earning assets do not include the interest earned on trading securities, which is accounted for under Other Income (Loss) Net. However, it does include average balances of trading securities. |
2021 and 2022. For the year ended December 31, 2022, our interest revenue amounted to Ch$4,466,881 million, which denotes an 87.0% or Ch$2,078,411 million increase when compared to the Ch$2,388,470 million recorded in 2021. The annual increase was primarily attributable to the rise in inflation, from 6.6% in 2021 to 13.3% in 2022 (measured as UF variation), explaining an annual increase of Ch$1,272,966 million in our interest revenues. The increase in inflation had mainly to do with: (i) measures taken by the government and the Congress to assist companies and individuals during the COVID-19 pandemic, leading to injecting significant liquidity in the local economy that resulted in a significant growth in household spending, particularly during the first half of 2022, (ii) the effect of higher external prices derived from the global disruption of the global supply chain, which was amplified by the effect of the geopolitical conflict between Russia and Ukraine on energy prices, and (iii) a weakened exchange rate for most of the second half of the year that had a pass-through effect on local prices. In addition, the steady upward trend in real and nominal average interest rates accrued on our interest-earning assets supported an annual advance of Ch$796,143 million in interest revenues. The increase in average interest rates was the consequence of: (i) the aggressive tightening monetary policy deployed by Central Bank in order to halt the inflationary process by lifting the local reference rate from 4.00% as of December 31, 2021 to 11.25% as of December 31, 2022, (ii) higher long-term interest rates aligned with market expectations for inflation in the long-run that stayed by most of 2022, (iii) the upward trend evidenced in foreign interest rates, particularly in the second half of 2022 produced by global central banks’ monetary policy actions, and (iv) the recovery shown by consumer loans during 2022.
Based on the effects abovementioned, our overall average interest rate earned on our assets increased from 5.85% for the year ended on December 31, 2021 to 10.40% for the year ended on December 31, 2022.
2020 and 2021. For the year ended December 31, 2021, our interest revenue was Ch$2,388,470 million, representing a 27.3% increase when compared to the Ch$1,876,795 million recorded in 2020. The annual increase was primarily due to the effect of increased inflation, as reflected by an annual UF variation of 6.61% as of December 31, 2021, when compared to 2.69% as of December 31, 2020, which explained Ch$658,738 million of the higher interest revenues earned on inflation-indexed assets. The increase in inflation was associated with diverse drivers, including: (i) economic growth driven by higher household consumption in 2021, (ii) an increase in external prices due to the effects of the pandemic and disruptions in the international supply chain, (iii) the impact of higher than expected liquidity among individuals due to support programs and fiscal policies intended to assist them during the COVID-19 pandemic, including three pension fund withdrawals, (iv) a weaker currency given the sharp depreciation of the Chilean peso against the U.S. dollar as of December 31, 2021, and (v) lower unemployment, all of which translated into higher demand for durable and non-durable goods that pushed overall prices in the Chilean economy up. The aforementioned effect of higher inflation on interest revenues coupled with the effect of an annual increase of 10.3% in average balances of interest-earning assets, primarily due to increases in loans to customers, resulted in higher interest accrued on interest-earning assets by Ch$102,827 million in 2021 when compared to 2020.
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These effects were partially offset by the impact of lower average nominal and real interest rates (excluding inflation) accrued on our interest-earning assets during the year ended December 31, 2021, as compared to the year ended December 31, 2020, resulting in an Ch$203,490 million decrease in interest revenues produced by interest rates that remained at historically low levels for the first three quarters of 2021, as the Central Bank had to deploy an aggressive expansionary monetary policy to mitigate the economic effects of the pandemic by reducing the reference interest rate, which remained at 0.5% between April 2020 and July 2021. Similarly, long-term interest rates were well below average throughout 2020, while returning to average levels by mid-2021. In addition, higher-interest rate lending products, such as consumer loans, suffered a significant decrease in average balances as a consequence of economic drivers prompted by the pandemic, which also caused a decline in the average interest rate earned on assets. To a lesser extent, the result of derivatives held for cash hedge accounting purposes decreased Ch$48,101 million in 2021 when compared to 2020, mostly related to the liability position of the hedging derivative denominated in UF given higher inflation.
Based on the above, the effect of higher inflation more than offset the lower average real and nominal interest rates, which resulted in an increase of the overall average interest rate earned on our assets from 5.03% for the year ended on December 31, 2020 to 5.85% for the year ended on December 31, 2021.
Interest Expense
The following table sets forth information regarding our interest expense and average interest bearing liabilities for the years ended December 31, 2020, 2021 and 2022:
For the Year Ended December 31, | % Increase (Decrease) | |||||||||||||||||||
2020 | 2021 | 2022 | 2020/2021 | 2021/2022 | ||||||||||||||||
IFRS: | (in millions of Ch$, except percentages) | % | ||||||||||||||||||
Interest expense | Ch$ | 560,007 | Ch$ | 814,448 | Ch$ | 2,200,752 | 45.4 | % | 170.2 | % | ||||||||||
Average interest-bearing liabilities: | ||||||||||||||||||||
Saving accounts and time deposits(1) | 9,857,365 | 8,467,508 | 11,696,542 | (14.1 | ) | 38.1 | ||||||||||||||
Obligations under repurchase agreements | 280,827 | 140,600 | 184,448 | (49.9 | ) | 31.2 | ||||||||||||||
Borrowings from financial institutions | 3,225,303 | 4,420,847 | 5,043,041 | 37.1 | 14.1 | |||||||||||||||
Debt issued | 8,719,276 | 8,491,701 | 9,496,198 | (2.6 | ) | 11.8 | ||||||||||||||
Commercial Papers | 219,046 | 359,836 | 133,208 | 64.3 | (63.0 | ) | ||||||||||||||
Lease Liabilities | 133,514 | 107,048 | 94,063 | (19.8 | ) | (12.1 | ) | |||||||||||||
Other financial obligations | 186,137 | 176,505 | 200,493 | (5.2 | ) | 13.6 | ||||||||||||||
Total | Ch$ | 22,621,468 | Ch$ | 22,164,045 | Ch$ | 26,847,993 | (2.0 | )% | 21.1 | % | ||||||||||
Average rates paid on total interest bearing liabilities(2): | ||||||||||||||||||||
Average nominal rates | 2.48 | % | 3.68 | % | 8.20 | % | ||||||||||||||
Average (Chilean peso-denominated) non-interest bearing current account and demand deposits | Ch$ | 12,882,627 | Ch$ | 17,048,827 | Ch$ | 15,550,988 | 32.3 | % | (8.8 | )% |
(1) | Includes interest-bearing demand deposits. |
(2) | See “Item 4. Information on the Company—Selected Statistical Information—Average Balance Sheets, Interest Earned on Interest Earning Assets and Interest Paid on Interest Bearing Liabilities.” |
2021 and 2022. Our interest expense increased 170.2%, or Ch$1,386,304 million on an annual basis, from Ch$814,448 million in 2021 to Ch$2,200,752 million in 2022. The annual increase in interest expense was mostly due to the effect of higher average nominal and real interest rates accrued on our interest-bearing liabilities, mainly supported by local short-term interest rates that increased steadily over the course of the year, in line with the local reference interest rate that grew from 4.00% in December 2021 to 11.25% in December 2022, which translated into an increase in interest paid on short-term interest-bearing liabilities such as time deposits. The effect of higher average interest rates accrued on interest-bearing liabilities (excluding inflation) explained an annual increment of Ch$724,587 million in interest expense. Furthermore, the impact of higher inflation, as reflected by an annual UF variation of 13.3% in 2022 as compared to 6.6% in 2021 explained additional interest expense of Ch$621,444 million on our UF-denominated interest-bearing liabilities. To a lesser extent, interest expense grew Ch$47,335 million in 2022 in line with average balances of interest-bearing liabilities growing 21.1% on an annual basis, largely attributable to the 38.1% annual rise in average balances of time deposits, in contrast with the 8.8% annual decrease in average balances of non-interest bearing current account and demand deposits.
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As a result of both higher interest rates and increased inflation, our overall interest paid on interest bearing liabilities increased from 3.68% for the year ended on December 31, 2021 to 8.20% for the year ended on December 31, 2022.
2020 and 2021. Our interest expense increased 45.4%, or Ch$254,441 million, in 2021, from Ch$560,007 million for the year ended December 31, 2020 to Ch$814,448 million recorded for the year ended December 31, 2021. The annual increase in interest expense was mostly due to the impact of higher inflation, as reflected by an annual UF variation of 6.61% as of December 31, 2021, when compared to 2.69% as of December 31, 2020, which explains Ch$308,794 million of the higher interest expenses paid on our UF-denominated interest-bearing liabilities. The impact of higher UF variation was to some extent offset by lower average nominal and real interest rates (excluding inflation) accrued on our interest-bearing liabilities, particularly as a consequence of local and foreign short-term interest rates that remained at historically low levels for most of 2021, as a consequence of the monetary stimulus set by the Central Bank and other central banks abroad in 2020 in order to deal with the effects of the COVID-19 pandemic on the global economy, policies that remained for most of 2021. Overall, the lower average nominal and real interest (excluding inflation) accrued on interest-bearing liabilities resulted in a decrease of Ch$48,389 million in interest expenses in 2021, as compared to 2020. To a lesser extent, an annual decrease of 2.0% in average balances of interest-bearing liabilities explained a decrease of Ch$8,051 million in interest expenses (excluding inflation), primarily driven by the impact of an annual decrease of 14.1% in savings accounts and time deposits, which was partially explained by the 32.3% annual increase in non-interest bearing current account and demand deposits that reinforced our funding and reduced the needs for time deposits.
Based on the above, higher inflation resulted in an increase in the interest paid on liabilities by offsetting the effect of lower average nominal an interest rates, which increased the overall interest paid on interest bearing liabilities from 2.48% as of the year ended December 31, 2020 to 3.68% as of the year ended December 31, 2021.
Net Fees and Commissions Income
The following table sets forth certain components of our fees and commissions income (net of fees paid to third parties that provide support for those services) for the years ended December 31, 2020, 2021 and 2022:
Year Ended December 31, | % Increase (Decrease) | |||||||||||||||||||
2020 | 2021 | 2022 | 2020/2021 | 2021/2022 | ||||||||||||||||
(in millions of Ch$, except percentages) | % | |||||||||||||||||||
IFRS: | ||||||||||||||||||||
Mutual funds | Ch$ | 92,514 | Ch$ | 108,221 | Ch$ | 121,028 | 17.0 | % | 11.8 | % | ||||||||||
Insurance | 131,361 | 95,482 | 100,865 | (27.3 | ) | 5.6 | ||||||||||||||
Current accounts, overdrafts, credit lines and credit cards | 63,923 | 72,541 | 104,762 | 13.5 | 44.4 | |||||||||||||||
Demand accounts and ATMs | 55,779 | 68,619 | 73,506 | 23.0 | 7.1 | |||||||||||||||
Stock brokerage | 12,462 | 13,834 | 12,568 | 11.0 | (9.2 | ) | ||||||||||||||
Cash management services | 3,769 | 5,484 | 3,160 | 45.5 | (42.4 | ) | ||||||||||||||
Letters of credit, guarantees, collateral and other contingent loans | 27,825 | 30,466 | 36,154 | 9.5 | 18.7 | |||||||||||||||
Custody and trust services | 8,565 | 9,560 | 8,857 | 11.6 | (7.4 | ) | ||||||||||||||
Foreign trade and currency exchange | 2,319 | 2,426 | 2,976 | 4.6 | 22.7 | |||||||||||||||
Financial advisory services | 4,487 | 4,598 | 8,935 | 2.5 | 94.3 | |||||||||||||||
Credits and factoring | 4,003 | 4,421 | 4,461 | 10.4 | 0.9 | |||||||||||||||
Collection services | 16,984 | 16,159 | 17,049 | (4.9 | ) | 5.5 | ||||||||||||||
Teller services expenses | (4,927 | ) | (4,211 | ) | (4,469 | ) | (14.5 | ) | 6.1 | |||||||||||
Credit pre-evaluation services | (244 | ) | (229 | ) | - | (6.1 | ) | (100.0 | ) | |||||||||||
Wire transfers and payment orders | 13,364 | 15,709 | 19,009 | 17.5 | 21.0 | |||||||||||||||
Other | 13,784 | 11,948 | 13,271 | (13.3 | ) | 11.1 | ||||||||||||||
Total | Ch$ | 445,968 | Ch$ | 455,028 | Ch$ | 522,132 | 2.0 | % | 14.7 | % |
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2021 and 2022. Our income from fees and commissions totalled Ch$522,132 million in 2022, which denotes a 14.7% annual increase when compared to the Ch$455,028 million recorded in 2021. This annual increase in fee-based income was primarily supported by:
● | An annual increment of Ch$32,010 million or 47.0% in fees and commissions from transactional services (including current accounts, overdrafts, credit lines and credit cards), from Ch$68,145 million in 2021 to Ch$100,155 million in 2022. This performance was mostly the result of the overall improvement in transactionality during this year, as many economic sectors benefited from the successful vaccination process against COVID-19 that have been taking place since 2021, from which restrictions on both mobility and social interaction mostly disappeared, translating into the normalization of overall spending across the economy. As such, the annual growth in fee income was related to annual increases of 28.4% in purchases, 42.9% in cash withdrawals and 39.0% in bill payments with credit card in 2022. To a lesser degree, fees from transactional services also benefited from higher inflation, as fees are mostly denominated in UF, as well as the opening of ~118,300 new checking accounts in 2022. |
● | An annual increase of 11.8% or Ch$12,807 million in fees and commissions from mutual funds management, from Ch$108,221 million in 2021 to Ch$121,028 million in 2022. The annual increment was mostly explained by: (i) the sustained change in the portfolio mix from fixed-income mutual funds towards local and international equity funds that bear higher fees given investors’ preferences for riskier investments since mid-2021 given the effect of higher interest rates on fixed-income securities, and (ii) the overall improvement in average margins borne by fixed-income mutual funds. These factors more than offset the effect of an 8.9% nominal annual contraction in average assets under management. |
● | An annual increase of Ch$5,689 million or 18.7% in fees related to letters of credit, guarantees, collateral and other contingent loans, from Ch$30,465 million in 2021 to Ch$36,154 million in 2022. This was the consequence of more favorable conditions for international trade throughout 2022 when compared to the subdued performance of 2021 due to the aftermaths that the COVID-19 pandemic had on the global economy. This behavior, in conjunction with improved value offerings across all business segments, is aligned with a 30.4% annual growth in Trade Finance loan balances. |
● | An annual increase of Ch$5,383 million or 5.6% in fees from the insurance brokerage business, from Ch$95,482 million in 2021 to Ch$100,865 million in 2022, which was mostly supported by the positive effect of improved consumer loan origination after bottoming out during the COVID-19 pandemic. This effect coupled with successful campaigns we launched over the course of the year in order to cope with increasing competition, which explained an 18.2% nominal increase in written premiums in 2022 when compared to 2021. |
● | An annual increase of Ch$4,887 million or 7.1% in fees associated with demand accounts and ATMs, from Ch$68,619 million in 2021 to Ch$73,506 million in 2022, as a result of higher transactionality, in line with normalized consumption after the COVID-19 pandemic. This was reflected by: (i) annual increases in the total turnover and amount of cash withdrawal transactions in our ATM network of 6.3% and 19.5%, respectively, and (ii) annual advances of 26.5% and 39.9% in total turnover and amount of debit card transactions, respectively. These trends were partly offset by a decrease of 12.3% in the average ticket per transaction, including both cash withdrawals and debit card transactions. |
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2020 and 2021. Our income from fees and commissions was Ch$455,028 million in 2021, which denotes a 2.0% annual increase when compared to the Ch$445,968 million recorded in 2020. This annual increase in fee-based income was primarily supported by:
● | An annual increase of 17.1%, or Ch$15,834 million, in fees and commissions from mutual funds management, from Ch$92,514 million in 2020 to Ch$108,348 million in 2021. This annual increase was mainly the result of: (i) an increase of 5.2% in the average balance of assets under management by our mutual funds management subsidiary, which recorded a market share of 24.3% as of December 31, 2021, and (ii) a change in the portfolio mix from fixed-income funds to local and international equity funds, with the latter bearing higher fees. Unlike trends seen in 2020, when fixed-income funds were highly preferred over riskier assets given the effect of the uncertainty on the outlook for local and global economies and the market volatility produced by the COVID-19 pandemic, during 2021, the change in the portfolio mix has been conducted by a shift in the investors’ preferences toward riskier investments given the negative effects of the steady upward trend observed in local long-term interest rates for most of 2021 on the market value of fixed-income securities throughout the year. |
● | An annual increase of 23.0% or Ch$12,840 million in net fees and commissions from demand accounts and ATMs, from Ch$55,779 million in 2020 to Ch$68,619 million in 2021. This increase was mostly the consequence of an annual increase in the number of transactions in the context of the economic rebound seen in 2021, as mobility restrictions began to be gradually lifted and social interaction converged to normalized levels as the vaccination process progressed, which resulted in higher use of both debit cards and ATMs. |
● | An annual increase of 13.5%, or Ch$8,618 million, in fees and commissions from transactional services (including current accounts, overdrafts, credit lines and credit cards) from Ch$63,923 million in 2020 to Ch$72,541 million in 2021. This increase was mainly due to an annual increase in the number of transactions in the context of the economic rebound seen in 2021 as many economic sectors and industries reopened during the year as decreased contagion rates led to greater mobility within the country. Thus, the increase was due to an annual increase in use of credit cards, as reflected by the amount of transactions increasing 24.6%, which is aligned with the recovery in economic activity, although the average amount per transaction slightly decreased 2.5% on an annual basis. Also, it is important to note that 2020 was certainly a subdued year in terms of fees coming from these services due to the negative impact that the COVID-19 pandemic had on employment, disposable income of individuals, household spending and, therefore, transactionality, posing a low basis for comparison. |
● | An annual increase of 17.5%, or Ch$2,344 million, in fees related to wire transfers and payment orders, from Ch$13,364 million in 2020 to Ch$15,708 million in 2021. This behavior was linked to high levels of liquidity among individuals during 2021 prompted by special measures taken by the government to assist them amid the COVID-19 pandemic, such as three withdrawals from pension funds, which led to increased cash management services and transactionality among companies and individuals. |
● | An annual increase of 8.3%, or Ch$2,305 million, in fees related to letters of credit guarantees, collateral and other contingent loans, from Ch$27,825 million in 2020 to Ch$30,130 million in 2021. This figure was mostly associated with: (i) a depreciation of the Chilean peso against the U.S. dollar in 2021 (19.8%) as compared to the appreciation of the Chilean peso against the U.S. dollar in 2020, given that a portion of the underlying loans is denominated in foreign currency, and (ii) a recovery in international trade during 2021, particularly associated a low comparison base in 2020 due to the COVID-19 pandemic. |
These increases were partially offset by an annual decline of 27.3%, or Ch$35,879 million, in fees related to the insurance brokerage business, from Ch$131,361 million in 2020 to Ch$95,482 million in 2021. This decrease was mostly influenced by the non-recurrent base effect of the higher amount recognized in 2020 in connection with the extraordinary upfront fee coming from our long-term partnership with an insurance company in 2020. This effect in fees coming from our insurance brokerage business was to some extent offset by a 12-month real increase of 4.2% in written premiums as of December 31, 2021, primarily due to increased lending activity over the second half of the year, particularly in the origination of consumer loans and residential mortgage loans that increased 35.0% and 33.7% in 2021 on an annual basis, respectively.
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Other Income (Loss), Net
Other income (loss), net, consists of net gains and losses from financial operating income, net gains and losses from foreign exchange transactions and other operating income. Financial operating income results include gains and losses realized on the sale of securities, gains and losses from marking to market of securities and interest rate and currency derivatives at the end of the period. Net gains and losses from foreign exchange transactions include gains and losses realized upon the sale of foreign currency and foreign exchange derivatives and gains and losses arising from the period-end translation of foreign currency denominated assets and liabilities into pesos. Foreign exchange results also include net adjustments on U.S. dollar-indexed domestic currency transactions and existing interest rate differences in currency derivatives.
Some of the line-tems presented below under Other Income (Loss), Net have been reclassified to or from other line-items as mentioned in Item 5. Operating and Financial Review and Prospects–Critical Accounting Policies–Changes in Accounting Policies, Estimates and Disclosures. Accordingly, explanations for previous years may have changed to reflect such reclassification.
The following table sets forth certain components of our other income (loss), net, for the years ended December 31, 2020, 2021 and 2022:
For the Year Ended December 31, | % Increase (Decrease) | |||||||||||||||||||
2020 | 2021 | 2022 | 2020/2021 | 2021/2022 | ||||||||||||||||
(in millions of Ch$, except percentages) | % | |||||||||||||||||||
IFRS: | ||||||||||||||||||||
Financial instruments held for trading at fair value through profit or loss: | ||||||||||||||||||||
Financial derivative contracts | Ch$ | (96,338 | ) | Ch$ | 143,643 | Ch$ | 5,518 | (249.1 | )% | (96.2 | )% | |||||||||
Debt and Other financial instruments | 58,018 | 36,598 | 257,406 | (36.9 | ) | 603.3 | ||||||||||||||
Derecognition of financial assets and liabilities at amortized cost and financial assets at fair value through other comprehensive income: | ||||||||||||||||||||
Financial assets at amortized cost | 39 | 5,458 | 2,264 | 138.9 | (58.5 | ) | ||||||||||||||
Financial assets at fair value through other comprehensive income | 27,091 | 1,242 | (63,401 | ) | (95.4 | ) | (5,204.8 | ) | ||||||||||||
Financial liabilities at amortized cost | — | — | (1 | ) | 0.0 | (100.0 | ) | |||||||||||||
Exchange, indexation and accounting hedging of foreign currency | 156,662 | (15,962 | ) | 105,038 | (110.2 | ) | (758.1 | ) | ||||||||||||
Ineffective accounting hedges | (89 | ) | — | — | (100.0 | ) | 0.0 | |||||||||||||
Total net financial operating (loss) income | 145,383 | 170,979 | 306,824 | 17.6 | 79.5 | |||||||||||||||
Income attributable to investments in other companies | (5,099 | ) | 1,793 | 13,031 | (135.2 | ) | 626.8 | |||||||||||||
Result from non-current assets and disposal groups held for sale not admissible as discontinued operations | (1,017 | ) | 1,986 | 4,848 | (295.3 | ) | 144.1 | |||||||||||||
Other operating income, net | 20,288 | 21,063 | 29,659 | 3.8 | 40.8 | |||||||||||||||
Total other income (loss), net | Ch$ | 159,555 | Ch$ | 195,821 | Ch$ | 354,362 | 22.7 | % | 81.0 | % |
2021 and 2022. Our other income (loss), net amounted to Ch$354,362 million in 2022, denoting a 81.0%, or Ch$158,541 million, annual increase as compared to the Ch$195,821 million recorded in 2021. This annual increase was primarily the result of:
● | An annual increment of Ch$220,808 million in income from debt and other financial instruments (held-for-trading securities), from Ch$36,598 million in 2021 to Ch$257,406 million in 2022. This was the consequence of: (i) the positive effect of higher local short-term interest rates on the interest earned on these instruments, which was aligned with a reference rate that increased from 4.00% in December 31, 2021 to 11.25% in December 31, 2022, (ii) higher gains from fair value adjustments of fixed-income securities when compared to 2021 given a low comparison base due to unfavorable shifts in local long-term interest rates that year (prompted by pension fund withdrawals and increased uncertainty), and (iii) the positive effect of higher inflation on inflation-indexed securities. |
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● | An annual increase of Ch$121,000 million in income from exchange, indexation and accounting hedging of foreign currency, from a net loss of Ch$15,962 million in 2021 to a net gain of Ch$105,038 million in 2022. This performance was influenced by an annual increase of approximately Ch$374,357 million in foreign exchange adjustments associated with our on-balance foreign exchange liability exposure, from a net loss of Ch$230,277 million in 2021 to a positive income of Ch$144,080 million, primarily explained by both: (i) the appreciation of 0.3% of the Chilean peso against the U.S. dollar in 2022 as compared to the sharp depreciation of 19.8% of the Chilean peso against the U.S. dollar in 2021, and (ii) an annual increase in foreign exchange adjustments related to the proactive management of our foreign-currency intra-day position and increased revenues from FX spot and FX forward trading with customers, which allowed us to benefit from exchange rate volatility. This annual increment was to some extent offset by: (i) an annual decrease of approximately Ch$240,578 million in foreign exchange transactions on our off-balance foreign exchange net asset position in derivatives held for cash flow hedge accounting, given both increased exposure and trends in foreign exchange, since part of our on-balance foreign exchange liability exposure (composed of long-term debt denominated in foreign currency) is mirrored by hedge accounting derivatives, and (ii) a decline of nearly Ch$14,444 million in foreign exchange adjustments from assets local currency–denominated assets that are adjusted by the effect of changes in foreign exchange (leasing loans) in 2022 in relation to 2021. |
● | An annual increase of Ch$11,238 million in income attributable to investments in other companies, from Ch$1,793 million in 2021 to Ch$13,031 million in 2022. This result was almost entirely explained by greater net income from Transbank, the company that manages payment operations of credit and debit cards for most of the local banks yet, since interchange fares were revised by the local authorities after being frozen in 2021. |
● | An annual increment of Ch$8,596 million in other operating income, from Ch$21,063 million in 2021 to Ch$29,659 million in 2022, which relied on the recognition of the inflation effect on the amount of monthly tax provisional payments (PPM) accumulated during 2022, in line with an increase in inflation from 6.6% in 2021 to 13.3% in 2022 (measured as UF variation). |
These effects were partly offset by:
● | An annual decline of Ch$138,125 million in income from trading derivatives, from Ch$143,643 million in 2021 to Ch$5,518 million in 2022. Most of this annual change was associated with foreign exchange adjustments of our average net foreign currency position in derivatives that explained approximately Ch$120,372 million of lower income, from a net gain of Ch$98,374 million in 2021 to a net loss of Ch$21,638 million. While the positive result seen in 2021 was the result of the sharp depreciation of 19.8% of the Chilean peso against the U.S. dollar and an increased average net asset position in foreign currency derivatives, the negative result of 2022 was mostly attributable to volatility observed in both the Chilean peso against the U.S. dollar parity and an average foreign currency exposure through derivatives that changed from a net asset position at the beginning of 2022 to a net liability position for most of the year, all of which negatively impacted our results from foreign exchange adjustments. To a lesser extent, the increase in inflation translated into an annual decline of approximately Ch$5,063 million on inflation-indexed derivatives in 2022. |
● | An annual decrease of Ch$64,643 million in the sale of financial assets measured at fair value through other comprehensive income, from a net income of Ch$1,242 million in 2021 to a net loss of Ch$63,401 million in 2022. The main factor explaining this change was the sale of certain securities that accumulated marking-to-market losses on equity accounts during 2022, which translated into the recognition of a Ch$58,588 million loss. The fair value of these instruments, issued by the Government, were originated by the sharp increase in local interest rates in 2022. |
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2020 and 2021. Our other income (loss), net amounted to Ch$195,821 million in 2021, denoting a 22.7%, or Ch$36,266 million, annual increase as compared to the Ch$159,555 million recorded in 2020. This annual increase was primarily the result of:
● | An annual increase of Ch$239,981 million in income from derivatives, from a net loss of Ch$96,338 million in 2020 to a net gain of Ch$143,643 million in 2021. The reversal was mainly explained by: (i) an increase in results from foreign exchange adjustments to the average net asset position held in foreign currency derivatives by approximately Ch$216,780 million, from a negative result of nearly Ch$118,045 million in 2020 to a net gain of approximately Ch$98,730 million in 2021, which in turn was the combination of the end-of-period sharp depreciation of 19.8% of the Chilean peso against the U.S. dollar in 2021 as compared to the appreciation of 5.3% observed for the Chilean peso against the U.S. dollar in 2020, as well as an increase in the net asset average exposure to exchange rate through trading derivatives in 2021 as compared to 2020, and (ii) the positive combined effect of improved probabilities of default –given more certainties related to the COVID-19 pandemic than in 2020– and portfolio compression carried out during 2021 on CVA for derivatives by Ch$7,380 million from a net charge of Ch$3,241 million in 2020 to a net benefit of Ch$4,139 million in 2021. |
● | An annual increase of Ch$6,892 million in income attributable to associates, from a net loss of Ch$5,099 million in 2020 to a net gain of Ch$1,793 million in 2021. This effect was mostly explained by: (i) a low comparison base in 2020 given impairments recognized in December 2020 in Nexus S.A., the company that provides us with credit card processing services, and (ii) higher income in 2021 from Transbank, the company that manages the payment operation of credit and debit cards for most of the local banks, due to the adjustment in client fees charged by Transbank in September 2021, as authorized by the Chilean Antitrust Court (Tribunal de Defensa de la Libre Competencia) to reflect alignment with operating costs. This decision came after fees were frozen by this court in 2020, which resulted in economic losses for Transbank for 2020 and most of 2021. |
● | An annual increment of Ch$3,003 million in results from non-current assets and disposal groups held for sale not admissible as discontinued operations, from a net loss of Ch$1,017 million in 2020 to a net gain of Ch$1,986 million in 2021 due to higher income from assets received in lieu of payment. |
● | An annual increase of 3.8% or Ch$835 in other operating income in 2021 as compared to 2020, from Ch$20,228 million in 2020 to Ch$21,063 million in 2021. This increase was mainly the consequence of: (i) higher revenues associated with tax reimbursements, and (ii) recovery of write-offs related to the new fraud law, which determines that banks must refund fraudulent amounts reported by customers and then obtain proof to revert those charges or, otherwise, write-off them. For more information on the new fraud law, please see “Item 4. Information on the company—Regulation and Supervision—Consumer Oriented Regulation”. |
The increases were partially offset by:
● | An annual decrease of Ch$172,624 million, in income from foreign exchange transactions, from a positive income of Ch$156,662 million in 2020 to a loss of Ch$15,962 million in 2021. This change was principally due to foreign exchange adjustments of Ch$406,750 million on our on-balance foreign exchange liability exposure, mostly composed of long-term debt denominated in foreign currency issued abroad, as a result of both: (i) the significant shift in the exchange rate ranging from an end-of-period appreciation of 5.3% of the Chilean peso against the U.S. dollar in 2020 to a depreciation of 19.8% of the Chilean peso against the U.S. dollar in 2021, and (ii) long-term debt placements abroad for an amount of Ch$684,671 million (U.S.$803 million) in 2021 as compared to almost no issuances in 2020. These factors were partly offset by: (i) an increase of Ch$216,360 million in foreign exchange adjustments on our off-balance foreign exchange net asset position in derivatives held for cash flow hedge accounting (mirroring part of the on-balance liability exposure to long-term debt denominated in foreign currency), as a result of the trends in exchange rates mentioned earlier, and (ii) an increase of nearly Ch$17,758 million in foreign exchange adjustments on assets denominated in local currency, but adjusted by the effect of changes in foreign exchange (primarily leasing loans), given the evolution mentioned above. |
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● | An annual decrease of 36.9%, or Ch$21,423 million, in income from financial assets held for trading, from Ch$58,018 million in 2020 to Ch$36,598 million in 2021. The annual decline was primarily the consequence of the sharp increase experienced by local long-term interest rates ranging from 300 to 400 basis points in the twelve-month period ended on December 31, 2021, which resulted as a second-round effect of pension fund withdrawals on the local capital market. This decrease was, in turn, to some extent offset by the positive effect of higher than expected inflation (2.69% in 2020 and 6.61% in 2021, measured as UF variation) on the carry of inflation-indexed securities. |
● | An annual decrease of 95.4%, or Ch$25,849 million in the sale of financial assets measured at fair value through other comprehensive income, from revenues of Ch$27,091 million in 2020 to income of Ch$1,242 million in 2021. The annual variation was mainly explained by the steady increase in local long-term interest rates, ranging from 300 to 400 basis points throughout 2021. This effect was amplified by a high comparison base, given the sharp decreases in interest rates in 2020, amid the monetary policy actions taken by central banks around the world to cope with the effects of the pandemic, which enabled us to benefit from positive marking-to-market through sales of fixed income securities. |
Provisions for Expected Credit Losses
We recognize allowances to cover possible credit losses in accordance with IFRS as issued by the IASB. For statistical information with respect to our substandard loans and allowances for loan losses, see “Item 4. Information on the Company—Selected Statistical Information” and Note 11(f) to our audited consolidated financial statements as of and for the year ended December 31, 2021. According to regulations applicable to such periods, the amount of provisions charged to income in any period consists of net provisions for possible loan losses.
The following table sets forth information with respect to our provisions and allowances for expected credit losses and charge-offs for each of the years ended December 31, 2020, 2021 and 2022:
For the Year Ended December 31, | % Increase (Decrease) | |||||||||||||||||||
2020 | 2021 | 2022 | 2020/2021 | 2021/2022 | ||||||||||||||||
(in millions of Ch$, except percentages) | ||||||||||||||||||||
IFRS: | ||||||||||||||||||||
Provisions: | ||||||||||||||||||||
Gross provisions for expected credit losses(1) | Ch$ | 588,865 | Ch$ | 89,579 | Ch$ | 477,870 | (84.8 | )% | 433.5 | % | ||||||||||
Total loan loss recoveries | 41,759 | 70,407 | 65,740 | 68.6 | (6.6 | ) | ||||||||||||||
Net provisions for expected credit losses(1) | 547,106 | 19,172 | 412,130 | (96.5 | ) | 2,049.6 | ||||||||||||||
Charge-offs: | ||||||||||||||||||||
Total charge-offs | 332,978 | 241,221 | 265,479 | (27.6 | ) | 10.1 | ||||||||||||||
Net charge-offs | 291,219 | 170,814 | 199,739 | (41.3 | ) | 16.9 | ||||||||||||||
Other asset quality data: | ||||||||||||||||||||
Total loans | Ch$ | 30,937,690 | Ch$ | 34,265,873 | Ch$ | 36,726,297 | 10.8 | % | 7.2 | % | ||||||||||
Average Loans | 30,722,724 | 32,439,096 | 35,370,876 | 5.6 | 9.0 | |||||||||||||||
Allowances for loan losses | Ch$ | 836,107 | Ch$ | 673,496 | Ch$ | 821,609 | (19.4 | )% | 22.0 | % | ||||||||||
Allowances for expected credit losses as a percentage of total loans | 2.70 | % | 1.97 | % | 2.24 | % | – | – | ||||||||||||
Net provisions for expected credit losses as a percentage of average loans | 1.78 | % | 0.06 | % | 1.17 | % | – | – |
(1) | This amount includes provisions for due from banks, loans to customers, contingent loan risks and allowances for debt instruments at fair value through OCI. |
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2021 and 2022. Our provisions for loans losses posted an annual increase of Ch$392,958 million, from Ch$19,172 million in 2021 to Ch$412,130 million in 2022. The annual increase in credit risk expenses was primarily the result of:
● | An annual advance of Ch$426,224 million in gross provisions for expected credit losses, from a release of approximately Ch$188,324 million in 2021 to an establishment of Ch$237,900 million in 2022. The change in allowances during 2022 was mostly explained by: |
o | The establishment of allowances by Ch$247,765 million are explained by the normalization of our main asset quality indicators to pre-pandemic levels. In 2021, given extraordinary events in a challenging environment produced by the COVID-19 pandemic, the government deployed a fiscal aid package consisting in direct money transfer to individuals, which coupled with three pension fund withdrawals by individuals (during 2020 and 2021) approved by the Congress and other packages aimed at assisting companies. These initiatives had a direct and positive impact on liquidity in the economy that significantly benefited payment behavior and risk profiles of individuals and companies that resulted in a significant decline in overall delinquencies. All of these effects, particularly the liquidity surplus, were more normalized (at an industry level) in 2022, resulting in a deterioration in the customers’ payment capacity and increased delinquency in 2022 when compared to 2021. Higher inflation also contributed to this scenario by decreasing the purchasing power of individuals. Accordingly, our past-due (90 days or more) over total loans ratio increased from 0.85% in December 2021 to 1.08% in December 2022. These effects were reflected in expected credit losses as result of our forward-looking provisioning models. |
o | In 2022, we updated our provisioning models to take into consideration the outlook for the local economy and expected financial trends, given new pieces of information including the evolution of COVID-19 pandemic and global geopolitical concerns, that may be relevant for our internal models. As a result, we released Ch$9,865 million in allowances during 2022. |
● | An annual increase of Ch$24,259 million in charge-offs, aligned with lower level of liquidity among customers in 2022 when compared to 2021 and the effect of higher inflation on customers’ disposable income. Due to the same factor, recoveries declined Ch$4,667 million on an annual basis. |
● | An annual increment of Ch$7,008 million in the impairment of financial instruments measured at fair value through other comprehensive income, due primarily to: (i) unfavorable changes in credit spreads in line with a subdued economic outlook that resulted in higher probabilities of default for our counterparties, and (ii) increased positions taken in financial instruments measured at fair value through OCI issued by both local and foreign issuers. |
These effects were partly offset by: (i) an annual decrease of Ch$58,113 million in provisions for expected credit losses linked to state-guaranteed loan program FOGAPE, explained by the scheduled amortization of these types of loans, and (ii) lower provisions for expected credit losses by Ch$17,742 million resulting from the sale of loan portfolios.
As a result of the annual advance in provisions for expected credit losses, our risk expenses ratio (ECLs to average loans) increased from 0.06% in 2021 to 1.17% in 2022.
Regarding delinquency, our past-due loans (loans 90 days or more past-due) increased Ch$105,141 million or 36.3% on an annual basis, from Ch$307,696 million in 2021 to Ch$432,697 million in 2022. Accordingly, the past-due ratio (90 days or more past-due loans over total loans) increased from 0.90% in 2021 to 1.18% in 2022. The annual decrease in past-due loans was caused by the combination of declines in both the retail and the wholesale banking segment. Diverse economic and business dynamics contributed to the increase in both the amount of past-due loans and our past-due loans ratio in 2022 when compared to 2021. In the case of past-due loans (loans 90 days or more past due), we experienced an annual increase of approximately Ch$125,001 million in the retail banking segment that was partly offset by a decrease of Ch$4,372 million in the wholesale banking segment, in each case, as compared to 2021. The increase in the retail banking segment was primarily supported by the normalization of customers’ payment behavior after a period of non-recurrent factors particularly associated with the excess of liquidity seen in the economy during 2021 as a result of pension fund withdrawals and government aid packages to support individuals, which increased disposable income throughout 2021. These factors temporarily benefited the payment behavior in both consumer and mortgage loans. During 2022, instead, as the liquidity surplus has begun to disappear, consumer and residential mortgages past-due loans (loans 90 days or more past due) increased Ch$49,998 million and Ch$23,258 million on an annual basis, respectively. Likewise, SMEs past-due loans (loans 90 days or more past due) also increased Ch$51,745 million in 2022 when compared to 2021, primarily due to the low comparison base that was highly influenced by the government-guaranteed loan program (Fogape–Reactiva) released in 2021 to support SME in the context of COVID-19. Instead, the wholesale banking segment recorded a decrease of Ch$4,372 million in commercial past-due loans (loans 90 days or more past due), which was the consequence of improved business conditions for companies, as mobility and commercial activity has returned to normal levels, benefiting companies’ results and credit behavior. As a result, past-due ratios (90 days or more past-due loans over total loans) increased from 1.00% in 2021 to 1.37% in 2022 in the retail banking segment while decreasing from 0.48% in 2021 to 0.41% in 2022 in the wholesale banking segment.
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2020 and 2021. Our provisions for loans losses posted an annual decrease of 96.5%, or Ch$527,934 million, from Ch$547,106 million in 2020 to Ch$19,172 million in 2021. The annual decrease in credit risk expenses was primarily the result of:
● | A decline of Ch$398,529 million in gross provisions for expected credit losses, from an establishment of Ch$210,205 million in 2020 to a release of approximately Ch$188,324 million in 2021. Whereas the increase in provisions for 2020 was based on the prevailing economic environment prompted by the spread of the COVID-19, the allowance release in 2021 was explained by: |
o | Improved economic dynamics given the lifting of most of mobility restrictions associated with the COVID-19 pandemic in 2021, which had a direct positive impact on both the financial condition of companies, as business activity returned to almost normal levels, and the improved risk profile of individuals based on decreasing unemployment. These macroeconomic trends coupled with non-recurrent events, such as the three pension fund withdrawals by individuals by the end of 2020 and throughout 2021, and the fiscal aid package deployed by the government to address the economic effects of the COVID-19 pandemic, all resulting in enhanced payment capacity of personal banking customers, which in turn resulted in a significant decline in delinquency for the industry as a whole and for us in particular. In fact, our delinquency rate decreased from 0.97% in 2020 to 0.85% in 2021. As a result, the economic, business and behavioral parameters contained in our forward-looking provisioning models were modified in order to reflect the revised outlook, which resulted in a risk allowance release of approximately Ch$162,018 million during 2021. |
o | To a lesser extent, in order to accurately reflect the change in the economic outlook after the worst of the COVID-19 pandemic, we updated our provisioning models for both the individually-evaluated and the group-based evaluated portfolios. This resulted in an allowance release of approximately Ch$26,308 million in 2021. |
● | The change in allowances for expected credit losses coupled with lower charge-offs of Ch$91,767 million in 2021 when compared to 2020 and an increase of Ch$28,646 in recoveries within the same period, all in line with and improved economic and business environment and excess of liquidity within the economy that benefited payment behavior. |
Based on these drivers, our ratio of provisions for expected credit losses to average loans decreased from 1.78% in 2020 to 0.06% in 2021.
Regarding delinquency, many factors resulted in an overall improvement in past-due loans (loans 90 days or more past-due), which decreased Ch$9,901 million or 3.3%, from Ch$299,408 million in 2020 to Ch$289,507 million. Accordingly, and given the increase of the total loan book, the past-due ratio (90 days or more past-due loans over total loans) declined from 0.97% in 2020 0.85% in 2021. The annual decrease in past-due loans was caused by the combination of declines in both the retail and the wholesale banking segment. In wholesale banking, past-due loans decreased Ch$4,992 million in 2021 when compared to 2020, which was concentrated in commercial loans. This was mainly the consequence of 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. Accordingly, the past-due loans ratio for the wholesale banking segment decreased from 0.84% in 2020 to 0.51% in 2021. Likewise, in retail banking past-due loans decreased Ch$4,909 million in 2021 when compared to 2020. This decrease was principally related to a decline in past-due in consumer loans and to a lesser extent by lower past-due mortgage loans, which was partially offset by an increase in past-due loans granted to SMEs. The trend shown by individuals’ payment capacity had mainly to do with the excess of liquidity in the economy produced by the three consecutive pension fund withdrawals and the aid package deployed by the government to support individuals, which significantly 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. Based on these effects, the past-due loans ratio of the retail banking segment decreased from 1.21% in 2020 to 1.12% in 2021. As mentioned above, various extraordinary factors benefiting the customers’ payment capacity, particularly the excess of liquidity among personal banking customers, contributed to this behavior in past-due loans. Nonetheless, we recognize this trend is expected to converge to medium-term average levels in the range of 1.1% to 1.3% for us, to the extent the above-average liquidity levels begin to dissipate.
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ECL Sensitivity Analysis
The following analysis contains a quantitative sensitivity assessment of the Expected Credit Losses (“ECL”) in relation to the main macroeconomic assumptions included in the models used for that purpose. The ECL reflects an unbiased probability-weighted loss for a certain range of future economic scenarios. We determine the ECL based on three economic scenarios : (i) base case (60%), (ii) upside case (20%), and (iii) downside case (20%).
The sensitivity of our model to potential changes in projections for key macroeconomics variables (“MEV”) is determined as monetary amounts representing one-time impacts on ECL for Stages 1 and 2, which are broken down by the Retail and the Wholesale Banking Segments. However, since MEV are highly correlated, a scenario-based analysis is provided, which takes into consideration the cross-correlation of the MEV to determine a combine impact on ECL.
The following table sets forth the MEV we use for the analysis and the shifts applied to them. Shifts are defined as one standard deviation from the historical mean for each MEVs:
Macroeconomic Variable | Shift 1 Standard Deviation | |||
Real Sector MEVs | ||||
GDP Growth Rate | (1.45 | )% | ||
Unemployment rate | 0.46 | |||
Government Expenditure | (4.68 | ) | ||
Copper Price | (14.94 | ) | ||
Financial and Monetary Sector MEVs | ||||
Central Bank Interest Rate | 0.42 | |||
Consumer Price Index | 0.64 | |||
M1 Money Supply | (2.93 | ) | ||
Exchange Rate | 5.20 | % |
We define a scenario-based analysis by establishing eight possible scenarios for the MEVs, as follows :
Real Sector MEVs
i) | Scenario 1 : Shift on GDP growth rate |
ii) | Scenario 2 : Shift on Unemployment Rate |
iii) | Scenario 3 : Shift on Government Expenditure |
iv) | Scenario 4 : Shift on Copper Price |
Financial and Monetary Sector MEVs
v) | Scenario 5 : Shift on Central Bank Interest Rate |
vi) | Scenario 6 : Shift on Consumer Price Index |
vii) | Scenario 7 : Shift on M1 Money Supply |
viii) | Scenario 8 : Shift on Exchange Rate |
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For the scenario-based analysis one MEV is shifted and the rest of them are related to that shift by multiplying it with a related factor.
MEV Scenarios | ||||||||||||||||||||||||||||||||
MEV Sensitivity to MEV Scenarios | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | ||||||||||||||||||||||||
(in percentage) | ||||||||||||||||||||||||||||||||
Real Sector Variable | ||||||||||||||||||||||||||||||||
GDP growth rate | (1.45 | )% | (0.15 | )% | (0.11 | )% | 0.48 | % | (0.03 | )% | 0.46 | % | 0.31 | % | 0.12 | % | ||||||||||||||||
Unemployment rate | 0.05 | 0.46 | (0.01 | ) | (0.11 | ) | (0.13 | ) | (0.06 | ) | (0.04 | ) | (0.07 | ) | ||||||||||||||||||
Government Expenditure | (0.37 | ) | 0.06 | (4.68 | ) | (0.29 | ) | 0.33 | (0.21 | ) | (0.06 | ) | (0.75 | ) | ||||||||||||||||||
Copper Price | 4.96 | 3.68 | (0.94 | ) | (14.94 | ) | (2.12 | ) | (7.41 | ) | (0.97 | ) | (9.63 | ) | ||||||||||||||||||
Financial and Monetary Variable | ||||||||||||||||||||||||||||||||
Central Bank Interest Rate | 0.01 | (0.12 | ) | (0.03 | ) | 0.06 | 0.42 | (0.05 | ) | 0.30 | (0.04 | ) | ||||||||||||||||||||
Consumer Price Index | (0.20 | ) | (0.08 | ) | 0.03 | 0.32 | 0.07 | 0.64 | 0.13 | 0.25 | ||||||||||||||||||||||
M1 Money Supply | 0.63 | 0.27 | (0.04 | ) | (0.19 | ) | (2.05 | ) | (0.59 | ) | (2.93 | ) | 0.29 | |||||||||||||||||||
Exchange rate | (0.44 | )% | (0.74 | )% | 0.83 | % | 3.35 | % | (0.52 | )% | 2.05 | % | (0.51 | )% | 5.20 | % |
As depicted by the table above, MEV scenarios show correlations between most of them. For instance, in Scenario 5, a strong upward shift in the Central Bank Interest Rate leads to a strong decrease in M1 Money Supply, which goes the opposite way in Scenario 8, where an increase in the exchange rate should lead to a increase in M1 Money Supply.
The following table sets forth the combined impact of shifts in all MEV for each scenario on our ECL:
Range of MEV Scenarios Impact on the ECL | ||||||||
Macroeconomic Variable | Retail Banking Segment | Wholesale Banking Segment | ||||||
(in millions of Ch$) | ||||||||
Real Sector Scenarios | Ch$ | (257) – 15,816 | Ch$ | (570) – 12,168 | ||||
Financial and Monetary Sector Scenarios | Ch$ | 1,411 – 8,113 | Ch$ | 1,446 – 12,496 |
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Operating Expenses
Some of the line items presented below under Operating Expenses have been reclassified to or from other line items as mentioned in Item 5. Operating and Financial Review and Prospects–Critical Accounting Policies–Changes in Accounting Policies, Estimates and Disclosures. Accordingly, explanations for previous years may have changed to reflect such reclassification.
The following table sets forth information regarding our operating expenses for the years ended December 31, 2020, 2021 and 2022:
For the Year Ended December 31, | % Increase (Decrease) | |||||||||||||||||||
2020 | 2021 | 2022 | 2020/2021 | 2021/2022 | ||||||||||||||||
IFRS: | (in millions of Ch$, except percentages) | % | ||||||||||||||||||
Personnel expenses | Ch$ | 457,176 | Ch$ | 450,952 | Ch$ | 528,226 | (1.4 | )% | 17.1 | % | ||||||||||
Administrative expenses: | ||||||||||||||||||||
Advertising | 23,561 | 30,652 | 37,233 | 30.1 | 21.5 | |||||||||||||||
Building maintenance | 48,218 | 39,679 | 42,157 | (17.7 | ) | 6.2 | ||||||||||||||
Rentals and insurance | 15,686 | 15,672 | 15,469 | (0.1 | ) | (1.3 | ) | |||||||||||||
Office supplies | 11,094 | 8,093 | 9,288 | (27.1 | ) | 14.8 | ||||||||||||||
Other expenses | 220,322 | 230,529 | 251,127 | (4.6 | ) | 8.9 | ||||||||||||||
Total administrative expenses | 318,881 | 324,625 | 355,274 | 1.8 | 9.4 | |||||||||||||||
Depreciation and amortization | 73,357 | 76,798 | 84,205 | 4.7 | 9.6 | |||||||||||||||
Impairments | 1,661 | 1,690 | 77 | 1.7 | (95.4 | ) | ||||||||||||||
Other operating expenses | 19,277 | 19,348 | 27,701 | 0.4 | 43.2 | |||||||||||||||
Total | Ch$ | 870,352 | Ch$ | 873,413 | Ch$ | 995,483 | 0.4 | % | 14.0 | % |
2021 and 2022. Our total operating expenses increased 14.0% or Ch$122,070 million on an annual basis from Ch$887,413 million in 2021 to Ch$995,483 million in 2022. The annual change in operating expenses was mainly attributable to:
● | An annual increase of approximately Ch$78,050 million or 17.1% in personnel expenses, from Ch$450,952 million in 2021 to Ch$528,226 million in 2022. This was explained by: (i) an annual increase of Ch$38,852 million attributable to variable compensation linked to the solid results achieved in 2022 when compared to 2021, (ii) an annual increase of Ch$30,289 million or 10.4% in salaries principally explained by the recognition of the inflation effect (UF variation of 13.3% in 2022), which was to some extent counterbalanced by an annual decrease in average headcount, (iii) severance payments increasing approximately Ch$11,160 million or 68.8%, from Ch$27,381 million in 2021 to Ch$16,221 million in 2022, as a consequence of organizational changes made during the year, and (iv) an annual increase of Ch$5,000 million in benefits to the staff and other related expenses as many of them are indexed to (or adjusted by) inflation. |
● | An annual increment of approximately Ch$30,649 million or 9.4% in administrative expenses, from Ch$324,625 million in 2021 to Ch$355,274 million in 2022. The main explanatory factors behind this figure were: (i) an annual increase of Ch$14,781 million or 13.6% in IT and Communication expenses mostly explained by additional disbursements related to software licensing, data services and other IT products, aligned with initiatives deployed throughout the year in order to upgrade and accelerate our digital transformation strategy, (ii) an annual increase of Ch$6,580 million or 21.5% in marketing and advertising expenses related to new products and services, including FAN account, the support plan for SMEs, media exposure linked to promotional events that require social interaction that we have been able to reactivate as mobility restrictions ceased in 2022, (iii) an annual increase of Ch$2,483 million or 6.3% in fixed-asset maintenance expenses, impacted by the new service model and maintenance of branches and corporate buildings as most of the staff returned to the office, which is coupled with an increased number of clients coming in person to our branches, and (iv) an annual increase of Ch$1,196 million or 14.8% in office supplies expenses associated with purchases of password generation devices, checkbooks and credit cards for clients. |
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● | An annual increase of Ch$8,353 million or 43.2% in other operating expenses, from Ch$19,348 million in 2021 to Ch$27,701 million in 2022, which was mostly influenced by both: (i) higher expenses by approximately Ch$4,091 million related to assets received in lieu of payment, and (ii) an annual increase of approximately Ch$3,312 million in operational risk write-offs and provisions resulting from external fraud through payment channels, partly explained by normalized transactionality. |
● | An annual increase of Ch$7,407 million or 9.6% in depreciation and amortization, from Ch$76,798 million in 2021 to Ch$84,205 million in 2022. This behavior was principally explained by: (i) an annual increase of approximately Ch$3,671 million in amortization of intangible assets due to software improvements and upgrades in order to meet customers’ needs and operating requirements, and (ii) higher depreciation of leased assets by approximately Ch$2,568 million, explained by higher expenses linked to branches and ATM locations. |
2020 and 2021. Our total operating expenses increased 0.4% or Ch$3,061 million on an annual basis from Ch$870,352 million in 2020 to 873,413 million in 2021. The annual change in operating expenses was mainly attributable to:
● | An annual increase of 1.8%, or Ch$5,744 million, in administrative expenses, from Ch$318,881 million in 2020 to Ch$324,625 million in 2021. The main drivers explaining this annual increase were as follows: (i) an annual increase of 9.3% or Ch$9,263 million in IT and communication expenses mostly due to the implementation of both our digital transformation strategy and efficiency initiatives in order to enhance and adapt capabilities across the corporation, as well as cybersecurity related expenses in order to provide us with improved infrastructure, protocols and tools to ensure an industry-leading customer experience in times of increasing demand for remote settings and services, (ii) higher advertising and marketing expenses of nearly Ch$7,091 million or 30.1% on an annual basis, highly associated with our efforts to reinforce our brand value and appreciation among customers and non-customers while boosting new product and services, such as our FAN account, as well as ESG actions including media exposure to promote the Teleton fundraising campaign and initiatives related to entrepreneurship and women support, (iii) an annual increase of Ch$3,624 million or 24.7% in external advisory expenses related to the identification of efficiency opportunities across all of our businesses and support processes while designing action plans to overcome them in the short-term, (iv) higher taxes and contributions expenses by Ch$2,510 million or 14.3% on an annual basis due to a low comparison base as a result of the temporary exemption on the payment of credit cards stamp and seal taxes (between April and September of 2020) due to the impact of the COVID-19 pandemic, and (v) an annual increase in security and cash vault services of Ch$2,442 million or 22.6% explained by both the temporary effect of higher cash needs in the context of pension fund withdrawals and direct money transfers to individuals and a low comparison base given the subdued commercial activity in 2020 when mobility restrictions were fully in place and only a portion of our branch network was fully operating, behavior that was normalized during 2021 due to the reactivation of the economy. These factors were partially offset by: (i) an annual decline of approximately Ch$8,083 million or 19.5% in outsourced services, which was mainly related to the deployment of efficiency initiatives such as the internalization of credit pre-evaluation services, (ii) lower fixed-asset maintenance expenses of Ch$6,112 million or 12.7%, mostly due to higher expenses in 2020 related to repairs made as a consequence of the social upheaval that occurred in Chile in October 2019, services incurred in order to deal with the impact of the COVID-19 pandemic and the first steps of the implementation of our dual branch network in the context of our new service model, (iii) an annual contraction of Ch$3,001 million or 27.1% in office supplies expenses as a result of the non-recurring effect of higher expenses in sanitation materials recorded in 2020 due to increased local and international prices amid the worst effects of the COVID-19 pandemic, and (iv) lower costs in energy, heating and other services by Ch$1,111 or 20.0% on an annual basis, explained by our focus on sustainability, which allowed us to reduce our total energy consumption. |
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● | An annual increase of 4.7%, or Ch$3,441 million, in depreciation and amortization of intangible assets, from Ch$73,357 million in 2020 to Ch$76,798 million in 2021. This figure was related to the implementation of diverse IT projects related to cybersecurity and our digital transformation strategy that led to higher software amortization, which coupled with temporary effects related to modifications in rental agreements in 2020 prompted by the sanitary contingency and the social unrest that kept unused several ATMs across the country. |
The increase in operating expenses was partially offset by an annual decrease of approximately Ch$6,224 million or 1.4% in personnel expenses from Ch$457,176 million in 2020 to Ch$450,952 million in 2021, mainly due to: (i) an annual decline of Ch$6,772 million, or 29.5%, in severance payments, principally associated with higher charges made at the end of 2020 in order to address upcoming organizational changes in order to pursue higher operating efficiency, aligned with an annual contraction of 6.5% in headcount as of December 31, 2021, and (ii) other benefits decreasing Ch$4,942 million, aligned with the annual decrease in headcount. The decrease in personnel expenses was in turn partially offset by: (i) an annual increase of Ch$3,015 million or 1.2% in salaries, mostly associated with the recognition of higher inflation in salaries despite the steady decrease in headcount mentioned above, and (ii) bonuses and other compensation expenses increasing Ch$2,252 million in 2021, mostly related to higher bonuses for a total amount of Ch$10,768 million in 2021 when compared to 2020, mostly associated with a special bonus granted to our staff in September 2021 to recognize the effort and commitment of our employees in these difficult times and higher provisions for performance bonuses, due to the upsurge in commercial activity in 2021. The increase in salaries and other compensation were also in turn partially offset by an annual decrease of Ch$6,311 million associated with the negotiation of collective bargaining processes, and an annual decrease of Ch$1,748 million in bonuses and variable compensation mostly due to a lower headcount.
Income Tax
The Chilean tax system contains differences in the tax treatment for monetary correction (effect of inflation on equity), as well as provisions on individual loans and for charge-offs related to past-due loans, all of which has an impact on our effective tax rate through deferred taxes. Also, until 2014 all real estate taxes paid on properties that are leased to customers were deductible from our taxable income as a tax credit. However, in light of the tax reform approved in 2014, for the year ended December 31, 2015 only 50% of these taxes can be deducted from our taxable income. Since 2016, no tax credits have been allowed from taxes paid on leased properties, with the exception of properties used in agricultural activities. For more information, see “Item 10. Additional Information—Taxation—Chilean Tax Considerations—Tax Reform Law No. 20,780.”
In September 2014, the Chilean Congress approved a law reforming the Chilean tax system. This tax reform (Law No. 20,780) gradually increases the first category tax or corporate tax rate between 2014 and 2018 while establishing two alternative tax regimes from 2017 onwards: (i) the Semi-Integrated Regime and (ii) the Attribution Regime. The tax reform increased the statutory corporate tax rate from 20.0% in 2013 to 21.0% in 2014, 22.5% in 2015 and 24.0% in 2016. From 2017 onwards, the statutory corporate tax rate will depend on the tax regime chosen by the owners of the taxpayer (the company). If the Semi-Integrated Regime is selected, the company will be subject to a statutory corporate tax rate of 25.5% in 2017 and 27.0% from 2018 onwards. If, instead, the Attribution Regime is selected, the company will be subject to a statutory corporate tax rate of 25.0% from 2017 onwards. Notwithstanding the above, in February 2016, a new tax law was enacted (Law No. 20,899), which subjects publicly-traded companies only to the Semi-Integrated Regime. Accordingly, the statutory corporate tax rate for Banco de Chile was 25.5% in 2017 and 27.0% from 2018 onwards.
On August 23, 2018 the Chilean Government presented a bill to the Chilean congress, which was intended to modernize the Chilean tax system by introducing a set of technical adjustments in order to simplify the current tax system, while incorporating new regulations related to the integration of the whole tax system and introducing new taxes on digital services, among other topics. The bill, however, was not passed by the Chilean Congress. Thereafter, following the social crisis that took place in Chile in October 2019, the Chilean Government reformulated the proposed bill, which at that point had not been approved by the Chilean Congress yet, in order to address new social demands by means of increasing tax collection, while giving up certain elements with the purpose of achieving an agreement. Thus, Law No. 21,210 was passed by the Chilean Congress on January 29, 2020 and enacted by the Chilean Government on February 24, 2020, to modernize the local tax system. The law mainly focused on: (i) promoting entrepreneurship measures by providing SMEs with a special tax regime based on total integration and a statutory tax rate of 25%, as opposed to large companies and corporations whom will continue to be subject to a semi-integrated system, while bearing a statutory corporate tax rate of 27%, (ii) implementing initiatives to promote private investment by introducing instantaneous or accelerated depreciation for fixed-assets, reducing the timeframe to receive reimbursements of VAT paid on fixed-assets, while reducing or eliminating property taxes paid by elderly people, (iii) increasing taxes paid by high-income individuals by means of adding a new tax bracket of 40%, (iv) raising taxes on properties exceeding U.S.$500,000 in assessed value, (v) incorporating a regional green tax of 1% levied on investment projects exceeding U.S.$10 million in capital expenditures that were subject to environmental approval, (vi) lowering tax benefits on capital gains obtained in stock markets, (vii) creating a Taxpayer Protection & Advisory Agency, which aims to be a counterpoint to the Chilean Internal Revenue Service on taxation matters, and (viii) introducing a digital approach, which considers both the compulsory use of electronic bill and invoices, aimed at reducing tax evasion, and the imposition of VAT on digital services rendered from foreign countries. This law did not represent a significant change for us in terms of a statutory corporate tax rate of 27%, or the semi-integrated system that currently applies to us. Nonetheless, it requires us to withhold the VAT levied on digital services paid through our credit or debit cards, which translates into additional IT and processing costs.
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In February 2022, Law No. 21,420 was enacted with the purpose of reducing or removing diverse tax exemptions by introducing the following measures: (i) the taxation of any type of service with VAT, unless expressively exempted, starting on 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, which was recently reversed on February 2023 under Law No. 21,540 (so never went into effect), (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.
These changes have not had a material impact on our results of operations or financial condition. However, we cannot rule out that future changes in the Chilean tax system will have an impact on the economy or the banking industry and, consequently, in our results of operations and profitability. 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 of operations”. “Item 4. Regulation and Supervision—Amendments to the Chilean Tax System” and “Item 10. Additional Information—Taxation—Chilean Tax Considerations.”
2021 and 2022. Our income tax expense was Ch$289,209 million in 2022, which represented an annual increase of 4.8%, or Ch$13,240 million, from the Ch$275,969 million recorded in 2021. In spite of this annual increase, our effective tax rate decreased from 20.7% in 2021 to 16.7% in 2022. The annual change was mostly the consequence of: (i) an annual advance of Ch$402,724 million in income before income taxes, which translated into an annual increase of Ch$108,736 million in income tax expense at the statutory corporate tax rate of 27.0%, and (ii) additional income tax by approximately Ch$13,794 million explained by the sale of FVTOCI instruments with cumulative marking-to-market losses on equity during 2022, since the instruments involved in the sale are treated under Art. 104 of the local tax code, meaning that losses at the moment of sale are added to the taxable base. These factors were offset by lower income tax by Ch$109,452 million on an annual basis due to the effect of higher inflation on our shareholders’ equity, which may be deducted from our taxable base.
2020 and 2021. Our income tax expense was Ch$275,969 million in 2021, which represented an annual increase of 167.4%, or Ch$172,746 million, from the Ch$103,223 million recorded in 2020. Despite this increase in income tax, the effective tax rate only increased from 20.5% in 2020 to 20.7% in 2021. The income tax increase was primarily the result of: (i) an annual increase in income before income taxes by Ch$827,433 million in 2021 when compared to 2020, mostly due to changes in provisioning models that led to a decrease in provisions for expected credit losses, higher inflation that benefited net interest income and a low comparison base in 2020 due to the effects of the COVID-19 pandemic on our business, effects that jointly represented an annual increase of Ch$223,407 million in income tax when considering the statutory corporate tax rate of 27.0%. This factor was partly offset by an annual increase of Ch$44,392 million in other deductions related to the effect of inflation revaluation on equity accounts, which provides an income tax benefit that is deductible from taxable income under Chilean tax laws.
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Business Segments
To the extent that it is available and because we believe it is useful in analyzing our results, we have included information on a consolidated basis by business segments, disclosed under our internal reporting policies. A summary of differences between IFRS and our internal reporting policies is presented under “Item 5. Operating and Financial Review and Prospects—Operating Results—Summary of Differences between Internal Reporting Policies and IFRS.”
For management purposes, we have organized our operations and commercial strategies into four business segments, which are defined according to the type of products and services offered to target customers. These business segments are:
Retail Banking: This segment is focused on individuals and small and medium-sized companies whose annual sales do not exceed UF 70,000 (approximately Ch$2,460 million as of December 31, 2022). The segment’s value proposition is primarily focused on consumer loans, commercial loans, current accounts, credit cards, credit lines and residential mortgage loans.
Wholesale Banking: This segment is focused on corporate clients and large companies whose annual sales exceed UF 70,000 (approximately Ch$2,460 million as of December 31, 2022). This segment offers products and services focused on commercial loans, current accounts, cash management services, debt instruments, foreign trade, derivative contracts and leases, as well as corporate finance transactions.
Treasury and Money Market: The revenue generated by this segment relates to the management of our liquidity and net positions subject to market risks. This segment also includes the results of our securities portfolio, our derivatives positions and currency trading.
Operations through subsidiaries: This segment includes all companies controlled by us whose results are obtained individually by the respective company. As of December 31, 2022, this business segment consisted of:
● | Banchile Administradora General de Fondos S.A.; |
● | Banchile Asesoría Financiera S.A.; |
● | Banchile Corredores de Seguros Ltda.; |
● | Banchile Corredores de Bolsa S.A.; and |
● | Socofin S.A. |
On February 4, 2021, we began a voluntary and programmed 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 subsidiary became officially dissolved on July 19, 2022.
The accounting policies described in the summary of accounting principles in “Item 5. Operating and Financial Review and Prospects—Operating Results—Critical Accounting Policies” apply to all business segments. Matters such as the evaluation of segment performance and decision-making processes regarding goals and allocation of resources for each segment are based on a cost-benefit analysis and are aligned with our overall strategic goals.
In order to measure each segment’s financial performance, we use a business segment-based profitability system, which allows us to obtain information for each business segment relative to income, balances, revenues and expenses, among other indicators. This system has been internally developed in order to serve our specific requirements and we continuously work to improve it. In addition, business segment information is subject to general internal auditing procedures to ensure its integrity and usefulness for management decision-making.
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The financial information used to measure the performance of our business segments is not necessarily comparable with similar information from other financial institutions because it is based on our internal reporting policies. The accounting policies used to prepare our operating segment information are similar to those described in Note 2(aa) to our audited consolidated financial statements as of and for the year ended December 31, 2022 appearing elsewhere in this annual report, except as noted below:
● | The net interest margin of loans and deposits is measured on an individual transaction basis, due to the difference between the effective individual transaction rate and our related fund transfer price in terms of maturity, re-pricing and currency. |
● | The results associated with gap management (interest rate and currency mismatches) are allocated to the business segments in proportion to the loans and demand deposits managed by each segment. |
● | For purposes of allocating the effect of funding through capital and reserves, the internal performance profitability system considers capital allocation in each segment in accordance with Basel guidelines. |
● | In addition to direct costs (consisting mainly of labor and administrative expenses of the business segments), we allocate all of our direct and indirect operating costs of back office and support units to each business segment by utilizing the most relevant business driver to assign such costs to a specific segment. |
● | We apply Chilean GAAP, as required by the CMF, when measuring and recording allowances for loan losses, assets received in lieu of payments, minimum dividend allowances and other minor items for internal reporting purposes. These accounting principles differ in certain respects from IFRS. A description of these differences is presented below under “Item 5. Operating and Financial Review and Prospects—Operating Results—Summary of Differences between Internal Reporting Policies and IFRS.” |
Net Income by Business Segment
Some of the line items presented below have been reclassified to or from other line-items as mentioned in Item 5. Operating and Financial Review and Prospects–Critical Accounting Policies–Changes in Accounting Policies, Estimates and Disclosures. Accordingly, explanations for previous years may have changed to reflect such reclassification.
The following table sets forth income before income tax by business segment in accordance with our internal reporting policies for each of the years ended December 31, 2020, 2021 and 2022:
For the Year Ended December 31, | % Increase (Decrease) | |||||||||||||||||||
2020 | 2021 | 2022 | 2020/2021 | 2021/2022 | ||||||||||||||||
(in millions of Ch$, except percentages) | ||||||||||||||||||||
BANK’S INTERNAL REPORTING POLICIES: | ||||||||||||||||||||
Retail banking | Ch$ | 272,700 | Ch$ | 498,965 | Ch$ | 766,259 | 83.0 | % | 53.6 | % | ||||||||||
Wholesale banking | 185,142 | 346,747 | 716,886 | 87.3 | 106.7 | |||||||||||||||
Treasury and Money Market | 65,795 | 43,428 | 97,698 | (34.0 | ) | 125.0 | ||||||||||||||
Subsidiaries | 65,434 | 81,332 | 104,349 | 24.3 | 28.3 | |||||||||||||||
Other | – | – | – | – | – | |||||||||||||||
Income before Income tax | Ch$ | 589,071 | Ch$ | 970,472 | Ch$ | 1,685,192 | 64.7 | % | 73.6 | % |
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Retail Banking
2021 and 2022. Our retail banking segment recorded income before income tax of Ch$766,259 million in 2022, which represented an annual increase of 53.6% or Ch$267,294 million when compared to the Ch$498,965 million recorded in 2021.
The annual increase in income before income tax was mainly the consequence of the annual growth recorded by operating revenues, which may be summarized, as follows:
● | An annual increase of Ch$363,316 million in net interest income, which was the result of: (i) increased contribution of the UF net asset position partly allocated to this segment due to both greater average exposure and an inflation rate that increased from 6.6% in 2021 to 13.3% in 2022 (measured as UF variation), and (ii) an annual increase of approximately Ch$176,047 million in the contribution of demand deposit accounts managed by this segment to our funding, mostly explained by the steady rise in local and foreign interest rates, particularly in the short-term, which more than offset the annual decline of 12.5% in average demand deposits balances managed by the segment. These effects were to some extent offset by: (i) an annual decrease of approximately Ch$12,200 million in income from loans, explained by lower average lending spreads on consumer loans, and (ii) an annual decline in income from credit prepayments, explained by lower incentives to refinance or prepay debt given the prevailing scenario of interest rates and lower liquidity among individuals |
● | An annual increment of Ch$41,221 million or 15.8% in income from fees and commissions, from Ch$260,417 million in 2021 to Ch$301,638 million in 2022. This figure was mostly the consequence of an increase in transactional services, such as credit cards, debit cards and checking accounts, as the overall household consumption normalized during 2022 when compared to 2021, given the lifting of mobility and social interaction restrictions due to improved health conditions, leading to increased transactionality among retail customers. This driver is coupled with the effect of higher inflation on fees that are mostly denominated in UF. |
● | An annual increase of Ch$9,541 million in income attributable to investments in other companies, from a net loss of Ch$452 million in 2021 to a net gain of Ch$9,089 million in 2022, which was mostly attributable to the effect of higher net income earned by Transbank, the company that manages the payment operation of credit and debit cards for most of the local banks, based on the revision of fees by the end of 2021 after being frozen for most of 2021, which translated into financial losses that year. |
The annual increase in operating revenues was partially counterbalanced by:
● | An annual advance of Ch$80,325 million or 13.0% in operating expenses, from Ch$618,495 million in 2021 to Ch$698,820 million in 2022. Most of this annual change was attributable to an increase of Ch$50,745 million in personnel expenses on an annual basis. This was the result of: (i) further provisions for variable compensation as a consequence of higher results achieved during 2022, (ii) an annual increase in salaries due to the impact of inflation which increased from 6.6% in 2021 to 13.3% in 2022 (measured as UF variation), that was partly offset by a decrease in average headcount in 2022 when compared to 2021, (iii) higher severance payments as a consequence of a decrease in average headcount in line with efficiency initiatives and organizational changes, and (iv) higher benefits and other personnel related expenses as most of them are indexed to the UF. The increase in personnel expenses coupled with higher administrative expenses by Ch$19,891 million or 7.9% on an annual basis explained by the deployment of our digital transformation program that resulted in IT-related expenses, such as data services and software licensing, in order to improve both our staff productivity and customers’ experience either on-site in our nationwide branch network or remotely through our digital and internet-based banking. |
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● | An annual increase of Ch$65,815 million or 25.6% in provisions for expected credit losses in light of asset quality indicators that are returning to pre-pandemic levels, after a period of significantly positive credit risk performance in 2021, supported by abnormally high levels of liquidity among retail banking customers as a result of diverse assistance measures to support people during the pandemic that led to a temporary improvement in the clients’ payment capacity. This effect all but disappeared in 2022 due to the decline in the liquidity surplus, which coupled with the effect of inflation on the purchasing power of individuals. The increase in expected credit losses had also to do with loan growth, particularly associated with the recovery in consumer loans. On the other hand, in 2022 we set a lower amount of additional provisions in 2022 (partly allocated to this segment), given lowered uncertainty in relation to 2021 on how the the aftermath of COVID-19 could harm the economic outlook and customers’ credit behavior. |
2020 and 2021. Our retail banking segment recorded income before income tax of Ch$498,965 million in 2021, which represented an annual increase of 83.0% or approximately Ch$226,965,million when compared to the Ch$272,700 million recorded in 2020.This annual increase in income before income tax was mainly the consequence of:
● | An annual increase of Ch$143,104 million or 15.2% in net interest income as compared to 2020, primarily as a result of: (i) a higher contribution of the portion of our UF net asset exposure that is partly attributable to this segment, driven by both an annual increase in inflation as represented by a UF variation of 2.79% in 2020 that increased to 6.61% in 2021, and a larger inflation-indexed exposure, and (ii) higher contribution of demand deposit accounts managed by this segment as a consequence of average balances that increased by 42.9% on an annual basis. These effects were to some extent offset by: (i) lower income from loans by approximately Ch$33,900 million, due primarily to lower income from consumer loans due to weakened demand for this kind of credit in the context of above average levels of liquidity among personal banking customers in light of the fiscal policies to deal with the pandemic that resulted in direct transfers and pension fund withdrawals. |
● | An annual decrease of Ch$68,305 million or 21.0% in provisions for loan losses in 2021 as compared to 2020. The positive performance in terms of credit risk was largely attributable to a significant improvement in asset quality, at an industry level, that was mainly attributable to the above average liquidity among personal banking customers that translated into a temporary improved payment capacity and a transitory decrease in non-performing loans. This effect resulted in lower provisioning as asset quality is a key driver when establishing allowances for loan losses. In addition, the temporary positive trend in asset quality more than offset the impact of higher additional allowances by Ch$113,000 million on an annual basis, for this segment, to anticipate potential second-round effects of the pandemic on customers’ continued payment capacity. |
● | An annual increase of Ch$12,560 million or 473.8% in net financial operating and foreign exchange transactions in 2021 when compared to 2020, which was mainly due to the positive effect of exchange rate changes on the U.S.$-indexed asset position to hedge the impact on U.S.$-indexed expenses, given the 19.8% depreciation of the Chilean peso in 2021 as compared to 5.3% appreciation in 2020. |
The increase in income before income tax was partially offset by lower income from fees and commissions of Ch$4,922 million or 1.9% on an annual basis, mainly as a result of lower fee income from insurance brokerage, primarily driven by the non-recurrent base of effect associated with the upfront fee received from the alliance with an international insurer that was mainly recognized in 2019 and 2020 and was not present in 2021. This effect was to some extent offset by the recovery of fee income related to transactional services such as credit cards, debit cards and checking account supported by improved economic dynamism, particularly linked to household consumption.
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Wholesale Banking
2021 and 2022. Our wholesale banking segment recorded an 106.7%, or Ch$370,139 million, annual increase in income before tax, from Ch$346,747 million in 2021 to Ch$716,886 million in 2022. This annual increase was mainly attributable to:
● | An annual increase of Ch$390,456 million in net interest income, as a consequence of: (i) higher contribution of UF net asset position (partly allocated to this segment) due to both increased average exposure and higher inflation as mentioned earlier, (ii) an annual increase of approximately Ch$147,374 million in the contribution of demand deposit accounts managed by the segment to our cost of funds, primarily caused by increasing local and foreign interest rates, and (iii) higher income from loans by approximately Ch$27,467 million principally explained by an annual increase of 12.5% in average loan balances managed by the segment and, to a lesser degree, slightly higher lending spreads in 2022 when compared to 2021. |
● | An annual increase of Ch$7,525 million in net financial operating and foreign exchange transactions in 2022, mostly related to improved results from foreign exchange spot and forward transactions carried out by the segment’s customers in the context of increased exchange rate volatility that translated into a greater volume of transactions during the year. |
● | An annual increase of Ch$5,865 million or 8.7% in fees and commissions, from Ch$67,343 million in 2021 to Ch$73,208 million in 2022. The main factor behind this performance was an expansion in fees associated with trade finance and guarantees, collaterals and other contingent loans, partly associated with more favorable conditions for international trade in 2022 since global trade returned to normalized levels after the impact of the pandemic, as reflected by the reactivation of Trade Finance loans that increased 30.4% on an annual basis. |
These effects were partly offset by:
● | An annual increase of Ch$31,792 million or 20.4% in operating expenses, which in turn was explained by: (i) the impact of inflation on salaries that partially offset a decrease in average headcount in 2022, (ii) an annual rise in variable compensation as a consequence of better results achieved in 2022, and (iii) higher IT expenses aligned with digital transformation initiatives, including software licensing and data services, that improved both our staff productivity and service quality by means of enhancing digital applications and internet-based services provided to these type of customers. |
● | An annual increase of Ch$5,229 million or 5.3% in expected credit losses. As explained for the Retail Banking segment, the normalization of asset quality indicators had an impact on our individually-evaluated loan portfolio. These effect was partly counterbalanced by lower additional allowances set in 2022 when compared to 2021 (partly allocated to the segment) due to decreased uncertainty in regards to the economic and political environment in 2022. |
2020 and 2021. Our wholesale banking segment recorded an 87.3%, or Ch$161,605 million, annual increase in income before tax, from Ch$185,142 million in 2020 to Ch$345,244 million in 2021.This annual increase was mainly attributable to:
● | An annual increase of Ch$95,206, or 25.2%, in net interest income, which was mainly the result of: (i) a higher contribution of the portion of our UF net asset exposure that is attributable to this segment, driven by both an annual increase in inflation as represented by a UF variation of 2.79% in 2020 that increased to 6.61% in 2021, and a larger inflation-indexed exposure, and (ii) higher income from loans by approximately Ch$9,570 million (including loans and contingent loans), which was primarily the result of a 4.3% increase in average loan balances and stable lending spreads in 2021 when compared to 2020. These factors were partly offset by a decrease of approximately Ch$10,770 million, or 11.8%, in the contribution of demand deposits managed by this segment to our cost of funds, primarily as a consequence of lower interest rates. |
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● | An annual decrease of Ch$37,871 million, or 72.2%, in provisions for loan losses in 2021 when compared to 2020, mainly due to improved payment capacity of wholesale customers in light of recovered dynamism produced by the gradual lifting of mobility restrictions that reactivated many economic sectors, particularly those that strongly depend on social interaction, all of which translated into lower provisioning for individually-evaluated wholesale customers. These factors enabled us to more than offset: (i) the impact of unfavorable trends in exchange rate for provisioning of U.S.$-denominated loans managed by the segment, given the trends followed by exchange rate mentioned above, and (ii) higher additional allowances by Ch$113,000 million set in 2021 when compared to 2020 in order to anticipate potential lagged effects of the pandemic in payment behavior, which is partly allocated to this segment. |
● | An annual increase of Ch$14,885 million, or 42.6%, in net financial operating and foreign exchange transactions in 2021 when compared to 2020, which was the result of: (i) the positive effect of exchange rate changes on the U.S.$-indexed asset position to hedge the impact on U.S.$-indexed expenses, principally credit risk expenses associated with U.S.$-denominated loans managed by this segment, given the 19.8% depreciation of the Chilean peso in 2021 as compared to the 5.3% appreciation in 2020, and (ii) higher results associated with foreign exchange spot/forward transactions and derivatives transactions carried out by wholesale customers in a context of high market volatility in order to manage exposure to market risks. |
● | An annual increase of Ch$11,744 million, or 21.1%, in income from fees and commissions in 2021 when compared to 2020, mainly associated with enhanced lending, trade finance and cash management activity, in line with better economic conditions and reactivation of commercial activity. |
Treasury and Money Market
2021 and 2022. Our Treasury and Money Market segment posted an increase of Ch$52,270 million, or 125.0% million, on an annual basis before income tax, from Ch$43,270 million in 2021 to Ch$97,968 million in 2022.
The increase was mainly attributable to: (i) the positive effect of higher inflation on the contribution of our UF net asset exposure that is partly allocated to this segment, (ii) an annual increase of approximately Ch$14,300 million in income from the management of our Trading desk, which was explained by changes in mid-term and long-term interest rates that benefited the fair value of held-for-trading securities, particularly in the last quarter of 2022 and proactive management of our foreign-currency intra-day position, all based in our ability to take advantage of specific market events that resulted in increased volatility in market factors, and (iii) an annual increase of approximately Ch$4,200 million in revenues from our Debt Securities desk, as a result of positive fair value adjustments on fixed-income securities in comparison with lower results in 2021 given the increase in local long-term interest rates, and (iv) higher results from Counterparty Value Adjustments (CVA’s) for derivatives on an annual basis, which was associated with improved probabilities of default of our counterparties when compared to 2021 due to decreased uncertainty.
These effects were to some extent offset by an annual increase of Ch$7,008 million in provisions for expected credit losses, from Ch$1,002 million in 2021 to Ch$8,009 million in 2022 related to impairments of financial assets measured at fair value through OCI and amortized cost, due to increased positions taken during 2022 in instruments issued by both local and foreign banks.
2020 and 2021. Our Treasury and Money Market segment posted a decrease of Ch$22,367 million, or 34.0% million, on an annual basis income before tax, from Ch$65,795 million in 2020 to Ch$43,428 million in 2021.
The decrease was mainly attributable to an annual decline of Ch$21,233 million, or 30.5%, in operating revenues, which in turn was primarily caused by a decrease of approximately Ch$26,600 million in net revenues from the management of our investment portfolio as result of the high comparison base represented by 2020, when we benefited from the positive effect of the sharp decrease in local and foreign interest rates on fixed-income securities, which compares to the sharp increase evidenced by local long-term interest rates in 2021 following the financial effects of pension fund withdrawals on the yield curves.
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This decline in revenues was partially offset by higher income from the management of our trading portfolio of approximately Ch$10,600 million in 2021 when compared to 2020, mainly due to: (i) increased benefits from CVA’s for derivatives by approximately Ch$7,400 million on an annual basis, which was the consequence of improved probabilities of default of our counterparties in 2021 when compared to 2020, given lower uncertainties associated with the pandemic and the economic recovery observed in 2021, and (ii) an increase of approximately Ch$8,700 million in the fair value adjustment of derivative positions explained by favorable shifts in mid-term local interest rates. These positive effects on income before income tax were in turn partially offset by a decrease of approximately Ch$5,100 million in income explained by lower marking-to-market gains in trading securities given the significant increase in long-term local interest rates in 2021 for the reason mentioned above in comparison with the sharp decrease in interest rates in 2020 following monetary actions taken by central banks around the world in response to the pandemic.
Operations through Subsidiaries
2021 and 2022. Our subsidiaries recorded income before income tax of Ch$103,349 million for the year ended December 31, 2022, representing a 28.3%, or Ch$23,017 million, increase when compared to the Ch$81,332 million reached in 2021. This annual increase in income before income tax is mainly attributable to:
● | An annual increase of approximately Ch$13,100 million in income before income tax in our securities brokerage subsidiary, which was the result of: (i) an annual increase in financial income coming from the management of the fixed-income portfolio, which benefited from positive changes in interest rates, particularly during the second half of 2022, and (ii) higher revenues from foreign exchange transactions based on an annual expansion of 22.6% in currency trading that allowed us to benefit from specific windows of opportunity. This annual increase in net financial income was partly offset by an annual increase of nearly Ch$5,700 million in operating expenses, mostly influenced by personnel expenses that recognized the effect of inflation on salaries and higher variable compensation. |
● | An annual increase of Ch$5,400 million in income before income tax in our mutual funds management subsidiary. The main factor behind this performance was the increase in fee income, which was explained by: (i) the sustained change in the portfolio mix from fixed-income mutual funds towards local and international equity funds that bear higher commissions given a change in investors’ preferences in 2022 due to shifts in interest rates, and (ii) the overall improvement in average margins borne by fixed-income mutual funds, which was particularly associated with funds of longer tenors. These positive effects were to some extent offset by: (i) an annual decrease of 8.9% in the average balance of assets under management, and (ii) an annual increase of approximately Ch$3,000 million in operating expenses, mostly linked to personnel expenses. |
● | An annual increase of Ch$3,200 million in income before income tax in our financial advisory subsidiary, which was almost entirely attributable to higher income from fees and commissions. This annual increment was explained by specific M&A and capital market transactions in which the subsidiary participated during 2022 in comparison with 2021, as economic activity gradually returned to normal levels. |
2020 and 2021. Our subsidiaries recorded income before income tax of Ch$81,332 million for the year ended December 31, 2021, representing a 24.3%, or Ch$15,898 million, increase when compared to the Ch$65,434 million reached in 2020. This annual increase in income before income tax is mainly attributable to:
● | An annual increase of Ch$8,778 million or 35.0% in income before income tax in our mutual funds subsidiary. The main reason behind this increase was related to higher income from fees and commissions of Ch$11,617 million, or 25.8%, recorded by this subsidiary primarily as a result of: (i) a change in investors’ preferences from fixed-income funds to equity and blended funds, that bear higher fees, and (ii) an annual expansion of 5.2% in assets under management of this subsidiary partly due to the increase of disposable income of retail investors due to pension fund withdrawals. The increase in fee income was to some extent offset by an annual increase of Ch$2,759 million, or 8.2%, in operating expenses, primarily explained by higher personnel and administrative expenses in line with higher commercial activity in 2021 when compared to 2020, which represents a low comparison base as a consequence of the COVID-19 pandemic. |
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● | An annual increase of Ch$4,090 million, or 80.2%, in income before income tax in our insurance brokerage subsidiary on an annual basis. This increase was largely explained by (i) an annual increase of Ch$3,491 million, or 16.2%, in income from fees and commissions, which in turn was attributable to the recovery in lending activity, particularly due to the gradual recovery in the origination of consumer loans by the end of 2021 as compared to the decline experienced in 2020 and (ii), to a lesser extent, by a Ch$0.5 million, or 2.7%, decrease in operating expenses, principally linked to administrative expenses. |
● | An annual increase of Ch$1,932 million, or 5.8%, in income before income tax of our securities brokerage subsidiary. This annual increase was primarily due to an annual increase of Ch$4,537 million, or 6.2%, in fee-based income, which in turn is the result of: (i) an annual recovery of 13.9% in the stock trading turnover as investors returned to the equity market in 2021 in pursuit of more profitable investments than fixed-income securities and an improved economic context associated with the lifting of COVID-19 pandemic mobility restrictions and the reactivation of economic activity, (ii) an annual expansion of 46.0% in currency trading in view of the volatility seen in the foreign currency market driven by diverse economic and political issues in the local market and (iii) higher fee-income as well as the increase of Ch$1,036 million in net interest income related to the fixed-income portfolio managed by the subsidiary. These positive factors were partially offset by higher operating expenses of Ch$3,271 million, or 8.2%, on an annual basis, largely explained by higher personnel expenses as a consequence of a low comparison base effect to 2020 associated with weakened commercial activity due to the COVID-19 pandemic. |
Summary of Differences between Internal Reporting Policies and IFRS
We prepare our business segments’ financial information in accordance with our internal reporting policies, which differ in certain significant aspects from IFRS. The following table sets forth net income and equity for the years ended December 31, 2020, 2021 and 2022 in accordance with our internal reporting policies and under IFRS:
Year Ended | ||||||||||||
December 31, 2020 | December 31, 2021 | December 31, 2022 | ||||||||||
(in millions of Ch$) | ||||||||||||
Income before income tax (Internal Reporting Policies) | Ch$ | 589,071 | Ch$ | 970,472 | Ch$ | 1,685,192 | ||||||
Reconciliation to IFRS | (84,218 | ) | 361,814 | 49,818 | ||||||||
Income before income tax (IFRS) | 504,853 | 1,332,286 | 1,735,010 | |||||||||
Net income (Internal Reporting Policies) | 463,109 | 792,192 | 1,409,435 | |||||||||
Reconciliation to IFRS | (61,479 | ) | 264,125 | 36,366 | ||||||||
Net income (IFRS) | 401,630 | 1,056,317 | 1,445,801 | |||||||||
Equity (Internal Reporting Policies) | 3,726,268 | 4,293,522 | 4,858,327 | |||||||||
Reconciliation to IFRS | 270,813 | 525,450 | 573,110 | |||||||||
Equity (IFRS) | Ch$ | 3,997,081 | Ch$ | 4,818,972 | Ch$ | 5,431,437 |
Some differences exist between our net income and equity as determined in accordance with our internal reporting policies, which are used for management reporting purposes, as presented in the segment information, and our net income and equity as determined under IFRS, as presented in our audited consolidated financial statements.
The main differences that should be considered are the following:
● | Loan loss allowances |
The main difference between Chilean GAAP and IFRS 9 regarding loan loss allowances is that loan loss allowances under Chilean GAAP are calculated using expected loss models based on specific guidelines set by the CMF, which in turn are based on an expected losses approach. Additionally, if approved by the Board, a bank would be allowed to establish additional (voluntary) provisions to cover credit risk of non-predictable economic changes that could affect the macro-economic environment or a specific economic sector. Under IFRS 9 “Financial instruments,” allowances for loan losses are calculated based on the “expected credit losses” models. The CMF has not yet adopted IFRS 9 for banks and therefore we have adjusted our financial statements to fully comply with IFRS standards. The most significant impact of IFRS 9 on the Bank’s financial statements arises from the new impairment requirements on credit risk matters. As a result of these differences in accounting policies, our net income under IFRS was Ch$14,171 million lower, Ch$353,357 million higher and Ch$70,450 higher than our internally (or Chilean GAAP) reported net income in 2020, 2021 and 2022, respectively. The impact on equity was Ch$228,178 million, Ch$581,535 and Ch$656,070 million higher than our internally (or under Chilean GAAP) reported equity in 2020, 2021 and 2022, respectively.
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● | Provisions for country risk and for contingent loan risk |
Under Chilean GAAP, the Bank provisions for country risk cover the risk taken when holding or committing resources in any foreign country. These allowances are established according to country risk classifications established by the CMF and therefore are not in accordance with IFRS as issued by the IASB. The Bank has adjusted its financial statements accordingly.
Under Chilean GAAP, the Bank has established allowances related to the undrawn available credit lines and contingent loans in accordance with the CMF. With the adoption of IFRS 9, provisions for contingent loans are calculated based on expected credit loss. As a result of these accounting policies differences, our net income under IFRS was lower than our net income reported under internal reporting policies (or Chilean GAAP) by Ch$54,061 million, Ch$2,452 million and Ch$47,049 million in 2020, 2021 and 2022, respectively. Likewise, our equity under IFRS was Ch$21,990 million, Ch$24,442 million and Ch$71,491 million lower than our internally (or under Chilean GAAP) reported equity in 2020, 2021, and 2022, respectively, due to these accounting differences.
Other differences that do not materially impact our financial statements:
● | Business Combination |
Under internal reporting policies, our merger with Citibank Chile was accounted for under the pooling of interest method, while under IFRS, and for external financial reporting purposes, the merger of the two banks was accounted for as a business combination in which we were the acquirer as required by IFRS 3 “Business Combinations”. Under IFRS 3, we recognized all acquired net assets at fair value as determined at the acquisition date, as well as the goodwill resulting from the purchase price in excess of net assets recognized. This accounting difference did not have impact on results for 2020, 2021 and 2022. However, the impact on equity (associated with results recognized before 2020) was Ch$33,410 million in 2020, 2021 and 2022.
● | Provision for mandatory dividends |
Chilean banks are required by the Chilean Corporations Law to distribute at least 30% of their net income to shareholders unless the shareholders unanimously approve the retention of profits. A bank may, however, be prohibited from distributing dividends to shareholders, even those representing the mandatory 30% of its net income, if such distribution would cause the bank to violate certain statutory capital requirements. Under our internal reporting policies (Chile GAAP) and as approved by shareholders, we record a minimum dividend allowance of at least 60% of the period’s net distributable income, as permitted by the CMF. Under IFRS, only the mandatory portion of dividends as required by the Chilean Corporations Law must be recognized (i.e., 30%). This accounting difference does not lead to differences in net income. However, due to this difference our equity under IFRS was Ch$81,339 million, Ch$86,020 million, and Ch$97,328 million higher than our internally (or Chilean GAAP) reported equity in 2020, 2021 and 2022, respectively.
● | Assets Received in Lieu of Payment |
The Compendium of Accounting Standards for Banks, as issued by the CMF, requires that the assets received in lieu of payments are measured at historical cost or fair value, less cost to sell, if lower, on a portfolio basis and written off if not sold after a certain period of time in accordance with specific guidelines established by the CMF. Under IFRS, these assets are deemed non-current assets held for sale and their accounting treatment is set by IFRS 5 “Non-Current Assets Held for Sale and Discontinued Operations.” In accordance with IFRS 5 these assets are measured at historical cost or fair value, less cost to sell, if lower. Accordingly, under IFRS these assets are not written off unless they are impaired. As a result of this accounting policy difference, our net income was Ch$4,424 million, Ch$568 million lower and Ch$2,844 million higher than our internally (or under Chilean GAAP) reported net income in 2020, 2021 and 2022, respectively. This resulted in an equity decrease under IFRS of Ch$629 million, Ch$61 million and Ch$2,905 million in 2020, 2021 and 2022, respectively, from the equity accounted under internal reporting policies (or Chilean GAAP)
● | Suspension of Income Recognition on Accrual Basis |
In accordance with the Compendium of Accounting Standards, financial institutions must suspend recognition of income on an accrual basis in their statements of income for certain loans included in the impaired portfolio. IFRS 9 and IAS 39 did not allow the suspension of accrual of interest on financial assets for which an impairment loss has been determined. As of January 1, 2018, the Bank adopted IFRS 9. Under IFRS 9, interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets, except for financial assets that have subsequently become credit-impaired (or “Stage 3”), for which interest revenue is calculated by applying the effective interest rate to their amortized cost (i.e., net of expected credit losses provision). Off-balance interests are recorded as interest income only if the Bank receives the related payments. This difference does not materially impact our financial statements.
● | Deferred taxes |
The Bank records, when appropriate, deferred tax assets and liabilities for the estimated future tax effects attributable to differences between the carrying amount of assets and liabilities and their tax bases. All of the aforementioned differences had an impact on deferred taxes, which resulted in net income under IFRS that was Ch$22,739 million lower, Ch$97,419 million higher and Ch$13,452 million higher than our internally (or under Chilean GAAP) reported net income in 2020, 2021 and 2022, respectively. The impact of these adjustments resulted in lower equity under IFRS by Ch$63,339 million, Ch$161,421 million and Ch$175,271 million in 2020, 2021 and 2022, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity Management
A sound liquidity strategy must be focused on ensuring that funds are available to honor our financial commitments when they are due and also to take advantage of attractive business opportunities. To accomplish this, we monitor funding liquidity (i.e., the ability to raise funds when they are needed without incurring abnormal costs) and trading liquidity (i.e., the ability to easily decrease debt instruments held in our portfolios and/or offset price risk positions generated by derivative transactions).
Liquidity risk can be broken down into two types of risks: trading liquidity risk and funding liquidity risk. Trading liquidity risk deals with the inability to decrease cash positions (bonds, loans, etc.) and/or offset price risks generated by derivatives transactions and funding liquidity risk is related to our inability to raise funds. Both risks can lead to potentially adverse scenarios that might make the Bank unable to meet its payment obligations and/or potential payment obligations when they become due.
These two risks are jointly managed but by utilizing different tools, as detailed below.
Trading Liquidity Risk Management
Holding a stake of debt instruments with deep secondary markets ensures trading liquidity. Central Bank and government instruments and short-term banks’ time deposits show these characteristics. These kinds of instruments are held in our trading portfolio while comprising a portion of our portfolio of financial instruments measured at fair value through other comprehensive income as well. In addition, mortgage bonds issued by banks resident in Chile, as well as corporate bonds are also part of our portfolio of financial instruments measured at fair value through other comprehensive income.
Even though mortgage and corporate bonds show much less trading liquidity than Central Bank and government fixed-income instruments, the former may be sold to the Central Bank under repurchase agreements. Government instruments and short-term banks’ time deposits can also be sold to the Central Bank under repurchase agreements.
Funding Liquidity Risk Management
Diversifying funding sources and avoiding a concentration of large fund providers or funding maturity dates are means to ensure funding liquidity. We diversify through the establishment of triggers that monitor concentrations of funding sources, maturities, currencies, etc. The aggregation of significant fund providers by currency is monitored as a percentage of our current liabilities.
In particular, our funding strategy aims to satisfy our customers’ needs and to enhance our product base offering while maintaining a prudent product diversification profile, currencies and maturities. We are focused on broadening the current core and diversified funding obtained through the retail banking business. In addition, we are continuously issuing either senior or subordinated bonds in order to match both the liquidity and the interest rate risk generated by our long-term loans.
In addition to our own metrics in place to monitor liquidity, the Central Bank and the CMF have established regulations regarding liquidity, which include minimum reserve requirements for demand and time deposits, minimum “technical” reserve requirements for demand deposits and maximum expected outflows for the following 30 and 90 days.
The Central Bank has established a minimum reserve requirement of 9.0% for demand deposits and 3.6% for time deposits. The reserve requirement must be complied with separately by currency (Chilean Peso and foreign currencies).
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In addition, we are subject to a “technical” reserve requirement for demand deposits applicable to all banks that operate in Chile. The daily balance of deposits and obligations payable on demand, except for obligations with other banks, may not exceed 2.5 times the amount of the bank’s Regulatory Capital (or Total Capital). Following the implementation of Basel III in Chile, banks defined as systemically important banks could bear stricter requirements in terms of “technical” reserves, since the threshold could decrease to 1.5 times the bank’s Regulatory Capital (or Total Capital). For more information, see “Item 4. Information on the Company—Regulation and Supervision—Reserve Requirements.”
Deposits and obligations payable on demand include:
● | deposits in current accounts; |
● | other demand deposits or obligations payable on demand and incurred in the ordinary course of business; |
● | savings deposits that allow unconditional withdrawals that bear a stated maturity; and |
● | other deposits unconditionally payable immediately. |
Chilean banks are not required, however, to maintain the minimum reserves referred to above for deposits and obligations subject to this “technical” reserve.
Financing Plan Guidelines
Every year financing needs arising from operating activities are projected in order to gauge our ability to timely and effectively raise funds in local and foreign markets. For these purposes, we evaluate core commercial banking balances, namely, loans to customers and demand deposits, from which an in-depth analysis of potential sources of funding are assessed based on public information, interest rate trends and debt issuance programs in place in Chile and abroad.
The following are the key drivers our Treasury evaluates in order to determine our ability to meet our cash requirements for the next fiscal year:
● | Balance sheet growth expected in the business plan for the next fiscal period, which is mainly associated with growth in loans to customers, loans and advances to banks, internal and regulatory liquidity and positions to be taken in securities held for trading, securities measured at fair value through other comprehensive income, held to maturity securities and any purchase or investment in fixed assets or affiliates. |
● | Expected growth of demand deposits for the next fiscal period, including the amount of reserves and technical reserves, if any, that may be required. |
● | Expected growth of time deposits for the next fiscal period, including reserve requirements. |
● | Scheduled maturity of medium-term and long-term liabilities. |
● | Maximum participation that local pension funds could be expected to invest in Banco de Chile’s long-term bonds, based on their historical highest participation in Banco de Chile’s securities and the regulatory limits that pension funds managers are subject to per type of fund, considering fund C, D, E of the pension fund system, which are more oriented to fixed-income securities. |
● | Maximum participation that local mutual funds have reached in Banco de Chile’s long-term bonds. |
● | The unused amount of long-term debt programs in Chile or abroad by which we are able to raise funding effectively and on a timely basis. |
For more information on our liability structure, see “Item 5. Liquidity And Capital Resources—Borrowings, Off-Balance Sheet Arrangements and Tabular Disclosure of Contractual Obligations” below.
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Regulatory Liquidity Requirements
Chilean regulations also require that the expected outflows within the following 30 days not exceed the amount of a bank’s Basic Capital (or CET1 capital) and the expected outflows within the following 90 days not exceed twice the amount of a bank’s Basic Capital. Expected outflows may include behavioral assumptions and they have to be computed separately by currency. This report is called the C46 index.
Furthermore, in March 2016 the Chilean regulator began to require C47 and C48 reports. The C47 report focuses on liabilities analysis from a concentration, maturity and renewal perspectives. On the other hand, the C48 report gauges LCR and NSFR. In October 2018, the CMF established a new report on liquidity matters (C49) intended to refine the measurement of LCR and NSFR as defined by the C48 report. The C49 report began to be submitted in parallel with the C48 report on April 4, 2019. Also, the Central Bank set a minimum requirement for LCR starting at 60% in 2019 and reaching 100% in 2023 by increasing ten percentage points per year, while no regulatory limit was set for NSFR. Thereafter, on March 8, 2022 the Central Bank revised minimum requirements for both the LCR and the NSFR. Accordingly, the regulatory limit for LCR was accelerated to 100% in June 2022 while the threshold for NSFR was set at 100% although being phased-in in a four-year period starting June 2022 at 60% and increasing ten percentage points in January 1st of each year until reaching 100% on January 1, 2026.
As of December 31, 2022 our LCR and NSFR were 338% and 133%, respectively, on a consolidated basis. Accordingly, we were fully in compliance with the prevailing regulatory requirements.
Likewise, in the most recent amendment to Chapter III.B.2.1 of the Compendio de Normas Financieras the Central Bank also established that banks are required to carry out an Internal Liquidity Adequacy Assessment Process (“ILAAP”). The final rules associated with ILAAP were published on January 16, 2023, based on which we submitted this report to the CMF for first time in April 2023, on a summarized basis, as permitted by the regulation.
For more information on liquidity risk regulations, see “Item 4. Information on the Company—Regulation and Supervision—Liquidity Risk Regulations.” Also, for recent measures adopted by the Central Bank in view of the COVID-19, impacting liquidity risk management of banks, see “Item 5. Operating and Financial Review and Prospects—Operating Results—Impacts of COVID-19 in 2022” and “Item 5. Operating and Financial Review and Prospects—Trend Information.”
We supplement regulatory reports and metrics with internally-developed reports that are aimed at providing us with a broader perspective on liquidity matters. The market access report, the liquidity buffer, intraday liquidity and liquidity ratios, are the main internal reports we use in order to monitor liquidity while establishing internal alerts and triggers for decision making. For more information see Note 44 (3) to our audited consolidated financial statements.
Mandatory metrics requested by the CMF and internal metrics developed by us utilizing internal models are prepared on a daily basis by the Financial Control & Treasury Area, which reports to the CFO. These reports are submitted on a daily basis to the Market Risk Area and the Treasury Division, which are in charge of overseeing and managing our liquidity, respectively. The Finance, International and Market Risk Committee also monitors these metrics on a monthly basis.
Given our internal metrics and policies, we believe that our working capital is sufficient to meet our present needs.
Cash Flows
The tables below set forth our principal sources of cash. Our subsidiaries are not an important source of cash for us and therefore do not significantly affect our ability to meet our cash obligations. No legal, contractual or economic restrictions exist on the ability of our subsidiaries to transfer funds to us in the form of loans or cash dividends as long as they abide by the regulations in the Chilean Corporations Law regarding loans to related parties and minimum dividend payments.
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For the Year Ended December 31, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
IFRS: | (in millions of Ch$) | |||||||||||
Net cash provided by (used in) operating activities | Ch$ | (2,472,359 | ) | Ch$ | 3,005,641 | Ch$ | 128,626 |
2021 and 2022. Net cash from operating activities recorded a decrease from a net inflow of Ch$3,005,641 million in 2021 to a net inflow of Ch$128,626 million in 2022. The annual change of Ch$2,877,015 million was principally the consequence of: (i) an annual decrease of Ch$8,321,763 million in the net inflow from demand deposits from a net inflow of Ch$3,369,787 million in 2021 to a net outflow of Ch$4,951,976 million in 2022, which was mostly explained by both the decrease in the liquidity surplus generated by aid packages and pension funds withdrawals that occurred in the context of the COVID-19 downturn that benefited individuals, and the steady upward trend in short-term interest rates in 2022, which encouraged depositors to move towards time deposits, and (ii) a moderate increase of Ch$305,613 million in the outflow related to loans granted to customers and advances to banks, which is mainly attributable to greater overnight deposits held in the Central Bank for liquidity management purposes in 2022 when compared to 2021. These factors were to some extent offset by: (i) an annual increase of Ch$4,795,534 million in the net inflow from funding with time deposits, given the same reasons behind the decrease in the inflow from demand deposits, (ii) an increase of approximately Ch$477,638 million in the outflow associated with other assets and liabilities, (iii) a net annual increase of Ch$320,355 million in funding with repurchase agreements from a net outflow of Ch$176,369 million in 2021 to a net inflow Ch$143,986 million.
2020 and 2021. Net cash provided by operating activities recorded a reversal in 2021 from a net outflow of Ch$2,472,359 million in 2020 to a net inflow of Ch$3,005,641 million in 2021. The annual change of Ch$5,478,000 million was mainly the result of: (i) a net decrease of approximately Ch$3,448,391 million in cash outflow associated with the purchase of financial assets held for trading, primarily related to reserve requirements associated with demand deposit balances, which remained at stable high levels, from which purchases were oriented to renew the balance of instruments that expired, (ii) an increase of approximately Ch$2,135,062 million in inflow from funding with savings accounts and demand deposits, based on the increase experienced by short-term interest rates by the end of the year following the policy tightening carried out by the Central Bank to control inflation, and (iii) a decrease of approximately Ch$1,435,294 million in the cash outflow associated with lower loans granted to customers and banks as a whole, mainly explained by lower amount of advances to banks, particularly associated with lower balances held in overnight deposits in the Central Bank during 2021. These factors were to some degree offset by: (i) an increase of approximately Ch$652,068 million in the outflow associated with other assets and liabilities, and (ii) a decrease of approximately Ch$473,358 million in the net inflow from demand deposits, based on a moderate deceleration in the growth of demand deposit balances, particularly by the end of 2021 when short-term interest rates began to increase in connection with actions taken by the Central Bank.
For the Year Ended December 31, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
IFRS: | (in millions of Ch$) | |||||||||||
Net cash provided by (used in) investing activities | Ch$ | 210,306 | Ch$ | (2,987,305 | ) | Ch$ | (847,829 | ) |
2021 and 2022. Our cash flows used in investing activities recorded a decrease of Ch$2,139,476 million from a net outflow of Ch$2,987,305 million in 2021 to a net outflow of Ch$847,829 million in 2022. The lower net use of cash flow in investing activities was principally the consequence of: (i) a net annual decrease of Ch$1,322,381 million in the outflow related to new investments in fixed-income instruments measured at fair value through OCI from a net outflow of Ch$2,070,906 million in 2021 to a net outflow of Ch$748,725 million in 2022, which was the consequence of larger positions taken in 2021 to benefit from the financial spread between our low cost of funds and instruments denominated in local currency accruing higher interest rates, a trend that all but disappeared throughout 2022 when we mainly took positions in foreign-currency denominated instruments where this spread was more favorable, and (ii) an annual decline of Ch$819,734 million in the net outflow associated with no positions taken in fixed-income securities measured at amortized cost in 2022 as compared to an outflow of Ch$813,477 million in purchases of this kind of instruments in 2021.
2020 and 2021. We experienced a reversal of Ch$3,197,611 million in our cash flows provided by investing activities from a net inflow of Ch$210,306 million in 2020 to a net outflow of Ch$2,987,305 million in 2021. This net use in investing activities was primarily due to: (i) a net annual increase in the outflow associated with purchases of fixed-income securities measured at fair value through other comprehensive income from an inflow of Ch$285,558 in 2020 to a net outflow of Ch$2,070,906 million in 2021, which was primarily explained by higher positions taken in securities with mid-term maturities during 2021 to benefit from both the accrual at higher interest rates and positive marking-to-market in the long-run while covering reserve requirements produced by persistent high levels of demand deposits in 2021, and (ii) positions taken in held-to-maturity financial instruments for an amount of Ch$813,477 million in 2021 in comparison with no investments in 2020, due to the same reasons underlying the investment in securities measured at fair value through other comprehensive income.
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For the Year Ended December 31, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
IFRS: | (in millions of Ch$) | |||||||||||
Net cash provided by (used in) financing activities | Ch$ | 1,461,583 | Ch$ | 1,376,413 | Ch$ | (161,803 | ) |
2021 and 2022. The net cash provided by financing activities decreased Ch$1,538,216 million from a net inflow of Ch$1,376,413 million in 2021 to a net outflow of Ch$161,803 million in 2022. This reversal was mainly caused by: (i) a decrease of Ch$1,237,828 million in the inflow associated with borrowings from the Central Bank that had primarily to do with Ch$1,237,814 million raised in 2021 from the FCIC provided by the Central Bank in the context of COVID-19 to ensure liquidity in the local financial system, which compares to no further funding obtained in 2022 form the same source, (ii) an annual increase of Ch$319,556 million in the amount of dividends distributed to our shareholders from Ch$220,271 million distributed in 2021 from the net distributable income for 2020 to Ch$539,827 million distributed in 2022 with charge to our net distributable income for the year ended December 31, 2021, based on both greater net income in 2021 when compared to 2020 and a higher payout ratio on net distributable income that increased from 70% in March 2021 to 100% in March 2022, (iii) a decline of Ch$305,200 in proceeds from bond issuances given a high comparison base as represented by 2021 when we raised approximately Ch$1,661,016 million in long-term debt and commercial paper indebtedness in Chile and abroad as compared to Ch$1,355,816 million raised in 2022, primarily in Chile, and (iv) higher payments of interest on long-term bonds by Ch$216,948 million as a consequence of bond placements carried out by the end of 2021. These factors were to some extent offset by a net increase of Ch$572,448 million in the inflow associated with borrowings from foreign financial institutions in order to fund an greater demand for trade finance loans while replacing funding from commercial paper.
2020 and 2021. The net cash provided by financing activities decreased Ch$85,170 million from a net inflow of Ch$1,461,583 million in 2020 to a net inflow of Ch$1,376,413 million in 2021. This moderate decrease was mainly the result of a decrease in the inflow related to borrowings from the Central Bank by Ch$1,872,786 million from Ch$3,110,600 million in 2020 to Ch$1,237,814 million in 2021, which was primarily associated with the lower funding raised from the Central Bank through FCIC. This factor was to some degree offset by: (i) a net increase in the inflow associated with borrowings from foreign financial institutions by Ch$954,504 million linked to the reactivation of trade finance loans in a context of a low comparison base prompted by the COVID-19 pandemic in 2020, (ii) an increase of approximately Ch$771,881 million in proceeds from bond issuances, based on consecutive placements in Chile and abroad in 2021 to diversify our funding structure while optimizing our cost of funds and (iii) a decrease of Ch$130,267 million in dividends paid to shareholders from Ch$350,538 million in 2020 (associated with net distributable income for 2019) to Ch$220,271 in 2021 (associated with net distributable income for 2020) as a result of lower net distributable income in 2020 when compared to 2019 due to the effects of the COVID-19 pandemic on the banking business and, to a lesser extent, a higher pay-out ratio in 2020 (70%) in comparison with 2021 (60%).
193
Asset and Liability Management
Our asset and liability management policy is to maximize net interest income, return on assets and average equity in light of interest rate, liquidity and foreign exchange risks, within the limits of Chilean banking regulations and our internal risk management policies. Subject to these constraints, we may from time to time take mismatched positions as to interest rates or, in certain limited circumstances, foreign currencies when justified, in our view, by market conditions and prospects, and subject to our asset and liability management policies. Our board of directors determines our asset and liability policies. See Note 44 to our audited consolidated financial statements as of and for the year ended December 31, 2022 appearing elsewhere in this annual report.
Borrowings by Type of Liability and Terms
The following table presents the maturities of each borrowing category for the indicated year.
As of December 31, 2021 | As of December 31, 2022 | |||||||||||||||||||||||
Long-term | Short-term | Total | Long-term | Short-term | Total | |||||||||||||||||||
(in millions of Ch$) | ||||||||||||||||||||||||
IFRS: | ||||||||||||||||||||||||
Borrowings from financial institutions: | ||||||||||||||||||||||||
Central Bank credit lines for renegotiation of loans | Ch$ | – | Ch$ | – | Ch$ | – | Ch$ | – | Ch$ | – | Ch$ | – | ||||||||||||
Other borrowings from the Central Bank | 3,328,446 | 1,020,014 | 4,348,460 | 4,348,521 | – | 4,348,521 | ||||||||||||||||||
Borrowings from domestic financial institutions | – | – | 2,699 | 2,699 | ||||||||||||||||||||
Borrowings from foreign institutions | 59,700 | 453,705 | 513,405 | – | 1,046,456 | 1,046,456 | ||||||||||||||||||
Debt issued: | ||||||||||||||||||||||||
Senior Bonds | 7,193,949 | 1,014,885 | 8,208,834 | 7,805,443 | 1,352,217 | 9,157,660 | ||||||||||||||||||
Commercial papers | – | 348,445 | 348,445 | – | 107,910 | 107,910 | ||||||||||||||||||
Subordinated bonds | 799,034 | 118,476 | 917,510 | 892,489 | 118,416 | 1,010,905 | ||||||||||||||||||
Mortgage finance bonds | 1,977 | 2,139 | 4,116 | 1,147 | 1,230 | 2,377 | ||||||||||||||||||
Other financial obligations | 90 | 249,915 | 250,005 | 22 | 344,008 | 344,030 | ||||||||||||||||||
Total other interest bearing liabilities | Ch$ | 11,383,196 | Ch$ | 3,207,579 | Ch$ | 14,590,775 | Ch$ | 13,047,622 | Ch$ | 2,972,936 | Ch$ | 16,020,558 |
The Bank was in material compliance with all of its debt instruments during 2021 and 2022.
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Central Bank Borrowings
Central Bank borrowings include credit lines for the renegotiation of loans and other borrowings. Historically, the Central Bank provided credit lines for the renegotiation of mortgage loans due to the need to refinance debts as a result of the economic recession and crisis of the Chilean banking system from 1982 to 1985. These credit lines were linked to the UF index and carry real interest rates.
In the context of the COVID-19 pandemic, the Central Bank provided lending facilities for all banks holding commercial or consumer loans on their balance sheet, conditional on the increase in loan balances (FCIC). For more information see “Item 5. Operating and Financial Review and Prospects—Trend Information”. As of December 31, 2022, the amount borrowed from the Central Bank, associated with the FCIC facility was equivalent to Ch$4,348,521 million, denominated in Chilean pesos and bearing at a nominal interest rate of 0.5%. The maturities of the outstanding balances were, as follows:
As of December 31, 2022 | ||||
IFRS: | (in millions of Ch$) | |||
Due within 1 year | Ch$ | – | ||
Due after 1 year but within 2 years | 4,348,521 | |||
Due after 2 years but within 3 years | – | |||
Due after 3 years but within 4 years | – | |||
Due after 4 years but within 5 years | – | |||
Due after 5 years | – | |||
Total Central Bank borrowings | Ch$ | 4,348,521 |
Borrowings from Domestic Financial Institutions
Borrowings from domestic financial institutions are generally used to fund our general operations. As of December 31, 2022, we had no borrowings from domestic financial institutions. As of the same date, borrowings from domestic financial institutions had the following maturity profile:
As of December 31, 2022 | ||||
IFRS: | (in millions of Ch$) | |||
Due within 1 year | Ch$ | 2,699 | ||
Due after 1 year but within 2 years | – | |||
Due after 2 years but within 3 years | – | |||
Due after 3 years but within 4 years | – | |||
Due after 4 years but within 5 years | – | |||
Due after 5 years | – | |||
Total domestic borrowings | Ch$ | 2,699 |
Borrowings from Foreign Financial Institutions
We have short- and long-term borrowings from foreign banks. These loans are denominated in foreign currency and are used to fund our foreign trade loans and carried an average nominal interest rate of 2.17% in the year ended December 31, 2022. The outstanding maturities of these borrowings as of December 31, 2022 were, as follows:
As of December 31, 2022 | ||||
IFRS: | (in millions of Ch$) | |||
Due within 1 year | Ch$ | 1,046,456 | ||
Due after 1 year but within 2 years | – | |||
Due after 2 years but within 3 years | – | |||
Due after 3 years but within 4 years | – | |||
Due after 4 years but within 5 years | – | |||
Due after 5 years | – | |||
Total foreign borrowings | Ch$ | 1,046,456 |
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Senior Long-Term Bonds
Our bonds are primarily denominated in local currency, mainly in UF, and, to a lesser extent, in foreign currencies, including Swiss francs (CHF), Hong Kong dollar (HKD), Japanese Yen (JPY), U.S. Dollar (USD), Euros (EUR), Peruvian sol (PEN), Norwegian krone (NOK) and Australian dollar (AUD).
As of December 31, 2022, bonds denominated in local currency, with semi-annual interest and principal, accounted for Ch$7,207,010 million, all denominated in UF, with a weighted average annual interest rate of 2.31%. As of the same date, bonds denominated in foreign currency, most of them with annual interest and principal payments, amounted to Ch$1,950,650 million and carried an average annual interest rate of 2.75% (excluding the effect of exchange rate adjustments). In general, long-term bonds, denominated in both local and foreign currency, are intended to finance loans that had a maturity of more than one year.
The maturities of bonds denominated in local currency (Ch$ or UF) as of December 31, 2022 were:
As of December 31, 2022 | ||||
IFRS: | (in millions of Ch$) | |||
Due within 1 year | Ch$ | 1,133,738 | ||
Due after 1 year but within 2 years | 823,019 | |||
Due after 2 years but within 3 years | 823,524 | |||
Due after 3 years but within 4 years | 1,071,121 | |||
Due after 4 years but within 5 years | 865,499 | |||
Due after 5 years | 2,490,109 | |||
Total bonds | Ch$ | 7,207,010 |
During 2022, we issued bonds denominated in UF for an amount equivalent to Ch$1,088,897 million at a weighted average real interest rate of 3.22% and tenors in the range of 11 to 19 years.
We did not carry out any issuance of long-term bonds denominated in Chilean pesos during 2022.
The maturities of bonds denominated in foreign currency as of December 31, 2022 were:
As of December 31, 2022 | ||||
IFRS: | (in millions of Ch$) | |||
Due within 1 year | Ch$ | 218,479 | ||
Due after 1 year but within 2 years | 138,940 | |||
Due after 2 years but within 3 years | 109,638 | |||
Due after 3 years but within 4 years | – | |||
Due after 4 years but within 5 years | 345,628 | |||
Due after 5 years | 1,137,965 | |||
Total bonds | Ch$ | 1,950,650 |
During 2022 we issued bonds denominated in foreign currency for an amount equivalent to Ch$51,670 million at a weighted average interest rate of 8.65% and a tenor of 20 years.
Commercial paper
Our commercial paper is denominated in U.S. dollars and carried an average annual interest rate of 0.94% as of December 31, 2022. This average rate does not include the effect of exchange rate adjustments.
The maturities of our commercial paper as of December 31, 2022 were:
As of December 31, 2022 | ||||
IFRS: | (in millions of Ch$) | |||
Due within 1 year | Ch$ | 107,910 | ||
Due after 1 year but within 2 years | – | |||
Due after 2 years but within 3 years | – | |||
Due after 3 years but within 4 years | – | |||
Due after 4 years but within 5 years | – | |||
Due after 5 years | – | |||
Total bonds | Ch$ | 107,910 |
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During 2022 we issued commercial paper in an amount of Ch$215,249 million, bearing an average interest rate of approximately 3.67%.
Subordinated Bonds
As of December 31, 2022, our outstanding subordinated bonds were denominated in UF. Payments of interests and principal are generally due on a semiannual basis and the discount on the issuance is amortized over the life of the bond. As of December 31, 2022, we had an outstanding balance of Ch$1,010,905 million in subordinated bonds, bearing an effective weighted average real interest rate of 3.20% taking into consideration the discount at issuance.
Subordinated bonds are also intended to finance loans having a maturity of more than one year. As of December 31, 2022, the maturities of subordinated bonds were:
As of December 31, 2022 | ||||
(in millions of Ch$) | ||||
IFRS: | ||||
Due within 1 year | Ch$ | 118,416 | ||
Due after 1 year but within 2 years | 9,818 | |||
Due after 2 years but within 3 years | 10,338 | |||
Due after 3 years but within 4 years | 7,624 | |||
Due after 4 years but within 5 years | 4,720 | |||
Due after 5 years | 859,989 | |||
Total subordinated bonds | Ch$ | 1,010,905 |
During 2022, there were no subordinated bonds issuances.
Mortgage Finance Bonds
Mortgage finance bonds are used to finance the granting of mortgage loans. The outstanding principal amounts of the bonds are amortized on a quarterly basis. The range of maturities of these bonds is between five and 30 years. The bonds are linked to the UF index and carried a weighted average annual interest rate of 3.21% as of December 31, 2022.
The maturities of mortgage finance bonds as of December 31, 2022 were:
As of December 31, 2022 | ||||
IFRS: | (in millions of Ch$) | |||
Due within 1 year | Ch$ | 1,231 | ||
Due after 1 year but within 2 years | 556 | |||
Due after 2 years but within 3 years | 187 | |||
Due after 3 years but within 4 years | – | |||
Due after 4 years but within 5 years | 39 | |||
Due after 5 years | 364 | |||
Total mortgage finance bonds | Ch$ | 2,377 |
During 2022, we did not carry out any issuance of mortgage finance bonds.
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Other Financial Obligations
The maturities of other financial obligations as of December 31, 2022 were as follows:
As of December 31, 2022 | ||||
IFRS: | (in millions of Ch$) | |||
Other long-term obligations: | ||||
Obligations with Chilean Government | Ch$ | 22 | ||
Total other long-term obligations | 22 | |||
Other short-term obligations | 344,008 | |||
Total other obligations | Ch$ | 344,030 |
As of December 31, 2022, other financial obligations had the following maturities:
As of December 31, 2022 | ||||
(in millions of Ch$) | ||||
IFRS: | ||||
Due within 1 year | Ch$ | 344,008 | ||
Due after 1 year but within 2 years | 22 | |||
Due after 2 years but within 3 years | – | |||
Due after 3 years but within 4 years | – | |||
Due after 4 years but within 5 years | – | |||
Due after 5 years | – | |||
Total other obligations | Ch$ | 344,030 |
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Funding by Type of Liability and Average Rates
The following table sets forth our average daily balance of liabilities for the years ended December 31, 2021 and 2022 in each case together with the related average nominal interest rates paid thereon:
Year Ended December 31, | ||||||||||||||||||||||||
2021 | 2022 | |||||||||||||||||||||||
Average Balance | % of Total Liabilities | Average Nominal Rate | Average Balance | % of Total Liabilities | Average Nominal Rate | |||||||||||||||||||
(in millions of Ch$, except percentages) | ||||||||||||||||||||||||
IFRS: | ||||||||||||||||||||||||
Current accounts and demand deposits | Ch$ | 17,048,827 | 39.6 | % | — | % | Ch$ | 15,550,988 | 32.7 | % | — | % | ||||||||||||
Savings accounts and time deposits | 8,467,508 | 19.7 | 1.56 | 11,696,542 | 24.6 | 8.31 | ||||||||||||||||||
Borrowings from financial institutions | 4,420,847 | 10.3 | 0.53 | 5,043,041 | 10.6 | 0.74 | ||||||||||||||||||
Debt issued | 8,491,701 | 19.7 | 7.69 | 9,496,198 | 20.0 | 12.26 | ||||||||||||||||||
Commercial Paper | 359,836 | 0.8 | 0.34 | 133,208 | 0.3 | 0.97 | ||||||||||||||||||
Other financial obligations | 176,505 | 0.4 | 1.73 | 200,493 | 0.4 | 3.78 | ||||||||||||||||||
Lease Liabilities | 107,048 | 0.2 | 1.85 | 94,063 | 0.2 | 1.98 | ||||||||||||||||||
Other interest bearing liabilities | 140,600 | 0.3 | 0.67 | 184,448 | 0.4 | 8.59 | ||||||||||||||||||
Other non-interest bearing liabilities | 3,877,837 | 9.0 | — | 5,187,969 | 10.8 | — | ||||||||||||||||||
Total liabilities | Ch$ | 43,090,709 | 100.0 | % | 1.89 | % | Ch$ | 47,586,950 | 100.0 | % | 4.62 | % |
Our most important sources of funding are customer deposits, which primarily consist of peso-denominated, non-interest bearing current accounts and demand deposits and both Chilean Peso and UF-denominated interest bearing time deposits and savings accounts. Current accounts and demand deposits represented 39.6% and 32.3% of our average total liabilities in 2021 and 2022, respectively. These kinds of liabilities are our least-cost source of funding. On the other hand, savings accounts and time deposits represented 19.7% and 24.1% of our average liabilities in 2021 and 2022, respectively. Lastly, debt issued represented 19.7% and 20.0% of our average liabilities in 2021 and 2022, respectively.
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TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following tables set forth our contractual obligations and commercial commitments by residual maturity. As of December 31, 2022, the scheduled maturities of our contractual obligations, including accrued interest, were as follows:
Due within 1 year | Due after 1 year but within 3 years | Due after 3 years but within 5 years | Due after 5 years | Total | Estimated Interest Payment | |||||||||||||||||||
IFRS: | (in millions of constant Ch$ as of December 31, 2022) | |||||||||||||||||||||||
Contractual Obligations | ||||||||||||||||||||||||
Currents accounts and other demand deposits | Ch$ | 13,592,155 | Ch$ | – | Ch$ | – | Ch$ | – | Ch$ | 13,592,155 | Ch$ | – | ||||||||||||
Transaction in the course of payment | 681,792 | – | – | – | 681,792 | |||||||||||||||||||
Saving accounts and time deposits | 13,830,746 | 521,646 | 5,940 | 655 | 14,358,987 | |||||||||||||||||||
Bonds issued | ||||||||||||||||||||||||
Mortgage finance bonds | 1,231 | 743 | 39 | 364 | 2,377 | 279 | ||||||||||||||||||
Bonds | 1,279,557 | 1,895,121 | 2,282,248 | 3,628,074 | 9,085,000 | 1,258,608 | ||||||||||||||||||
Commercial Bonds | 180,570 | 180,570 | 25,016 | |||||||||||||||||||||
Subordinated Bonds | 118,416 | 20,156 | 12,344 | 859,989 | 1,010,905 | 364,537 | ||||||||||||||||||
Hedged Instrument | ||||||||||||||||||||||||
Inflows: | ||||||||||||||||||||||||
Corporate Bond EUR | (1,533 | ) | (45,839 | ) | (1,646 | ) | (52,347 | ) | (101,365 | ) | ||||||||||||||
Corporate Bond HKD | (92,127 | ) | (92,999 | ) | (161,662 | ) | (158,619 | ) | (505,407 | ) | ||||||||||||||
Corporate Bond PEN | (6,344 | ) | (12,689 | ) | (12,689 | ) | (163,094 | ) | (194,816 | ) | ||||||||||||||
Corporate Bond CHF | (107,255 | ) | (139,270 | ) | (120,501 | ) | – | (367,026 | ) | |||||||||||||||
Corporate Bond USD | (14,520 | ) | (29,039 | ) | (22,684 | ) | (526,617 | ) | (592,860 | ) | ||||||||||||||
Obligation USD | (59,876 | ) | – | – | – | (59,876 | ) | |||||||||||||||||
Corporate Bond JPY | (1,853 | ) | (3,705 | ) | (3,705 | ) | (209,193 | ) | (218,456 | ) | ||||||||||||||
Corporate Bond AUD | (5,625 | ) | (11,254 | ) | (11,252 | ) | (242,281 | ) | (270,412 | ) | ||||||||||||||
Corporate Bond NOK | (2,366 | ) | (4,732 | ) | (4,732 | ) | (69,621 | ) | (81,451 | ) | ||||||||||||||
Outflows: | ||||||||||||||||||||||||
Cross Currency swap EUR | 1,533 | 45,839 | 1,646 | 52,347 | 101,365 | |||||||||||||||||||
Cross Currency swap HKD | 92,127 | 92,999 | 161,662 | 158,619 | 505,407 | |||||||||||||||||||
Cross Currency Swap PEN | 6,344 | 12,689 | 12,689 | 163,094 | 194,816 | |||||||||||||||||||
Cross currency swap CHF | 107,255 | 139,270 | 120,501 | – | 367,026 | |||||||||||||||||||
Cross currency swap USD | 14,520 | 29,039 | 22,684 | 526,617 | 592,860 | |||||||||||||||||||
Cross currency swap USD | 59,876 | – | – | – | 59,876 | |||||||||||||||||||
Cross currency swap JPY | 1,853 | 3,705 | 3,705 | 209,193 | 218,456 | |||||||||||||||||||
Cross Currency Swap AUD | 5,625 | 11,254 | 11,252 | 242,281 | 270,412 | |||||||||||||||||||
Cross Currency Swap NOK | 2,366 | 4,732 | 4,732 | 69,621 | 81,451 | |||||||||||||||||||
Borrowings from financial institutions | 1,049,155 | 4,348,521 | – | – | 5,397,676 | |||||||||||||||||||
Other obligations | 344,008 | 22 | – | – | 344,030 | |||||||||||||||||||
Lease contracts | 27,615 | 27,634 | 15,009 | 19,111 | 89,369 | |||||||||||||||||||
Services contracts | 15,560 | 8,141 | 661 | – | 24,362 | |||||||||||||||||||
Obligations under repurchase agreements | 216,264 | – | – | – | 216,264 | |||||||||||||||||||
Total | Ch$ | 31,337,069 | Ch$ | 6,821,984 | Ch$ | 2,316,241 | Ch$ | 4,508,193 | Ch$ | 44,983,487 | Ch$ | 1,648,440 |
200
Capital Management
We manage our capital adequacy as efficiently as we can, as we understand that capital is a scarce resource provided by our shareholders and generated by us through the capitalization of both part of our net distributable earnings and the effect of inflation on our shareholders’ equity. In this regard, our senior management and board of directors consider capital management to be a crucial input for the definition, implementation and achievement of our strategic goals, as well as the way in which we can cover all the business-related risks.
Thus, through our capital management policy, we seek to:
● | Ensure our capital adequacy and the quality of our capital, on a consolidated basis, based on the management of business-related risks; |
● | Establish sufficient capital levels, through the definition of internal capital targets, in order to both support the achievement of our business strategy and face stress scenarios; |
● | Ensure compliance with the internal capital objectives in the short- and medium-term while complying with the requirements set by the regulator; |
● | Determine a suitable reporting regime to meet the internal and regulatory requirements; |
● | Provide corporate governance, in addition to specific roles and responsibilities for capital and risk management purposes. |
Capital Adequacy Requirements
Beginning December 1, 2021 all the requirements related to the adoption of Basel III framework were put in place for all Chilean banks, although considering the phase-in process for the adoption of diverse matters including: (i) adjustments to Common Equity Tier 1 Capital and risk-weighted assets, (ii) the requirement of buffers such as the conservation buffer and the systemic buffer, among others.
According to the General Banking Act, each bank must comply with the following capital requirements as a percentage of its risk-weighted assets, net of required allowances:
● | Common Equity Tier 1 Capital (CET1) above 4.5% of risk-weighted assets; |
● | Tier 1 Capital = CET1 Capital + Additional Tier 1 Capital (AT1) above 6.0% of risk-weighted assets; |
● | Tier 1 + Tier 2 above 8.0% of risk-weighted assets; |
● | Conservation Buffer of 2.5% of risk-weighted assets, to be fulfilled with CET1 in a four-year period starting December 1, 2021 at 0.625% and increasing by the same amount on a yearly basis; |
● | Countercyclical Buffer of up to 2.5% of risk-weighted assets, to the extent applicable, to be fulfilled with CET1; |
● | Domestic-Systemically Important Banks (D-SIB) Buffer in the range of 1.0% to 3.5% of risk-weighted assets, to be fulfilled with CET1 at 25% rate every year starting December 1, 2021, to the extent applicable (nevertheless, given the COVID-19 contingency, the starting date was postponed to December 1, 2022); |
● | Pillar 2 capital charge of up to 4.0% of risk-weighted assets, to the extent applicable, to be fulfilled in a six-month timeframe once determined. |
Banks should also comply with a leverage ratio, meaning CET1 Capital of at least 3% of their total risk assets, net of required allowances. If a bank is defined as a domestic-systemically important bank, the threshold for the leverage ratio could be subject to further requirement of up to 50% of the systemic buffer imposed over risk-weighted assets but over total risk assets.
201
For more information on capital requirements, capital tiers and guidelines associated with calculation of risk-weighted assets and buffers, see “Item 4. Information on the Company—Regulation and Supervision—Modifications to the General Banking Act.”
Pursuant to the general Banking Act, local banks must comply with minimum capital requirements in relation to both total assets and risk-weighted assets (considering credit, market and operational risk). As of December 31, 2022 CET1 Capital must be at least 3.0% of total assets (the same in December 2021), based on the leverage requirements. Likewise, as of December 31, 2022, local banks’ Total or Regulatory Capital, must be at least 9.5625% of their risk weighted assets (10.125% in December 2021), Tier1 Capital must be at least 7.5625% of their risk weighted assets (8.125% in December 2021) and CET1 Capital must be at least 6.0625% of their risk weighted assets (6.625% in December 2021), including minimum regulatory limits, and phase-in implementation of conservation buffer and systemic buffer. We were not subject to counter-cyclical buffer or Pillar 2 capital requirement as of December 31, 2022.
As of December 31, 2022, Banco de Chile fully complied with capital adequacy requirements by holding:
As of December 31, 2022 | ||||||||||||
Actual Ratio | Phase-In | Fully-Loaded | ||||||||||
Leverage Ratio | 8.6 | % | 3.0000 | % | 3.00 | % | ||||||
Common Equity Tier 1 | 13.6 | 6.0625 | 8.25 | |||||||||
Tier 1 Ratio | 14.1 | 7.5625 | 9.75 | |||||||||
Total Capital Ratio | 17.9 | % | 9.5625 | % | 10.75 | % |
(1) | Consider 50% of conservation buffer and 25% of the systemic buffer applying to Banco de Chile as of December 31, 2022, given the phase-in for Basel III requirements. |
(2) | Consider full application of conservation buffer (2.5%) and systemic buffer applying to Banco de Chile as of December 31, 2022 (1.25%). |
The following table sets forth our minimum capital requirements and capital availability for Banco de Chile for the years ended December 31, 2021 and 2022, based on the requirements set by the CMF under Basel III:
● | CET1 Capital over Total Risk Assets |
As of December 31, | ||||||||
2021 | 2022 | |||||||
CHILEAN GAAP: | (in millions of Ch$) | |||||||
CET1 Capital Minimum Requirement | Ch$ | 1,591,564 | Ch$ | 1,684,060 | ||||
Excess over minimum CET1 Capital required | Ch$ | 2,631,450 | Ch$ | 3,155,327 |
● | CET1 Capital over Risk Weighted Assets |
As of December 31, | ||||||||
2021 | 2022 | |||||||
CHILEAN GAAP: | (in millions of Ch$) | |||||||
CET1 Capital Minimum Requirement | Ch$ | 2,167,996 | Ch$ | 2,161,477 | ||||
Excess over minimum CET1 Capital required | Ch$ | 2,055,018 | Ch$ | 2,677,910 |
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● | Tier 1 Capital over Risk Weighted Assets |
As of December 31, | ||||||||
2021 | 2022 | |||||||
CHILEAN GAAP: | (in millions of Ch$) | |||||||
Tier 1 Capital Minimum Requirement | Ch$ | 2,658,864 | Ch$ | 2,696,275 | ||||
Excess over minimum Tier 1 Capital required | Ch$ | 1,891,395 | Ch$ | 2,321,378 |
● | Total Capital or Regulatory Capital over Risk Weighted Assets |
As of December 31, | ||||||||
2021 | 2022 | |||||||
CHILEAN GAAP: | (in millions of Ch$) | |||||||
Total Capital or Regulatory Capital Minimum Requirement | Ch$ | 3,313,353 | Ch$ | 3,409,339 | ||||
Excess over minimum Total Capital required | Ch$ | 2,320,992 | Ch$ | 2,964,077 |
Moreover, in April 2023 we began to comply with Pillar 3 requirements in accordance with the guidelines provided by the CMF, for the three-month period ended March 31, 2023. Likewise, we will release our first Pillar 3 annual report in January 2024, as required by the regulation.
Capital Expenditures
For information on our capital expenditures, see “Item 4. Information on the Company—History and Development of the Bank—Capital Expenditures.”
RECENT DEVELOPMENTS
As of the date of this annual report, there are no recent developments to report.
TREND INFORMATION
The following trends may have an impact on the Chilean economy and the economic growth of its trade partners, and could therefore affect the Chilean banking industry, and thus, could affect our business, operating results or financial condition:
Impact of COVID-19
Since the worldwide outbreak of COVID-19 began in early 2020, countries have responded by taking various measures aimed at, among other things, mitigating the spread of the virus. As of the date of this annual report, concerns about the effects of COVID-19 on worldwide and the Chilean economy have significantly decreased, especially as new variant strains of varying degrees of severity that appear from time to time seem to be controlled by the immunity population has gained as a result of vaccination. As of the date of this annual report, Chile is in a total opening phase, which has permitted the reactivation of many economic sectors, such as services and commerce. This has been possible thanks to a successful vaccination process reflected by the fact that as of the date of this annual report, approximately 91.1% of the Chilean population have received at least one dose of the vaccine, approximately 89.1% have received the total vaccination scheme and approximately 81.8% and 60.9% have received third and a fourth booster doses.
From a macroeconomic point of view, the sustained control of the virus allowed almost all economic sectors to return to normal activity throughout 2022. Nevertheless, the aftermath of the economic downturn produced by the COVID-19 pandemic marked a change in the local economy in 2022, as reflected by a moderate GDP expansion of 2.4% that succeeded a period of unsustainable growth in 2021 caused by non-recurrent macroeconomic factors, particularly associated with the extraordinary measures adopted by the Chilean Government and the Congress to assist people, which included three pension fund withdrawals and direct money transfers to face the public health contingency, all resulting in a boost in liquidity and, therefore, in household consumption. The main consequence of the economic overheating experienced in 2021, together with other external factors, was a sharp increase in inflation as represented by a 12.8% rise in the Consumer Price Index, which resulted in a tightening monetary policy that took the reference interest rate from 4.00% in December 2021 to 11.25% in December 2022. Following these trends, in conjunction with certain degree of uncertainty regarding the political and social outlook, the Chilean Central Bank expects the local economy to experience a contraction in the range of 0.75% to 1.75% in 2023, driven by forecasted shrinkages in both private investment and household consumption. Amid this environment, inflation is expected to decrease to approximately 3.6% in December 2023, thereby converging to the Central Bank’s medium-term goal of 3.0% in 2024.
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If new variant strains of the COVID-19 virus, or other similar diseases or viruses, appear and spread as quickly as COVID-19 in the past, financial institutions may face increased credit risk, market risk, strategic risk, operational risk, and compliance risk. This could also translate into lowered economic performance, liquidity constraints, reduced access to funding, and longstanding contingency plans in order to address the emergency. Likewise, given the way in which local and international financial markets and economic indicators, such as exchange rates, interest rates, credit spreads and commodity prices experienced increased volatility at the beginning of the COVID-19 outbreak, any shocks or unexpected movements in these market factors due to new variant strains could result in financial losses associated with our trading portfolio or financial assets measured at fair value through other comprehensive income.
For a discussion of the impact of COVID-2019 on our business in 2020 and 2021 and related government measures, see “Item 5. Trend Information—Impact of COVID-19” in the Form 20-F for the year ended December 31, 2020 filed with the SEC on April 30, 2021, and in the Form 20-F for the year ended December 31, 2021 filed with the SEC on April 29, 2022.
Other Relevant Trends
We believe we have developed strong competitive advantages that will allow us to remain a relevant participant within the Chilean banking industry. We are continuously seeking additional improvements in matters such as operating efficiency, productivity, profitability and service quality by developing new customer oriented service models, launching new financial products and services and implementing high quality information technologies. Our business environment is increasingly competitive and an active market for mergers and acquisitions tends to encourage large financial groups. In addition, competition from non-banking companies, mainly those involved in the retail industry, has encouraged us to develop improved value propositions to satisfy our customers’ needs.
Unfavorable developments on the U.S.-China “trade-war” or the effects of Brexit could negatively affect global economic growth and adversely impact Chilean economic growth as a result of external forces affecting copper prices, the growth trends of Chile’s main trade partners or global trade. Any impact on the local economy would certainly affect the dynamics of the banking industry.
Political and diplomatic events are taking place around world, including recently appointed administrations or the upcoming elections in certain of the principal developed countries and various countries in Latin America, a redefinition of political and economic alliances and the emergence of radicalized political movements in other parts of the world. In addition, the latent threat of armed conflicts or terrorism in the Middle East and Asia, the ongoing tensions between the U.S. and Iran, the ongoing armed conflict between Russia and Ukraine in eastern Europe that threatens to become global, have contributed to global migration crises and political instability that have been managed in dramatically different ways by developed countries. Any negative development in these matters could result in the adoption of protectionist policies, immigration bans, restrictions on foreign trade or prohibitions on business with specific investors in particular countries or within certain countries. If any of these risks materialize, they could result in increased uncertainty and volatility in the international markets.
The Chilean economy and the Chilean financial system are also exposed to political, social and economic developments occurring in the country. Any uncertainty regarding political or economic reforms could result in deteriorated business sentiment and consumer confidence, which could result in further slowdown of the Chilean economy by affecting both overall capital expenditures and household consumption. This exposure also exists with respect to the negative effects of climate change on macroeconomic indicators and customers in general.
We believe that Chile and its financial industry have demonstrated success in facing worldwide financial contingencies because of the strict fiscal policy, forward-looking and independent monetary policy, as well as strong regulation and supervision related to the financial industry. Nevertheless, the impact on global macroeconomic performance may be adversely affected by current turmoil in global banking industry, particularly after the collapse of two U.S. banks and the forced sale of Credit Suisse.
In addition, the recent international trend of improved protection of consumers’ financial rights has become increasingly significant in Chile. If this trend leads to several and/or dramatic changes in the Chilean financial regulation, the banking industry could be adversely affected and, therefore, we could experience a negative impact on our future operating results.
For more information regarding the potential economic or regulatory factors that could affect our results of operations or financial condition, see “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.”
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OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, we are party to a number of off-balance sheet arrangements that present credit, market and operational risks that are not reflected in our audited consolidated financial statements. These activities include commitments to extend credit not otherwise accounted for as contingent loans, such as overdrafts and credit card lines of credit, and long-term contractual obligations under operating leases or service contracts.
We provide customers with off balance sheet credit support through loan commitments. Such commitments are agreements to lend to a customer at a future date, subject to compliance with contractual terms. Since substantial portions of these commitments are expected to expire without us having to make any loans, total commitment amounts do not necessarily represent our actual future cash requirements. The amounts of these loan commitments were Ch$8,651,193 million as of December 31, 2021 and Ch$9,347,863 million as of December 31, 2022. See Note 29 to our audited consolidated financial statements as of and for the year ended December 31, 2022 appearing elsewhere in this annual report. The amounts of subscribed leasing contracts were Ch$147,861 million as of December 31, 2021 and Ch$167,947 million as of December 31, 2022.
Interest rate and cross-currency swaps, which are entered into in order to hedge our foreign investment portfolio, are recorded at their estimated fair market values. For more information, see Note 10 to our audited consolidated financial statements as of and for the year ended December 31, 2022 appearing elsewhere in this annual report.
The credit risk of both on and off-balance sheet financial instruments depends on many factors, including the value of collateral held and other security arrangements. To mitigate credit risk, we generally determine the need for specific covenant, guarantee and collateral requirements on a case-by-case basis, depending on the nature of the financial instrument and the customer’s creditworthiness. The amount and type of collateral held to reduce credit risk varies, but may include real estate, machinery, equipment, inventory and accounts receivable, as well as cash on deposit, stocks, bonds and other marketable securities that are generally held in our possession or at another appropriate custodian or depository. This collateral is valued and inspected on a regular basis to ensure both its existence and adequacy. Additional collateral is requested when appropriate. For further information, see Note 28 to our audited consolidated financial statements as of and for the year ended December 31, 2022 appearing elsewhere in this annual report.
Financial Guarantees
The following is a summary of the nominal value of instruments that are considered financial guarantees, and which are accounted for in off-balance sheet accounts:
As of December 31, 2022 | ||||
(in millions of Ch$) | ||||
Performance bonds | Ch$ | 2,697,608 | ||
Foreign office guarantees and standby letters of credit | 348,774 | |||
Total | Ch$ | 3,046,382 |
Guarantees in the form of performance bonds, standby letters of credit and foreign office guarantees are issued in connection with agreements made by customers to counterparties. If the customer fails to comply with the agreement, the counterparty may enforce the performance bonds, standby letters of credit or foreign office guarantees as a remedy. Credit risk arises from the possibility that the customer may not be able to repay us for these guarantees.
As of December 31, 2022, the expiration of guarantees per period was as follows:
Due within 1 year | Due after 1 year but within 3 years | Due after 3 years but within 5 years | Due after 5 years | Total | ||||||||||||||||
(in millions of Ch$) | ||||||||||||||||||||
Performance bonds | Ch$ | 1,768,061 | Ch$ | 798,270 | Ch$ | 113,786 | Ch$ | 17,491 | Ch$ | 2,697,608 | ||||||||||
Foreign office guarantees and standby letters of credit | 294,422 | 46,828 | 928 | 6,596 | 348,774 | |||||||||||||||
Total | Ch$ | 2,062,483 | Ch$ | 845,098 | Ch$ | 114,714 | Ch$ | 24,087 | Ch$ | 3,046,382 |
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Item 6 Directors, Senior Management and Employees
DIRECTORS AND SENIOR MANAGEMENT
Directors
Our administration is conducted by our board of directors, which, in accordance with our bylaws (estatutos), consists of 11 directors and two alternate directors. The entire board of directors is elected every three years. Our current board of directors was elected in March 2023 and its term expires in March 2026.
Cumulative voting is permitted for the election of directors. Our chairman and our chief executive officer are appointed by our board of directors and hold their offices at its discretion. Scheduled meetings of our board of directors are held at least twice a month. Extraordinary board of directors meetings may be called by the chairman, when requested by a majority of the directors, or, in limited circumstances, when requested by a single director.
Our current directors are as follows:
Director | Position | Committee Memberships | Age | |||
Pablo Granifo Lavín | Chairman | 8 | 64 | |||
Andrónico Luksic Craig | Vice Chairman | 1 | 69 | |||
Julio Figueroa | Vice Chairman | 2 | 51 | |||
Ana Holuigue Barros | Director | 4 | 67 | |||
Andrés Ergas Heymann | Director | 2 | 56 | |||
Jean Paul Luksic Fontbona | Director | 1 | 58 | |||
Raul A. Anaya Elizalde | Director | 4 | 68 | |||
Sinéad O’Connor | Director | 1 | 46 | |||
Hernán Büchi Buc | Director | 2 | 74 | |||
Francisco Pérez Mackenna | Director | 4 | 65 | |||
Jaime Estévez Valencia | Director | 4 | 76 | |||
Paul Fürst Gwinner | Alternate Director | 3 | 56 | |||
Sandra Guazzotti | Alternate Director | 2 | 56 |
Pablo Granifo L. was re-elected as the chairman of our board of directors in 2023, a position which he has held since 2007. He was our Chief Executive Officer from 2001 to 2007, and previously, Chief Executive Officer of Banco A. Edwards from 2000 to 2001, commercial manager at Banco Santiago from 1995 to 1999 and corporate manager at Banco Santiago from 1999 to 2000. Mr. Granifo is also chairman of the board of directors of Banchile Administradora General de Fondos S.A., Banchile Asesoría Financiera S.A., Socofin S.A., a member of the executive committee of Banchile Corredores de Seguros Limitada. He is also chairman of Viña San PedroTarapacá S.A., and a member of the board of directors of Quiñenco S.A., Compañía Cervecerías Unidas S.A., Empresa Nacional de Energía Enex S.A., Embotelladoras Chilenas Unidas S.A. and Cervecera CCU Chile. Mr. Granifo is also a member of the Chilean Bank Association. He holds a degree in business administration from the Pontificia Universidad Católica de Chile.
Andrónico Luksic C. has been a director and the vice chairman of our board of directors since 2002 and was re-elected in 2023. Mr. Luksic is also chairman of LQ Inversiones Financieras S.A., Quiñenco S.A. and Compañía Cervecerías Unidas S.A., vice chairman of Compañía Sud Americana de Vapores S.A. (CSAV S.A.) and a member of the board of directors of Antofagasta plc (United Kingdom), Antofagasta Minerals, Nexans S.A. and Invexans S.A. In addition to his corporate roles, Mr. Luksic is a founding member of the Advisory Board of the Panama Canal Authority and a member of the International Advisory Council of the Brookings Institution, the Chairman’s International Advisory Council of the Americas Society/Council of the Americas, the International Business Leaders’ Advisory Council for the Mayor of Shanghai, and the International Advisory Council of the China Investment Corporation. Mr. Luksic is also a founding member of the Harvard Global Advisory Council, and the Columbia University World Projects Advisory Council. He is a member of the Harvard Business School Latin American Advisory Board, the Dean’s Council of the Harvard Kennedy School, the Americas Executive Board of the MIT Sloan School of Management, the International Advisory Board of the Blavatnik School of Government at the University of Oxford, and the International Advisory Boards of Tsinghua University School of Economics and Management and the Fudan University School of Management. Mr. Luksic attended Babson College in the U.S., where he is an Emeritus member of the Board of Trustees. Andrónico Luksic and Jean Paul Luksic are brothers.
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Julio Figueroa. has been a member of our board of directors since December 27, 2018, and was most recently re-elected as director and appointed vice chairman of the board in March 2023. He is Chief Executive Officer at Citi Latin America South –LAS– (Argentina, Chile, Colombia, Peru, Paraguay, Peru, Uruguay and Venezuela) based in Buenos Aires, Argentina. In addition to this role, he is also Head of Corporate & Investment Banking (CIB) for LAS Cluster. Mr. Figueroa joined Citi in Buenos Aires in 1994 in CIB after working for IBM Argentina in the finance division. Since then, from 1994-2001 he has held several roles in CIB Argentina as a senior banker covering Argentine clients in different industries. He moved to the Citi Latin America Regional Office in Miami, U.S.A. in 2001, as a senior corporate finance transactor in CIB, covering corporate clients in Latin America, and to Citi New York, United States, in 2004 as managing director, responsible for Financial Sponsors & Private Equity Clients for CIB Latin America. In 2010, Mr. Figueroa returned to Buenos Aires as CIB Head for Citi Argentina, a position he held until May 2014, when he was appointed Chief Executive Officer for Citi Peru and Vice President of the board of directors of Citibank del Peru S.A., responsible for the wholesale and the consumer businesses. In November 2015, Mr. Figueroa was named Chief Executive Officer for Citi in Argentina, where he led a significant transformation of the franchise, both in the wholesale and consumer businesses. In January 2017, in addition to his role as Chief Executive Officer of Citi Argentina, he became head of Southern Cone (Argentina, Uruguay and Paraguay) and CIB Head for Southern Cone. In January 2020, he expanded his responsibility and became head of Latin America South LAS (Argentina, Chile, Colombia, Ecuador, Peru, Paraguay, Uruguay and Venezuela). Mr. Figueroa received his MBA finance degree from the CEMA University in Buenos Aires, a B.A. in business administration and a B.A. in accounting, both from Universidad Católica Argentina (U.C.A.) in Buenos Aires. He is a member of the Asociación Empresaria Argentina (AEA), Consejo Empresarial de América Latina (CEAL) in Argentina, Young President Organization (YPO) in Argentina, and Instituto para el Desarrollo Empresarial en Argentina (IDEA).
Raul A. Anaya Elizalde. was a member of our board of directors from 2008 to 2013, and November 2020 to today, and was re-elected to our board of directors in March 2023. Mr. Anaya is currently Chairman of the Board of Directors of Citibanamex Seguros S.A. de C.V., Citibanamex Pensiones S.A. de C.V. in Mexico, Citibank (Trinidad & Tobago) Ltd. and Citicorp Merchant Bank Ltd, Trinidad & Tobago. Mr. Anaya worked at Citi for 32 years until his retirement in June 2019. Before retiring, he was the Corporate Head of In-Business AML (KYC) for Citibanamex, subsidiary of Citigroup in Mexico, from July 2017 to June 2019. From July 2015 to June 2017, Raul Anaya was the Corporate Head of Transformation for Citibanamex in Mexico. Before his role in Citibanamex, from July 2012 to July 2015, Mr. Anaya was the Citi CEO for Latin America Consumer and Commercial Banking. Prior to this, Mr. Anaya served as Head of Global Retail Banking immediately following his position as the COO of Citigroup’s Global Consumer Banking Council, which commenced in April 2010. He also served as CEO of Citigroup's businesses in Central America and the Caribbean starting in July 2008. From December 2005 to July 2008, Mr. Anaya was the CEO of Latin America’s (except Brazil and Mexico) Consumer Group. He was responsible for retail banking, credit cards, and consumer finance, after serving as Retail Head for Latin America since February 2005. From August 2003 to January 2005, he was Executive Director of Consumer Assets at Banamex in Mexico, responsible for mortgages, personal loans and vehicle financing. Prior to this position, Mr. Anaya served as Division Director for the Central Metropolitan Retail Banking Division at Banamex. From May 1999 to January 2002, he was Chairman and CEO of Banco Bansud S.A. (formerly a subsidiary of Banamex) in Argentina. Mr. Anaya joined Citibank at Banamex’s New York Agency in October 1987 and later became General Manager of the Banamex Agency in Los Angeles, Executive Vice-President of the Corporate Banking and International Division at California Commerce Bank, General Manager of the Banamex Agency in Houston and General Manager of the Banamex Agency in New York, in charge of its offices in the United States and Canada. Mr. Anaya Chaired the Board of Directors of most of Citi’s financial and subsidiary entities across all of Central America.
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Ana Holuigue Barros (independent) was appointed member of our board of directors in March 2023. She is currently President of Chile Transparente (2022), director of Parque Arauco S.A. (2019) and Empresa Nacional del Petróleo (ENAP) (2018) and member of the Board of Directors of Grupo Prisma (2016). Previously, Mrs. Holuigue served as President (2019 - 2022) and Director (2018 - 2019) of Televisión Nacional de Chile (TVN), Director of Un Techo para Chile (2000 - 2022), Director of Fundación Amigos por Siempre (2015 - 2020), Director of CORPBANCA (2011 - 2015), Member of the Superior Council of Universidad Alberto Hurtado (2002 - 2017), Vice President (2010 - 2012) and President of the Audit Committee of Empresa de Ferrocarriles del Estado (EFE), Director of Fundación Chile (2010 - 2014), Director of Centro Cultural Gabriela Mistral (GAM) (2010 - 2014), Director of Consorcio Periodístico de Chile (COPESA) (2007 - 2014), Director of Unimarc (2009 - 2011), President of Asociación de Radiodifusores de Chile (ARCHI) (2005 - 2007) and Director of Consejo de Autorregulación y Ética Publicitaria (CONAR) (2004 - 2011). Mrs. Holuigue was also Executive Director of Grupo de Radios DIAL (2005 - 2017), founding partner and director of Radio DUNA (1995 - 2005), Corporate Manager of Telefónica (1992 - 1994), Marketing and Product Manager of Banco Santiago (1989 - 1992) and Research Manager (1985 - 1989) and Research Engineer (1980 - 1984) of Compañía de Petróleos de Chile (COPEC). Mrs. Holuigue was also a member of the Business and Society Circle of ICARE (2022 to date), Member of the Board of Red de Alimentos (2016 to date), Member of the Advisory Board of CLAPES UC (2014 to date), Advisor of Comunidad Mujer (2002 to date), Member of the Government Commission for the Defense of Free Competition (2011 - 2012) and for Women's Employment (2012), and part-time professor of Introduction to Economics, Microeconomics and Price Theory, Institute of Economics (1979 - 1989) and research professor at Institute of Economics (1979 - 1980) at Pontificia Universidad Católica de Chile. She also received the 100 Women Leaders Distinction. Mrs. Holuigue holds a degree in Business Administration and a Master's postgraduate degree in Economics from Pontificia Universidad Católica de Chile.
Andrés Ergas H. was appointed member of our board of directors in 2017 and was re-elected in March 2023. Previously, he was an advisor to the board of directors since August 2014 until his appointment as director. Currently, he is chairman of the board of Nomads of the Seas, Todo Moda, Isadora and Inersa 1. Previously, he was chairman and Chief Executive Officer of Banco HNS, chairman of the board of directors of Compañía General de Leasing and vice chairman of Factoring Finersa. He has also served on the boards of Banco de A. Edwards, Hotel Plaza San Francisco Kempinsky, BMW Chile, Inmobiliaria Paidahue, Mitsubishi Motors and Dina Trucks Co. Mr. Ergas was President and Founder of the Factoring Companies Association. He holds a degree in business administration from the Universidad Diego Portales.
Jean Paul Luksic F. was appointed member of our board of directors in April 2013 and was re-elected in March 2023. Mr. Luksic is vice chairman of Quiñenco S.A. and Sociedad Matriz SAAM S.A. Mr. Luksic has also been chairman of the board of directors of Antofagasta plc (United Kingdom) since 2004 and of Antofagasta Minerals S.A. Mr. Luksic was appointed to the board of directors of Antofagasta plc in 1990 and was the Chief Executive Officer of Antofagasta Minerals until his appointment as chairman of Antofagasta plc in 2004. He is also a member of the Consejo Minero, the industry body representing the largest mining companies in Chile. Mr. Luksic holds a B.Sc. degree in management and science from the London School of Economics and Political Science. Jean Paul Luksic is the brother of Andrónico Luksic.
Sinead O’Connor was appointed member of our board of directors in March 2023. She has 23 years’ experience in the banking industry. Throughout her career, she has worked in the areas of investment, sales, marketing, human resources and digital transformation, among others, in banks in the United Kingdom, Spain and Mexico. Since April 2022, Ms. O’Connor has been CEO of Consumer Bank at Citibanamex, Mexico’s second largest bank with 35,000 employees and 12 million customers. Previously, between 2018 and 2022, she served as Chief Digital Officer for the same bank, where she led the development of the company’s digital and data strategy. Prior to joining Citibanamex, from 2003 to 2018 she held different positions at Santander Group based in Madrid, Spain. Ms. O’Connor is a graduate of University College Cork and holds a Master in European Business from ESCP Business School.
Hernán Büchi Buc was elected a member of our board in August 2019 and re-elected in March 2023. Previously, he served as an advisor to our board since 2008, and during 2007 he was a member of our board of directors. He is the founder and advisor of the Instituto Libertad y Desarrollo, and president of the Directive Council of Universidad del Desarrollo. Mr. Büchi is also a board member of Quiñenco S.A.. Between 1985 and 1989, Mr. Büchi served as the Minister of Finance, and prior to this, he served as the Superintendent of Banks from 1984-1985, Minister of Planning from 1983-1984, and Vice-Secretary of Health from 1980-1983. Mr. Büchi holds a degree in civil mining engineering from the University of Chile and a Master’s Degree from Columbia University.
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Francisco Pérez M. has been a member of our board of directors since 2001 and was re-elected in March 2023. Since 1998, Mr. Perez has also served as the Chief Executive Officer of Quiñenco S.A. Mr. Pérez is also chairman of the board of directors of Compañía Sud Americana de Vapores S.A., Empresa Nacional de Energía Enex S.A., Enex Corp Ltd (UK), Invexans S.A., and Tech Pack S.A. He was formerly the Chief Executive Officer of Compañía Cervecerías Unidas S.A., of which he is still a director. Mr. Perez is a member of the board of directors of LQ Inversiones Financieras S.A., Embotelladoras Chilenas Unidas S.A., Cía. Cervecerías Unidas Argentina S.A., Cía. Pisquera de Chile S.A., Cervecera CCU Chile Limitada, Viña San Pedro Tarapacá S.A., Inversiones y Rentas S.A., Nexans (France), Sociedad Matriz SAAM S.A., Hapag-Lloyd A.G. (Germany) and member of the executive committee of Banchile Corredores de Seguros Limitada. Prior to 1991, Mr. Perez was Chief Executive Officer of Citicorp Chile and also was Vice President of Bankers Trust in Chile. Mr. Perez holds a degree in business administration from the Pontificia Universidad Católica de Chile and an MBA from the University of Chicago.
Jaime Estévez V. has been a member of our board of directors since 2007 and was re-elected in March 2023. He is also currently a member of the board of directors of Cruzados SADP. Previously, Mr. Estévez was chairman of the board of directors of Banco Estado, a Chilean state-owned bank. Additionally, he has served as a director of AFP Provida and AFP Protección, two Chilean pension fund investment companies, and as director of Endesa Chile S.A. Mr. Estévez was the Minister of Public Works from January 2005 to March 2006, and simultaneously, the Minister of Transportation and Telecommunications. He was also a congressman from March 1990 to March 1998 and President of the Lower Chamber of the Chilean Congress from March 1995 to November 1996. Mr. Estévez holds a degree in economics from the Universidad de Chile.
Paul Fürst G. has been a member of our board since November 2019 and was re-elected as first alternate director in March 2023. From 1998 to date, he has been a member of the board and partner at Grupo Plaza S.A., where he was also a member of the audit committee for two years, until April 2019. In addition, since 2009 he has been a partner and director of the mining company Ventana Minerals, since 2005 a partner and director of the mining and hydrogeology drilling company Terraservice, member of the board and partner of the goat products company Caprilac, and member of the board and partner of the agricultural company Comaihue. Previously, he was partner and member of the board at Parque Arauco S.A. for eleven years and director at the General Fund Manager WEG for two years. Mr. Fürst Gwinner is a commercial engineer from the Universidad de Las Condes. In addition, Mr. Fürst pursued the Senior Management Program (PADE) of the ESE Business School at the Universidad de los Andes.
Sandra Guazzotti has been a member of our board of directors since June 2019 and was re-elected as second alternate director in March 2023. Ms. Guazzotti is Head of Multi Country Region of Latin America at Google Cloud since November 2021 and has more than 20 years of global experience in IT and finance. Previously, Ms. Guazzotti led MCR Oracle between 2019 and 2021, and was General Manager of Oracle Chile twice, firstly between 2011-2014, and later in 2018. During her career at Oracle, she held the positions of Vice President of Investment Solutions and Financing for Asia – Pacific, based in Singapore, and Vice President of Corporate Sales in Japan. Prior to joining Oracle in 1999, she held various positions in the financial services industry, both in Japan and Argentina. Ms. Guazzotti holds degrees in International Relations from the University of Tsukuba, Japan and Senior Management (PADE) from Universidad de los Andes, Chile. Additionally, she has the Diploma of Directors of the Institute of Directors (IoD), United Kingdom. Ms. Guazzotti was awarded as “Executive of the Year” (2019) by Mujeres Empresarias and Revista Capital, and distinguished as one of the “100 Women Leaders in Chile” by the organization Mujeres Empresarias and the newspaper El Mercurio (2011, 2018 and 2019). She is also the former President and member of the Board of Directors of the Chilean-American Chamber of Commerce (AmCham Chile) and member of the board of Universidad Adolfo Ibañez. Ms. Guazzotti is also a member of Women Corporate Directors (WCD).
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Senior Management
Our current executive officers are as follows:
Executive Officers | Position | Age | ||
Eduardo Ebensperger Orrego | Chief Executive Officer | 57 | ||
Rolando Arias Sánchez | Chief Financial Officer | 59 | ||
Alfredo Villegas Montes | General Legal Counsel and Secretary of the Board | 52 | ||
Cristián Lagos Contardo | Manager — People and Organization Division | 57 | ||
José Luis Vizcarra Villalobos | Manager — Commercial Division | 64 | ||
Felipe Echaiz Bornemann | Manager — Global Compliance Division | 55 | ||
Axel Fahrenkrog Romero | Manager — Corporate Banking Division | 52 | ||
Sergio Karlezi Aboitiz | Manager — Treasury Division | 57 | ||
Oscar Mehech Castellón | Manager — Internal Audit Division | 58 | ||
Paola Alam Auad | Manager — Wholesale Credit Risk Division | 60 | ||
Julio Cubillo Navarro | Manager — Retail Credit & Global Risk Control Division | 47 | ||
Claudia Herrera García | Manager — Marketing and Digital Banking Division | 52 | ||
Esteban Kemp De La Hoz | Manager — Operations and Technology Division | 43 | ||
Salvador Danel Hernández | Manager — Cyber Security Division | 49 |
Eduardo Ebensperger O. has been our Chief Executive Officer since May 2016. He has held several positions at Banco de Chile including manager of the Commercial Division from 2014 to 2016, manager of the Wholesale, Large Companies and Real Estate Division between 2008 and 2014 and manager of the Large Companies Division between 2005 and 2007. Between 2002 and 2005, he was the Chief Executive Officer of Banchile Factoring S.A. He originally joined Banco de A. Edwards in 1989, where he was appointed as the regional branch manager in 1997 until 1999 when he was appointed as manager of the Medium Sized Companies Division until 2001. Currently, he serves on the boards of directors of Banchile Asesoría Financiera S.A., Banchile Administradora General de Fondos S.A., Banchile Corredores de Seguros Limitada and Socofin S.A. He is also member of the Advisory Council of the Faculty of Economics and Administration of the University of Chile. Mr. Ebensperger holds a degree in business administration from the Universidad de Chile.
Rolando Arias S. has been our Chief Financial Officer since June 2014. Prior to this position, Mr. Arias was manager of the Research and Planning Area. He served as manager of the Financial Control Area of Banco de Chile after its merger with Banco de A. Edwards from 2002 to 2006. Before this merger, Mr. Arias was in charge of the Planning Area of Banco de A. Edwards from 1997 to 2001. Mr. Arias joined Banco de A. Edwards in 1987 and until 1997 he held various positions related to controlling and planning. Mr. Arias holds a degree in business administration from Pontificia Universidad Católica de Chile.
Alfredo Villegas Montes. has been our General Counsel and Secretary of our board of directors since December 2019. Previously, he served as deputy general counsel since 2017. Before, he was head legal counsel for the Commercial Division since 2008. He joined Banco de Chile in 2002 as a result of its merger with Banco de A. Edwards, having joined the latter in 1994. Since January 2021, he has been the vice president of the legal affairs committee of the Chilean Banks Association. Mr. Villegas is an attorney and holds a law degree from the Universidad de Chile.
Cristián Lagos C. has been our People and Organization Division manager since May 2012. From 2008 to March 2012 he was the Corporate Human Resources and Reputational manager of Compañía General de Electricidad S.A. He was the Human Resources manager of Chilesat S.A. and corporate manager of Telmex S.A after those two companies merged. Previously, he was the Planning and Human Resources Division manager at Banco Sudaméricano, and later Scotiabank following the merger of these two banks. Currently, he is also member of the board of directors of Guillermo Subercaseaux Banking Studies Institute. Mr. Lagos holds a degree in psychology from the Universidad Diego Portales.
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José Luis Vizcarra V. has been our Commercial Division Manager since January 2020. Mr. Vizcarra joined Banco de Chile in September 1977. As of the date of his most recent appointment, he was the Metropolitan Regional Manager, a position he held since 2017. Previously, he served as regional area manager and zone manager in different locations throughout Chile, among other roles. Currently, he is a member of the boards of directors of Banchile Administradora General de Fondos S.A., Socofin S.A. and the Executive Committee of Banchile Corredora de Seguros S.A. Mr. Vizcarra has a technical degree in finance from Instituto de Estudios Bancarios Guillermo Subercaseaux, a graduate degree in corporate management from Universidad del Desarrollo, and a diploma in finance from Universidad de Buenos Aires.
Felipe Echaiz B. has been manager of our Global Compliance Division since January 2008. Mr. Echaiz previously worked for Citibank for ten years. Between 2004 and 2005 he was vice-president and Multinationals Cluster Group Head, and then served as Country Compliance Officer for Citigroup Chile between 2006 and 2007. In 2003 Mr. Echaiz was deputy director of the Anti-Money Laundering and Organized Crime Unit at the Public Prosecutor’s Office. At present, Mr. Echaiz is a member of the Compliance Committee of the Chilean Association of Banks. Mr. Echaiz is an attorney and holds a law degree from the Pontificia Universidad Católica de Chile and holds a master’s degree in finance and economics from the Universidad de Chile.
Axel Fahrenkrog Romero. has been the Head of Corporate Banking Division since July 2020. Prior to that, he was the multinational head since June 2016 at Banco de Chile. Before this position, he worked as the Multinational Unit Head at Citibank Chile since 2007, a position which he held in Banco de Chile upon the merger of Citibank and Banco de Chile. From 1995 to 2005, Mr. Fahrenkrog covered different positions within main local banks as the multinational and corporate relationship manager, and also as the group unit head in commercial banking. Currently, he is also a member of the board of directors of Banchile Asesoría Financiera S.A. Mr. Fahrenkrog holds a degree in Business Administration at Universidad de Valparaiso and an MBA from The University of Queensland, Brisbane, Australia.
Sergio Karlezi Aboitiz. has been the Manager of Treasury Division since December 2011. Previously, he was the Manager of Treasury between October 2009 and November 2011. From June 2006 to December 2008, Mr. Karlezi served as Head Trader of Citibank Chile, holding the same position at Banco de Chile until September 2009. Since 2000, he worked for six years as Executive Director of Santander Investment New York. Before that, Mr. Karlezi held positions as Head Trader in Chase Manhattan Bank (now J.P. Morgan) and Santander Investment Chile. Mr. Karlezi holds a degree in Industrial Civil Engineering from the Universidad de Santiago de Chile.
Oscar Mehech C. has been manager of our Internal Audit Division since July 2008. Before that, he was our Regulatory Policies Division manager in 2008, Global Compliance Division manager from 2006 until 2007 and deputy general counsel between 2004 and 2006. Prior to joining the Bank in 2002, he was deputy general counsel at Banco de A. Edwards, an institution that he joined in 1991. Mr. Mehech is also the chairman of the Audit Committee of the Chilean Banks Association since March 2023 and vice chairman of the surveillance committee at Depósito Central de Valores S.A. He holds a law degree from Universidad de Chile and an MBA from Pontificia Universidad Católica de Chile.
Paola Alam A. has been manager of our Wholesale Credit Risk Division since September 2018. Before, she served as the acting Corporate Credit Risk Division Manager since August 2018. Previously, since 2006, she was manager of Banco de Chile’s Business Risk Area. Mrs. Alam initially joined the Risk Area of Banco de A. Edwards in 1994, where she served in several positions. She has experience in risk taking in all sectors from SME to corporations, and in the last few years she has served in charge of the Large Companies Area. Previously, she worked at Price Waterhouse. Mrs. Alam holds a degree in business administration from Universidad de Santiago de Chile.
Julio César Cubillo N. has been manager of our Retail Credit Risk Division since October 2018 and, since July 2020, has also been manager of our Global Risk Control Division. Previously, between May 2017 and July 2018, he was head of Credit Risk at BBVA Chile. Likewise, Mr. Cubillo was Global Head of Credit Risk for Consumer Finance line of business at BBVA Holding (Spain) and before that he was Global Head of Retail Credit Risk Tools at BBVA Holding (Spain), in which he continued serving between years 2011 and 2017. He started his career at Bankinter in Madrid developing several functions in the risk areas and segments during 11 years. Currently, he also is member of the board of directors of Socofin S.A. Mr. Cubillo is an economist from the Universidad Carlos III de Madrid (Spain), having also completed an executive development program at IESE Business School (Spain).
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Claudia Herrera G. has been our Marketing and Digital Banking Division Manager since October 2019. Previously, she was the Division Manager in charge of Digital Transformation, a strategic program that she continues to lead. She joined Banco de A. Edwards in 2000, and in 2009, she assumed the position of Area Manager for Regional Large Businesses. In 2010 she became the Area Manager for Large Metro Businesses, Factoring and Comex, a position she held until June 2019 when she was named Division Manager of Large Metro Business, Factoring and Comex. She holds a degree in business administration from the Adolfo Ibáñez University.
Esteban Kemp D. has been manager of our Operations and Technology Division since August 2018. Before, he served as our acting manager of our Global Risk Control Division in March 2018. Prior to that, he had been the manager of the operational risk area since 2016. Mr. Kemp joined Banco de Chile in July 2016, after serving as senior manager at EY Chile. He had his first managerial position as a manager at Everis, in 2011. Mr. Kemp holds a civil engineer degree in computer science from the Universidad Austral de Chile and holds an MBA from the Universidad Adolfo Ibáñez.
Salvador Danel H. has been manager of our Cybersecurity Division since January 2019. During 2016 he was Cybersecurity Architect at Microsoft, responsible as a cybersecurity advisor for several organizations, cybersecurity assessments, compromise recovery activities and cloud planning. During 2015 he was Senior Security Manager at Accenture, responsible for the evaluation, planning and implementation of plans and processes related to cybersecurity for different industries. Between 2008 and 2014 he held the position of Senior Manager of Enterprise Risk Services at Deloitte, responsible for various areas, including, among others, cybersecurity practices to improve technology solutions, consulting services and business management, cybersecurity projects, define and develop corporate cybersecurity strategies. In addition, Mr. Danel is co-founder of Secure Information Technologies Consulting, responsible for, among other, defining the processes of the cybersecurity business (risk, threat and vulnerability management, incident management, hardening of infrastructure, forensic analysis, data classification, destruction of data and others), and IT and security assessment. Mr. Danel holds a bachelor’s degree in Information Technology Engineering from the Anahuac University (Mexico).
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COMPENSATION
The table below presents the amount of compensation, as established by our shareholders, to the members of our board of directors for the year ended December 31, 2022. These amounts include remuneration for services, fees for attendance at meetings of our board of directors, meetings of committees of our board of directors and meetings of board of directors of our subsidiaries, consulting services and travel expenses.
Name of Director | Remuneration | Fees for Attending Meetings of our Board of Directors | Fees for Attending Meetings of Committees of our Board of Directors and Meetings of the Board of Directors of our Subsidiaries(1) | Consulting | Total | |||||||||||||||
(in millions of Ch$) | ||||||||||||||||||||
Pablo Granifo Lavín | Ch$ | 691 | (2) | Ch$ | 79 | Ch$ | 370 | Ch$ | – | Ch$ | 1,140 | |||||||||
Andrónico Luksic Craig | 193 | 13 | – | – | 206 | |||||||||||||||
Raul A. Anaya Elizalde | 64 | 41 | 94 | – | 199 | |||||||||||||||
Hernán Büchi Buc | 64 | 38 | 71 | – | 173 | |||||||||||||||
Jaime Estévez Valencia | 64 | 43 | 102 | – | 209 | |||||||||||||||
Sandra Guazzotti | 64 | 37 | 59 | – | 160 | |||||||||||||||
Francisco Pérez Mackenna | 64 | 41 | 91 | – | 196 | |||||||||||||||
Jean-Paul Luksic Fontbona | 64 | 20 | – | – | 84 | |||||||||||||||
Alfredo Ergas Segal | 64 | 43 | 129 | – | 236 | |||||||||||||||
Andrés Ergas Heymann | 64 | 37 | 74 | – | 175 | |||||||||||||||
Samuel Libnic | – | – | – | – | – | |||||||||||||||
Julio Figueroa | – | – | – | – | – | |||||||||||||||
Paul Fürst Gwinner | 64 | 39 | 67 | – | 170 | |||||||||||||||
Other Subsidiary Directors | – | – | 147 | – | 147 | |||||||||||||||
Total | Ch$ | 1,460 | Ch$ | 431 | Ch$ | 1,204 | Ch$ | – | Ch$ | 3,095 |
(1) | Includes fees paid to members of the Advisory Committee of Banchile Corredores de Seguros Ltda. of Ch$16 million. |
(2) | Includes a provision of Ch$498 million, to account for an incentive which will be paid depending on our results. |
For the year ended December 31, 2022 there were no fees paid for advisory services to the board of directors, while travel and other related expenses amounted to Ch$95 million.
Consistent with Chilean law, we do not disclose to our shareholders, or otherwise make public, information regarding the compensation of our executive officers. Pursuant to the Chilean Corporations Law, our directors/audit committee must approve compensation plans, but we are not required to have a compensation committee. For the year ended December 31, 2022, no amounts were set aside or accrued by us to provide pension, retirement or similar benefits for our directors and officers. None of our directors is a party to any agreement with us or any of our subsidiaries that provides for benefits upon termination of his appointment as a director.
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BOARD PRACTICES
Governance Practices
The board of directors delegates certain functions and activities to our committees to research, evaluate and report to the board of directors regarding specific matters which may affect our businesses.
The Directors/Audit Committee
The directors/audit committee’s primary objectives are to seek the efficiency, maintenance, application and functioning of our internal control systems and compliance with applicable rules and procedures governing our business; to identify and understand our business risks; to supervise the activities of Internal Audit, ensuring their independence from management; to serve as mediator and coordinator of tasks between the internal audit work and our independent auditors; to act as a communication channel between our internal audit team, our independent auditors and our board of directors; and to ensure the compliance with the duties set forth in Article 50 bis of the Chilean Corporations Law.
Our directors/audit committee is composed of three members appointed by the board of directors. The directors/audit committee is currently composed of the following individuals:
● | Jaime Estévez (financial expert); |
● | Ana Holuigue; and |
● | Raúl Anaya E. |
Mr. Estevez was appointed as member of the directors/audit committee by our board of directors at the meeting held on April 12, 2007. Mrs. Holuigue was appointed as member of the directors/audit committee by our board of directors at the meeting held on March 9, 2023. Mr. Anaya was appointed to the directors/audit committee by our board of directors at the meeting held on April 8, 2021. Mr. Estevez and Mrs. Holuigue comply with the independence requirements of both Chilean law and Rule 10A-3 under the Exchange Act and are full voting members of our directors/audit committee.
Mr. Anaya is exempt from the independence requirements of Rule 10A-3 of the Exchange Act pursuant to the exemption under Rule 10A-3(b)(1)(iv)(D). Pursuant to that exemption, Mr. Anaya is a non-voting member of our directors/audit committee with respect to all matters required to be addressed by our directors/audit committee under U.S. federal securities laws.
The directors/audit committee met 15 times (12 ordinary and 3 extraordinary meetings) during 2022. The budget of the directors/audit committee is approved annually at the ordinary annual shareholders’ meeting. The directors/audit committee satisfies the applicable requirements of the CMF and operates pursuant to a charter document. The CMF recommends that at least one of the members of the directors/audit committee be experienced with respect to the accounting procedures and financial aspects of banking operations. The directors/audit committee submits a report regarding its activities to our board of directors after each directors/audit committee meeting and presents an annual report at our ordinary annual shareholder’s meeting. As established in the directors/audit committee’s charter, the chief executive officer, the general counsel and the manager of our Internal Audit Division, or their respective deputies, shall also attend this committee’s meetings. The directors/audit committee may also invite other persons to attend meetings. The directors/audit committee may appoint independent personnel to carry out specific duties.
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The directors/audit committee’s specific objectives include, among others:
● | Seeking efficiency, maintenance, application and functioning of our internal control systems, and compliance with rules and procedures; |
● | Supervising compliance with rules and procedures governing the banking business and identifying the business risks of our and our subsidiaries’ activities; |
● | Supervising the activities of our Internal Audit Division and ensuring its independence from management; |
● | Serving as an intermediator and coordinator of tasks between our internal audit work and our independent auditors, and acting as a communication channel between these teams and our board of directors; |
● | Proposing to the board of directors the independent auditors and the credit rating agencies to be proposed at the shareholders meeting; |
● | Analyzing the reports, content, procedures and scope of the revisions by our independent auditors and credit rating agencies; |
● | Analyzing the reports of internal audits and revisions and analyzing and reviewing the annual audit program; |
● | Analyzing the interim and annual financial statements; |
● | Analyzing our financial statements included in the Form 20-F; |
● | Gathering information on accounting changes occurring during the year and their effects; |
● | Reviewing issues affecting the internal control systems; |
● | Analyzing the remuneration systems and compensation plans for managers and executive officers; |
● | Analyzing the annual performance self-evaluation process; |
● | Analyzing related party transactions pursuant to Title XVI of the Chilean Corporations Law; |
● | Analyzing policies relating to operational risk and progress in the risk-management process and SOX self-evaluation; |
● | Analyzing and informing on matters related to the Global Compliance Division, principally regarding the revision of policies for detecting and sanctioning money laundering transactions; and |
● | Reviewing customer claims filed with the CMF and the Customer Defense Division of the Chilean Association of Banks and Financial Institutions. |
Portfolio Risk Committee
The portfolio risk committee is continuously informed regarding the composition, concentration and risk of our loan portfolio, from a global, sector-specific and line of business perspective.
Among several matters, the portfolio risk committee is responsible for:
● | Closely reviewing the performance of our principal debtors, past-due loan ratios, past-due loan indicators, write-offs and allowances for loan losses; |
● | Analyzing proposals for discussion with, and approval by, our board of directors with respect to credit policies; |
● | Reviewing and approving different methodologies to assess each portfolio; |
● | Calculating allowances for loan-losses and determining additional and anticyclical allowances and methodologies related to the Bank’s capital management; |
● | Reviewing and approving both the integral risks measurement and the credit risk appetite framework. |
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The portfolio risk committee meets on a monthly basis and is composed of the chairman of our board of directors, two additional members of our board of directors, our chief executive officer; the manager of our Wholesale Credit Risk Division, the manager of our Retail Credit and Global Control Risk Division, the manager of our Commercial Division and the manager of our Risk Control and Information Management Area.
Board Credit Committee
Our governance structure relating to our credit evaluation process is based on our business segments and on the total requested. All credit committees are represented by qualified members with sufficient authority over credit approval limits.
Credit decisions are mostly made by different credit committees, the highest of which, in terms of lending limits, is the board credit committee. The board credit committee meets on a weekly basis and reviews all transactions related to clients or groups of companies exceeding UF 750,000, as well as those transactions that, in accordance with our bank’s credit risk policies must be reviewed and approved by the Board Credit Committee. This committee is chaired by our Chairman and is comprised by all of our board members, our chief executive officer and the manager of our Wholesale Credit Risk Division.
Additionally, for retail banking, we have loan committees that in exceptional cases review individual customers when they do not meet our customer profile policies, payment behavior requirements or maximum financing amounts.
Finance, International and Market Risk Committee
The main objectives of the finance, international and market risk committee are to continuously review and follow-up on the Bank’s capital basis, liquidity (funding and instruments negotiation), main financial positions and results, and to assess price and liquidity risks thereof. Thus, this committee oversees compliance with applicable regulations, procedures and our policies, also recommending and implementing finance guidelines and appropriate actions to address any contingencies. Likewise, it monitors the Bank’s balance sheet and any change it may suffer in accordance with applicable accounting and financial standards.
The finance, international and market risk committee meets on a monthly basis. Its members are the chairman of the board of directors, four other members of the board of directors, the chief executive officer, the chief financial officer, the manager of our Treasury Division, the manager of our Wholesale Credit Risk Division and the manager of the market risk area.
The finance, international and market risk committee covers the following topics, among others:
● | Design, develop and continuous review of policies and procedures related to limits and alerts of financial positions and exposures, ensuring adequate control and disclosure to the board of directors; |
● | Review of the Bank’s annual Liquidity Plan and Price Risk limits framework; |
● | Ensure the compliance with the Bank’s Market Risk Management Policy, Liquidity Policy and Fair Value Policy; |
● | Prior to the board’s approval, review the risk appetite framework, the finance plans and the price risk plan; |
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● | Continuously monitor financial exposures and market/liquidity risks, ensuring compliance with the board’s risk framework; |
● | Review methodologies, main assumptions and results of stress tests, ensuring coherence with the economic environment and financial markets, and to develop action plans to address such results if necessary; |
● | Monitor actual results of the different financial exposures, including the accuracy of our predictions and their impact on our positions; and |
● | Review the liability profile, including long-term funding provided by foreign investors, and the main credit exposures generated by the derivatives portfolio. |
Money Laundering and Financing of Terrorism Prevention Committee
The money laundering and financing of terrorism prevention committee was set up in April 2006 with the purpose of defining the policies and procedures that would comprise the asset laundering and financing of terrorism prevention system, as well as evaluating compliance and deciding on all matters related to these subjects.
This committee is composed of three board members, two of which must be independent. Additionally, the committee includes, as non-voting members, our chief executive officer, our general counsel and the chief executive officer of Banchile Administradora General de Fondos S.A. (who also, in this case, acts on behalf of Banchile Corredores de Bolsa S.A.), the manager of our Operations and Technology Division, the manager of our Internal Audit Division, the manager of our Global Compliance Division and the manager of our Anti Money Laundering Area.
The asset laundering and financing of terrorism prevention committee meets quarterly and among other functions as determined by our board has the following functions:
● | To approve the policies and procedures concerning the gathering of information on customers and their activities and the acceptance and monitoring of their accounts, products and operations; |
● | To approve policies and procedures concerning unusual transaction detection systems; formal channels of information to senior management; and monitoring, analysis and reporting mechanisms; |
● | To approve policies and procedures concerning surveillance methods and relations with correspondent banks; |
● | To approve policies and procedures concerning staff selection, training programs and codes of conduct; |
● | To approve the policies and procedures concerning money laundering and terrorism financing prevention; |
● | To approve policies and procedures relating to client segmentation, products and high risk areas and their treatment, including special guidelines related to monitoring and controlling transactions associated with PEPs; |
● | To approve policies and procedures relating to sanctions applied by the Office of Foreign Assets Controls (OFAC) to persons or countries listed under it; |
● | To designate persons related to the Unidad de Análisis Financiera (UAF) according to Law No. 19,913; |
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● | To review and analyze results to verify compliance with current policies and procedures; |
● | To be informed and aware of decisions relating to the number of suspicious transaction reports sent to the UAF; |
● | To consider activities developed to train staff in money laundering and terrorism financing prevention; |
● | To be informed and aware of technological and other types of projects relevant to the Global Compliance Division; and |
● | To inform our board of directors of regulatory changes related to the prevention of money laundering and financing of terrorism. |
Higher Operational Risk Committee
The Higher Operational Risk Committee addresses and validates any necessary change in the procedures, controls and IT systems that uphold our Bank’s operations, with the purpose of mitigating operational risks thereof, ensuring that the Bank, overall as well as its respective divisions and areas, properly manage and control these risks.
Among other matters, this committee is responsible for:
● | Approving our operational risk management model, ensuring the implementation of policies, rules, methodologies and associated procedures; |
● | Approving plans and initiatives for the development of the operational risk management model and monitoring it; |
● | Reviewing and approving operational risks within our integral risk measurement, also ensuring its review and validation by the Capital Management Committee and its approval by the board of directors; |
● | Reviewing and approving the operational risk appetite framework, defining metrics of acceptable levels of tolerance and appetite for operational risk and maintaining a permanent control over their compliance; |
● | Tracking the main incidents and operational events, their root causes, impacts and corrective measures; |
● | Ensuring the progress of the main action plans associated with incidents, events and operational risk assessments; |
● | Acknowledging and being permanently informed about the level of our exposure to operational risk and the main risks to which it is exposed; |
● | Understanding the main strategies to mitigate our most significant operational risks, whether they have materialized or not, and following up on the implementation of these strategies; |
● | Ensuring the long term solvency of the organization by avoiding those risk factors that may jeopardize the continuity of the Bank; |
● | Ensuring that the policies of operational risk, information security, business continuity and outsourcing services are aligned with the objectives and strategies of the Bank; |
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● | Determining the development of new products and services, process changes or outsourcing, in those cases of greater complexity or impact; |
● | Informing our board of directors about the comprehensive operational risk management model and level exposure for the Bank´s operational risk, the main risks, events and action plans in this respect; |
● | Acknowledging the results of critical suppliers’ yearly evaluation and following up on any measures defined therein. |
This committee meets on a monthly basis, and is composed of the chairman and three additional members of our board of directors, our chief executive officer, the manager of our Retail Credit and Global Control Risk Division, the manager of our Operations and Technology Division, the manager of our Commercial Division, the manager of our Cybersecurity Division and the manager of our Marketing and Digital Banking Division.
Capital Management Committee
The main function and objective of this committee is to evaluate, monitor and review the Bank’s capital adequacy under the principles set by the Bank’s Capital Management Policy and applicable risk appetite frame, safeguard that capital resources are adequately managed, that the principles set by the CMF in this respect are complied with, and the sustainability of the Bank’s business in the medium-term horizon.
Among other matters, the Capital Management Committee is responsible for:
● | Reviewing and updating, at least on an annual basis, the Capital Management Policy; |
● | Ensuring that the Bank counts with sufficient capital as may be required to properly manage its necessities in normal and stressed scenarios, in a three-year horizon. |
● | Reviewing the results of stress tests, the Bank’s risk appetite framework related to business and capital and the Bank’s Regulatory Capital (or Total Capital) self-evaluation report. |
● | Briefing the board of directors on the compliance of the Bank’s capital plan, the Banks’s risk appetite framework related to business and capital, and any variable affecting such parameters. |
This committee meets on a quarterly basis and is composed of two members of our board, the chief executive officer, the chief financial officer, the manager of our Wholesale Credit Risk Division, the manager of our Retail Credit and Global Control Risk Division and by the manager of our Financial Control of Treasury & Capital Area.
Leasing Committee
The main function of the Leasing Committee is to review the monthly evolution and results of our Leasing Area by means of a report that consolidates the management of the business divisions of the Bank.
This committee meets on a monthly basis and is composed of one or more directors appointed by the board of directors and our chief executive officer as voting members. Other managers from business areas are appointed from time to time by this committee as non-voting members.
Factoring Committee
The Factoring Committee was set up in 2013, after the merger of Banchile Factoring S.A. with us. Its purpose is to analyze the evolution and results of our Factoring Area in terms of volume, prices, margins, provisions and expenses and analyze the factoring product for each business area of the Bank.
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This committee meets on a monthly basis and is composed of one or more directors appointed by the board of directors and our chief executive officer as voting members. Other managers from business areas are appointed from time to time by this committee as non-voting members.
Banchile Corredores de Seguros Executive Committee
The main purpose of the Banchile Corredores de Seguros Executive Committee is to analyze the growth and results of our insurance brokerage subsidiary.
This committee is composed of the chairman of our board of directors, one other member of our board of directors, our chief executive officer, the manager of our Commercial Division and the chief executive officer of Banchile Corredores de Seguros Ltda.
Committees composed of Banco de Chile’s senior management
The main committees composed of Banco de Chile’s senior management executives are:
Management Committee
The management committee, the highest coordinating body of our management, is chaired by our chief executive officer and composed by the managers of each of our divisions; its principal function is to discuss main strategic guidelines and to analyze the market and the banking industry.
This committee meets every two months and resolves issues relating to our internal policies and analyzes our performance. In this committee, numerous divisions exchange their points of view as to our business and prioritize joint initiatives. Each year, this committee outlines the foundations for our annual plan. After the individual annual plan for each business area is agreed upon by our chief executive officer and each division manager, under the coordination of our chief financial officer, the overall plan is submitted to our board of directors for approval. This committee also reviews progress and budgets for approved plans on a regular basis.
Disclosure Committee
The main purpose of this committee is to comply with best practices in the disclosure of financial information to the market, to allow the market and its participants an adequate interpretation of our bank’s financial situation, business position and solvency level, through different reports published for such purposes. This committee meets on a quarterly basis, and its members are required to review annual, mid-year and quarterly financial reports and in general all financial information disclosed by us prior to each disclosure.
The members of the disclosure committee include our chief financial officer, our chief accountant, our chief legal counsel for international, financial and investment banking matters, the manager of our Wholesale Credit Risk division, the manager of our Retail Credit and Global Control Risk division, the manager of our Research and Planning Area, the manager of our Financial Control of Treasury & Capital Area and the manager of our Risk Follow-up Area. The manager of our Internal Audit Division may participate in this committee as well.
Ethics Committee
The Ethics Committee was established in 2005 to define, promote and regulate behavior of professional and personal excellence consistent with our philosophy and values to be followed by all our staff in order to meet the expectations of our customers.
To meet these goals and promote a culture of ethical behavior, the Ethics Committee sets policies on ethics and ensures their compliance, develops training plans related to ethics in our business, and reinforces positive behavior among our staff. The Ethics Committee also acts as a forum to address, discuss and resolve any conduct by our staff that is inconsistent with our values. This committee meets every four months and additionally, when necessary, upon receiving internal reports or complaints. It is chaired by the manager of our People and Organization Division and includes our general counsel, the manager of our Internal Audit Division, the manager of our Global Compliance Division, the manager of our Commercial Division, and the manager of our Operational and Technology Division.
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Operational Risk Committee
The operational risk committee, at a management level, is responsible for initiating any necessary change in the procedures, controls and IT systems that uphold the Bank’s operations, with the purpose of mitigating operational risks thereof, ensuring that the Bank overall as well as its respective divisions and areas, properly manage and control these risks. Most of the responsibilities of our Higher Operational Risk Committee are also addressed, at a management level and as first instance, by the Operational Risk Committee.
This committee meets on a monthly basis, and is chaired by the manager of our Retail Credit and Global Control Risk Division, and includes our chief financial officer, the manager of our Cybersecurity Division, the manager of our Operational Risk Area, the manager of our Technological Risk Area, the manager of our Business Continuity, the manager of our Planning and PMO Area, the manager of our Large Companies Area, the manager of the Corporate Audit Area, the manager of our Operations Area, the manager of our Clients Area, the Head of the Legal Department and the sub-manager of our Operational Risk Management Area.
Sustainability Committee
This main objective of this committee is to analyze and propose sustainability challenges and requirements in business strategies, based on actions related to environmental, social and governance (ESG) matters. Among other tasks, it is also responsible for designing, managing and disseminating our bank’s (and its subsidiaries) sustainability strategy and policies. For such purposes, different stakeholders are considered, including clients, investors, employees, the community and suppliers.
This committee meets every two months and is chaired by our chief executive officer. It is also composed by our chief financial officer, our general counsel, the manager of our Marketing and Digital Banking Division, the manager of our People and Organization Division, our head of Investor Relations (also Chief Economist), the manager of our Corporate Affairs and Sustainable Development area and the manager of our Corporate Image and Advertising area.
Quality Committee
This main objective of this committee is to generate strategic guidelines for decision-making on issues related to the attention of customers, through all channels available at the bank, by means of the analysis of customer perception and relevant competition. In addition, this committee supervises projects and initiatives aimed at increasing the permanence and referrals of our clients.
This committee meets every two months and is chaired by our chief executive officer, our chief financial officer, the manager of our Commercial Division, the manager of our Corporate Division, the manager of our Operations and Technology Division, the manager of our Marketing and Digital Banking Division, the manager of our Clients Area and the head of the Clients’ Feedback area.
Technical Committee for Internal Models Supervision and Development
This committee sets methodic guidelines to develop, follow-up and document diverse statistical models used throughout our Bank’s products focused on massive segments in order to assess their credit risk. It also safeguards the coherence between models and compliance of minimum satisfaction standards as required. Every model that must be approved by the Portfolio Risk Committee and by our board of directors must previously pass through a recommendation from this committee.
This committee meets on a monthly basis and is composed by the manager of our Retail Credit and Global Control Risk Division, the manager of the Risk Follow-up Area, the manager of the Research and Management Area, the manager of our Retail Business Development Area, the manager of our Risk Models Area, the deputy manager of our Retail and Model Follow-up Area, the deputy manager of our Big-Data and Regulatory Systems Area, the deputy manager of our Pre-approved Admissions Area, the deputy manager of our Regulatory Models Area, the deputy manager of our Infrastructure and Management Area, the deputy manager of our Risk Modeling Validation Area and our Capital Risk Models Department Chief.
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Investment and Expenditures Committee
The main objectives of the Investment and Expenditures Committee are to review investment or expenditures related initiatives or projects amounting to more than UF12,500; to ensure that these investments or expenditures are consistent with our strategic plans; and to evaluate these new projects from an economic perspective, among others. Notwithstanding the foregoing, if a project involves the incremental disbursement of resources for more than UF25,000, this committee must request the approval of our board of directors.
This committee meets only in extraordinary sessions, on the dates determined by its chair. It is composed of our chief executive officer, our chief financial officer, the manager of the Administrative Area and the Manager of the Expenditure Control Area. If any technological project is to be approved, the manager of the Operations and Technology Division, the manager of the Technology and Infrastructure Area and the manager of the Planning and Project Management Office Area also participate.
Project Approval Committee
The main objectives of this committee are to approve technology initiatives or projects, whether investments or expenditures; to ensure that these investments or expenditures are consistent with our strategic plans; and to economically evaluate new projects, among others. Notwithstanding the latter, if a project involves the incremental disbursement of resources of more than UF12,500, this committee requires the approval of the Investment and Expenditures Committee.
This committee meets on a weekly basis or as extraordinary determined by its chair. Its members are the manager of the Operations and Technology Division (chairing this committee), the manager of the Administrative Area, the manager of the Expenditures Control Area and the manager of the Planning and Project Management Office Area.
Policies and Procedures
Our board of directors has approved policies and procedures addressing several matters. In addition, the Merger Agreement between us and Citibank Chile provided that as a general rule our board of directors would approve and implement certain policies and procedures relating to the operation of the joint entity. These policies are reviewed annually and updated as necessary.
As of the date of this annual report, our board of directors or, when applicable, our senior management, have approved policies and/or procedures regarding the following issues, among others:
● | Code of Conduct; | ● | Capital Management Policy | ||
● | Anti-Money Laundering, Anti- Terrorism Finance and Non-Proliferation of Weapons of Mass Destruction Policy; | ● | Capital Expenditure Policy; | ||
● | Conflict of Interest Management Policy; | ● | Expense Management Policy; | ||
● | Anti-Trust Policy; | ● | Accounting Policies and Procedures; | ||
● | Anti-Bribery and Foreign Corrupt Practices Act; | ● | Complex Products and Services Policy; | ||
● | Office of Foreign Assets Control; | ● | Tax Standards for Tax Sensitive Transactions Policy; | ||
● | Insider Trading and Personal Investment Management Policy; Information Barriers; | ● | Tax Policy and Procedures; | ||
● | Regulation K—Debts Previously Contracted; | ● | Fiduciary Policy; |
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● | Regulation K—Equity Activity; | ● | Mergers and Acquisitions Policy; | ||
● | Regulation W (23 A/B); | ● | Records Management Policy; | ||
● | Financial Information Disclosure Policy | ● | Electronic Transportable Media Policy; | ||
● | Fair Lending Policy; | ● | Volcker Rule Policy; | ||
● | Loans to Directors and Senior Management; | ● | Market Risk Policy; | ||
● | Independent Research Policy; | ● | Liquidity Risk Policy; | ||
● | Related Parties Regular Transactions Policy; | ● | Crime Prevention Model Policy; | ||
● | Charitable Donations Policy; | ● | FATCA Policy; | ||
● | Internal Audit Policy; | ● | Fair Value Policy; | ||
● | Non-Discriminatory Access to Credit Product for Natural Persons Policy; | ● | Compliance Program for Antitrust Regulation; | ||
● | Information Security and Cybersecurity Policy; | ● | Manual for Handling Information of Interest to the Market; | ||
● | Technological Security Plan and Cibersecurity; | ● | PEPs Policy; | ||
● | Anti-Tying Policy; | ● | Business Continuity (COB); | ||
● | Mandatory Absence Policy; | ● | Citi Information Security Standards; | ||
● | Compliance Policy/Program; | ● | General Ledger Maintenance Policy; | ||
● | Legal Entity Management Policy; | ● | Quality Policy; | ||
● | Fraud Management Policy; | ● | Environmental Sustainability Policy; | ||
● | Anti-Boycott Policy; | ● | Sustainability Policy; | ||
● | Issue Tracking, Management and Escalation Process; | ● | Inclusion, Non-Discrimination and Respect for Diversity Policy; | ||
● | Operational Risk Management Policy; | ||||
● | Credit Risk Policy; | ||||
● | Vendor Selection and Management Process; | ||||
● | Web Site Standards Policy; | ||||
● | Information Technology; | ||||
● | Service Outsourcing Policy; |
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EMPLOYEES
The following table shows a breakdown of our full-time, permanent employees at the dates indicated:
As of December 31, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
Banco de Chile | 10,876 | 10,288 | 10,610 | |||||||||
Subsidiaries | 2,258 | 1,996 | 1,940 | |||||||||
Total | 13,134 | 12,284 | 12,550 |
As of December 31, 2022, we had 12,550 employees (on a consolidated basis), of whom 9,219 (including Banco de Chile and subsidiaries) were unionized, representing 73.5% of the total employees of the Bank and its subsidiaries. As of the same date, all management positions were held by non-unionized employees.
Banco de Chile currently has 11 unions that collectively negotiate their bargaining agreements. Two of those unions are associated with our subsidiaries, Banchile Administradora General de Fondos, Banchile Corredores de Bolsa and Socofin. In the case of Banchile Administradora General de Fondos and Banchile Corredores de Bolsa (“Banchile”), there is only one union representing workers of both (“Banchile union”). The remaining nine unions represent the Bank’s employees and five of them negotiate as a single union (Federación de Sindicatos de Banco de Chile).
During 2016 we renegotiated existing collective bargaining agreements with the unions of three of our subsidiaries, Socofin and Banchile union. In the case of Socofin, we reached a four-year agreement, which expired in 2020. On December 31, 2016, our former credit pre-evaluation subsidiary (Promarket S.A.) was merged into the Bank. As a result, Promarket’s union was integrated into the Bank. Based on the last collective bargaining agreement signed by Promarket and its union in 2014, a new collective bargaining process between the Bank and the former Promarket union took place in November 2017. Following that negotiation, we reached a three-year agreement that expired in 2020.
In addition, during the first quarter of 2018, we renegotiated the collective bargaining agreement signed with the union associated with former employees of Citibank (before the merger between Citibank and Banco de Chile) and reached a three-year agreement expiring in December 2020. Also, it is worth mentioning that based on formerly signed contracts, during the second quarter of 2018 we renegotiated the collective bargaining agreement with the remaining unions representing the Bank’s employees, including Sindicato BAE and Federación de Sindicatos de Banco de Chile. As of December 2022, the unions represented 31.0% and 6.1% of our employees (on a consolidated basis), respectively.
During 2019, we carried out a collective bargaining process with Banchile’s union, reaching a three-year agreement, which expired in 2022.
In 2020, we renegotiated the collective bargaining agreements with two of the Bank’s unions, particularly with those composed of former employees of Citibank and Promarket. We reached a three-year agreement expiring in November 2023. We believe that these agreements were a significant milestone in the relationship with our unions considering the current, challenging scenario and the uncertain social, economic and political context for the next few years. In addition, in March 2021 we successfully completed collective bargaining processes with Sindicato BAE, Federación de Sindicatos de Banco de Chile and Sindicato Banco de Chile, reaching a three-year agreement. As of December 2022, these three unions jointly represented 55.2% of our employees on a consolidated basis.
Finally, during 2022 we carried out a collective bargaining process with Banchile’s union, reaching a three-year agreement, expiring in 2025.
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We believe all of these agreements reflect the satisfactory relationships between the Bank and its employees, while reinforcing our commitment to their career development. To emphasize our employees’ high level of commitment to the Bank and our customers during various challenging periods, we granted a one-time bonus of Ch$500,000 in December 2019 to part of the staff, and introduced additional benefits to address transport problems due to the significant disruption we observed during the social unrest in 2019. We have also supported remote working arrangements for those collaborators who do not necessarily need to perform their work in-person. In order to do that, we acquired a significant number of laptops, which have been installed with world-class cybersecurity measures. We have also set up our contingency sites with proven health measures in order to avoid overcrowding, while utilizing other locations in order to provide our employees with even more space to carry out their tasks. Furthermore, due to the increase in our consolidated net income for the year ended 2022, as compared to 2021, during 2022 we granted a special performance bonus to our staff in order to recognize the effort and commitment of our employees and their permanent support to the corporation’s strategic pillars.
See “Item 8—Financial Information—Legal Proceedings—Setting of Minimum Services and Emergency Teams in Case of a Strike,” for information on the setting of the Bank’s minimum services and emergency teams in case of a strike by our labor unions.
We have comprehensive personnel training and development programs that include internal courses on operational, technical and commercial matters, as well as participation in external seminars and conferences. In 2022, the total cost of training programs was approximately 0.4% of our consolidated personnel expenses. These expenses were associated with 3,976 training courses that were attended by 261,792 attendees. In addition, for the year ended December 31, 2022 the Bank granted 192 scholarships to staff members for specialization purposes.
We do not maintain any pension or retirement programs for the vast majority of our employees. We do, however, pay certain long-serving key employees a severance payment upon retirement. Although we have provided productivity bonuses to individual employees on a discretionary basis, we do not maintain a formal profit-sharing plan.
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SHARE OWNERSHIP
Mr. Andronico Luksic and Mr. Jean Paul Luksic, members of our board of directors since March 2002 and April 2013, respectively, together with members of their family, control Quiñenco S.A. (“Quiñenco”). As of April 19, 2023, Quiñenco directly and indirectly owns 50% of LQIF, which in turns owns directly 46.34% of our outstanding shares and 4.81% through Inversiones LQ-SM Ltda. (“LQ-SM”). Quiñenco also directly holds 0,11% of our total common stock.
LQIF and LQ-SM are investment vehicles incorporated under Chilean law through which Quiñenco and Citigroup hold their ownership interests in Banco de Chile. As part of the strategic partnership between Citigroup and Quiñenco, they entered into a framework agreement which was included in our 6-K filed on July 20, 2007. Pursuant to this agreement and following the merger of Citibank Chile into Banco de Chile, Quiñenco and Citigroup became the shareholders of LQIF, the parent corporation of Banco de Chile, among other companies. LQ-SM is an investment vehicle whose major shareholder LQIF owns 99.99% of its shares.
As of April 19, 2023, Citigroup is the owner of 50% of LQIF and Quiñenco, directly and indirectly, owns 50% of LQIF. Regardless of any increase in participation by Citigroup, however, the framework agreement provides that Quiñenco will remain in control of LQIF and the corporations that are directly or indirectly controlled by LQIF. Accordingly, Quiñenco will maintain the power to elect the majority of the directors of LQIF and Banco de Chile.
None of our directors or senior management directly owns 1% or more of our outstanding common stock. Further, none of our directors (including Mr. Andronico Luksic and Mr. Jean Paul Luksic) or senior management have different or preferential voting rights with respect to the shares they own.
We do not have any arrangements for involving employees in our capital, including any arrangements that involve the issue or grant of options of our shares or securities.
In view of the cash dividend approved at our annual shareholders’ meeting held on March 28, 2019, SAOS repaid the Central Bank subordinated debt on April 30, 2019. See “Item 4. Information on the Company—History and Development of the Bank—The 1982-1983 Economic Crisis and the Central Bank Subordinated Debt.” As a consequence of such full payment, Sociedad Matriz del Banco de Chile S.A. (“SM-Chile”) is in the process of being liquidated and its shareholders, LQ Inversiones Financieras S.A. and Inversiones LQ SM Ltda., increased their direct shareholdings in our ordinary shares. Similarly, other shareholders of SM-Chile became our direct shareholders, which significantly increased the public float of our stock. As a result of the repayment SAOS was dissolved.
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Item 7 Major Shareholders and Related Party Transactions
MAJOR SHAREHOLDERS
Ownership Structure
As described in “Item 4. Information on the Company—History and Development of the Bank—History—The 1982–1983 Economic Crisis and the Central Bank Subordinated Debt,” the Chilean banking system, including us, experienced significant instability during that time that required the Central Bank and the Chilean Government to provide financial assistance to most Chilean private sector banks which resulted, pursuant to Law No. 18,818 enacted in 1989, in the repurchase by us of our portfolio of non-performing loans from the Central Bank and the assumption of the Central Bank’s subordinated debt relating to our non-performing loans.
In November 1996, pursuant to Law No. 19,396, our shareholders approved a reorganization by which the former Banco de Chile was converted into a holding company named Sociedad Matriz del Banco de 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 incorporated Sociedad Administradora de la Obligación Subordinada S.A. (“SAOS”), a wholly-owned subsidiary and special purpose legal vehicle created pursuant Law No. 19,396, whose only business purpose is to repay indebtedness to the Central Bank. In exchange for assuming the Central Bank debt, SAOS received from SM-Chile a certain portion of our shares as collateral, which as of April 30, 2019 represented 28.31% of our shares. Pursuant to applicable law and the bylaws of both SAOS and SM-Chile, the economic rights of our shares held by SAOS belonged to the Central Bank; however, their voting rights were exercised by the shareholders of SM-Chile at Banco de Chile’s shareholders’ meetings. On April 30, 2019, SAOS fully repaid the Central Bank subordinated debt. As a consequence, SAOS was dissolved. SM-Chile is currently in the process of being liquidated, and SM-Chile’s shareholders became our direct shareholders, which significantly increased our public float.
As a result, shares of Banco de Chile owned by SAOS and SM-Chile were distributed as follows:
a) | the shares of Banco de Chile, owned by SAOS, and the proceeds obtained from the liquidation of any assets owned by SAOS at the time of their liquidation, were distributed among series A, B and D shareholders of SM-Chile pro rata based on the participation of each series in the total amount of series A, B and D shares. |
b) | the shares of Banco de Chile owned by SM–Chile were distributed in the following proportions: |
● | Series A shareholders received one Banco de Chile share for each share they have in SM–Chile. |
● | Series D shareholders received one Banco de Chile share for each share they have in SM–Chile. |
● | Series E shareholders received one Banco de Chile share for each share they have in SM–Chile. |
● | The remaining shares of the Banco de Chile were distributed among the Series B shareholders. |
c) | The proceeds of the liquidation of any other asset, after the full payment of any debt of SM-Chile on the date of its dissolution, will be distributed among all the shareholders of SM–Chile, on a pro-rata basis. |
As a consequence of the distribution of Banco de Chile shares among SM-Chile shareholders, LQ Inversiones Financieras S.A. and Inversiones LQ SM Ltda. increased their direct shareholdings in our ordinary shares from their prior direct shareholdings of 27.18% and 0.29%, respectively, to 46.344% and 4.806% in each case. LQIF and Inversiones LQ-SM Ltda. are vehicles incorporated under Chilean law through which Quiñenco S.A. and Citigroup hold their ownership interests in Banco de Chile. Additionally, Quiñenco S.A. has a direct shareholding of 0.1097% of our total common stock.
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Major Shareholders
The following table sets forth certain information regarding the ownership of outstanding shares as of April 19, 2023 for the following:
● | each person or entity who is known by us to own beneficially more than 5% of our outstanding shares and LQIF. |
● | our directors and members of our executive management group, as a group. |
Ownership in Banco de Chile
(As of April 19, 2023)
Name | Amount Owned | Percentage | ||||||
LQIF and LQ-SM(1) | 51,670,277,343 | 51.15 | % | |||||
Directors and executive officers as a group(2) | 5,989,716,815 | 5.93 | % |
(1) | LQIF and LQ-SM hold 46.34% and 4.81%, respectively, of our shares. In connection with the framework agreement executed between Citigroup, Inc. and Quiñenco S.A. in July 2007 and following the merger of Citibank Chile into Banco de Chile, Citigroup became a shareholder of LQIF. As of April 19, 2023, Citigroup is the owner of 50% of LQIF, and Quiñenco directly and indirectly owns 50% of LQIF. Regardless of any increase in participation by Citigroup, however, the agreement provides that Quiñenco will remain in control of LQIF and the corporations that are directly or indirectly controlled by LQIF. Accordingly, Quiñenco will maintain the right to elect the majority of the directors of LQIF and Banco de Chile. As of December 31, 2022, members of the Luksic family or their affiliates beneficially owned 82.9% of the common shares of Quiñenco S.A. Mr. Andrónico Luksic and Mr. Jean Paul Luksic are members of our board of directors. |
(2) | Percentage reflects direct and indirect share ownership, excluding the share ownership of Mr. Andronico Luksic and Mr. Jean Paul Luksic, members of our board of directors, whose direct and indirect ownership is reflected and discussed under the share ownership of LQIF and LQ-SM above. |
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RELATED PARTY TRANSACTIONS
In the ordinary course of our business, we engage in a variety of transactions with certain of our affiliates and related parties. Financial information concerning these transactions is set forth in Note 43 to our audited consolidated financial statements as of and for the year ended December 31, 2022, appearing elsewhere in this annual report. In accordance with the Chilean Corporations Law, related party transactions in publicly held corporations and its affiliates are defined as every negotiation, act, contract or operation in which the corporation deals with any of the following persons: (i) one or more persons related to the corporation, in accordance with the Chilean Securities Law No. 18,045; (ii) a director, manager, administrator, main executive or liquidator of the corporation, acting on its own behalf or on behalf of third parties, or their respective husband or wife or any other person to which such director, manager, administrator, main executive or liquidator has a second degree relationship with (either by consanguinity or affinity); (iii) companies or corporations in which the persons mentioned in the previous item are owners, directly or through other juridical or natural persons, of 10% or more of its capital, or directors, managers, administrators or main executives; (iv) those established in the bylaws of the corporation or those identified by the directors committee on a well-founded basis, as the case may be, even in the event of those set out at the final paragraph of article 147; or (v) any person who has acted as a director, manager, administrator, main executive or liquidator of the corporation within 18 months of the relevant transaction.
We may only enter into transactions with related parties if (i) the purpose of the transaction is in our best interest, (ii) the transaction reflects prevailing market prices, terms, and conditions and (iii) the transaction complies with the requirements and procedures specified in the Chilean Corporations Law, which requires our board of directors to approve the relevant transaction based upon the criteria mentioned in items (i) and (ii) of this paragraph. In order for our board of directors to approve any such transactions, the related party involved in or negotiating the transaction must give prior notice to our board of directors.
A violation of these provisions shall not affect the transaction’s validity, but shall grant us, our shareholders or third parties an indemnification right to claim damages for the benefit of the company. The amount of damages claimed shall be equal to the sum of the benefits improperly obtained by the related party as a result of the relevant transaction. All board resolutions approving such related party transactions must be reported to our shareholders at the following ordinary annual shareholders’ meeting. Violations of this provision may result in administrative or criminal sanctions and civil liability to shareholders or third parties who suffer losses as a result of such violation.
The following transactions with related parties may be executed without complying with the requirements previously mentioned, subject to the prior approval of our board of directors: (i) transactions that are not considered material (for this purpose, an act or contract is deemed material if (1) it exceeds 1% of our paid-in capital and reserves and it also exceeds UF 2,000 or (2) it exceeds UF 20,000; and there is a presumption that all contracts celebrated within a period of 12 months constitute one single transaction, irrespective of whether they are executed in one or more separate transactions during such period of time); (ii) transactions that, according to a general policy of customary transactions adopted by the board of directors of the corporation, are considered customary in connection with our corporate purpose; and (iii) transactions among corporations in which we own, directly or indirectly, at least 95% of the stake of the counterparty.
In connection with number (ii) above, on December 29, 2009, our board of directors established the following general policy which permits us to carry out certain transactions with related parties without the requirements and procedures set forth in the Chilean Corporations Law. The general policy adopted by our board of directors permits, among other things, transactions in the ordinary course of our business, such as opening current accounts, making deposits, extending loans or credit lines with or without collateral, factoring transactions, the sale and transfer of commercial paper, collections, payments and funds transfers, foreign exchange transactions and issuing letters of credit. This general policy has also been extended to our affiliates. Recent amendments to the Chilean Corporations Law enacted in mid-April 2021 established additional requirements to this general policy, as follows: (i) it must be previously assessed by the Directors/Audit Committee; (ii) it must comply with certain minimum requirements set forth by the CMF; and (iii) it may not authorize entering into agreements involving more than 10% of the assets of the company. In connection with number (ii), such minimum requirements have not yet been issued by the CMF as of the date of this annual report.
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We believe that we have complied with the applicable requirements of the Chilean Corporations Law in all transactions with related parties and affirm that we will continue to comply with such requirements.
On July 19, 2007, Quiñenco, Citigroup Inc. and Citibank Overseas Investment Corporation entered into a Master Joint Venture Agreement (the “Framework Agreement”) that set forth the parameters of a partnership between Quiñenco and Citigroup Inc., including the eventual merger of Citibank Chile into us. The Framework Agreement provided that Citigroup Inc. would initially acquire a 32.96% equity interest in LQIF, our controlling shareholder, and would be entitled to increase its stake in LQIF to either 41.4778% or 50% through the exercise of several options. Citigroup Inc. could also be required to increase its stake in LQIF to 50% if Quiñenco exercised a put option under the Framework Agreement. The acquisition by Citigroup Inc. of its initial interest in LQIF occurred, with effect on January 1, 2008, under the terms of the Framework Agreement and the corresponding Merger Agreement between us and Citibank Chile dated December 26, 2007. For purposes of the Merger Agreement, the operations and businesses of Citibank Chile that were effectively contributed to us were deemed to represent 10.497% of the post-merger entity and, together with other assets and businesses contributed by Citigroup Inc. to LQIF, were the basis for the issuance by LQIF of the 32.96% equity interest in LQIF transferred to Citigroup Inc. As consideration for the merger, we issued and conveyed to LQIF (and indirectly, the holders of Citibank Chile shares) 8,443,861,140 no-par value “Banco de Chile-S” series shares (which, as of the date hereof, were converted into ordinary shares, by means of the amendment of the Bank’s bylaws).
Under the Framework Agreement, Quiñenco remains as the controlling shareholder of LQIF and therefore of us, while Citigroup Inc. is granted certain governance and other shareholder rights in LQIF. With respect to the governance rights in us, Citigroup Inc. had the right to name two directors to our 11-member board of directors (later amended as explained below), while Quiñenco maintained the right to appoint a majority of our board of directors. Citigroup Inc. also has the power to propose the appointment of certain of our executive officers (including our chief financial officer) and at least one representative on our directors/audit committees. Under this agreement, Citigroup Inc. was also granted certain veto rights over certain “fundamental strategic decisions” (as defined in the Framework Agreement), such as the delisting of our ADSs from the New York Stock Exchange or the delisting of our shares from the Santiago Stock Exchange and the Bolsa Electrónica de Chile, entry into new lines of business or large acquisitions, approval of related party transactions and changes to our bylaws or organizational documents. Furthermore, Citigroup Inc. agreed to purchase substantially all of the assets of our North American (i.e., Miami and New York) branches for U.S.$130 million. The Framework Agreement also sets forth a series of ancillary agreements proposed to be entered into by the parties to the Framework Agreement and some of their affiliates.
On December 31, 2007, we entered into an Asset Purchase Agreement with Citibank, N.A. (the “Asset Purchase Agreement”), whereby we sold substantially all of the assets and operations of our banking businesses in Miami and New York to Citibank, N.A. and Citibank, N.A. agreed to offer employment to substantially all of the employees in those branches and to assume substantially all of the liabilities related to such assets and operations. In consideration for this sale, we were paid an aggregate purchase price of U.S. $130 million, in addition to the assumption of liabilities. Following the completion of the sale, the Miami and New York branches were placed in voluntary liquidation in January 2008. In March 2008, the banking licenses for both branches were surrendered to the appropriate banking regulator.
On December 19, 2008, Quiñenco, Citigroup Inc. and Citibank Overseas Investment Corporation amended the Framework Agreement (the “2008 Amendment”), and through it the Shareholders’ Agreement mentioned below. The 2008 Amendment provided that if Citigroup Inc. did not acquire 8.52% of LQIF’s shares (to hold at least a 41.4778% ownership interest in LQIF) as a consequence of the actions and decisions of any relevant authority in the United States, Quiñenco shall have the right to compensation as provided in the 2008 Amendment, and Citigroup Inc. shall have the option of acquiring either a 41.4778% or a 50% interest in LQIF. Furthermore, the 2008 Amendment provided that if for any reason Citigroup Inc. did not exercise any of the call options mentioned in the previous sentence, Quiñenco or its affiliates, as applicable, shall be entitled to require Citigroup Inc. to sell to them a number of shares of LQIF such that, after such sale, Quiñenco shall directly or through its affiliates own an 80.1% ownership interest in LQIF. If this had occurred, Citigroup Inc.’s governance and other shareholder rights mentioned in the preceding paragraph should have been those provided in Clause Six of the Shareholders’ Agreement referred to below. Notwithstanding these provisions, on January 29, 2010, Citigroup Inc. exercised a call option to acquire 8.52% of LQIF’s shares and, on March 15, 2010, Citigroup Inc. exercised another call option to acquire an additional 8.52% of LQIF’s shares. Consequently, since April 30, 2010 Citigroup Inc. and Citigroup Overseas Investment Corporation indirectly own 50% of LQIF. As a result, since April 30, 2010, Citigroup Inc. has been granted certain corporate governance rights over us, as described above.
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Effective January 9, 2014, Quiñenco Citigroup Inc. and Citibank Overseas Investment Corporation entered into an amendment to the Framework Agreement, and additionally Quiñenco, Citigroup Chile S.A. and other shareholders of LQIF entered into an amendment to the Shareholders’ Agreement (as defined below) (collectively, the “2014 Amendments”), to, among other things, reduce LQ Inversiones Financieras S.A.’s minimum shareholding in Banco de Chile (direct and indirect) from 58.33% to 51%. Prior to the 2014 Amendments, Citigroup had the right to appoint five of the permanent members of our board of directors, provided that the number of directors Citigroup had the right to appoint was reduced by the number of directors appointed by minority shareholders, subject to a minimum of one permanent director appointed by Citigroup. Pursuant to the 2014 Amendments, Citigroup maintains its right to appoint five of the permanent members of our board of directors, except that in the event our minority shareholders appoint five permanent directors and thus no person proposed by Citigroup can be appointed as a permanent director, then Citigroup shall have the right to appoint two alternate directors.
On December 27, 2007, Quiñenco, Citigroup Chile S.A. and the minority shareholders of LQIF entered into a shareholders’ agreement (the “Shareholders’ Agreement”) that formalized the rights of Citigroup Inc. with respect to the governance rights in us as set forth in the Framework Agreement (and as discussed in the preceding paragraphs). The Shareholders Agreement, as amended, became effective on January 1, 2008.
On December 27, 2007, we entered into the Global Connectivity Agreement with Citigroup Inc. The Global Connectivity Agreement enables us and our clients to become part of Citigroup’s global network and provides a framework for us and Citigroup Inc. to direct new business to both companies. The agreement sets forth the terms upon which we, Citigroup Inc. and our respective affiliates will develop a relationship with respect to cross-border business and certain related services (such as corporate and investment banking services, international personal banking services and global transactions services, among others). The parties agreed on the following principles with respect to implementing the terms of the agreement: (i) the promotion of global connectivity products among Chilean customers, (ii) the setup of a technology platform, (iii) the training of employees and officers and (iv) the construction of international support networks to carry out the transactions contemplated by the agreement. This agreement was replaced by the new Global Connectivity Agreement dated October 22, 2015, as mentioned below.
On December 27, 2007, we entered into a Cooperation Agreement with Citigroup Inc. with the purpose of providing a framework for the integration of Citibank Chile with us following the merger and ensuring a successful relationship between us and Citigroup Inc. In particular, the Cooperation Agreement establishes a communication mechanism between us and Citigroup Inc. to enhance the exchange of ideas and information related to the integration of our business with that of Citibank Chile and provides for certain specific areas of collaboration going forward (such as with respect to our hedging and derivatives strategies). This agreement was replaced by the new Cooperation Agreement dated October 22, 2015, as mentioned below.
On December 27, 2007, we also entered into a Trademark License Agreement with Citigroup Inc. in which Citigroup Inc. granted us a non-exclusive paid-up and royalty-free license to use certain of Citigroup Inc.’s trademarks in Chilean territory. In addition, Citigroup Inc. granted us a license to use its domain name solely in connection with marketing and promoting authorized services in Chilean territory. This agreement was replaced by the new Trademark License Agreement dated October 22, 2015 and, later, by the Amended and Restated Trademark License Agreement dated November 29, 2019, as mentioned below.
On September 25, 2009, we entered into a Master Services Agreement with Citigroup Inc. This agreement regulates and supplements certain reciprocal services that, before the merger between us and Citibank Chile, had been provided pursuant to the terms of certain service agreements then in effect between Citigroup Inc. (and certain of its affiliates) and Citibank Chile, which were assumed, after the merger, by us as legal successor to Citibank Chile. Furthermore, this agreement seeks to foster global connectivity with respect to the banking and financial services referred to in the Global Connectivity Agreement and in the other agreements executed with Citigroup Inc. mentioned above. This agreement has been restated and amended as further explained below.
On October 22, 2015 and effective January 1, 2016, we entered into a new Global Connectivity Agreement, a new Cooperation Agreement, and a new Trademark License Agreement with Citigroup Inc., replacing the original agreements mentioned above (the “2015 Global Connectivity Agreement”, “2015 Cooperation Agreement” and “2015 Trademark License Agreement”, respectively). Later, the 2015 Global Connectivity Agreement was amended on April 26, 2021 and August 31, 2021. As for the 2015 Trademark License Agreement, it was replaced by the Amended and Restated Trademark License Agreement dated November 29, 2019, for the same term as the 2015 Cooperation Agreement (the “2019 Amended and Restated Trademark License Agreement”).
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On January 26, 2017, we entered into a new Master Services Agreement with Citigroup Inc. replacing the original agreement dated September 25, 2009, which expired on January 1, 2017. This agreement was retroactively effective on January 1, 2017 and has the same duration of the 2015 Cooperation Agreement as mentioned above. The new Master Services Agreement regulated certain reciprocal services to be provided by the parties and seeks to foster global connectivity with respect to the banking and financial services referred to in the 2015 Global Connectivity Agreement and in the other agreements executed with Citigroup Inc. This agreement was restated and amended on November 29, 2019 (the “2019 Amended and Restated Master Services Agreement”), and then again in 2021 as explained below.
The 2015 Global Connectivity Agreement, the 2015 Cooperation Agreement and the 2019 Amended and Restated Trademark License Agreement each have a duration period of two years and have been extended several times. The last time such agreements were extended was on August 31, 2021, when the parties agreed to extend their terms from January 1, 2022 to January 1, 2024. However, the parties may convene before August 31, 2023 to agree on an extension to these agreements for a new period of two years commencing on January 1, 2024 until January 1, 2026. In the event that the parties do not agree to an extension, these agreements will be automatically extended once for a period of one year starting January 1, 2024 until January 1, 2025, the date on which they shall terminate without any formality. If the parties agree to the two-year extension mentioned above, the same renewal procedure may be used by the parties to extend the agreements in the future, as many times as they agree. Likewise, on August 31, 2021, the parties entered into an Amended and Restated Master Services Agreement for the same term as the agreements mentioned above in this paragraph, which replaced the 2019 Amended and Restated Master Services Agreement.
On November 29, 2021, Banco de Chile (holder of a 29.63% share ownership) and all of the other shareholders of Operadora de Tarjetas de Crédito Nexus S.A. (“Nexus”), a company whose purpose is to provide credit card processing services, agreed to sell 100% of their shares in Nexus to a third party. The transaction is subject to the fulfillment of a series of conditions, including the authorization of the CMF and the approval of the Fiscalía Nacional Económica (Chilean Antitrust Prosecution Office).
In addition to the aforementioned regulation set forth in the Chilean Corporations Law, the CMF provides certain rules on related party transactions in Chapter 12-4 of the Recopilación Actualizada de Normas for purpose of regulatory lending limits. To some extent, such regulation differs from the Chilean Corporations Law in the treatment and definition of related party transactions. Further, in accordance with CMF’s Compendium of Accounting Standards, a note addressing our transactions with related parties must be included in our audited consolidated financial statements. Such note has to comply with the aforementioned CMF rules on related parties and must be prepared in accordance with Chilean GAAP as issued by the CMF.
For more information on our transactions with related parties, see Note 43 to our audited consolidated financial statements as of and for the year ended December 31, 2022, appearing elsewhere in this annual report.
Loans to Related Parties
As disclosed in Note 43(c) to our audited consolidated financial statements as of and for the year ended December 31, 2022 appearing elsewhere in this annual report, we incurred an aggregate of Ch$177,379 million in expenses and recorded Ch$261,816 million in income from transactions with related parties in 2022, other than loans.
As authorized by the General Banking Act, and within the regulatory lending limits, we hold several outstanding loans owed to us by related parties. All such loans:
(i) | were made in the ordinary course of business; |
(ii) | were made on terms, including interest rates and collateral, substantially the same as those prevailing at the time for comparable transactions with other persons; and |
(iii) | did not involve more than the normal risk of collectability or present other unfavorable features. |
We held an aggregate of Ch$705 million in loans (once allowances for loan losses are deducted) to related parties, as of December 31, 2022. As of the same date we held other assets with related parties amounting to Ch$712 million while liabilities with related party transactions amounted to Ch$1,230 million. See Note 40 to our audited consolidated financial statements as of and for the year ended December 31, 2022 appearing elsewhere in this annual report for details concerning on these transactions.
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Item 8 Financial Information
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Audited Consolidated Financial Statements
Please refer to “Item 18. Financial Statements.”
Legal Proceedings
We and our subsidiaries are subject to claims and are parties to legal proceedings in the normal course of business. A summary of certain current legal proceedings is below.
Charges brought under Securities Market Law
On October 30, 2014, the SVS (the former capital market regulator before its replacement by the CMF) imposed a fine of UF 50,000 (approximately U.S.$2 million as of December 31, 2014) on Banchile Corredores de Bolsa S.A. (“Banchile Corredores”), based on alleged infringement of Article 53 second paragraph of Law No. 18,045 for a specific transaction of SQM-A’s shares intermediated by Banchile in 2011. In this regard, Article 53 second paragraph of Law No. 18,045 provides that “…no person may engage in transactions or induce or attempt to induce the purchase or sale of securities, whether or not governed by this Act, by means of any misleading or deceptive act, practice, mechanism or artifice…” Banchile filed a claim against that fine with the Santiago Civil Courts requesting to void the fine.
On January 16, 2019, Banchile Corredores filed an inapplicability request with the Constitutional Court challenging the enforcement of the then applicable Article 29 of the Decree Law N° 3,538 and requested this court to render such provision as inapplicable in this process, on the grounds that it breaches the Chilean Constitution. On November 14, 2019, the Constitutional Court ruled in favor of Banchile Corredores rendering such provision as inapplicable.
On December 2019, the 22nd Santiago Civil Court issued its judgment on Banchile Corredores’ claim, reducing the fine to an amount of UF 7,500, approximately U.S.$275,000, as of December 2019. Both parties in these proceedings – Banchile Corredores and Consejo de Defensa del Estado (Chilean State Defense Board) – challenged this judgment through the procedures of appeal and nullity, both of which are currently pending in the Santiago Court of Appeals.
Banchile Corredores de Bolsa’s attorneys in charge of the claim believe that there are solid grounds to obtain a judgment in favor of Banchile Corredores de Bolsa S.A.
As of the date of this annual report, there are no new developments on this case.
Consumer Protection Claim
In March 2022, we were notified of a lawsuit filed by SERNAC on the grounds that: 1) the Bank allegedly charges certain expenses and judicial collection fees that, under SERNAC’s view, should be charged within applicable limits; and 2) certain contractual clauses should be declared as abusive. In the lawsuit, SERNAC requests the court to order the Bank to reimburse the purportedly overcharged expenses and fees and to apply the maximum legal fines. The Bank has contested this lawsuit, seeking its full dismissal on the grounds that it has complied with applicable regulations in all respects. As of the date of this annual report, it is not possible to estimate the monetary amounts involved in this claim or to determine whether it could have a material impact on our results of operations.
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Spanish Court’s Request to Chilean Judicial Authorities
Please refer to “Item 8. Financial Information—Legal Proceedings—Request from Spanish Court to Chilean Authorities” of the Bank’s Form 20-F for the year ended December 31, 2013, as filed with the U.S. Securities and Exchange Commission on April 25, 2014. As described therein, the applicable Spanish court sent a rogatory letter to the applicable Chilean judicial authorities in order to notify them that a lawsuit pending before the Spanish Court had been amended to add causes of action concerning concealment of assets and money laundering against our chairman and the former manager of our former New York branch and against us, Banchile Corredores de Bolsa S.A. and Banchile Administradora General de Fondos S.A., the latter three facing subsidiary civil liability only. The rogatory letter, among other items, requested a joint guarantee from the defendants in the amount of U.S. $77,348,374 and, if the aforementioned parties were not to grant such a joint guarantee, requested the attachment of assets of up to U.S. $103,131,165. In April 2012, the Spanish court temporarily dismissed such lawsuit on the grounds that Chilean judicial authorities were investigating the same matters and, therefore, should take lead on said investigation. Likewise, the Chilean judicial investigation, where no charges were filed against us or our related parties, was temporarily dismissed in January 2014. However, the Spanish investigation was reopened in 2021. As such, we hereby provide an update of the current status.
In January 2021, the Criminal Chamber of the National Audience of Spain, sustaining a petition from the plaintiff, ordered the reopening of this investigation and later, through a rogatory letter sent by the Spanish court to the Chilean judicial authorities, we, our subsidiaries, Banchile Corredores de Bolsa S.A. and Banchile Administradora General de Fondos S.A., and our Chairman were notified of the reopening of this investigation.
During 2022, through a new rogatory letter from the applicable Spanish court to the Chilean Supreme Court, we, our chairman, Banchile Corredores de Bolsa S.A. and Banchile Administradora General de Fondos S.A. were notified of the lawsuit described above, becoming parties in the case before the Spanish Court. As such, we, our chairman and the aforementioned subsidiaries requested to the Spanish court the final dismissal of the case, which was ruled in our favor; however, the plaintiff has appealed against this decision and is pending to be resolved.
Public Prosecutor Investigation Against Former Commander in Chief
In August 2021, the Chilean Public Prosecutor requested us to provide background information of our compliance with the crime prevention models set forth in local legislation and their implementation in relation to certain transactions carried out by the former Commander in Chief of the Chilean Army, Mr. Juan Miguel Fuente-Alba and his spouse. We also received supplementary requirements after the initial request.
These requests from the Chilean Public Prosecutor’s Office are due to an investigation of the purported criminal liability of legal entities or natural persons, other than Mr. Fuente-Alba and his spouse, who are currently defendants in criminal proceedings. Further, this investigation includes banks or financial institutions, and some related parties, who may have been involved in money laundering in connection with the criminal proceedings against Mr. Fuente-Alba.
We are cooperating fully in the investigation and providing the necessary documentation to the Chilean Public Prosecutor.
Dividends
General
We currently have a single series of common shares and the dividends on our shares are proposed by our board of directors and are approved by our shareholders at the ordinary annual shareholders’ meeting following the year with respect to which the dividends are proposed. Our ordinary annual shareholders’ meeting is required to be held in the first three months of each year. Following shareholder approval, the dividends are declared and paid. Dividends are paid to shareholders of record on the fifth business day preceding the date set for payment of the dividend. The applicable record dates for the payment of dividends to holders of our ADSs are, to the extent practicable, the same. Under the Chilean Corporations Law and regulations issued thereunder, Chilean publicly held corporations are generally required to distribute at least 30% of their consolidated annual earnings as dividends, except to the extent they have accumulated losses. Under the General Banking Act, a Chilean bank may pay dividends upon approval of its shareholders from (i) net earnings of previous fiscal years (i.e., interim dividends are not permitted), (ii) the reserve kept for that purpose or (iii) other funds permitted under Chilean law. In addition, the amount of the dividends that may be paid by Chilean banks are limited if mandatory additional capital requirements, and/or additional counter-cyclical buffer capital that may be requested by the Central Bank, are not met.
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Cash Dividends
In March 2020, our shareholders at the ordinary annual shareholders meeting agreed to the distribution and payment of dividend No. 208 in the amount of Ch$3.47008338564 per ordinary share, with a corresponding charge to our 2019 net distributable income.
In March 2021, our shareholders at the ordinary annual shareholders meeting agreed to the distribution and payment of dividend No. 209 in the amount of Ch$2.18053623438 per ordinary share, with a corresponding charge to our 2020 net distributable income.
In March 2022, our shareholders at the ordinary annual shareholders meeting agreed to the distribution and payment of dividend No. 210 in the amount of Ch$5.34393608948 per ordinary share, with a corresponding charge to our 2021 net distributable income.
In March 2023, our shareholders at the ordinary annual shareholders meeting agreed to the distribution and payment of dividend No. 211 in the amount of Ch$8.58200773490 per ordinary share, with a corresponding charge to our 20122 net distributable income.
The following table sets forth the cash dividends declared per common share during the years ended December 2020, 2021 and 2022:
As of and for the Year Ended December 31, | ||||||||||||||||
2020 | 2021 | 2022 | ||||||||||||||
Chile GAAP: | (in Ch$, except percentages) | (in U.S.$) | ||||||||||||||
Dividend payout ratio(1) | 59.11 | % | 47.56 | % | 68.14 | % | ||||||||||
Average Dividend per Common Share | 3.47 | 2.18 | 5.34 | 0.006 |
(1) | Dividends per share are calculated by dividing the amount of the dividend paid during each year by the previous year’s number of shares outstanding. |
Whether future dividends will be paid will depend upon our earnings, financial condition, capital requirements, governmental regulations and policies and other factors. Accordingly, there can be no assurance that dividends in future years will be paid at a rate similar to dividends paid in past years.
On January 28, 2016, our Board of Directors decided to establish a provision for minimum dividends equivalent to 60% of the distributable net income generated each fiscal year, beginning January 2016 and onwards. On March 14, 2019, our Board of Directors resolved to establish a provision for minimum dividends equivalent to 60% of the distributable net income generated during the course of the year. For that purpose, the distributable net income was defined as the amount resulting from the net income for the relevant period minus the inflation effect (or inflation adjustment) on our paid-in capital and reserves, based on the Consumer Price Index variation between the previous month of calculation and the month of November of the previous year. Lastly, on March 12, 2020, our Board of Directors decided it would, for 2020 and onwards, maintain this net income calculation method to distribute as dividends for 2020, while agreeing to provision a 60% over the net income balance so calculated.
Stock Dividends
During 2020, no stock dividends, in the form of fully paid-in shares, were distributed to our shareholders.
During 2021, no stock dividends, in the form of fully paid-in shares, were distributed to our shareholders.
During 2022, no stock dividends, in the form of fully paid-in shares, were distributed to our shareholders.
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Capital Increases
During 2020, no stock dividends, in the form of fully paid-in shares, were distributed to our shareholders.
During 2021, no stock dividends, in the form of fully paid-in shares, were distributed to our shareholders.
During 2022, no stock dividends, in the form of fully paid-in shares, were distributed to our shareholders.
ADR Holders
Dividends payable to holders of our ADSs are net of conversion expenses of the depositary and are subject to Chilean Withholding Tax, currently set at the rate of 35%, subject to certain credits. For further information on these taxes see “Item 5. Operating and Financial Review and Prospects—Operating Results—Income Tax and Item 10. Additional Information—Taxation—Chilean Tax Considerations”. Owners of our ADSs are not charged any fees by us with respect to cash or stock dividends.
Pursuant to current Chilean foreign exchange regulations, a shareholder who is not a resident of Chile does not need to be authorized as a foreign investor in order to receive dividends, sale proceeds or other amounts with respect to its shares remitted outside Chile, but the investor must inform the Central Bank about any such transactions and must remit foreign currency through the Formal Exchange Market. See “Item 10. Additional Information—Exchange Controls” for additional information on how ADS holders may remit currency outside Chile.
SIGNIFICANT CHANGES
No significant changes in our financial condition have occurred since the date of the most recent audited consolidated financial statements included in this annual report.
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Item 9 The Offer and Listing
Nature of Trading Market
Shares of our common stock are traded on all Chilean stock exchanges. Our shares have been listed on the Santiago Stock Exchange since 1894 and on the Electronic Stock Exchange since 1989. The Santiago Stock Exchange is the main trading market for our shares.
The Chilean securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. The Santiago Stock Exchange, which is Chile’s main exchange, had a market capitalization of approximately U.S.$172,347 million as of December 31, 2022. As of the same date, the total annual trading turnover was approximately U.S$43,408.3 million while the average monthly trading turnover was approximately U.S.$ 3,617.4 million. The Santiago Stock Exchange was established in 1893 and is a private company whose equity consists of 48 million shares owned by 61 shareholders as of December 31, 2022. As of the same date, 191 companies by means of 207 series of stocks were listed on the Santiago Stock Exchange.
In addition, as reported by the Santiago Stock Exchange, the ten largest companies in terms of market capitalization represented approximately 48.6% of the Santiago Stock Exchange’s aggregate market capitalization as of December 31, 2022. As of the same date, the ten most traded companies accounted for approximately 73.1% of the Santiago Stock Exchange’s equity trading. During 2022 approximately 33.8% of the companies listed on the Santiago Stock Exchange had their shares traded on an average of 70% or more of the exchange’s trading days.
Our ADSs, each representing 200 shares of common stock, without nominal (par) value, have been listed on the NYSE since January 2, 2002 under the symbol “BCH”. JPMorgan Chase Bank is our depositary for purposes of the ADSs. As of December 31, 2023, a maximum of 4,563,793 ADSs were outstanding (equivalent to 912,758,600 shares of common stock or 0.90% of the total number of issued shares of common stock as of the same date). Since certain of our ADSs are held by brokers or other nominees, the number of record holders in the United States may not be fully indicative of the number of direct beneficial owners in the United States or of where the beneficial owners of such shares are resident.
On October 23, 2018 we announced a ratio change to our ADR program from one ADS per 600 of our common shares into one ADS per 200 of our common shares. This modification became effective on November 23, 2018, upon which ADR holders received two additional ADSs for each ADS held as of the record date of November 15, 2018. Additionally, the existing ADRs, continued to be valid as of the effective date and were not exchanged for new ones.
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The table below shows, for the periods indicated, the annual, quarterly and monthly high and low closing prices (in nominal Chilean pesos) of the traded shares of our securities, labeled “Chile” series, on the Santiago Stock Exchange and the Electronic Stock Exchange:
Santiago Stock Exchange | Electronic Stock Exchange | |||||||||||||||
Period | High | Low | High | Low | ||||||||||||
(Ch$ per share of our common stock)(1) | ||||||||||||||||
Annual Price History | ||||||||||||||||
2017 | 100.4 | 76.9 | 104.0 | 75.0 | ||||||||||||
2018 | 105.3 | 94.6 | 105.0 | 99.0 | ||||||||||||
2019 | 105.5 | 79.0 | 106.0 | 79.0 | ||||||||||||
2020 | 88.5 | 57.0 | 87.6 | 58.8 | ||||||||||||
2021 | 89.8 | 66.4 | 89.8 | 66.5 | ||||||||||||
2022 | 91.0 | 68.8 | 91.7 | 68.6 | ||||||||||||
2023 (through April 19) | 88.8 | 74.6 | 87.8 | 75.0 | ||||||||||||
Quarterly Price History | ||||||||||||||||
2017 | ||||||||||||||||
1st Quarter 2017 | 83.0 | 76.9 | 83.0 | 75.0 | ||||||||||||
2nd Quarter 2017 | 87.6 | 80.1 | 88.0 | 79.5 | ||||||||||||
3rd Quarter 2017 | 97.6 | 86.9 | 97.9 | 86.1 | ||||||||||||
4th Quarter 2017 | 100.4 | 87.8 | 104.0 | 87.5 | ||||||||||||
2018 | ||||||||||||||||
1st Quarter 2018 | 105.3 | 99.0 | 105.0 | 99.0 | ||||||||||||
2nd Quarter 2018 | 102.0 | 97.4 | 101.9 | 97.5 | ||||||||||||
3rd Quarter 2018 | 103.1 | 96.6 | 104.0 | 96.2 | ||||||||||||
4th Quarter 2018 | 101.3 | 94.6 | 100.9 | 95.5 | ||||||||||||
2019 | ||||||||||||||||
1st Quarter 2019 | 105.5 | 99.2 | 106.0 | 98.8 | ||||||||||||
2nd Quarter 2019 | 101.9 | 96.8 | 101.9 | 96.8 | ||||||||||||
3rd Quarter 2019 | 105.0 | 99.0 | 104.6 | 99.7 | ||||||||||||
4th Quarter 2019 | 103.0 | 79.0 | 103.0 | 79.0 | ||||||||||||
2020 | ||||||||||||||||
1st Quarter 2020 | 88.5 | 57.0 | 87.6 | 59.2 | ||||||||||||
2nd Quarter 2020 | 78.3 | 66.5 | 77.8 | 66.7 | ||||||||||||
3rd Quarter 2020 | 79.0 | 58.8 | 79.0 | 58.8 | ||||||||||||
4th Quarter 2020 | 75.0 | 59.2 | 76.5 | 59.4 | ||||||||||||
2021 | ||||||||||||||||
1st Quarter 2021 | 89.8 | 73.2 | 89.8 | 72.5 | ||||||||||||
2nd Quarter 2021 | 86.5 | 66.9 | 86.5 | 66.8 | ||||||||||||
3rd Quarter 2021 | 78.0 | 66.4 | 77.7 | 66.5 | ||||||||||||
4th Quarter 2021 | 83.5 | 66.6 | 83.1 | 67.5 | ||||||||||||
2022 | ||||||||||||||||
1st Quarter 2022 | 90.0 | 68.8 | 87.9 | 68.6 | ||||||||||||
2nd Quarter 2022 | 90.0 | 81.2 | 87.7 | 82.1 | ||||||||||||
3rd Quarter 2022 | 91.0 | 82.3 | 91.7 | 82.0 | ||||||||||||
4th Quarter 2022 | 88.6 | 83.4 | 89.0 | 83.5 | ||||||||||||
2023 | ||||||||||||||||
1st Quarter 2023 | 88.8 | 74.6 | 87.8 | 75.0 | ||||||||||||
2nd Quarter 2023 (through April 19) | 81.5 | 77.1 | 77.9 | 77.0 | ||||||||||||
Monthly Price History | ||||||||||||||||
November 2022 | 87.9 | 83.7 | 86.9 | 83.5 | ||||||||||||
December 2022 | 88.0 | 83.4 | 86.5 | 84.0 | ||||||||||||
January 2023 | 87.0 | 82.9 | 86.5 | 83.4 | ||||||||||||
February 2023 | 88.0 | 85.3 | 86.8 | 83.4 | ||||||||||||
March 2023 | 88.8 | 74.6 | 87.8 | 75.0 | ||||||||||||
April 2023 (through April 19) | 81.5 | 77.1 | 77.9 | 77.0 |
Sources: Santiago Stock Exchange and the Electronic Stock Exchange—Official Quotation Bulletins and Bloomberg.
(1) | Pesos per share reflect nominal price at trade date. |
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The table below shows the annual, quarterly and monthly high and low closing prices, as reported by the NYSE:
New York Stock Exchange | ||||||||
Period | High | Low | ||||||
(U.S.$ per ADS)(1) | ||||||||
Annual Price History | ||||||||
2017 | 98.14 | 69.91 | ||||||
2018 | 105.50 | 27.88 | ||||||
2019 | 32.48 | 19.78 | ||||||
2020 | 22.40 | 13.62 | ||||||
2021 | 24.98 | 15.71 | ||||||
2022 | 22.62 | 16.01 | ||||||
2023 (through April 19) | 22.31 | 18.11 | ||||||
Quarterly Price History | ||||||||
2017 | ||||||||
1st Quarter 2017 | 74.95 | 69.91 | ||||||
2nd Quarter 2017 | 79.04 | 72.70 | ||||||
3rd Quarter 2017 | 92.99 | 77.89 | ||||||
4th Quarter 2017 | 98.14 | 80.64 | ||||||
2018 | ||||||||
1st Quarter 2018 | 105.50 | 98.75 | ||||||
2nd Quarter 2018 | 102.16 | 92.10 | ||||||
3rd Quarter 2018 | 95.00 | 84.54 | ||||||
4th Quarter 2018 | 91.41 | 27.88 | ||||||
2019 | ||||||||
1st Quarter 2019 | 32.48 | 28.74 | ||||||
2nd Quarter 2019 | 30.08 | 27.76 | ||||||
3rd Quarter 2019 | 29.60 | 27.46 | ||||||
4th Quarter 2019 | 28.84 | 19.78 | ||||||
2020 | ||||||||
1st Quarter 2020 | 22.40 | 13.62 | ||||||
2nd Quarter 2020 | 20.52 | 15.78 | ||||||
3rd Quarter 2020 | 19.91 | 14.91 | ||||||
4th Quarter 2020 | 20.82 | 14.95 | ||||||
2021 | ||||||||
1st Quarter 2021 | 24.98 | 20.12 | ||||||
2nd Quarter 2021 | 24.73 | 18.59 | ||||||
3rd Quarter 2021 | 19.84 | 17.15 | ||||||
4th Quarter 2021 | 20.25 | 15.71 | ||||||
2022 | ||||||||
1st Quarter 2022 | 22.62 | 16.26 | ||||||
2nd Quarter 2022 | 21.91 | 18.10 | ||||||
3rd Quarter 2022 | 20.13 | 16.01 | ||||||
4th Quarter 2022 | 20.82 | 17.51 | ||||||
2022 | ||||||||
1st Quarter 2023 | 22.31 | 18.11 | ||||||
2nd Quarter 2023 (through April 19) | 20.46 | 18.93 | ||||||
Monthly Price History | ||||||||
November 2022 | 19.08 | 17.84 | ||||||
December 2022 | 20.82 | 18.80 | ||||||
January 2023 | 21.97 | 19.56 | ||||||
February 2023 | 22.31 | 20.55 | ||||||
March 2023 | 21.97 | 18.11 | ||||||
April 2023 (through April 19) | 20.46 | 18.93 |
Source: Bloomberg.
(1) | One ADS represents 200 shares of common stock since November 23, 2018. Before that date, one ADS represented 600 shares of common stock. |
(2) | One Trading Unit represents 600 shares of common stock. |
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Item 10 Additional Information
MEMORANDUM AND ARTICLES OF ASSOCIATION
Set forth below is a brief summary of the significant provisions of our estatutos (bylaws) and Chilean law. This description contains all material information concerning our shares, but does not purport to be complete and is qualified in its entirety by reference to our estatutos (a copy of which is filed by reference as Exhibit 1.1 to this annual report), the General Banking Act, the Chilean Corporations Law and the Securities Market Law.
We are an open stock corporation and are registered with the Chilean Public Registry of Commerce of Santiago under Page 23,859 Number 18,638 of the year 1996, and authorized to operate as a bank by the CMF. The Chilean Corporations Law, the Securities Market Law and the General Banking Act set forth the rules and requirements for establishing, and operating banks in Chile, as well as shareholder rights in a Chilean bank. Additionally, the operation and the shareholder’s rights are also governed by the bank’s estatutos, which effectively serve as both the articles of incorporation and the bylaws of a company incorporated in the United States. Legal provisions in Chile take precedence over any contrary provision set forth in a corporation’s estatutos. Both the Chilean Corporations Law and our estatutos provide that legal actions by shareholders against us (or our officers or directors) to enforce their rights as shareholders or by one shareholder against another in their capacity as such are to be brought in Chile in arbitration proceedings.
The Chilean securities markets are principally regulated by the CMF under the Securities Market Law and the Chilean Corporations Law. In the case of banks, compliance with these laws is also supervised by the CMF.
Purpose
Our corporate purpose is to undertake all acts, contracts, business and transactions as the General Banking Act allows banking institutions to undertake, without prejudice to expanding or restricting our scope of action consistent with current legal precepts or such as may be established in the future.
Capitalization
As of April 19, 2023, there are 101,017,081,114 Banco de Chile shares outstanding of our capital stock. All of such shares are fully paid.
Our shares are no par value and full voting rights. There are no legal restrictions on the payment of dividends from our net income, except that we may only pay a single dividend per year (i.e., interim dividends are not permitted). Under the Chilean Corporations Law and regulations issued thereunder, Chilean public corporations are generally required to distribute at least 30% of their consolidated annual earnings as dividends, except to the extent they have accumulated losses. Under the General Banking Act, a Chilean bank may pay dividends upon approval of its shareholders from (i) net earnings of previous fiscal years (i.e., interim dividends are not permitted), (ii) the reserve kept for that purpose or (iii) other funds permitted under Chilean law. In addition, according to the General Banking Act the amount of dividends that may be paid by Chilean banks is limited if mandatory additional capital requirements, and/or additional counter-cyclical buffer capital requirements that may be requested by the Central Bank, are not met. For more information on the Chilean banking legislation, see “Item 4. Information on the Company—Regulation and Supervision—Modifications to the General Banking Act.”
Under Chilean law, the shareholders of a company, acting at an extraordinary shareholders’ meeting, have the power to authorize an increase in the company’s capital. When an investor subscribes for issued shares, the shares are registered in such investor’s name, even if not paid for, and the investor is treated as a shareholder for all purposes, except with regard to receipt of dividends and the return of capital. The investor becomes eligible to receive dividends or the return of capital once it has paid for the shares; if it has paid for only a portion of such shares, it is entitled to reserve a corresponding pro rata portion of the dividends declared with respect to such shares unless the company’s bylaws provide otherwise. If an investor does not pay for shares for which it has subscribed on or prior to the date agreed upon for payment, the company is entitled under Chilean law to auction the shares on a stock exchange and collect the difference, if any, between the subscription price and the auction proceeds. However, until such shares are sold, the subscriber continues to exercise all the rights of a shareholder (except the right to receive dividends or the return of capital). In the case of banks, authorized shares and issued shares that have not been paid for within the period fixed for their payment by the CMF are cancelled and are no longer available for issuance by the company.
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The Chilean Corporations Law provides that the purchaser of shares of a company implicitly accepts its bylaws and any agreements adopted at shareholders’ meetings.
Directors
For a description of the provisions of our estatutos relating to our board of directors and our directors/audit committee, see “Item 6. Directors, Senior Management and Employees—Board Practices.”
Ownership Restrictions
Under the Securities Market Law and the regulations of the CMF, shareholders of open stock corporations are required to report the following to the CMF and the Chilean stock exchanges:
● | any direct or indirect acquisition or sale of shares that results in the holder’s acquiring or disposing of, directly or indirectly, 10% or more of an open stock corporation’s share capital; and |
● | any direct or indirect acquisition or sale of shares or options to buy or sell shares, in any amount, if made by a holder of 10% or more of an open stock corporation’s capital or if made by a director, liquidator, main officer, general manager or manager of such corporation. |
The foregoing requirements also apply to the acquisition or sale of securities or agreements which price or return depends or is conditioned (all or in a significant part) upon changes or movements in the price of such shares. The report shall be made the day following the execution of the transaction.
In addition, any person who acquires 10% or more of our shares must include in the report whether the purpose of the acquisition is to acquire control of the company or if the acquisition is just a financial investment. A beneficial owner of ADSs representing 10% or more of our share capital will be subject to these reporting requirements under Chilean law.
According to the regulations of the CMF, Chilean banks that issue ADSs are required to inform the CMF if any person, directly or beneficially, acquires ADSs representing 5% or more of the total amount of shares of capital stock issued by such bank.
Under the Securities Market Law and the regulations of the CMF, persons or entities intending to acquire control, directly or indirectly, of an open stock corporation, regardless of the acquisition vehicle or procedure, and including acquisitions made through direct subscriptions or private transactions, are also required to inform the public of such intention at least 10 business days before the date on which the transaction is to be completed, but, in any case, as soon as negotiations regarding the change of control begin or as soon as confidential information and documents concerning the target are delivered to the potential acquirer such delivery can occur through a filing with the CMF, the stock exchanges where its securities are traded, companies controlled by and that control the target and through a notice published in two Chilean newspapers, which notice must disclose, among other information, the person or entity purchasing or selling, the price and the material conditions of any negotiations.
Prior to such publication, a written communication to such effect must be sent to the target corporation, to the controlling corporation, to the corporations controlled by the target corporation, to the CMF and to the Chilean stock exchanges. Title XV of the Securities Market Law provides the definition of a controlling power, direct holding and related party.
In addition to the foregoing, Article 54A of the Chilean Securities Market Law requires that within two business days of the completion of the transactions pursuant to which a person has acquired control of a publicly traded company, a notice shall be published in the same newspapers in which the notice referred to above was published and notices shall be sent to the same persons mentioned in the preceding paragraphs, as well as posted on their websites, if any.
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The provisions of the aforementioned articles do not apply when the acquisition is being made through a tender or exchange offer.
Title XXV of the Chilean Securities Market Law on tender offers and the regulations of the CMF provide that the following transactions must be carried out through a tender offer:
● | an offer which allows a person to take control of a publicly traded company, unless (i) the shares are being sold by a controlling shareholder of such company at a price in cash which is not substantially higher than the market price and the shares of such company are actively traded on a stock exchange and (ii) those shares are acquired (a) through a capital increase, (b) as a consequence of a merger, (c) by inheritance or (d) through a forced sale; |
● | an offer for a controlling percentage of the shares of a listed company if such person intends to take control of the parent company (whether listed or not) of such listed company, to the extent that the listed company represents 75% or more of the consolidated net worth of the parent company; and |
● | whenever a controlling shareholder acquires two-thirds of the voting shares of a listed company, such controlling shareholder must offer to purchase the remaining shares from the minority shareholders in a tender offer, unless (i) the controlling shareholder has reached two thirds of the voting shares through a tender offer for all of the shares of the company, or (ii) it reaches such percentage as a result of a reduction of the capital of the company by operation of law. |
Article 200 of the Chilean Securities Market Law prohibits any shareholder that has taken control of a publicly traded company from acquiring, for a period of 12 months from the date of the transaction in which it gained control of the publicly traded company, a number of shares equal to or greater than 3% of the outstanding issued shares of the target without making a tender offer at a price per share not lower than the price paid at the time of taking control. Should the acquisition from the other shareholders of the company be made on a stock exchange and on a pro rata basis, the controlling shareholder may purchase a higher percentage of shares, if so permitted by the regulations of the stock exchange.
Title XV of the Chilean Securities Market Law sets forth the basis to determine what constitutes a controlling power, a direct holding and a related party. The Chilean Securities Market Law defines control as the power of a person or group of persons acting (either directly or through other entities or persons) pursuant to a joint action agreement to direct the majority of the votes at the shareholders’ meetings of the corporation and to elect the majority of members of its board of directors, or to influence the management of the corporation significantly. Significant influence is deemed to exist in respect of the person or group of persons with an agreement to act jointly that holds, directly or indirectly, at least 25% of the voting share capital, unless:
● | another person or group of persons acting pursuant to joint action agreement, directly or indirectly, controls a stake equal to or greater than the percentage controlled by such person; |
● | the person or group does not control, directly or indirectly, more than 40.0% of the voting share capital and the percentage controlled is lower than the sum of the shares held by other shareholders holding more than 5% of the share capital (either directly or pursuant to a joint action agreement); or |
● | in cases where the CMF has ruled otherwise, based on the distribution or atomization of the overall shareholding. |
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According to the Chilean Securities Market Law, a joint action agreement is an agreement among two or more parties which, directly or indirectly, own shares in a corporation at the same time and whereby they agree to participate with the same interest in the management of the corporation or in taking control of the same. The law presumes that such an agreement exists between:
● | a principal and its agents; |
● | spouses and relatives within certain degrees of kinship; |
● | entities within the same business group; and |
● | an entity and its controller or any of the members of the controller. |
Likewise, the CMF may determine that a joint action agreement exists between two or more entities considering, among other things, the number of companies in which they participate and the frequency with which they vote identically in the election of directors, appointment of managers and other resolutions passed at extraordinary shareholders’ meetings.
According to Article 96 of the Chilean Securities Market Law, a business group is a group of entities with such ties in their ownership, management or credit liabilities that it may be assumed that the economic and financial action of such members is directed by, or subordinated to, the joint interests of the group, or that there are common credit risks in the credits granted to, or in the acquisition of securities issued by, them. According to the Chilean Securities Market Law, the following entities are part of the same business group:
● | a company and its controller; |
● | all the companies with a common controller together with that controller; and |
● | all the entities that the CMF declares to be part of the business group due to one or more of the following reasons: |
o | a substantial part of the assets of the company is involved in the business group, whether as investments in securities, equity rights, loans or guaranties; |
o | the company has a significant level of indebtedness and the business group has a material participation as a lender or guarantor of such indebtedness; |
o | the company is a member of a controlling group of any company of those mentioned in the first two bullets above and there are reasons grounded in ties in the ownership, management or credit liabilities to include it in the business group; or |
o | the company is controlled by a member of the controller of any of the entities of the business group if the latter is formed by more than one entity and if there is more than one group of controlling entities and there are reasons grounded in ties in the ownership, management or credit liabilities to include it in the business group. |
The General Banking Act provides that, as a matter of public policy, no person or company may acquire, directly or indirectly, more than 10% of the shares of a bank without the prior authorization of the CMF, which may not be unreasonably withheld. The prohibition also applies to beneficial owners of ADSs. In the absence of such authorization, any person or group of persons acting in concert would not be permitted to exercise voting rights with respect to the shares or ADSs acquired. In determining whether or not to issue such an authorization, the CMF considers factors given by the General Banking Act.
The General Banking Act also requires the prior authorization of the CMF for the following transactions:
● | the merger of two or more banks; |
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● | the acquisition of all or a substantial portion of a bank’s assets and liabilities by another bank; |
● | the control by the same person or controlling group of two or more banks; or |
● | a substantial increase in the share ownership by a controlling shareholder of a bank. |
Such prior authorization may be granted or rejected by the CMF, which is further authorized to set rules or specific requirements in that regard. For further information, see “Item 4. Information on the Company—Regulation and Supervision— Financial Market Commission.”
According to the General Banking Act, a bank may not grant loans to related parties on terms more favorable than those generally offered to non-related parties. Article 84 No. 2 of the General Banking Act and the regulations issued by the CMF provides that a natural person will not be considered related to the bank by the mere fact of owning up to 1% of the shares of such bank. Likewise, a legal person will not be considered to be related to the bank by the mere fact of owning directly, indirectly or jointly with other companies with which it forms a unit of economic interest, up to a 1% of the bank's shares. The foregoing percentages shall be 5% in the case of shareholders, whether natural or legal persons, of a bank whose shares are traded on a stock exchange. Additionally, the General Banking Act imposes certain restrictions on the amounts and terms of loans made by banks to related parties. These provisions would also apply to beneficial owners of ADSs representing more than 1% or 5%, as applicable, of the shares. For further information, see “Item 4. Information on the Company—Regulation and Supervision—Lending Limits.”
Article 16 bis of the General Banking Act provides that the individuals or legal entities that, individually or with other people, directly control a bank and who individually own more than 10% of its shares must send to the CMF reliable information on their financial situation in the form and in the opportunity set forth in Resolution No. 3,156 of the CMF.
There are no limitations for non-resident or foreign shareholders to hold or exercise voting rights on the securities of a bank.
Preemptive Rights and Increases of Share Capital
The Chilean Corporations Law provides that whenever a Chilean company issues new shares for cash, it must offer its existing shareholders the right to purchase a number of shares sufficient to maintain their existing ownership percentages in the company. Pursuant to this requirement, preemptive rights in connection with any future issue of shares will be offered by us to the depositary as the registered owner of the shares underlying the ADSs. However, the depositary will not be able to make such preemptive rights available to holders of ADSs unless a registration statement under the Securities Act is effective with respect to the underlying shares or an exemption from the registration requirements thereunder is available.
We intend to evaluate, at the time of any preemptive rights offering, the practicality under Chilean law and Central Bank regulations in effect at the time of making such rights available to our ADS holders, as well as the costs and potential liabilities associated with registration of such rights and the related shares of common stock under the Securities Act, and the indirect benefits to us of thereby enabling the exercise by all or certain holders of ADSs of their preemptive rights and any other factors we consider appropriate at the time, and then to make a decision as to whether to file such registration statement. There can be no assurance that any registration statement would be filed. If we do not file a registration statement and no exemption from the registration requirements under the Securities Act is available, the depositary will sell such holders’ preemptive rights and distribute the proceeds thereof if a premium can be recognized over the cost of such sale. In the event that the depositary is not able, or determines that it is not feasible, to sell such rights at a premium over the cost of any such sale, all or certain holders of ADSs may receive no value for such rights. Non-U.S. holders of ADSs may be able to exercise their preemptive rights regardless of whether a registration statement is filed. The inability of all or certain holders of ADSs to exercise preemptive rights in respect of shares of common stock underlying such ADSs could result in such holders not maintaining their percentage ownership of the common stock following such preemptive rights offering unless such holder made additional market purchases of ADSs or shares of common stock.
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Under Chilean law, preemptive rights are exercisable or freely transferable by shareholders during a period that cannot be less than 30 days following the grant of such rights. During such period, and for an additional 30-day period thereafter, a Chilean corporation is not permitted to offer any unsubscribed shares for sale to third parties on terms which are more favorable than those offered to its shareholders. At the end of such additional 30-day period, a Chilean open stock corporation is authorized to sell unsubscribed shares to third parties on any terms, provided they are sold on a Chilean stock exchange. Unsubscribed shares that are not sold on a Chilean stock exchange can be sold to third parties only on terms no more favorable for the purchaser than those offered to shareholders.
Shareholders’ Meetings and Voting Rights
An ordinary annual shareholders’ meeting is held within the first four months of each year. The ordinary annual shareholders’ meeting is the corporate body that approves the annual financial statements, approves all dividends in accordance with the dividend policy determined by our board of directors, elects the members of our board of directors and approves any other matter that does not require an extraordinary shareholders’ meeting. Extraordinary meetings may be called by our board of directors when deemed appropriate, and ordinary or extraordinary meetings must be called by our board of directors when requested by shareholders representing at least 10% of the issued voting shares or by the CMF.
Notice to convene the ordinary annual meeting or an extraordinary meeting is given by means of three notices which must be published in a newspaper of our corporate domicile (currently Santiago, Chile) previously determined by our shareholders at the ordinary annual meeting or, in the event an agreement is not reached in the previous ordinary annual meeting or the newspaper ceases to exist or has its distribution suspended for whatever reason, in the Official Gazette in a prescribed manner, and the first notice must be published not less than 15 calendar days nor more than 20 calendar days in advance of the scheduled meeting. Notice must also be given to the CMF, the Santiago Stock Exchange and the Chilean Electronic Stock Exchange. Currently, we publish our official notices in the El Mercurio newspaper of Santiago.
In the case of an ordinary annual shareholders’ meeting, shareholders holding a prescribed minimum ownership interest in us must be sent an annual report of our activities that includes audited consolidated financial statements. Shareholders who do not fall into this category but who request it must also be sent a copy of our annual report. In addition to these requirements, we regularly provide, and management currently intends to continue to provide, together with the notice of ordinary annual shareholders’ meeting, a proposal for the final annual dividend.
The quorum for a shareholders’ meeting is established by the presence, in person or by proxy, of shareholders representing at least an absolute majority of the issued shares. If a quorum is not present at the first meeting on first call, the meeting can be reconvened (in accordance with the procedures described in the previous paragraphs) and, upon the meeting being reconvened, shareholders present at the reconvened meeting are deemed to constitute a quorum regardless of the percentage of the shares represented.
The shareholders’ meetings pass resolutions by the affirmative vote of an absolute majority of those voting shares present or represented at the meeting. Approval by a two-thirds majority of the issued shares, however, is required at any shareholders’ meeting to approve any of the following actions:
● | a change in corporate form, merger or spin-off; |
● | an amendment to our term of existence, if any, or our early dissolution; |
● | a change in corporate domicile; |
● | a decrease of corporate capital previously approved by the CMF, provided it is not reduced below the minimum legal capital; |
● | the approval of capital contributions and appraisal of properties other than cash, in those cases where it is permitted by the General Banking Act; |
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● | a modification of the powers of shareholders or limitations on the powers of our board of directors; |
● | a reduction in the number of members of our board of directors; |
● | the transfer of 50% or more of the corporate assets or the implementation or amendment of any business plan that contemplates the transfer of more than 50% of our corporate assets or the transfer of 50% or more of the assets of a subsidiary if such subsidiary represents at least 20% of our total corporate assets, as well as transfer of shares of such subsidiary which would make it lose such status; |
● | any non-cash distribution in respect of the shares; |
● | a change in the manner of distribution of profits established in our bylaws; |
● | the granting of guarantees to secure third-party obligations in excess of 50% of our corporate assets, unless granted to a subsidiary; |
● | the repurchase of our shares under the conditions set forth in Articles 27A and 27B of the Chilean Corporations Law; |
● | the correction of nullity caused by formal defects of any amendments to our bylaws; |
● | approval or confirmation of transactions with related parties, as set forth in Articles 44 and 147 of the Chilean Corporations Law; or |
● | certain other matters set forth in our bylaws. |
Shareholders may accumulate their votes for the election of directors and cast all of their votes in favor of one person.
In general, Chilean law does not require a Chilean open stock corporation to provide the level and type of information that U.S. securities laws require a reporting company to provide to its shareholders in connection with a solicitation of proxies. However, shareholders are entitled to examine the books of a company and its subsidiaries within the 15-day period before any ordinary annual shareholders’ meeting.
The Chilean Corporations Law provides that a Chilean company’s annual report must include, in addition to the materials provided by the board of directors to shareholders, the comments and proposals made by the directors’ committee, and, whenever shareholders representing 10% or more of the issued voting shares so request, such shareholders’ comments and proposals in relation to the company’s affairs. Similarly, the Chilean Corporations Law provides that whenever the board of directors of an open stock corporation convenes an ordinary annual shareholders’ meeting and solicits proxies for that meeting, or distributes information supporting its decisions or other similar material, it is obligated to include as an annex to its annual report any pertinent comments and proposals that may have been made by the directors’ committee and shareholders owning 10% or more of the company’s voting shares who have requested that such comments and proposals be so included.
Only shareholders registered as such with us on the fifth business day prior to the date of a meeting are entitled to attend and vote their shares. A shareholder may appoint another individual (who need not be a shareholder) as his proxy to attend and vote on his behalf. Every shareholder entitled to attend and vote at a shareholders’ meeting has one vote for every share subscribed, as we do not have special classes of shares with different voting rights.
Our shareholders’ meetings held in 2020 were:
● | The ordinary annual shareholders’ meeting held on March 26, 2020, where our shareholders agreed to the distribution and payment of dividend No. 208, in the amount of Ch$3.47008338564 per Banco de Chile common share, with a charge to 2019 net distributable income of Banco de Chile. |
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Our shareholders’ meetings held in 2021 were:
● | The ordinary annual shareholders’ meeting held on March 25, 2021, where our shareholders agreed to the distribution and payment of dividend No. 210, in the amount of Ch$2.18053623438 per Banco de Chile common share, with a charge to 2020 net distributable income of Banco de Chile. |
Our shareholders’ meetings held in 2022 were:
● | The ordinary annual shareholders’ meeting held on March 17, 2022, where our shareholders agreed to the distribution and payment of dividend No. 211, in the amount of Ch$5.34393608948 per Banco de Chile common share, with a charge to 2021 net distributable income of Banco de Chile. |
As of April 19, 2023, the following shareholders’ meeting had been held:
● | The ordinary annual shareholders’ meeting held on March 23, 2023, where our shareholders agreed to the distribution and payment of dividend No. 212, in the amount of Ch$ 8.58200773490 per Banco de Chile common share, with a charge to 2022 net distributable income of Banco de Chile. |
Dividend, Liquidation and Appraisal Rights
For a description of the provisions of our estatutos related to our dividends, see “Item 8. Financial Information—Consolidated Statements and Other Financial Information—Dividends.”
Dividends that are declared but not paid by the date set for payment at the time of declaration are adjusted from the date set for payment to the date such dividends are actually paid, and interest is accrued thereon. The right to receive a dividend lapses if it is not claimed within five years from the date the dividend is payable, and the funds may be claimed by the Chilean treasury.
We may declare a dividend in cash or in shares. When a share dividend is declared above the legal minimum (which minimum must be paid in cash), our shareholders must be given the option to elect to receive cash. A holder of our ADSs may, in the absence of an effective registration statement under the Securities Act or an available exemption from the registration requirement thereunder, effectively be required to receive a dividend in cash. See “Item 10. Additional Information—Memorandum and Articles of Association—Preemptive Rights and Increases of Share Capital.”
In the event of our liquidation, the holders of our fully paid shares would participate equally and ratably, in proportion to the number of paid-in shares held by them, in our assets available after payment of all our creditors. The holders of fully paid shares would not be required to contribute additional capital to us in the event of our liquidation.
In accordance with the General Banking Act, our shareholders do not have appraisal rights in the event of a business combination or otherwise.
Approval of Financial Statements
Our board of directors is required to submit our audited consolidated financial statements to the shareholders annually for their approval. The approval or rejection of the audited consolidated financial statements is entirely within our shareholders’ discretion. If our shareholders reject our audited consolidated financial statements, our board of directors must submit new audited consolidated financial statements no later than 60 calendar days from the date of rejection. If our shareholders reject our new audited consolidated financial statements, our entire board of directors is deemed removed from office and a new board of directors shall be elected at the same meeting. Directors who individually approved our audited consolidated financial statements are disqualified from running for re-election for the ensuing period.
Registrations and Transfers
We act as our own registrar and transfer agent, as is customary among Chilean companies. In the case of jointly owned shares, an attorney-in-fact must be appointed to represent the joint owners in dealings with us.
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MATERIAL CONTRACTS
See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions.”
EXCHANGE CONTROLS
The Central Bank is responsible for maintaining the stability of the Chilean peso and the normal functioning of internal and external payments. The authority of the Central Bank for these purposes includes regulation of the amount of currency and credit in circulation, the performance of credit transactions and foreign exchange transactions and the issuance of regulatory provisions regarding monetary, credit, financing and foreign exchange matters.
Under the Basic Constitutional Act of the Central Bank, Law No. 18,840, foreign exchange transactions can be carried out in Chile by any person, subject to the limitations and restrictions established by the Central Bank. Foreign exchange transactions include buying and selling foreign currency and, in general, any act or agreement that may have the effect of creating, amending, or extinguishing an obligation payable in foreign currency, even if no transfer of funds or drafts to or from Chile is actually involved. Foreign exchange transactions also include transfers of or transactions with respect to gold or instruments representing gold.
The Central Bank can impose the following limitations on foreign exchange transactions:
● | The Central Bank can require that the transaction of specified foreign exchange operations, such as foreign investments and foreign credits, be reported to it; and |
● | The Central Bank can require that the execution of certain foreign exchange operations, such as money transfers to and from Chile, be made only in the Formal Exchange Market. The Formal Exchange Market consists of banks and other entities authorized by the Central Bank. |
Also, the Central Bank has the authority to establish certain restrictions on foreign exchange transactions with respect to the Formal Exchange Market. These restrictions may include the following: the obligation to return to Chile in Chilean pesos the value obtained in the export of goods, services, and other payments to foreign persons or entities that have a right of residency in Chile; that a reserve be maintained for credits, deposits and investments in foreign currency from or to a foreign country; and the obligation to obtain approval for payment or remittance of foreign exchange transactions, among others.
These restrictions may only be imposed by resolution adopted by the majority of board members of the Central Bank if required for the stability of the currency or the financing of the balance of payments of the country. Additionally, these restrictions may only be imposed for a predetermined period, which, at the most, may extend to a year. The resolution may be subject to veto by the Minister of Finance, in which case the restriction may only be adopted pursuant to a favorable vote of all the board members. The restriction, once the predetermined period has expired, may be renewed subject to the preceding rules.
On April 16, 2001, the Central Bank eliminated the prior foreign exchange restrictions, replaced the former Compendium of Foreign Exchange Regulations (“Compendium”) by a new one, and eliminated Chapter XXVI of the old Compendium, which regulated the establishment of an ADR facility by a Chilean company. Notwithstanding such replacement, the special regime of Chapter XXVI continued in force for Banco de Chile’s ADS program until March 7, 2011, when the Central Bank, JPMorgan Chase Bank N.A., as depositary bank, and Banco de Chile executed an agreement that terminated the Convención Cambiaria (“Exchange Convention”). As a consequence of such termination, the special exchange regime established in the Exchange Convention is no longer applicable. Thus, the Deposit Agreement, as amended from time to time, and Banco de Chile’s ADS program are subject to the exchange regulations of general applicability of Chapter XIV of the Compendium or such new regulations that may be issued in the future. Copies of amendments to the Deposit Agreement can be found as Exhibits to this annual report.
The ADS facility is governed by Chapter XIV of the Compendium on “Regulations applicable to Credits, Deposits, Investments and Capital Contributions from Abroad.” According to Chapter XIV, the establishment of an ADS facility is regarded as an ordinary foreign investment, subject to the above mentioned limitations, and it is not necessary to seek the Central Bank’s prior approval in order to establish an ADS facility. The establishment of an ADS facility only requires that the Central Bank be informed of the transaction, and that the transaction be conducted through the Formal Exchange Market.
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In Chile, until December 2015, foreign investments could also be made through the Foreign Investment Committee under Decree Law No. 600 of 1974, Foreign Investment Statute, which was an optional mechanism to invest capital in Chile that required, among other items, a foreign investment contract with the State of Chile. However, on September 29, 2014, Law No. 20,780 was published, which repealed Decree 600 effective January 1, 2016. However, this repeal does not apply retroactively. Therefore, foreign investment agreements entered into under Decree Law 600, before its repeal, will continue to be governed by Decree Law 600.
Investment in Our Shares and ADSs
With regard to exchange controls, investments made in shares of our common stock are subject to the following requirements:
● | any foreign investor acquiring shares of our common stock who brought funds into Chile for that purpose must bring those funds through an entity participating in the Formal Exchange Market; |
● | any foreign investor acquiring shares of our common stock to be converted into ADSs or deposited into an ADR facility who brought funds into Chile for that purpose must bring those funds through an entity participating in the Formal Exchange Market; |
● | in both cases, the entity of the Formal Exchange Market through which the funds are brought into Chile must report such investment to the Central Bank; |
● | all remittances of funds from Chile to the foreign investor upon the sale of the acquired shares of our common stock or from dividends or other distributions made in connection therewith must be made through the Formal Exchange Market; |
● | all remittances of funds from Chile to the foreign investor upon the sale of shares underlying ADSs or from dividends or other distributions made in connection therewith must be made through the Formal Exchange Market; and |
● | all remittances of funds made to the foreign investor must be reported to the Central Bank by the intervening entity of the Formal Exchange Market. |
When funds are brought into Chile for a purpose other than to acquire shares to convert them into ADSs or deposit them into an ADR facility and subsequently such funds are used to acquire shares to be converted into ADSs or deposited into an ADR facility, such investment must be reported to the Central Bank by the custodian within ten days following the end of each month within which the custodian is obligated to deliver periodic reports to the Central Bank.
When funds to acquire shares of our common stock or to acquire shares to convert them into ADSs or deposit them into an ADR facility are received by us abroad (i.e., outside of Chile), such investment must be reported to the Central Bank directly by the foreign investor or by an entity participating in the Formal Exchange Market within ten days following the end of the month in which the investment was made.
All payments in foreign currency in connection with our shares of common stock or ADSs made from Chile through the Formal Exchange Market must be reported to the Central Bank by the entity participating in the transaction. In the event there are payments made outside of Chile, the foreign investor must provide the relevant information to the Central Bank directly or through an entity of the Formal Exchange Market within the first ten calendar days of the month following the date on which the payment was made.
There can be no assurance that additional Chilean restrictions applicable to the holders of ADSs, the disposition of shares of our common shares underlying ADSs or the conversion or repatriation of the proceeds from such disposition will not be imposed in the future, nor can we assess the duration or impact of such restrictions if imposed.
This summary does not purport to be complete and is qualified by reference to Chapter XIV of the Central Bank Foreign Exchange Regulations, a copy of which is available in Spanish at the Central Bank’s website at www.bcentral.cl.
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TAXATION
Chilean Tax Considerations
The following discussion is based on income tax laws and other applicable regulations and rulings issued by the Chilean Internal Revenue Service (Servicio de Impuestos Internos) that have been enacted in Chile. The discussion summarizes the main Chilean income tax consequences for investments in ADSs or shares of common stock held by individuals without domicile or residence in Chile or legal entities that are neither incorporated under the laws of Chile nor permanently located in Chile. We refer to these investors as “foreign holders” hereafter.
For Chilean tax law purposes, under Law No. 21,210 published on February 24, 2020, an individual holder resides in Chile if the individual has resided in Chile for more than 183 continuous or discontinuous days within the last 12 months. On its turn, for Chilean tax law purposes an individual holder is domiciled in Chile if he or she resides in Chile with the real or supposed purpose of staying in the country. Domicile is defined as residence in a place with the intention of staying there. The intention is proved through facts and circumstances. Accordingly, the Chilean Internal Revenue Service has interpreted that an individual without residence in Chile may, nonetheless, be considered as domiciled in Chile since the day of entry into the country if he or she intends to stay in Chile and such intention is evidenced, for example, by circumstances such as the acceptance of a job position in Chile or the relocation of his or her family to the country, among other considerations., The Chilean Internal Revenue Service has also interpreted that an individual may lose residence when he or she is absent from Chile for more than 184 days in 12 consecutive months and that he or she may lose his or her domicile when he or she no longer has the main seat of his business in Chile. The Chilean Internal Revenue Service established affidavits under article 103 of the Income Tax Law for those who express their intention to acquire or lose domicile in Chile which will be considered together with other circumstances to define the quality of domiciled in the country. Taxpayers must pay personal income tax accrued through the year in which said affidavit is submitted
Under the current Constitution, taxes in Chile are governed by the principle of legality, which precludes the creation, suppression, modification, reduction or waiving of taxes, its essential elements, their form of computation, their collection or their form, proportionality or progression by any means other than a law. Chilean tax authorities, however, have the power to interpret tax laws by issuing rulings and regulations of either general or specific application.
Chile and the United States have subscribed an income and capital tax treaty for the avoidance of double taxation and the prevention of fiscal evasion, but its effectiveness is contingent upon its ratification by the United States Senate, which is still pending and whose approval date is uncertain.
In September 2014, the Chilean Government enacted a law reforming the Chilean tax system. This tax reform (Law No. 20,780) gradually increases the first category tax or corporate tax rate between 2014 and 2018 while establishing two alternative tax regimes from 2017 onwards: (i) the Semi-Integrated Regime and (ii) the Attribution Regime. Nevertheless, following this reform in the Chilean taxation system, in February 2016, a new tax law was enacted (Law No. 20,899), which simplified the previously mentioned reform (Law No. 20,780) by limiting the possibility of choosing between the two alternative tax regimes. According to this new law, publicly-traded companies, like Banco de Chile, will only be subject to a Semi-Integrated Regime. The Chilean IRS has provided instructions regarding these regulations by means of Circular Letter No 49/2016.
In August 2018, the Government proposed a new bill to the Chilean Congress seeking to modernize Chilean tax legislation. After almost two years of legislative discussion, Law No. 21,210, which modernizes the local tax system, was passed by the Chilean Congress and enacted by the Chilean Government on February 24, 2020. This law entered into force retroactively on January 1, 2020. The Chilean IRS has provided instructions regarding these regulations by means of Circular Letter No 73/2020. The new law mainly focuses on: (i) entrepreneurship promotion measures by providing SMEs with a special tax regime based on total integration and a statutory tax rate of 25%, as opposed to large companies and corporations whom will continue to be subject to a semi-integrated system while bearing a statutory corporate tax rate of 27%, (ii) initiatives to promote private investment by introducing instantaneous or accelerated depreciation for fixed-assets, reducing the time frame to receive reimbursements of VAT paid on fixed-assets while reducing or eliminating property taxes paid by elderly people, (iii) increasing taxes paid by high-income individuals by means of adding a new tax bracket of 40%, raising taxes on properties that exceed U.S.$500,000 in assessed value, incorporating a regional green tax of 1% levied on investment projects exceeding U.S.$10 million in capital expenditures that were subject to environmental approval, and lowering tax benefits on capital gains obtained in stock markets, (iv) the creation of a Taxpayer Protection & Advisory Agency, which aims to be a counterpoint to the Chilean Internal Revenue Service on taxation matters, and (v) the introduction of a digital approach, which considers both the compulsory use of electronic bill and invoices, aimed at reducing tax evasion, and the imposition of VAT on digital services rendered from foreign countries.
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In September 2020, Law No 21,256 was enacted establishing additional tax measures as part of the emergency plan for economic reactivation following the COVID-19 pandemic. Among others, the main measures included in this law were: (i) a temporary reduction of the statutory corporate tax rate to 10% for SMEs for the fiscal years 2020, 2021 and 2022, (ii) a refund of accumulated VAT for purchases and/or services acquired between January and May 2020 by SMEs, and (iii) a temporary additional accelerated depreciation for fixed assets newly and imported acquired between June 1, 2020 and December 31, 2022, for all types of companies.
In February 2022, Law No. 21,420 was published, reducing or eliminating a series of tax exemptions. As a result: (i) the taxation of services with VAT was extended to any type of service that is not exempt provided that it is a service performed after January 1, 2023; (ii) financial leasing agreements entered into on or after January 1, 2023 have the same treatment for tax and financial purposes, which was recently reversed by Law No 21.540 on February 2023 (so never went into effect in practice); (iii) a single tax of 10% is applied to the capital gains produced by the sale of actively traded stocks provided that the requirements established by Article N° 107 of the Chilean Income Tax Law apply to sales on or after September 1, 2022, which will not apply to local or foreign institutional investors; (iv) profits from life insurance contracts entered into on or after February 4, 2022 pay inheritance tax; (v) the rate of the upper bracket of the wealth tax on real estate was increased from 0.275% to 0.425%, effective January 1, 2023; (vi) the special VAT credit is eliminated for construction companies that build affordable homes for sales from 1 January 2025 onwards; (vii) 2% annual tax on expensive aircraft, helicopters, yachts and vehicles is implemented; (viii) tax benefits of affordable housing under DFL No. 2 of 1959 are reduced only to individuals and maximum for two homes, regardless of the date of acquisition, as of January 1, 2023; (ix) credit for the purchase of fixed assets is eliminated for large companies; (x) the value of mining patents is increased.
This discussion is not intended as tax advice to any particular investor. Such advice would require a complete understanding of an investor’s particular tax situation.
Cash Dividends and Other Distributions
Cash dividends distributed by us to foreign holders of our ADSs or shares of common stock are subject to a 35.0% withholding tax, which is withheld, declared and paid to the Chilean Treasury by us (the “Chilean Withholding Tax” hereafter). A tax credit associated with the corporate income tax or the first category tax (the “Corporate Tax” hereafter) actually paid by the company and registered in the Credit Registry may be deducted from the Chilean Withholding Tax levied on cash dividends, up to the amounts registered in the Credit Registry. Finally, distribution of non-taxable income is relieved from Chilean Withholding Tax.
For purposes of applying the Chilean Withholding Tax, cash dividends are grossed-up in the amount the Corporate Tax paid by the company, in the proportion corresponding to the ADS holder.
All dividends will be attached with a provisional Corporate Tax credit (applying the rate of the first category in effect) that should be confirmed by the company’s taxable income as of December 31 of the year in which the dividend was paid. If such provisional credit is determined to be totally or partially not applicable at the end of the year because retained taxable profits were not enough to cover the distribution, the company will have to pay on behalf of the foreign holders such balance, along with its annual tax return to be filed on April of the following year. Foreign holders shall reimburse the company the excess resulting from the tax difference originated by the provisional credit.
Notwithstanding the above, as of January 1, 2017 onwards Banco de Chile has been subject to a semi-integrated system (current general tax regime) by which personal or withholding taxes are only triggered upon distribution of taxable profits to the company’s owners or shareholders, with a tax credit of only 65% of the paid Corporate Tax, unless the owner or shareholder is resident in a country party to a Double Taxation Avoidance Treaty with Chile, in which case a tax credit up to 100% of the corporate tax paid by the company can be used against withholding taxes1.
1 | In cases where a Double Taxation Avoidance Treaty has only been signed but not yet ratified, Law No. 20.899, enacted on February 8, 2016, established a temporary extension of the use of 100% of corporate tax credit up to 2019. Subsequently, Law No. 21,047 enacted on November 23, 2017 extended the previously mentioned exemption until December 31, 2021. And, finally, Law No. 21,210 further extended this benefit up to 2026, with regard to Double Taxation Treaties signed through January 1, 2020, which is the case with the United States. |
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However, in order to provide evidence of their tax residence, foreign holders of our ADSs or of our shares of common stock must send to Banco de Chile a certificate of residence issued by their local tax authority.
Law No. 21,210 established a legal rule whereby, in the absence of proof to the contrary, the residence of the non-resident shareholders is accredited in the calendar business year by the issuance of a certificate of residence by the tax authority of the respective country of residence. This certificate must be legalized or apostilled and valid at the moment of the distribution of dividends, otherwise the Tax credit will be 65%. In December 2020, the Chilean Internal Revenue Service issued the Exempt Resolution No. 151, which sets the validity of the certificate of residence which will be as defined in the certificate and, in cases where it is not specified in the certificate, it will be valid according to the rules of the country in which it was issued, and in the absence of background information to establish the validity of the certificate, it will be deemed to be valid only until the last day of the issuance year. If the Chilean Internal Revenue Service can validate the certificate with the foreign tax authority by internet or other technological means, it will not be necessary to legalize or apostille the certificate.
Transitional Article 25 of Law No. 21,210 enacted on February 24, 2020, established an optional and temporary tax regime that allows corporate taxpayers to apply the Substitute Tax for Final Taxes (“ISFUT”), including Chilean withholding tax, as applicable, on taxable profits generated by companies before December 31, 2016 instead of the marginal tax rate applicable for shareholders. In addition, corporate taxes formerly paid by the companies on profits generated before December 31, 2016 can be considered as a tax credit to be discounted from the 30% associated with the ISFUT. According to the Ordinary Official Letter No. 2,762 issued by the Chilean IRS on October 13, 2021, from a taxation perspective, there is no issue with Chilean companies discounting (and withholding) the ISFUT from distributed dividends. For non-resident shareholders, who are subject to a 35% Chilean withholding tax, after choosing ISFUT, dividend distribution by companies will not affect tax withholding, as they have already paid all taxes in Chile.
Capital Gains
Capital gains realized on the sale, exchange or other disposition by a foreign holder of ADSs (or ADRs evidencing ADSs) will not be subject to Chilean taxation, provided that such disposition occurs outside Chile or that it is performed under the rules of Title XXIV of the Chilean Securities Market Law. The deposit and withdrawal of shares of common stock in exchange for ADRs will not be subject to any Chilean taxes.
Capital gains recognized on the sale or exchange of shares of common stock (as distinguished from sales or exchanges of ADSs representing such shares of common stock) by a foreign holder will be subject to both Corporate Tax and the Chilean Withholding Tax (Corporate Tax being creditable against the latter) if the seller is a taxpayer who obtains other income effectively taxed as first category. If the transaction does not meet this condition, capital gains will be taxed at the Chilean Withholding Tax of 35.0%, unless the special exemption described in the next paragraph applies.
Finally, an exemption regime is available for capital gains produced by the sale of actively traded stocks (under definitions established by the Chilean IRS) provided that the following requirements established by Article N° 107 of the Chilean Income Tax Law are met:
a) | The seller must have acquired the shares: (i) on a Chilean stock exchange authorized by the CMF; or (ii) pursuant to a regulated tender offer carried out according to Title XXV of the Chilean Securities Market Law; or (iii) at the time of incorporation of the corporation or pursuant to a capital increase; or (iv) pursuant to the exchange of public traded securities convertible in shares (in this case the acquisition cost of the shares corresponds to the exchange price); or (v) in a redemption of securities from mutual funds. |
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In regards to shares acquired in a capital increase process (as mentioned in (iii) above) before the company was publicly listed, only the greatest amount between the portion which exceeds the price of the offering on the stock exchange (closing price on the first day of transactions for the IRS) and the book value on the prior day will be exempted;
b) | The shares must be sold: (i) on a stock exchange authorized by the CMF; (ii) pursuant to a regulated tender offer; or (iii) in a contribution of securities on mutual funds; and |
c) | The exemption under analysis also applies if the sale or transfer of shares is executed within 90 days following the day on which they were no longer considered as actively traded. In such case, the profits exempted from Chilean taxes will correspond to the average price of said shares within the last 90 days in which they were actively traded. Any profits above the average price will be subject to the general tax regime applicable to the transfer of shares. |
This exemption regime was only in force until August 31, 2022, given that, as explained under “Chilean Tax Considerations“ above, Law No. 21,420 established a single 10% tax on the capital gain produced by the sale of actively traded stocks. In any case, the acquirer or the stockbroker must withhold the tax and if they do not know the amount of the capital gain they will apply a provisional withholding of 1% of the sale price of the shares.
Regarding ADSs, the acquisition value of the shares of common stock received in exchange for them will represent the tax basis of such shares. The acquisition value is determined by the parties in the relevant deposit agreement, and generally corresponds to the highest price at which they are traded on Chilean stock exchanges on the date when the exchange takes place. Consequently, the conversion of ADSs into shares of common stock and the sale of such shares of common stock for the value established under the deposit agreement will not generate a capital gain subject to taxation in Chile in case the sale of shares is made at the same tax basis as of the time of the conversion.
However, as the exchange is generally registered two days after it took place, if the price of the shares goes down, a gain would arise. In order to overcome this situation, on October 1, 1999, the Chilean Internal Revenue Service issued Ruling No. 3,708, allowing Chilean issuers of ADSs to amend the deposit agreements by including a clause stating that when exchanged shares are sold by the ADSs’ holders on a Chilean stock exchange, either on the same day in which the exchange is recorded in the shareholders’ registry of the issuer or within two business days prior to such date, the acquisition price of those exchanged shares will be the price recorded in the invoice issued by the stock broker that participated in the sale. Consequently, if this clause were included in the deposit agreement, the capital gain that may arise if the exchange date was different from the date in which the shares received in exchange for ADSs were sold will not be subject to taxation. Sale of shares at a higher value of the invoice of the broker will be subject to taxes in Chile.
The distribution and exercise of preemptive rights relating to the shares of common stock will not be subject to Chilean taxation. Amounts received in exchange for the shares or assignment of preemptive rights relating to the shares will be subject to both Corporate Tax and Chilean Withholding Tax (the former being creditable against the latter to the extent described above).
Stock dividends
Stock dividends (distributions of fully paid-in shares) are free of tax at the moment they are received by the shareholder.
Until 2019, capital gains obtained on the sale of shares received as stock dividends could be eligible for treatment under the art. 107 regime. Nevertheless, since 2020 capital gains associated with the sale of shares obtained as stock dividends are subject to the general tax regime. Therefore, foreign investors will be subject to Chilean Withholding Tax on capital gains arising as a consequence of the sale of shares received as stock dividends. Law No. 21,210 established that the shares will have no acquisition cost for tax purposes and will not be eligible for sale under Article 107 of the Chilean Income Tax Law, being the total amount of the sale price affected by the general tax regime.
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Mutual Funds and Investment Funds
Law No. 20,712, also known as the “Unitary Funds Act”, regulates all aspects related to mutual funds and investment funds, both public and private (creation, accepted investments, administration, forbidden activities, profit taxation, among others), as well as the activity of administrating third-party funds and individual portfolio management.
(1) The main aspects concerning taxation of foreign investments made in mutual and public funds are the following:
a) | In general, foreign investors are subject to a 10% Sole Tax over dividends and other forms of payment of taxable income originated from the Fund’s investments which would generally be subject to Chilean Withholding Tax, except if they are attributed to non-taxable income or income exempted from Chilean Withholding Tax. |
b) | The rescue of Fund quotas (capital investments) is not subject to Chilean taxes, only to the extent that the fund has been liquidated, only with respect to the capital invested plus its readjustment by inflation. |
c) | The capital gains arising from the sale or redemption of Fund’s quotas for reasons other than the Fund’s termination is subject to a 10% Sole Tax. |
(2) In the case of Funds that have at least 80% of their investment portfolio invested in certain foreign assets during at least 330 continuous or discontinuous days within the financial year, the foreign investments are taxed according to the following rules:
a) | Dividends attributed to income proceeding from the Fund’s investments in foreign assets (80% or more) are not subject to taxes in Chile. Dividends attributed to income proceeding from the Fund’s investments in Chilean assets (20% or less) are subject to a 10% Sole Tax, except for those who correspond to non-taxable o exempted income. |
b) | The capital gains produced by the sale or redemption of fund quotas for reasons other than the Fund’s termination are exempted from Chilean taxes. |
c) | Interests attributed to income proceeding from the Fund’s investments in foreign assets (80% or more) are not subject to taxes in Chile. Interests attributed to income proceeding from the Fund’s investments in certain Chilean assets (20% or less) and other specific kinds of investments are subject to a 4% Sole Tax, except for those who correspond to non-taxable o exempted income. No tax credits available. |
d) | Whatever the percentage of the investment portfolio of the Fund is invested in foreign assets, dividends and interest payments will be subject to the general tax regime (Corporate Tax plus Chilean Withholding Tax with a credit for paid Corporate Tax) if any individual or entity with domicile or residence in Chile holds an interest, or is entitled to benefits, of 5% or more in one of the foreign holders, excluding foreign individuals and institutional investors. |
This special tax treatment also requires that the internal investment policy of the Fund:
(a) | be in line with such percentage being invested specific foreign assets during the referred period of time; and |
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(b) | mandate that all other income proceeding from the remaining percentage of their portfolio investment (local assets) and not exempted from Chilean Withholding Tax be completely distributed among its participants during that year of their perception or during the 180 day-period following such financial year’s closing. |
Fixed Income (in force according to the Unitary Funds Act)
There are special tax regulations for bonds issued in Chile in a public offering which fulfill specific conditions established in the Chilean Income Tax Law (“104 Bonds”).
In February 2017, Law No. 20,956 came into effect, according to which the Chilean Withholding Tax on interest accrued by Chilean bonds, as a general rule, must be withheld by the issuer.
However, if the bond issuance agreement provides so, the Chilean Withholding Tax of 4% shall be withheld by the local custodian that is acting as the local tax agent for the foreign investor.
Regarding bonds issued by the Central Bank or by the Chilean Treasury, the withholding tax will always be borne by the issuer.
Finally, with regard to bonds whose issuance agreement was executed prior to the effectiveness of Law No. 20,956, local custodians must withhold the applicable tax unless the issuer adheres to said law by giving notice to the bondholders and to the Chilean Internal Revenue Service.
Capital gain produced in the sale of 104 Bonds should be exempted from Chilean taxes regardless of whether they are traded on a Chilean stock exchange in a continuous auction system, or over the counter.
The governmental bonds included in a list made by the Treasury Department qualify as 104 Bonds (even if some of the requirements mentioned above are not met) and are suitable for a tax exemption, regardless of its trading system, by virtue of Supreme Decree N° 471 of March 25, 2014.
According to the Chilean Income Tax Law, bonds and other debt instruments issued in Chile by Chilean companies are deemed to be located in Chile and therefore, sourced in Chile for income tax purposes. Therefore, the capital gains arising from their sale is subject to Chilean taxes, even if the seller is a non- resident. Also, interests arising from debt securities issued through offshore permanent establishments are deemed to be sourced in Chile.
Capital Gains Tax Regime for Foreign Institutional Investors
The Unitary Funds Act contains an exemption rule for capital gains obtained by foreign institutional investors in the sale of debt securities and the sale of shares subject to Article 107 of the Chilean Income tax Law.
According to this rule, capital gains obtained by foreign institutional investors in the sale of debt securities (public offerings not covered by the regime established in the Article 104 of the Chilean Income Tax Law) are exempted from income tax provided they have been issued prior to May 1, 2014 by companies incorporated in Chile and that the investor meets requirements set by the law.
The exemption shall be applicable for securities purchased before the entry in force of Unitary Funds Act (May 1, 2014), provided that the seller complies with the requirements listed in the repealed article 106, even in the case where the transfer of shares has not been made under any of the modalities set out in Article 107 (as described above).
Amendments to Law No. 21,420 to Article 107 of the Income Tax Act do not affect the capital gain of foreign institutional investors, who will remain exempt from this tax.
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Other Chilean Taxes
There are no Chilean inheritance, gift or succession taxes applicable to the transfer or disposition of the ADSs by a foreign holder; however, according to the Chilean Internal Revenue Service’s criteria, such taxes will generally apply to the transfer at death or by a gift of shares of common stock by a foreign holder. No Chilean stamp, issue, registration or similar taxes or duties apply to foreign holders of ADSs or shares of common stock.
Stamp duties are applied only to documented money credit operations. The tax rate varies depending on the transaction: (i) 0.332% flat fee for operations on demand and (ii) 0.066% per month with a 0.8% cap for operations subject to a maturity date.
Other Relevant Aspects
Law No. 21,210 mainly focuses on: (i) entrepreneurship promotion measures by providing SMEs with a special tax regime based on total integration and a statutory tax rate of 25%, as opposed to the general tax regime applicable for large companies and corporations, which will continue to be subject to a semi-integrated system with a statutory corporate tax rate of 27%, (ii) initiatives to promote private investment by introducing instantaneous or accelerated depreciation for fixed-assets, reducing the time frame to receive reimbursements of VAT paid on fixed-assets while reducing or eliminating property taxes paid by elderly people, (iii) raising taxes on properties that exceed U.S.$500,000 in assessed value, incorporating a regional green tax of 1% levied on investment projects exceeding U.S.$10 million in capital expenditures that were subject to environmental approval, and lowering tax benefits on capital gains obtained in stock markets, (iv) the creation of a Taxpayer Protection & Advisory Agency, which aims to be a counterpoint to the Chilean Internal Revenue Service on taxation matters, and (v) the introduction of a digital approach, which considers both the compulsory use of electronic bill and invoices, aimed at reducing tax evasion, and the imposition of VAT on digital services rendered from foreign countries.
Aside from the changes that have been mentioned previously, the new law increased personal taxes for Chilean residents. In fact, a new tax bracket of 40% was added for higher-income individuals, maintaining a bracket of 35% for the immediately lower segment. This modification became effective on January 1, 2020 and will levied on annual personal income exceeding UTA 310 (approximately U.S.$266,900).
Also, starting January 1, 2016, the Stamp Tax rate increased from 0.4% to 0.8%, which mainly affects loans and financing. On April 2, 2020, however, the Chilean Government enacted Law No. 21,225 with the purpose of arranging an Emergency Plan in order to mitigate the effects of COVID-19 on the local economy. This plan is composed of various economic and tax measures to ensure liquidity in the local financial system and financing to SMEs and corporations. One of these measures was a temporary reduction of the Stamp Tax to 0% for all lending operations between April and September 2020. In addition, Law No. 21,307 was published on February 3, 2021, which established a stamp tax exemption for credits granted to small and medium-sized enterprises with a state guarantee until December 31, 2021. Similarly, on December 3, 2022, Law No 21,514 was published, which created a new warrant fund for small businesses loans while also allowing extensions for loans under article 2 of Law No. 21,307.
Tax Reform currently under discussion
On July 7, 2022, the Chilean government submitted bill number 15170-05 to Congress, proposing a new tax reform. So far, this bill has been subject to several amendments.
This Reform creates a “Dual Regime”, which will be the general, non-integrated regime, meaning corporate and personal or final taxes will be separate.
Corporate tax is reduced to 25%, and a new additional 2% “development rate” is established. The latter will apply if the taxpayer does not invest in R&D, according to certain criteria. This will be applicable to taxpayers under article 14 A of the Income Tax Law. This development rate does not constitute a category tax, therefore, it cannot be used as credit against personal income tax.
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The tax reform also includes a new 2.5% “deferment tax” imposed over the equivalent amount of 22% of the taxpayer’s profits, provided 50% or more of their gross profit originates from passive income, such as: participation in other companies or entities, interests from money credit operations and real estate rents. This tax is intended to discourage and reduce the postponement of final or personal taxes payment.
Regarding personal income taxation, the company’s owners, shareholders or stakeholders will be subject to a new 22% “Capital Income Tax”, which will be levied on dividends paid by the company to its owners, without corporate tax credit. Its rate is applied over the net distributed amount and it must be withheld and paid by the company.
Owners who reside in countries without a Double Taxation Agreement (DTA) in force will be subject to the same Capital Income Tax, without any credit. If a DTA between Chile and their country of residence is in force, foreign investors will pay the 35% Additional or Withholding Tax and will be entitled to corporate tax credit.
As for Investment Funds, they will also be subject to the aforementioned deferment tax. Funds must withhold a 14% tax over distributions to owners or stakeholders without domicile nor residence in Chile. If said distributions are attributed to amounts pending taxation, withholding tax will be 35%. Whichever withholding tax is applied, it will constitute a Sole Tax, and will apply regardless of the existence of a DTA in force or lack thereof.
The integrated tax system will remain applicable to small and medium businesses and foreign investors who reside in countries in which a DTA is applicable.
This bill was rejected in its initial legislative procedure by the lower house of Chilean Congress on March 8, 2023. This, however, could be reversed by the Senate. If passed, the reform’s provisions will transition into full entry in force from 2025 to 2028.
United States Federal Income Tax Considerations
The following discussion is a summary of certain U.S. federal income tax considerations that may be relevant to the acquisition, ownership and disposition of shares of our common stock, as well as the ownership and disposition of ADSs received pursuant to a deposit into the ADR facility of shares of our common stock, by a beneficial owner that is: (i) an individual who is a citizen or resident of the United States; (ii) a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any state thereof or the District of Columbia; (iii) an estate the income of which is subject to U.S. federal income tax regardless of its source; or (iv) a trust if a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all substantial decisions of the trust (or otherwise if the trust has a valid election in effect under current U.S. Treasury regulations to be treated as a U.S. person). For purposes of this discussion, we refer to these owners of ADSs or shares of our common stock as “U.S. Holders.” If a partnership (or any entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds ADSs or shares of our common stock, the tax treatment of a partner generally will depend upon the status of the partner and upon the activities of the partnership. A prospective investor that is a partnership or a partner in a partnership holding ADSs or shares of our common stock should consult its own tax advisors.
This summary is not a comprehensive discussion of all of the tax considerations that may be relevant to a U.S. Holder’s decision to acquire ADSs or shares of our common stock. In particular, this discussion is directed only to U.S. Holders that will hold ADSs or shares of our common stock as capital assets (generally, property held for investment) and it does not address the Medicare tax on net investment income or any special U.S. federal income tax consequences that may be applicable to U.S. Holders that are subject to special treatment under the Internal Revenue Code of 1986, as amended (“U.S. Code”), such as banks, brokers or dealers in securities or currencies, traders in securities electing the mark-to-market method of accounting, financial institutions, insurance companies, tax-exempt entities, regulated investment companies, real estate investment trusts, partnerships, holders that own or are treated as owning 10% or more of our stock (by vote or by value), persons holding ADSs or shares of our common stock as part of a hedging, conversion or other integrated transaction or a straddle, persons subject to the alternative minimum tax or U.S. Holders whose functional currency is not the U.S. dollar. Prospective investors are advised to satisfy themselves as to the overall U.S. federal, state and local tax consequences of their ownership of ADSs or shares of our common stock by consulting their own tax advisors.
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Except where specifically described below, this discussion assumes that we are not a passive foreign investment company (“PFIC”), for U.S. federal income tax purposes. Please see the discussion under “—Passive Foreign Investment Companies” below.
The statements of U.S. federal income tax laws set out below are based on the laws in force as of the date of this annual report and may be subject to changes in U.S. federal income tax law occurring after that date, including changes that may have retroactive effect.
ADRs
A U.S. Holder who deposits shares of our common stock into the ADR facility, receiving ADSs in return, will be treated for U.S. federal income tax purposes as the beneficial owner of the underlying shares of our common stock represented by those ADSs and evidenced by ADRs. Deposits and withdrawals of shares of our common stock by U.S. Holders in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.
Taxation of Dividends
Subject to the discussion below under “—Passive Foreign Investment Companies,” distributions of cash or property (other than shares of our common stock, if any, distributed pro rata to all of our shareholders, including holders of ADSs) paid out of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) with respect to ADSs or shares of our common stock, including the net amount of the Chilean income tax withheld on the distribution (after taking into account the credit for the first category tax as described in Taxation—Chilean Tax Considerations—Cash Dividends and Other Distributions), will be includible in gross income as ordinary income on the date on which the U.S. Holder receives the distribution, in the case of shares of our common stock, or the date the depositary receives the distribution, in the case of ADSs. To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits as determined for U.S. federal income tax purposes, such excess amounts will be treated first as a non-taxable return of capital to the extent of such U.S. Holder’s tax basis in the shares of our common stock and, thereafter, as capital gain. As used below, the term “dividend” means a distribution that constitutes a dividend for U.S. federal income tax purposes. Dividends paid in Chilean pesos generally will be includible in gross income in a U.S. dollar amount calculated by reference to the spot market exchange rate in effect on the date the U.S. Holder receives the dividends, in the case of shares of our common stock, or the date the depositary receives the dividends, in the case of ADSs, regardless of whether the payment is in fact converted into U.S. dollars. U.S. Holders should consult their own tax advisors regarding the treatment of foreign currency gain or loss, if any, on any Chilean pesos received which are converted into U.S. dollars after they are received.
Dividends paid to corporate U.S. Holders with respect to ADSs or shares of our common stock will not be eligible for the dividends received deduction allowed to corporations under the U.S. Code. Under current law, dividends received by certain non-corporate U.S. Holders (including individuals) with respect to ADSs will be subject to U.S. federal income tax at preferential rates if the dividends constitute “qualified dividend income” for U.S. federal income tax purposes. Dividends paid on the ADSs will be treated as qualified dividend income if:
(1) | the ADSs are readily tradable on an established securities market in the United States; and |
(2) | we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a PFIC. |
The ADSs are listed on the NYSE and will qualify as readily tradable on an established securities market in the United States so long as they are so listed. Moreover, as discussed below under “—Passive Foreign Investment Companies,” we believe that we will not be treated as a PFIC for U.S. federal income tax purposes with respect to our 2022 and current taxable year, and based on our current expectations regarding the value and nature of our assets, the sources and nature of our income, relevant market and shareholder data and our current business plans, we do not anticipate becoming a PFIC in the future. However, there can be no assurance in this regard because the PFIC determination is made annually and is based on the portion of our assets (including goodwill) and income that is characterized as passive under the PFIC rules and our continued qualification for an exception to the PFIC rules for certain foreign banks.
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Based on existing guidance, we do not expect that dividends paid on shares of our common stock will be treated as qualified dividend income because shares of our common stock are not readily tradable on an established securities market in the United States and, although a comprehensive income tax treaty between Chile and the United States has been signed, such treaty is not currently in force.
Subject to generally applicable limitations and conditions under the U.S. Code (including a minimum holding period requirement), a U.S. Holder may be entitled to a foreign tax credit in respect of any non-U.S. income taxes withheld and paid over to the applicable non-U.S. tax authorities(after taking into account the credit for the first category tax, when it is available) . However, due to U.S. Treasury Regulations that apply to foreign income taxes paid or accrued in taxable years beginning on or after December 28, 2021, a U.S. holder may be restricted in its use of any foreign tax credit unless such holder elects benefits under an applicable income tax treaty with respect to an applicable tax. Although a comprehensive income tax treaty between the United States and Chile was signed in 2010, such treaty has not yet been ratified by each country and therefore is not yet effective. Accordingly, a U.S. holder may not be entitled to a foreign tax credit in respect of any Chilean income taxes withheld on a dividend distribution. Dividends paid on the ADSs or shares of our common stock generally will constitute foreign source income, and for purposes of calculating the foreign tax credit, as “passive category income,” for most U.S. Holders. U.S. Holders are not allowed foreign tax credits for income taxes withheld in respect of certain short-term or hedged positions in securities and may not be allowed foreign tax credits in respect of arrangements in which their expected economic profit is insubstantial. Alternatively, a U.S. Holder may be able to deduct otherwise-creditable Chilean income taxes paid with respect to dividends on our shares of common stock against its taxable income, assuming such U.S. Holder does not take a credit for any foreign income taxes paid or accrued during the taxable year and certain other conditions are met. U.S. Holders should consult their own advisors concerning the implications of these rules in light of their particular circumstances.
Taxation of Capital Gains or Losses
Subject to the discussion below under “—Passive Foreign Investment Companies,” gain or loss realized by a U.S. Holder on the sale, exchange or other taxable disposition of ADSs or shares of our common stock generally will be capital gain or loss and generally will be long-term capital gain or loss if the shares of our common stock have been held for more than one year. The amount of gain or loss realized will be the difference between (i) the amount realized on the sale, exchange or other taxable disposition of ADSs or shares of our common stock over (ii) the U.S. Holder’s adjusted tax basis in such ADSs or shares of our common stock. Long-term capital gain realized by certain U.S. Holders (including individuals) generally is eligible for favorable rates of U.S. federal income tax. The deductibility of capital losses is subject to significant limitations under the U.S. Code.
The initial tax basis of shares of our common stock purchased by a U.S. Holder generally will be the U.S. dollar value of the Chilean pesos denominated purchase price determined on the date of purchase. If shares of our common stock are treated as being traded on an “established securities market,” a cash basis U.S. Holder, or, if it elects, an accrual basis U.S. Holder, will determine the U.S. dollar value of the cost of such shares by translating the amount paid at the spot rate of exchange on the settlement date of the purchase. Such an election by an accrual basis U.S. Holder must be applied consistently from year to year and cannot be revoked without the consent of the U.S. Internal Revenue Service (the “U.S. IRS”). If a U.S. Holder converts U.S. dollars to Chilean pesos and immediately uses the currency to purchase shares of our common stock, such conversion generally will not result in taxable gain or loss to the U.S. Holder.
With respect to the sale, exchange or other taxable disposition of shares of our common stock, the amount realized by a U.S. Holder generally will be the U.S. dollar value of the payment received determined on (1) the date of receipt of payment in the case of a cash basis U.S. Holder or (2) the date of disposition in the case of an accrual basis U.S. Holder. If shares of our common stock are treated as being traded on an “established securities market,” a cash basis U.S. Holder, or, if it elects, an accrual basis U.S. Holder, will determine the U.S. dollar value of the amount realized by translating the amount received at the spot rate of exchange on the settlement date of the sale.
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Any gain or loss realized by a U.S. Holder on such a sale, exchange or other taxable disposition of shares of our common stock generally will be treated as U.S. source income or loss for U.S. foreign tax credit purposes. If Chilean income tax is withheld on such sale, exchange or other taxable disposition (see “Item 10. Additional Information—Taxation—Chilean Tax Considerations—Capital Gains”), a U.S. Holder’s ability to utilize foreign tax credits in respect of such Chilean income tax may be limited. Alternatively, a U.S. Holder may be able to deduct Chilean income taxes paid with respect to a disposition of shares of our common stock against its taxable income, assuming such U.S. Holder does not take a credit for any foreign income taxes paid or accrued during the taxable year and certain other conditions are met. U.S. Holders should consult their own tax advisors regarding the application of the foreign tax credit limitation rules to their investment in, and disposition of, the shares of our common stock.
Passive Foreign Investment Companies
Special U.S. federal income tax rules apply to U.S. persons owning ADSs or common shares of a PFIC. A foreign corporation generally will be classified as a PFIC for U.S. federal income tax purposes in any taxable year in which, after applying relevant look through rules with respect to the income and assets of subsidiaries, either:
(1) | at least 75% of its gross income is “passive income”; or |
(2) | on average at least 50% of the gross value of its assets is attributable to assets that produce passive income or are held for the production of passive income. |
For this purpose, passive income generally includes, among other things, dividends, interest, rents, royalties, gains from the disposition of passive assets and gains from commodities and securities transactions. In determining whether a foreign corporation is a PFIC, a pro rata portion of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) is taken into account.
Banks generally derive a substantial part of their income from assets that are interest bearing or that otherwise could be considered passive under the PFIC rules. An exception, however, is provided for income derived in the active conduct of a banking business (the “Active Bank Exception”). The application of the Active Bank Exception to banks is unclear under present U.S. federal income tax law. The U.S. IRS has issued a notice and has proposed U.S. Treasury regulations which have different requirements for qualifying as a foreign bank and for determining the banking income that may be excluded from passive income under the Active Bank Exception. Based on our current estimates of our gross income and gross assets, the nature of our business and our interpretation of the proposed U.S. Treasury regulations and notice relating to the Active Bank Exception, we do not expect to be classified as a PFIC for our current taxable year (although the determination cannot be made until the end of such taxable year), and we intend to continue our operations in such a manner that we do not expect to be classified as a PFIC in the foreseeable future. There can be no assurances in this regard, however, because the application of the relevant rules is complex and involves some uncertainty. The PFIC determination is made annually and is based on the portion of our assets (including goodwill) and income that is characterized as passive under the PFIC rules. In addition, the relevant U.S. Treasury regulations addressing the Active Bank Exception may not be finalized in their current form, and our PFIC status may be impacted if and when these U.S. Treasury regulations are finalized. Moreover, our business plans may change, which may affect the PFIC determination in future years.
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If we are treated as a PFIC for any year, U.S. Holders may be subject to adverse tax consequences upon a sale, exchange or other disposition of ADSs or shares of our common stock, or upon the receipt of certain “excess distributions” (generally distributions in excess of 125% of the average distribution over the shorter of a three-year period or the U.S. Holder’s holding period for shares of our common stock) from us. In this event, unless a U.S. Holder elects to be taxed annually on a mark-to-market basis with respect to ADSs or shares of our common stock, as described below, any gain realized on a sale or other taxable disposition of ADSs or shares of our common stock or excess distributions would be treated as realized ratably over the U.S. Holder’s holding period for such ADSs or shares of our common stock, and amounts allocated to prior years during which we were a PFIC would be taxed at the highest tax rate in effect for each such year. An additional interest charge may apply to the portion of the U.S. federal income tax liability on such gain or distribution treated under the PFIC rules as having been deferred by the U.S. Holder. Amounts allocated to the taxable year in which the sale or excess distribution occurs and to any year before we became a PFIC would be taxed as ordinary income in the taxable year in which the sale or excess distribution occurs. If we were a PFIC, certain subsidiaries and other entities in which we have a direct or indirect interest may also be PFICs (“Lower-tier PFICs”). Under attribution rules, U.S. Holders would be deemed to own their proportionate shares of Lower-tier PFICs and would be subject to U.S. federal income tax according to the rules described above on (i) certain distributions by a Lower-tier PFIC and (ii) a disposition of shares of a Lower-tier PFIC, in each case as if the U.S. Holder held such shares directly, even though such U.S. Holder had not received the proceeds of those distributions or dispositions.
If we are treated as a PFIC, the rules described in the foregoing paragraph can be avoided by a U.S. Holder that makes a “mark-to-market” election. A U.S. Holder may make a mark-to-market election for ADSs or shares of our common stock (but not for the shares of any Lower-tier PFIC) if such ADSs or shares of our common stock constitute “marketable stock” as defined in the U.S. Treasury regulations. ADSs and shares of our common stock will be marketable stock if they are regularly traded on a “qualified exchange or other market” within the meaning of the U.S. Treasury regulations. The ADSs are listed on the NYSE and will qualify as regularly traded on an established securities market so long as they are so listed. No assurance can be given, however, that our common stock will be considered regularly traded on an established securities market. In particular, it is unclear whether the Santiago Stock Exchange and the Bolsa Electrónica de Chile would meet the requirements for a “qualified exchange or other market.” A U.S. Holder electing the mark-to-market regime generally would compute gain or loss at the end of each taxable year as if the ADSs or shares of our common stock had been sold at fair market value. Any gain recognized by the U.S. Holder under mark-to-market treatment, or on an actual sale, would be treated as ordinary income, and the U.S. Holder would be allowed an ordinary deduction for any decrease in the value of its ADSs or shares of our common stock as of the end of any taxable year, and for any loss recognized on an actual sale, but only to the extent, in each case, of previously included mark-to-market income not offset by previously deducted decreases in value. Any loss on an actual sale of ADSs or shares of our common stock would be a capital loss to the extent in excess of previously included mark-to-market income not offset by previously deducted decreases in value. A U.S. Holder’s adjusted tax basis in its ADSs or shares of our common stock will be increased by the amount of income inclusion and decreased by the amount of deductions under the mark-to-market rules. U.S. Holders should be aware, however, that if we are determined to be a PFIC, the interest charge regime described above could be applied to indirect distributions or gains deemed to be attributable to U.S. Holders in respect of any of our Lower-tier PFICs, and the mark-to-market election generally would not be effective for such Lower-tier PFICs.
The rules described in the second preceding paragraph can also be avoided by a U.S. Holder that elects to treat us as a “qualified electing fund.” However, this option generally will not be available to U.S. Holders because we do not intend to provide the information necessary for U.S. Holders to make such election.
A U.S. Holder that owns ADSs or shares of our common stock during any taxable year that we are treated as a PFIC generally would be required to file U.S. IRS Form 8621. U.S. Holders should consult their own tax advisors regarding the application of the PFIC rules to ADSs or shares of our common stock, the availability and advisability of making an election to avoid the adverse tax consequences of the PFIC rules should we be considered a PFIC for any taxable year and the application of the reporting requirements on U.S. IRS Form 8621 to their particular situation.
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Backup Withholding and Information Reporting
Dividends paid on, and proceeds from the sale or other disposition of, ADSs or shares of our common stock to a U.S. Holder generally will be subject to the information reporting requirements of the U.S. Code and may be subject to backup withholding unless the U.S. Holder provides an accurate taxpayer identification number and makes any other required certification or otherwise establishes an exemption. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s U.S. federal income tax liability and may entitle the U.S. Holder to a refund, provided that certain required information is timely furnished to the U.S. IRS.
In addition, U.S. Holders may be required to comply with certain reporting requirements, including filing a U.S. IRS Form 8938, Statement of Foreign Financial Assets, with respect to the holding of certain foreign financial assets, including stock of foreign issuers, either directly or through certain foreign financial institutions, if the aggregate value of all such assets exceeds U.S.$50,000. U.S. Holders should consult their own tax advisors regarding the application of the information reporting rules to ADSs or shares of our common stock and the application of these reporting requirements to their particular situations.
HOLDERS OF ADSs OR SHARES OF OUR COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE CHILEAN, U.S. FEDERAL INCOME AND OTHER TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF ADSs OR SHARES OF OUR COMMON STOCK, INCLUDING, IN PARTICULAR, THE EFFECT OF ANY NON-U.S., STATE OR LOCAL TAX LAWS.
WHERE TO FIND ADDITIONAL INFORMATION
The materials included in this annual report on Form 20-F may be downloaded at the SEC’s website: http://www.sec.gov at http://www.sec.gov. Additional reports and information about us can be downloaded at the SEC’s website
ANNUAL REPORT TO SECURITY HOLDERS
We have submitted our 2022 local annual report provided to security holders in electronic format as an exhibit to a report on Form 6-K dated April 14, 2023.
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Item 11 Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative information related to market risk, see Note 44 to our audited consolidated financial statements as of and for the year ended December 31, 2022 appearing elsewhere in this annual report.
Item 12 Description of Securities Other Than Equity Securities
Item 12A Debt Securities
Not Applicable.
Item 12B Warrants and Rights
Not Applicable.
Item 12C Other Securities
Not Applicable.
Item 12D American Depositary Shares
JPMorgan Chase Bank, N.A. (the “Depositary”) serves as the depositary for our ADSs. ADS holders are required to pay various fees to the Depositary, and the Depositary may refuse to provide any service for which a fee is assessed until the applicable fee has been paid.
ADS holders are required to pay the Depositary amounts in respect of expenses incurred by the Depositary or its agents on behalf of ADS holders, including expenses arising from compliance with applicable law, taxes or other governmental charges, facsimile transmission or conversion of foreign currency into U.S. dollars.
ADS holders are also required to pay additional fees for certain services provided by the Depositary, as set forth in the table below.
Depositary service |
Fee payable by ADS holders | |
(a) Issuance and delivery of ADRs against deposits of shares, including deposits in respect of share distributions, rights and other distributions | Up to U.S.$5.00 per 100 ADSs (or portion thereof) | |
(b) Distribution of dividends | U.S.$0.02 or less per ADS | |
(c) Withdrawal of shares underlying ADSs | Up to U.S.$5.00 per 100 ADSs (or portion thereof) | |
(d) Transfer, combination and split-up of ADRs | U.S.$1.50 per ADS |
The Depositary may sell (by public or private sale) sufficient securities and property received in respect of share distributions, rights and other distributions prior to the deposit of shares to pay the charges described in (a) and (c) of the table above. In addition, the Depositary may deduct from any distributions on or in respect of deposited securities, or may sell by public or private sale for the account of a holder, any part or all of such deposited securities (after attempting by reasonable means to notify the holder prior to such sale), and may apply such deduction or the proceeds of any such sale in payment of any tax or other governmental charge that may become payable by or on behalf of a custodian or the Depositary with respect to any ADR, any deposited securities represented by ADSs or any distribution thereon.
ADS Split
On October 23, 2018 we announced a ratio change to our ADR program from one ADS per 600 of our common shares into one ADS per 200 of our common shares. This modification became effective on November 23, 2018, upon which ADR holders received two additional ADSs for each ADS held as of the record date of November 15, 2018. Additionally, the existing ADRs, as of the effective date continued to be valid and were not exchanged for new ones.
Payments by the Depositary
The Depositary has agreed to reimburse us for certain reasonable expenses related to the ADS program, subject to a cap agreed between the Depositary and us. These reimbursable expenses currently include, but are not limited to, legal fees, NYSE listing fees, investor relations servicing, investor related presentations, ADR-related advertising and public relations in those jurisdictions in which the ADRs may be listed or otherwise quoted for trading, and accountants’ fees in relation to our regulatory filings. During the year ended December 31, 2022, we received gross reimbursements from the depositary for an amount of U.S.$89,422.
Please refer to Exhibits 2.2 2.3 and 2.4 in the Form 20-F for the year ended December 31, 2021 filed with the SEC on April 29, 2022 for the remaining information relating to our American Depositary Shares required by Item 12 of Form 20-F.
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Part II
Item 13 Defaults, Dividend Arrearages and Delinquencies
None.
Item 14 Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
Item 15 Controls and Procedures
(a) Disclosure Controls and Procedures
We have evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of December 31, 2022.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a 15(f) and 15d 15(f) under the Exchange Act. The company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The company’s internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO – 2013 framework) in Internal Control Integrated Framework.
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Based on our assessment and those criteria, management believes that the company maintained effective internal control over financial reporting as of December 31, 2022.
(c) Report of Independent Registered Public Accounting Firm on Internal Controls
“EY Servicios Profesionales de Auditoria y Asesorias Limitada (“EY Audit Ltda”), the independent registered public accounting firm that has audited our financial statements, has issued an attestation report on our internal control over financial reporting as of December 31, 2022. This attestation report appears on page F-5 of our audited consolidated financial statements as of and for the year ended December 31, 2022.
(d) Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 16A Audit Committee Financial Expert
Our board of directors has determined that Mr. Jaime Estévez, a member of our directors/audit committee who satisfies the independence requirements of both Chilean law and Rule 10A-3 under the Exchange Act, qualifies as an “audit committee financial expert” pursuant to the Instruction to paragraph (a) of this Item 16A. Mr. Estévez possesses vast financial experience evidenced by the fact that he was chairman of the board of directors of Banco Estado, a Chilean state-owned bank. Additionally, he has served as a director of AFP Provida and AFP Protección, two Chilean pension fund investment companies, and as director of Endesa Chile S.A. Mr. Estévez was also the Minister of Public Works from January 2005 to March 2006, and simultaneously, the Minister of Transportation and Telecommunications. He was also a congressman from March 1990 to March 1998 and President of the Lower Chamber of the Chilean Congress from March 1995 to November 1996. Mr. Estévez holds a degree in economics from the Universidad de Chile.
Item 16B Code of Ethics
In 2008, we adopted a new Code of Ethics, as defined in Item 16B of Form 20-F under the Exchange Act, which we frequently revise and update, and which was last updated in July 2021. The Code of Ethics applies to directors and consultants of our Board, to our chief executive officer, chief financial officer, principal accounting officer and persons performing similar functions, and to all other employees without exception. A current copy of the Code of Ethics, also referred herein as the Code of Professional Ethics, or Code of Conduct was filed as Exhibit 11.1 to our annual report in the Form 20-F for the year 2021.
The Code of Ethics is available to the general public on our web page at www.bancochile.cl. This URL is intended to be an inactive textual reference only. It is not intended to be an active hyperlink to our website. The information on our website, which might be accessible through a hyperlink resulting from this URL, is not and shall not be deemed to be incorporated into this annual report on Form 20-F.
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Item 16C Principal Accountant Fees and Services
Audit and Non-Audit Fees
The following table sets forth the fees billed to us by our independent auditors, EY Audit Ltda, during the fiscal years ended December 31, 2020, 2021 and 2022:
Year ended December 31, | ||||||||||||
2020 | 2021 | 2022 | ||||||||||
(in millions of Ch$) | ||||||||||||
Audit fees | Ch$ | 772 | Ch$ | 702 | Ch$ | 839 | ||||||
Audit-related fees | – | – | – | |||||||||
Tax fees | 22 | 25 | 28 | |||||||||
Other fees | – | 129 | – | |||||||||
Total fees | Ch$ | 794 | Ch$ | 856 | Ch$ | 867 |
“Audit fees” in the above table are the aggregate fees billed by EY Audit Ltda. in connection with the audit of our annual financial statements. This line item includes: (i) the audit of our statutory accounts, and the audit of the consolidated financial statements required by Item 18 of Form 20-F and limited reviews of financial statements, (ii) reviews and issuances of comfort letters and (iii) other local attestation reports required by local regulators.
“Audit-related fees” in the above table are the aggregate fees billed by EY Audit Ltda. for assurance and related services that are reasonably related to the performance of the audit or review of the Bank’s financial statements and are not reported under “audit fees.” Services such as (i) attestation reports not required by statute or regulations and (ii) merger and acquisition due diligence are included in this line item. During 2020, 2021 and 2022, there were no such services rendered.
“Tax fees” in the above table are the aggregate fees billed by EY Audit Ltda. for permitted tax advisory and tax compliance services.
“All Other fees” in the above table are fees incurred in 2020, 2021 and 2022 related to certain consulting services such as: (i) operational risk assessment, (ii) foreign regulations compliance, and (iii) advisory services.
Directors/Audit Committee Pre-Approval Policies and Procedures
Auditors are pre-approved by our directors/audit committee, whose main duties are disclosed in “Item 6. Directors, Senior Management and Employees—Board Practices.” Furthermore, the selection of external auditors is subject to approval by our shareholders at the ordinary annual shareholders’ meeting. All proposed services carried out by our external auditors as well as corresponding fees related to audit and non-audit services, have been presented to our directors/audit committee, which has determined they are reasonable and consistent with our policies.
Item 16D Exemptions from the Listing Standards for Audit Committees
Mr. Raúl Anaya E. serves on our directors/audit committee in reliance upon the exemption from the independence requirements contained in Rule 10A-3(b)(1)(iv)(D). We do not believe that such reliance would materially adversely affect the ability of the directors/audit committee to act independently and to satisfy the other requirements of Rule 10A-3.
Item 16E Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We did not make any purchases of our previously issued shares during the fiscal year ended on December 31, 2022.
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Item 16F Change in Registrant’s Certifying Accountant
Not Applicable.
Item 16G Corporate Governance
Pursuant to Section 303A.11 of the Listed Company Manual of the NYSE, we are required to provide a summary of the significant ways in which our corporate governance practices differ from those required for U.S. companies under the NYSE listing standards. We are a Chilean bank with shares listed on the Santiago Stock Exchange, the Chilean Electronic Stock Exchange and ADSs listed on the New York Stock Exchange. Our corporate governance practices are governed by our bylaws, the General Banking Act, the Chilean Corporations Law, the Securities Market Law, and the regulations issued by the CMF. Therefore, you may not have the same protections afforded to shareholders of U.S. companies under the NYSE listing standards.
The table below discloses the significant differences between our corporate governance practices and the NYSE standards.
NYSE Standards | Our Corporate Governance Practice | |
Director Independence. Majority of board of directors must be independent. “Controlled companies,” which would include our company if it were a U.S. issuer, are exempt from this requirement. §303A.01 | Pursuant to the General Banking Act, we are not required to make a determination as to the independence of our directors. However, pursuant to the Chilean Corporations Law, under certain circumstances provided in Article 50b is of such law, we are required to appoint at least one independent director. | |
The definition of independence applicable to us pursuant to the Chilean Corporations Law differs in certain aspects from the definition applicable to U.S. issuers under the NYSE rules. | ||
Under the Chilean Corporations Law, there are several factors that must be observed in order to determine whether a director is deemed to be independent. These factors are included in Article 50 bis of the Chilean Corporations Law. In addition, under the regulations of the CMF, members of the directors/audit committee must satisfy international independence criteria set forth by our board of directors. | ||
Executive Sessions. Non-management directors must meet regularly in executive sessions without management. Independent directors should meet alone in an executive session at least once a year. §303A.03 | There is no similar requirement under our bylaws or under applicable Chilean law. | |
Audit committee. Audit committee must satisfy the independence and other requirements of Rule 10A-3 under the Exchange Act, and the more stringent requirements under the NYSE standards is required. §§303A.06, 303A.07. | We are in compliance with Rule 10A-3. The members of our directors/audit committee are not required to satisfy the NYSE independence and other audit committee standards that are not prescribed by Rule 10A-3. |
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NYSE Standards | Our Corporate Governance Practice | |
Nominating/corporate governance committee. Nominating/corporate governance committee of independent directors is required. The committee must have a charter specifying the purpose, duties and evaluation procedures of the committee. “Controlled companies,” which would include our company if it were a U.S. issuer, are exempt from these requirements. §303A.04 | We are not required to have, and do not have, a nominating/corporate governance committee. | |
Compensation committee. Compensation committee of independent directors is required, which must approve executive officer compensation. The committee must have a charter specifying the purpose, duties and evaluation procedures of the committee. “Controlled companies,” which would include our company if it were a U.S. issuer, are exempt from this requirement. §303A.05 | We are not required to have a compensation committee. Pursuant to the Chilean Corporations Law, our directors/audit committee must approve compensation plans. | |
Equity compensation plans. Equity compensation plans require shareholder approval, subject to limited exemptions. | Equity compensation plans require shareholder approval, subject to limited exemptions. | |
Code of Ethics. Corporate governance guidelines and a code of business conduct and ethics is required, with disclosure of any waiver for directors or executive officers. §303A.10 | We have adopted a code of ethics, also referred herein as Code of Professional Ethics or Code of Conduct, applicable to all of our executive officers, employees, directors and advisors to our board of directors, a version of which is filed as an exhibit to this Form 20-F. We are required by Item 16B of Form 20-F to disclose any waivers granted to our chief executive officer, chief financial officer, principal accounting officer and persons performing similar functions. Our Code of Ethics sets forth the principles and values that govern personnel conduct as well as other issues such as conflicts of interests, usage of privileged information, internal controls for fraud prevention and labor responsibility, among others. |
Item 16H Mine Safety Disclosure
Not applicable.
Item 16I Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
Item 16J Insider Trading Policies
Not applicable.
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Part III
Item 17 Financial Statements
Not applicable.
Item 18 Financial Statements
Our audited consolidated financial statements are included in this annual report beginning at page F-1. Our financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
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Item 19 Exhibits
LIST OF EXHIBITS
270
* | Filed herewith. |
Omitted from the exhibits filed with this annual report are certain instruments and agreements with respect to our long-term debt, none of which authorizes securities in a total amount that exceeds 10% of our total assets. We hereby agree to furnish to the SEC copies of any such omitted instruments or agreements as the SEC requests.
271
SIGNATURE
The registrant, Banco de Chile, hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Date: April 28, 2023
BANCO DE CHILE | |||
By | /s/ Eduardo Ebensperger O. | ||
Name: | Eduardo Ebensperger O. | ||
Title: | Chief Executive Officer |
272
Consolidated Financial Statements
BANCO DE CHILE AND SUBSIDIARIES
Ch$ or CLP | = | Chilean pesos |
MCh$ | = | Millions of Chilean pesos |
US$ or USD | = | U.S. dollars |
ThUS$ | = | Thousands of U.S. dollars |
EUR | = | Euro |
GBP | = | Great Britain pound |
JPY | = | Japanese yen |
CNY | = | Chinese yuan renminbi |
HKD | = | Hong Kong dollars |
CHF | = | Swiss franc |
PEN | = | Peruvian sol |
AUD | = | Australian dollar |
NOK | = | Norwegian krone |
UF or CLF | = | Unidad de fomento |
(The unidad de fomento is an inflation-indexed, Chilean peso denominated monetary unit set daily in advance on the basis of the previous month’s inflation rate). |
Index
F-2
EY Chile Avda. Presidente Riesco 5435, piso 4, Santiago |
Tel: +56 (2) 2676 1000 www.eychile.cl |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Banco de Chile
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of Banco de Chile and subsidiaries (the “Bank”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements“). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Bank as of December 31, 2022 and 2021, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Bank's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated April 27, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Bank‘s management. Our responsibility is to express an opinion on the Bank‘s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Bank in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F-3
EY Chile Avda. Presidente Riesco 5435, piso 4, Santiago |
Tel: +56 (2) 2676 1000 www.eychile.cl |
Allowance for loan losses
Description of the matter
At December 31, 2022, the Bank’s allowance for individual, grouped loan losses and contingent loan risk (ALL) was Ch$ 177,127 million, Ch$ 646,123 million and Ch$ 143,489 million, respectively. As discussed in Note 2 (i) (viii) to the consolidated financial statements, the allowance is calculated using an expected credit loss model (ECL). This allowance represents a probability-weighted amount, which is determined by evaluating a range of possible outcomes and reasonable and supportable information about past events, current and forecasts of market and economic conditions (Forward looking information – FLI). The allowance is based on the ECL associated with the probability of default in the next twelve months unless there has been a significant increase in credit risk (SICR) since origination or there is objective evidence of impairment. In those cases, the allowance is based on the change in the ECL over the life of the financial instrument.
Auditing the allowance for loan losses involves increased complexity and significant auditor judgement, as the process for the assessment of indicators of impairment includes multiple variables, estimates and involves significant judgment. Significant assumptions and judgments with respect to the estimation of the allowance for credit losses include the probability of default, loss given default and forward-looking information, as well as the application of management’s expert credit risk knowledge and judgment
Auditing the allowance for loan losses involves increased complexity and significant auditor judgement, as the process for the assessment of indicators of impairment includes multiple variables, estimates and involves significant judgment. Significant assumptions and judgments with respect to the estimation of the allowance for credit losses include the probability of default, loss given default and forward-looking information, as well as the application of management’s expert credit risk knowledge and judgment.
How we addressed the matter in our audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of the Bank’s controls, including those related to information systems used in the determination of the allowance for credit losses. For example, we tested controls over the identification of indicators of impairment, controls over changes in credit risk-rating, the governance and oversight controls over the review of the overall ECL, management’s review and approval of models used to calculate the ALL, including the data inputs and outputs of those models.
To test the ALL for individual, grouped, and contingent loans, our audit procedures included, among others, involving our credit risk modelling specialists to assist in assessing the methodology, models and assumptions used to estimate ECL, and comparing management’s forward-looking information to publicly available information from independent sources; performing independent recalculations. In addition, we assessed significant changes in credit risk rating triggers and testing the completeness and accuracy of underlying data used in the measurement of the ECL. We also assessed the adequacy of the related financial statements’ disclosures.
/s/ EY Audit Ltda.
We have served as the Bank’s auditor since 2002.
Santiago, Chile
April 27, 2023
F-4
EY Chile Avda. Presidente Riesco 5435, piso 4, Santiago |
Tel: +56 (2) 2676 1000 www.eychile.cl |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Banco de Chile
Opinion on Internal Control Over Financial Reporting
We have audited Banco de Chile and subsidiaries’ internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Banco de Chile and subsidiaries (the “Bank”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial position of the Bank as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and our report dated April 27, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Bank’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Bank’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Bank in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
F-5
Avda. Presidente Riesco 5435, piso 4, | Tel: +56 (2) 2676 1000 www.eychile.cl |
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ EY Audit Ltda.
Santiago, Chile
April 27, 2023
F-6
BANCO DE CHILE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As of December 31, 2022 and 2021
(Expressed in millions of Chilean pesos unless otherwise specified)
2022 | 2021 | |||||||||
Notes | MCh$ | MCh$ | ||||||||
ASSETS | ||||||||||
Cash and due from banks | 7 | |||||||||
Transactions in the course of collection | 7 | |||||||||
Financial assets held for trading at fair value through profit or loss: | ||||||||||
Derivative financial instruments | 8 | |||||||||
Debt financial instruments | 8 | |||||||||
Others | 8 | |||||||||
Financial assets at fair value through other comprehensive income: | ||||||||||
Debt financial instruments | 9 | |||||||||
Equity instruments | 9 | |||||||||
Derivative financial instruments for hedging purposes | 10 | |||||||||
Financial assets at amortized cost: | ||||||||||
Rights by resale agreements and securities lending | 11 | |||||||||
Debt financial instruments | 11 | |||||||||
Loans and advances to Banks | 11 | |||||||||
Loans to customers - Commercial loans | 11 | |||||||||
Loans to customers - Residential mortgage loans | 11 | |||||||||
Loans to customers - Consumer loans | 11 | |||||||||
Investments in other companies | 12 | |||||||||
Intangible assets | 13 | |||||||||
Property and equipment | 14 | |||||||||
Right-of-use assets | 15 | |||||||||
Current tax assets | 16 | |||||||||
Deferred tax assets, net | 16 | |||||||||
Other assets | 17 | |||||||||
Non-current assets and disposal groups held for sale | 18 | |||||||||
TOTAL ASSETS |
The accompanying notes 1 to 47 are an
integral part of these consolidated financial statements
F-7
BANCO DE CHILE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As of December 31, 2022 and 2021
(Expressed in millions of Chilean pesos unless otherwise specified)
2022 | 2021 | |||||||||
Notes | MCh$ | MCh$ | ||||||||
LIABILITIES | ||||||||||
Transactions in the course of payments | 7 | |||||||||
Financial liabilities held for trading at fair value through profit or loss: | ||||||||||
Derivative financial instruments | 19 | |||||||||
Others | 19 | |||||||||
Derivative Financial Instruments for hedging purposes | 10 | |||||||||
Financial liabilities at amortized cost: | ||||||||||
Current accounts and other demand deposits | 20 | |||||||||
Saving accounts and time deposits | 20 | |||||||||
Obligations by repurchase agreements and securities lending | 20 | |||||||||
Borrowings from financial institutions | 20 | |||||||||
Debt financial instruments issued | 20 | |||||||||
Other financial obligations | 20 | |||||||||
Lease liabilities | 15 | |||||||||
Regulatory capital financial instruments | 21 | |||||||||
Provision for dividends | 22 | |||||||||
Provisions for contingent loan credit risk | 23 | |||||||||
Other provisions | 24 | |||||||||
Current tax liabilities | 16 | |||||||||
Employee benefits | 25 | |||||||||
Other liabilities | 26 | |||||||||
TOTAL LIABILITIES | ||||||||||
EQUITY | ||||||||||
Capital | 27 | |||||||||
Reserves | 27 | |||||||||
Accumulated other comprehensive income | 27 | ( | ) | |||||||
Retained earnings: | ||||||||||
Retained earnings from previous periods | 27 | |||||||||
Income for the year | 27 | |||||||||
Less: Provision for dividends | 27 | ( | ) | ( | ) | |||||
Shareholders of the Bank | 27 | |||||||||
Non-controlling interest | 27 | |||||||||
TOTAL EQUITY | ||||||||||
TOTAL LIABILITIES AND EQUITY |
The accompanying notes 1
to 47 are an
integral part of these consolidated financial statements
F-8
BANCO DE CHILE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
As of December 31, 2022, 2021 and 2020
(Expressed in millions of Chilean pesos unless otherwise specified)
2022 | 2021 | 2020 | ||||||||||||
Notes | MCh$ | MCh$ | MCh$ | |||||||||||
Interest and UF indexation revenue | 29 | |||||||||||||
Interest and UF indexation expense | 29 | ( | ) | ( | ) | ( | ) | |||||||
Net interest and UF indexation income | ||||||||||||||
Income from commissions | 30 | |||||||||||||
Expense from commissions | 30 | ( | ) | ( | ) | ( | ) | |||||||
Net income from commissions | ||||||||||||||
Net Financial income (expense) | 31 | |||||||||||||
Income attributable to investments in other companies | 32 | ( | ) | |||||||||||
Result from non-current assets and disposal groups held for sale not admissible as discontinued operations | 33 | ( | ) | |||||||||||
Other operating income | 34 | |||||||||||||
TOTAL OPERATING INCOME, BEFORE EXPECTED CREDIT LOSSES | ||||||||||||||
Expected credit losses | 39 | ( | ) | ( | ) | ( | ) | |||||||
TOTAL OPERATING INCOME, NET OF EXPECTED CREDIT LOSSES | ||||||||||||||
Expenses from salaries and employee benefits | 35 | ( | ) | ( | ) | ( | ) | |||||||
Administrative expenses | 36 | ( | ) | ( | ) | ( | ) | |||||||
Depreciation and amortization | 37 | ( | ) | ( | ) | ( | ) | |||||||
Impairment of non-financial assets | 38 | ( | ) | ( | ) | ( | ) | |||||||
Other operating expenses | 34 | ( | ) | ( | ) | ( | ) | |||||||
TOTAL OPERATING EXPENSES | ( | ) | ( | ) | ( | ) | ||||||||
NET OPERATING INCOME | ||||||||||||||
Income taxes | 16 | ( | ) | ( | ) | ( | ) | |||||||
NET INCOME FOR THE YEAR | ||||||||||||||
Attributable to: | ||||||||||||||
Shareholders of the Bank | 27 | |||||||||||||
Non-controlling interests | ||||||||||||||
Earnings per share: | Ch$ | Ch$ | Ch$ | |||||||||||
Basic earnings | 27 | |||||||||||||
Diluted earnings | 27 |
The accompanying notes 1 to 47 are an
integral part of these consolidated financial statements
F-9
BANCO DE CHILE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
As of December 31, 2022, 2021 and 2020
(Expressed in millions of Chilean pesos unless otherwise specified)
2022 | 2021 | 2020 | ||||||||||||
Notes | MCh$ | MCh$ | MCh$ | |||||||||||
NET INCOME FOR THE YEAR | ||||||||||||||
ITEMS THAT WILL NOT BE RECLASSIFIED IN PROFIT OR LOSS | ||||||||||||||
Re-measurement of the liability (asset) for net defined benefits and actuarial results for other employee benefit plans | 27 | ( | ) | ( | ) | |||||||||
Fair value changes of equity instruments designated as at fair value through other comprehensive income | 27 | ( | ) | ( | ) | |||||||||
COMPREHENSIVE INCOME THAT WILL NOT BE RECLASSIFIED TO PROFIT OR LOSS BEFORE TAX | ( | ) | ( | ) | ||||||||||
Income tax on other comprehensive income that will not be reclassified to profit or loss | 16 | ( | ) | |||||||||||
TOTAL COMPREHENSIVE INCOME THAT WILL NOT BE RECLASSIFIED TO PROFIT OR LOSS AFTER TAX | ( | ) | ( | ) | ||||||||||
ITEMS THAT CAN BE RECLASSIFIED TO PROFIT OR LOSS | ||||||||||||||
Fair value changes of financial assets at fair value through other comprehensive income | 27 | ( | ) | ( | ) | |||||||||
Cash flow hedges | 27 | ( | ) | |||||||||||
Participation in other comprehensive income of entities registered under the equity method | 27 | ( | ) | ( | ) | |||||||||
COMPREHENSIVE INCOME THAT WILL BE RECLASSIFIED TO PROFIT OR LOSS BEFORE TAXES | ( | ) | ||||||||||||
Income tax on other comprehensive income that can be reclassified in profit or loss | 27 | ( | ) | ( | ) | |||||||||
TOTAL OTHER COMPREHENSIVE INCOME THAT WILL BE RECLASSIFIED TO PROFIT OR LOSS AFTER TAX | ( | ) | ||||||||||||
TOTAL OTHER COMPREHENSIVE INCOME FOR THE YEAR | 27 | ( | ) | |||||||||||
CONSOLIDATED COMPREHENSIVE INCOME FOR THE YEAR | ||||||||||||||
Attributable to: | ||||||||||||||
Shareholders of the Bank | ||||||||||||||
Non-controlling interests |
The accompanying notes 1 to 47 are an
integral part of these consolidated financial statements
F-10
BANCO DE CHILE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
for the years ended December 31, 2022, 2021 and 2020
(Expressed in millions of Chilean pesos unless otherwise specified)
Attributable to shareholders of the Bank | ||||||||||||||||||||||||||||||
Capital | Reserves (*) | Accumulated other comprehensive income | Retained earnings from previous years and income (loss) for the year | Total | Non- controlling interests | Total Equity | ||||||||||||||||||||||||
Notes | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||
Opening balances as of January 1, 2020 | ( | ) | ||||||||||||||||||||||||||||
Dividends distributed and paid | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
Other retention (release) earnings | ( | ) | ||||||||||||||||||||||||||||
Defined benefit plans adjustment | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
Application of provision for payment of common stock dividends | ||||||||||||||||||||||||||||||
Provision for payment of common stock dividends | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
Subtotal: transactions with owners during the year | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
Income for the year 2020 | ||||||||||||||||||||||||||||||
Other comprehensive income for the year | — | — | — | |||||||||||||||||||||||||||
Subtotal: Comprehensive income for the year | ||||||||||||||||||||||||||||||
Balances as of December 31, 2020 | ( | ) | ||||||||||||||||||||||||||||
Opening balances as of January 1, 2021 | ( | ) | ||||||||||||||||||||||||||||
Dividends distributed and paid | 27 | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
Other retention (release) earnings | ( | ) | ||||||||||||||||||||||||||||
Defined benefit plans adjustment | ||||||||||||||||||||||||||||||
Application of provision for payment of common stock dividends | ||||||||||||||||||||||||||||||
Provision for payment of common stock dividends | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
Subtotal: transactions with owners during the year | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
Income for the year 2021 | ||||||||||||||||||||||||||||||
Other comprehensive income for the year | 27 | |||||||||||||||||||||||||||||
Subtotal: Comprehensive income for the year | ||||||||||||||||||||||||||||||
Balances as of December 31, 2021 | ||||||||||||||||||||||||||||||
Opening balance as of January 1, 2022 | ||||||||||||||||||||||||||||||
Dividends distributed and paid | 27 | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
Other retention (release) earnings | ( | ) | ||||||||||||||||||||||||||||
Application of provision for payment of common stock dividends | ||||||||||||||||||||||||||||||
Provision for payment of common stock dividends | 27 | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
Subtotal: transactions with owners during the year | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
Income for the year 2022 | ||||||||||||||||||||||||||||||
Other reclassifications | ( | ) | ||||||||||||||||||||||||||||
Other comprehensive income for the year | 27 | — | ( | ) | — | ( | ) | — | ( | ) | ||||||||||||||||||||
Subtotal: Comprehensive income for the year | ( | ) | ||||||||||||||||||||||||||||
Balances as of December 31, 2022 | ( | ) |
(*) |
The accompanying notes 1 to 47 are an
integral part of these consolidated financial statements
F-11
BANCO DE CHILE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2022, 2021 and 2020
(Expressed in millions of Chilean pesos unless otherwise specified)
2022 | 2021 | 2020 | ||||||||||||
Notes | MCh$ | MCh$ | MCh$ | |||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||
Profit for the year before taxes | ||||||||||||||
Income tax | 16 | ( | ) | ( | ) | ( | ) | |||||||
Net income for the year | ||||||||||||||
Charges (credits) to income (loss) that do not represent cash flows: | ||||||||||||||
Depreciation and amortization | 37 | |||||||||||||
Impairment of non-financial assets | 38 | |||||||||||||
Allowances established for credit risk | 39 | |||||||||||||
Provisions for contingent loans | 39 | ( | ) | |||||||||||
Impairments for credit risk from financial assets at fair value through other comprehensive income | 39 | ( | ) | |||||||||||
Fair value of debt financial instruments held for trading at fair value through in profit or loss | ( | ) | ( | ) | ||||||||||
Change in deferred tax assets and liabilities | 16 | ( | ) | ( | ) | |||||||||
Net (income) loss from investments in companies with significant influence | 32 | ( | ) | ( | ) | |||||||||
Net (income) loss on sale of assets received in payments | 33 | ( | ) | ( | ) | ( | ) | |||||||
Net (income) loss on sale of sale of fixed assets | 33 | ( | ) | ( | ) | ( | ) | |||||||
Write-offs of assets received in payment | 33 | |||||||||||||
Other charges (credits) that do not represent cash flows | ||||||||||||||
Net change in exchange rates, interest, readjustments and commissions accrued on assets and liabilities | ( | ) | ( | ) | ( | ) | ||||||||
Changes due to (increase) decrease in assets and liabilities affecting the operating flow: | ||||||||||||||
Net (increase) decrease in accounts receivable from banks | ( | ) | ( | ) | ||||||||||
Net (increase) decrease in loans and accounts receivables from customers | ( | ) | ( | ) | ( | ) | ||||||||
Net decrease (increase) of debt financial instruments held for trading at fair value through profit or loss | ( | ) | ||||||||||||
Net (increase) decrease in other assets and liabilities | ( | ) | ||||||||||||
(Decrease) increase in deposits and other demand obligations | ( | ) | ||||||||||||
Increase (decrease) in repurchase agreements and securities loans | ( | ) | ( | ) | ||||||||||
Increase (decrease) in deposits and other time deposits | ( | ) | ||||||||||||
Sale of assets received in lieu of payment | ||||||||||||||
Total net cash flows provided by (used in) operating activities | ( | ) | ||||||||||||
CASH FLOW FROM INVESTING ACTIVITIES: | ||||||||||||||
Net (increase) decrease of debt financial instruments at fair value through other comprehensive income | ( | ) | ( | ) | ||||||||||
Net decrease (increase) of debt financial instruments at amortized cost | ( | ) | ||||||||||||
Principal and interest payments for obligations under lease contracts | 15 | ( | ) | ( | ) | ( | ) | |||||||
Leasedhold improvements | ( | ) | ( | ) | ( | ) | ||||||||
Property and equipment purchase | 14 | ( | ) | ( | ) | ( | ) | |||||||
Property and equipment sale | ||||||||||||||
Acquisition of intangibles | 13 | ( | ) | ( | ) | ( | ) | |||||||
Acquisition of investments in companies | 12 | ( | ) | |||||||||||
Dividend received of investments in companies | ||||||||||||||
Total net cash flows from (used in) investing activities | ( | ) | ( | ) | ||||||||||
CASH FLOW FROM FINANCING ACTIVITIES: | ||||||||||||||
Attributable to the interest of the owners: | ||||||||||||||
Redemption and payment of interest of letters of credit | ( | ) | ( | ) | ( | ) | ||||||||
Redemption and payment of interest on current bonds | ( | ) | ( | ) | ( | ) | ||||||||
Redemption and payment of interest on subordinated bonds | ( | ) | ( | ) | ( | ) | ||||||||
Current bonds issuance | 20 | |||||||||||||
Payment of common stock dividends | 27 | ( | ) | ( | ) | ( | ) | |||||||
Increase (decrease) in obligations with foreign banks | ( | ) | ( | ) | ||||||||||
Increase (decrease) in other financial obligations | ||||||||||||||
(Decrease) increase in obligations with the Central Bank of Chile | ( | ) | ||||||||||||
Payment of other long-term borrowings | ( | ) | ( | ) | ( | ) | ||||||||
Attributable to non-controlling interest: | ||||||||||||||
Dividend payment and/or withdrawals of paid-in capital in respect of the subsidiaries corresponding to the non-controlling interest | ( | ) | ( | ) | ( | ) | ||||||||
Total net cash flows from (used in) financing activities | ( | ) | ||||||||||||
VARIATION IN CASH AND CASH EQUIVALENTS DURING THE YEAR | ( | ) | ( | ) | ||||||||||
Exchange variations effect | ( | ) | ||||||||||||
Opening balance of cash and cash equivalent | 7 | |||||||||||||
Final balance of cash and cash equivalent | 7 | |||||||||||||
2022 | 2021 | 2020 | ||||||||||||
MCh$ | MCh$ | MCh$ | ||||||||||||
Interest operating cash flow: | ||||||||||||||
Interest and readjustments received | ||||||||||||||
Interest and readjustments paid | ( | ) | ( | ) | ( | ) |
The accompanying notes 1 to 47 are an
integral part of these consolidated financial statements
F-12
BANCO DE CHILE AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2022, 2021 and 2020
(Expressed in millions of Chilean pesos unless otherwise specified)
Reconciliation of liabilities arising from financing activities:
Changes from non-cash Flow items | ||||||||||||||||||||||||
31.12.2021 | Net Cash Flow | Acquisition / (Disposals) | Foreign currency | UF Movement | 31.12.2022 | |||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||
Letters of credit | ( | ) | ||||||||||||||||||||||
Bonds | ( | ) | ( | ) | ||||||||||||||||||||
Obligations with foreign banks | ||||||||||||||||||||||||
Obligations with the Central Bank of Chile | ( | ) | ||||||||||||||||||||||
Other financial obligations | ( | ) | ||||||||||||||||||||||
Dividends paid | ( | ) | ( | ) | ||||||||||||||||||||
Dividend payment and/or withdrawals of paid-in capital in respect of the subsidiaries corresponding to the non-controlling interest | ( | ) | ( | ) | ||||||||||||||||||||
Total liabilities from financing activities | ( | ) | ( | ) |
The accompanying notes 1 to 47 are an
integral part of these consolidated financial statements
F-13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. | Company Information: |
Banco de Chile, resulting from the merger of Banco Nacional de Chile, Banco Agrícola and Banco de Valparaíso, was formed on October 28, 1893 in the city of Santiago, in the presence of the Notary Eduardo Reyes Lavalle.
Banco de Chile (“Banco de Chile” or the “Bank”) is a Corporation organized under the laws of the Republic of Chile, regulated by the Commission for Financial Market (“CMF”). Banco de Chile also complies with the regulations published by the United States Securities and Exchange Commission (“SEC”) from which the Bank is also subject to its supervision since 2001, due to its registration in the New York Stock Exchange (“NYSE”) through its American Depositary Receipt (“ADR”) program.
Banco de Chile offers a broad range of banking services to its customers, ranging from individuals to large corporations. Additionally, the Bank offers international as well as treasury banking services. The Bank’s subsidiaries provide other services including securities brokerage, mutual fund management, factoring, insurance brokerage and financial advisory services.
Banco de Chile’s legal address is Ahumada 251, Santiago, Chile and its website is www.bancochile.cl.
2. | Summary of Significant Accounting Policies: |
(a) | Basis of preparation: |
The Bank’s consolidated financial statements for the years 2022, 2021 and 2020 have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
The Bank presents its statement of financial position broadly in order of liquidity. An analysis regarding recovery or settlement is presented in Note No. 42.
The consolidated financial statements comprise the consolidated statement of comprehensive income and the consolidated statements of financial position, changes in equity, cash flows and the related notes. The consolidated financial statements have been prepared under the historical cost convention, except for financial assets at fair value through other comprehensive income, financial assets held for trading measured at fair value through profit or loss and derivative contracts, which have been measured at fair value.
The consolidated statement of cash flows shows the changes in cash and cash equivalents arising from operating activities, investing activities and financing activities during the period.
F-14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(b) | Basis of consolidation: |
The Financial Statements of Banco de Chile as of and for the years ended December 31, 2022 and 2021 have been consolidated with those of its subsidiaries. The financial statements of the Bank’s subsidiaries are prepared for the same reporting year as for Banco de Chile, using consistent accounting policies.
(i) | Subsidiaries |
Consolidated Financial Statements as of December 31, 2022 and 2021 incorporate financial statements of the Bank and its subsidiaries. According IFRS 10 – “Consolidated Financial Statements”, control requires exposure or rights to variable returns and the ability to affect those returns through power over an investee. Specifically, the Bank has power over the investee when it has existing rights that give it the ability to direct the relevant activities of the investee.
When the Bank has less than a majority of the voting rights of an investee, but these voting rights are enough to have the ability to direct the relevant activities unilaterally, then the Bank has control. The Bank considers all factors and relevant circumstances to evaluate if its voting rights are enough to obtain control, which includes:
● | The amount of voting rights that the Bank has, related to the amount of voting rights of the other stakeholders. |
● | Potential voting rights maintained by the Bank, other holders of voting rights or other parties. |
● | Rights that emanated from other contractual arrangements. |
● | Any additional circumstance that indicate that the Bank has or does not have the ability to manage the relevant activities when decisions need to be made, including voting behavior patterns in previous shareholders’ meetings. |
The Financial Statements of the subsidiaries are included in the consolidated Financial Statements from the date control is obtained until the loss of such control. The Financial Statements have been prepared using uniform accounting policies for similar transactions and other events under equivalent circumstances.
The following table details the entities in which the Bank, directly or indirectly – owns a controlling interest and that are therefore consolidated in these financial statements:
Functional | Interest Owned | ||||||||||||||||||||||||||||||||
RUT | Subsidiaries | Country | Currency | Direct | Indirect | Total | |||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||||
% | % | % | % | % | % | ||||||||||||||||||||||||||||
96,767,630-6 | Banchile Administradora General de Fondos S.A. | Chile | Ch$ | ||||||||||||||||||||||||||||||
96,543,250-7 | Banchile Asesoría Financiera S.A. | Chile | Ch$ | ||||||||||||||||||||||||||||||
77,191,070-K | Banchile Corredores de Seguros Ltda. | Chile | Ch$ | ||||||||||||||||||||||||||||||
96,571,220-8 | Banchile Corredores de Bolsa S.A. | Chile | Ch$ | ||||||||||||||||||||||||||||||
96,932,010-K | Banchile Securitizadora S.A. en Liquidación (*) | Chile | Ch$ | ||||||||||||||||||||||||||||||
96,645,790-2 | Socofin S.A. | Chile | Ch$ |
(*)
Intercompany transactions and balances between the Bank and its subsidiaries and among its subsidiaries have been eliminated for consolidation purposes. Any non-controlling interest is recognized as a separate item within the Bank’s consolidated equity.
F-15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(b) | Basis of consolidation, continued: |
(ii) | Investment in Associates and Joint Ventures |
Associates
An associate is an entity over which
the Bank has significant influence on its operating and financial management policy decisions, without having control over the associate.
Significant influence is generally presumed when the Bank holds between
According to the equity method, the Bank’s investments in an associate are initially recorded at cost, and subsequently increased (or decreased) to reflect both the Bank’s pro rata share of the post-acquisition net income (or loss) of the associate and other movements directly recognized in the associate’s equity. Goodwill arising from the acquisition of an associate is included in the carrying value of the investment (net of any accumulated impairment loss). Since goodwill is not reported separately, an associate is not tested individually for impairment. Rather, the entire investment is tested for impairment as described below.
After the application of the equity method, the Bank determines whether it is necessary to recognize impairment loss on the Bank’s investment in an associate. The Bank determines at each reporting date whether there is objective evidence, considering information from internal and external sources, that the investment in the associate is impaired. If this is the case, the Bank calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognizes the amount in its income statement under the line “Income attributable to associates”.
Joint Ventures
Joint Ventures are joint arrangements whereby the parties to the agreement that have joint control over the arrangement have rights to the net assets covered by the arrangement. Joint control exists only when decisions about the relevant activities covered by the arrangement require the unanimous consent of the parties sharing control in the agreement.
According to IFRS 11, an entity shall determine the type of joint arrangement: “Joint Operation” or “Joint Venture”.
For investments defined as a “Joint Operation”, the assets, liabilities, income and expenses are recognized by the participation in the joint operation.
Investments defined as a “Joint Venture” will be registered according to the equity method.
Investments in other companies that, for their characteristics, are defined as “Joint Ventures” include the following:
● | Artikos Chile S.A. |
● | Servipag Ltda. |
F-16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(b) | Basis of consolidation, continued: |
(iii) | Structured entities |
Special purpose entities (“SPEs”) are generally created to comply with a specific and well-defined objective, such as securitizing specific assets or carrying out a specific loan transaction. An SPE is consolidated if, based on an assessment of its relationship with the Bank and the risks and benefits over the SPE, the Bank concludes that it has control of the SPE.
As of December 31, 2022 and 2021, the Bank does not control and therefore does not consolidate any SPEs.
(iv) | Asset management services investments and mutual funds |
The Bank, through its subsidiary Banchile Administradora General de Fondos S.A., manages assets through investment and mutual funds and other investment products on behalf of investors.
According to IFRS 10, for consolidation purposes, it is necessary to evaluate the role of the Bank and its subsidiaries in the funds that it manages, determining its role of Agent or Principal. When assessing whether an investor controls an investee, an investor with decision-making rights must determine whether it acts as a Principal or as an Agent for other parties. A number of factors are considered in making this assessment, including the following:
● | Scope to make decision over the investee. |
● | Rights held by other parties. |
● | Remuneration according to compensation arrangements. |
● | Exposition of the decision maker to the variability of returns from other interests that keeps the investee. |
The Bank and its subsidiaries manage investments and mutual funds on behalf and for the benefit of investors, acting only as an Agent in this relationship. Under this category, and as per the aforementioned rule, these funds are not controlled and therefore not consolidated by the Bank or its subsidiaries.
(c) | Non-controlling interest: |
Non-controlling interest represents the share of losses, income and net assets that the Bank does not control, either directly or indirectly. It is presented as a separate item in the Consolidated Statement of Comprehensive Income and the Consolidated Statement of Financial Position.
(d) | Going Concern: |
The Bank’s management has made an assessment of its ability to continue as a going concern and is satisfied that it has the resources to continue in business for the foreseeable future. Furthermore, management is not aware of any material uncertainties that may cast significant doubt upon the Bank’s ability to continue as a going concern. Therefore, the Financial Statements continue to be prepared on the going concern basis.
F-17
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(e) | Presentation and functional currency: |
The items included in the Financial Statements of each of the entities of Banco de Chile and its subsidiaries are valued using the currency of the primary economic environment in which it operates (functional currency). The functional currency of Banco de Chile is the Chilean peso, which is also the currency used to present the entity’s consolidated financial statements.
(f) | Transactions in foreign currency: |
Transactions in currencies other than the functional currency are considered to be in foreign currency and are initially recorded at the exchange rate of the functional currency on the transaction date. Monetary assets and liabilities denominated in foreign currencies are converted using the exchange rate of the functional currency as of the date of the Statement of Financial Position, for profit or loss the exchange rate corresponding to each month-end is applied. All differences are recorded as a charge or credit to income.
Assets and liabilities in foreign currencies
are shown at their equivalent value in Chilean pesos, calculated using
The amount of Ch$
(g) | Use of estimates and judgment: |
Preparing Consolidated Financial Statements requires Management to make judgments, estimations and assumptions that affect the application of accounting policies and the valuation of assets, liabilities, income and expenses presented. Actual results could differ from these estimated amounts.
Relevant estimates and assumptions are reviewed regularly by senior management in order to quantify certain assets, liabilities, income, expenses and uncertainties. Revisions to accounting estimates are recognized in the year in which the estimate is revised and for any future period that is affected.
Some accounting matters particularly involve uncertainties and therefore require a considerable degree of estimation and critical judgment when applying accounting policies. Details on the use of estimates and judgment and their effect on the amounts recognized in the Financial Statements are included in the following notes:
- | Impairment of instruments at fair value through OCI (Notes No. 9 and No. 39) | |
- | Expected credit losses (Notes No. 11, No. 24 and No. 39) | |
- | Useful lives of intangible assets, property and equipment and leased assets and lease liabilities and investment properties (Notes No. 13, No. 14 and No. 15) | |
- | Goodwill valuation (Note No. 13) | |
- | Deferred taxes and income taxes (Note No. 16) | |
- | Other provisions (Note No. 24) | |
- | Contingencies and commitments (Note No. 28) | |
- | Fair value of financial assets and liabilities (Note No. 41) |
F-18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(h) | Financial asset and liability valuation criteria: |
Measurement is the process of determining the monetary amounts at which the elements of the Financial Statements are to be recognized and carried in the Consolidated Statement of Financial Position and the Consolidated Statement of Other Comprehensive Income. This involves selecting the particular basis or method of measurement.
These bases or methods include the following:
(i) | Initial recognition |
The Bank and its subsidiaries recognize loans to customers, trading and investment securities, deposits, debt issued and subordinated liabilities on the date they originated. Purchases and sales of financial assets performed on a regular basis are recognized as of the trade date on which the Bank committed to purchase or sell the asset. All other assets and liabilities (including assets and liabilities at fair value through profit or loss) are initially recognized as of the trade date on which the Bank becomes a party to the contractual provisions of the instrument.
Financial assets or liabilities are initially recognized at fair value plus transaction costs directly attributable to their purchase or issuance, except in the case of financial assets and financial liabilities recorded at fair value through profit or loss (“FVPL”).
(ii) | Derecognition of financial assets and liabilities |
The Bank and its subsidiaries derecognize a financial asset (or where applicable, part of a financial asset) from its Statement of Financial Position when the contractual rights to the cash flows of the financial asset have expired or when the contractual rights to receive the cash flows of the financial asset are transferred during a transaction in which all ownership risks and rewards of the financial asset are transferred. Any portion of transferred financial assets that is created or retained by the Bank is recognized as a separate asset or liability.
When the Bank transfers a financial asset, it assesses to what extent it has retained the risks and rewards of ownership. In this case:
(a) | If substantially all risks and rewards of ownership of the financial asset have been transferred, it is derecognized and any rights or obligations created or retained upon transfer are recognized separately as assets or liabilities. |
(b) | If substantially all risks and rewards of ownership of the financial asset have been retained, the Bank continues to recognize it. |
(c) | If substantially all risks and rewards of ownership of the financial asset are neither transferred nor retained, the Bank will determine if it has retained control of the financial asset. In this case: |
(c.i) | If it has not retained control, the financial asset will be derecognized and any rights or obligations created or retained upon transfer will be recognized separately as assets or liabilities. |
(c.ii) | If the entity has retained control, it will continue to recognize the financial asset to the extent of its continuing involvement in the financial asset. |
A financial liability is derecognized when the obligation under the liability is discharged or canceled or expires.
F-19
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(h) | Financial asset and liability valuation criteria, continued: |
If an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of the existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the income statement.
(iii) | Offsetting |
Financial assets and liabilities are offset and the net amount is reported in the Statement of Financial Position if, and only if, the Bank has the legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis or to realize an asset and settle the liability simultaneously.
Income and expenses are shown net only if accounting standards allow such treatment, or in the case of gains and losses arising from a group of similar transactions, such as the Bank’s trading activities.
(iv) | Measurement categories of financial assets and liabilities |
The Bank classifies all of its financial assets based on the business model for managing these assets and each asset’s contractual terms, measured at either amortized cost, fair value through other comprehensive income (FVOCI) or fair value through profit or loss (FVPL).
The Bank classifies and measures its trading portfolio at FVPL as explained in Note No. 2 (i) (ii). The Bank may designate financial instruments at FVPL, if such designation eliminates or significantly reduces measurement or recognition inconsistencies.
Financial liabilities, other than loan commitments and financial guarantees, are measured at amortized cost or at FVPL when they are held for trading and derivative instruments or the fair value designation is applied.
Fair value measurements
The fair value of a financial instrument is the price that would be received to sell an asset or that would be paid to transfer a liability in an orderly transaction between participants in a main market (or more advantageous) at the measurement date under current market conditions, regardless of whether that price is directly observable or estimated using another valuation technique. The most objective and common fair value is the price that you would pay on an active, transparent and deep market (“quoted price” or “market price”).
When available, the Bank estimates the fair value of an instrument using quoted prices in an active market for that instrument. A market is considered active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis.
If a market for a financial instrument is not active, the Bank establishes fair value using a valuation technique. These valuation techniques include the use of recent market transactions between interested and duly informed parties that act in mutual independence conditions, if available, as well as references to the fair value of other instruments that are substantially the same, discounted cash flows (“DCF”) and options pricing models.
F-20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(h) | Financial asset and liability valuation criteria, continued: |
The chosen valuation technique uses the maximum observable market data, relies as little as possible on estimates performed by the Bank, incorporates factors that market participants would consider in setting a price and is consistent with accepted economic methodologies for pricing financial instruments. Inputs into the valuation technique reasonably represent market expectations and include risk and return factors that are inherent in the financial instrument. Periodically, the Bank calibrates the valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on any available observable market data.
The best evidence of the fair value of a financial instrument at initial recognition is the transaction price (i.e., the fair value of the consideration given or received) unless the fair value of that instrument is evidenced by a comparison with other observable current market transactions in the same instrument (i.e., without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets.
When the transaction price provides the best evidence of fair value at initial recognition, the financial instrument is initially measured at the transaction price and any difference between this price and the value initially obtained from a valuation model is subsequently recognized in incomes.
Fair value estimates obtained from models are adjusted for any other factors, such as model uncertainties, to the extent that the Bank believes that a third-party market participant would take them into account in pricing a transaction.
The Bank’s fair value disclosures are included in Note No. 41.
(i) | Financial assets and liabilities per financial statement line items: |
(i) | Loans and advances to banks, loans to customers and other financial assets at amortized cost |
The Bank measure loans and advances to banks, loans to customers and other financial assets at amortized cost as long as the following conditions are met:
- | The financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows from them. |
- | The contractual terms of the financial asset give rise on specified dates on which cash flows are to be received and such cash flows are solely payments of principal and interest (“SPPI”) on the principal amount outstanding. |
For classification process, the Bank performs the SPPI test, which assesses the contractual terms of the financial asset to identify whether they meet the SPPI criterion.
“Principal” for the purpose of this test is defined as the fair value of the financial asset at initial recognition and may change over the life of the financial asset (for example, if there are repayments of principal or amortization of the premium/discount).
The most significant elements of interest within a lending arrangement are typically the consideration for the time value of money and credit risk. To make the SPPI assessment, the Bank applies judgement and considers relevant factors, such as the currency in which the financial asset is denominated, and the period for which the interest rate is set.
F-21
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(i) | Financial asset and liability per financial statement line items, continued: |
In contrast, contractual terms that introduce a more than the minimis exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are solely payments of principal and interest on the amount outstanding. In such cases, the financial asset is required to be measured at FVPL.
(ii) | Financial assets at fair value through profit or loss |
Financial assets at fair value through profit or loss are securities acquired in order to generate profits from short-term price fluctuations or as a result of brokerage activities, or which are part of a portfolio on which a short-term profit-generating pattern exists. This item includes mainly Central Bank bonds and deposits from domestic banks and mutual fund investments.
Financial assets at fair value through profit or loss are stated at their fair value. Accrued interest, gains or losses from their fair market value adjustments, as well as gains or losses from trading activities, are included in “Net financial income (expense)” in the Consolidated Statement of Comprehensive Income. Dividends, interest and indexations are reported as “Net financial operating income” in the Consolidated Statement of Comprehensive Income.
All purchases and sales of financial assets at fair value through profit or loss that must be executed within the period established by market regulations or conventions are recorded using the trade date, which is the date on which the purchase or sale of the asset is committed. Any other purchase or sale is treated as a derivative (forward) until settlement occurs.
(iii) | Financial assets at FVOCI |
(iii.1) | Debt instruments at FVOCI |
The Bank applies the new category under IFRS 9 of debt instruments measured through FVOCI when both of the following conditions are met:
- | The instrument is held within a business model whose, objective is to collect contractual cash flows and sell financial assets. |
- | The contractual terms of the financial asset meet the SPPI test. |
FVOCI debt instruments are measured at fair value with gains and losses arising due to changes in fair value are recognized in Other Comprehensive Income (“OCI”). Interest income and foreign exchange gains and losses are recognized in profit or loss. The Expected Credit Losses (“ECL”), which are measured and recorded pursuant to the IFRS 9 adoption, recorded for debt instruments measured at FVOCI does not reduce the carrying amounts of these financial assets, as these remain at fair value in the statement of financial position, but instead, an amount equal to the allowance that would result from the impairment is recognized in OCI, with a corresponding charge to profit or loss. The accumulated loss recognized in OCI is recycled to profit or loss upon derecognition of the asset.
Where the Bank holds more than one investment in the same security, they are deemed to be disposed of on a first–in first–out basis. On derecognition, cumulative gains or losses previously recognized in OCI are reclassified from OCI to profit or loss.
F-22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(i) | Financial asset and liability per financial statement line items, continued: |
(iii.2) | Equity instruments at FVOCI |
Upon initial recognition, the Bank occasionally elects to classify irrevocably some of its equity investments as equity instruments at FVOCI when they meet the definition of Equity under IAS 32 “Financial Instruments: Presentation” and are not held for trading. Such classification is determined on an instrument-by instrument basis.
Gains and losses on these equity instruments are never recycled to profit or loss. Dividends are recognized in profit or loss as other operating income. Equity instruments at FVOCI are not subject to an impairment assessment.
(iv) | Operations under resale and repurchase agreements: |
The Bank carries out operations under resale agreements as a form of investment. The securities purchased under these agreements are not recognized on the Bank’s Consolidated Statement of Financial Position. The consideration paid is recognized under “Rights by resale agreements and securities lending” reflecting the transaction’s economic substance as a loan granted by the Bank. The difference between the purchase and the resale price is recorded in “Net interest income” and is accrued over the duration of the agreement using its effective interest rate. This treatment reflects the economic substance as a loan to the Bank.
The Bank also carries out operations under repurchase agreements as a form of financing. The securities sold under a repurchase agreement at a specific date in the future are not derecognized from the Consolidated Statement of Financial Position because the Bank retains all the risks and rewards of the ownership of the securities. The corresponding cash received is recognized in the balance sheet as an asset, and the corresponding obligation to return the cash, including any accrued interest, is recognized as a liability under “Obligations by repurchase agreements and securities lending”. The difference between the sale and the repurchase price is treated as “Net interest expense” and is accrued over the duration of the agreement using the effective interest rate.
The treatment of secured lending and financing transactions follows the principles laid out above. As of December 31, 2022 and 2021, there were no operations corresponding to securities lending.
(v) | Lease contracts |
Accounts receivable relating to leasing contracts, included under the caption “Loans to customers”, correspond to periodic rent installments of contracts, which meet the definition to be classified as financial leases and are presented at their nominal value net of unearned interest as of each year-end.
(vi) | Factoring transactions |
They are valued for the amounts disbursed by the Bank in exchange for invoices or other commercial instruments representative of credit, with or without responsibility of the grantor, received in discount. Price differences between the amounts disbursed and the nominal value of the credits are recorded in the result as interest income, through the effective interest method, during the financing period.
In those cases, where the transfer of these instruments was made without responsibility of the grantor, it is the Bank who assumes the insolvency risks of those required to pay.
F-23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(i) | Financial asset and liability per financial statement line items, continued: |
(vii) | Financial guarantees: |
In its ordinary course of business, the Bank gives financial guarantees consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognized in the Financial Statements at fair value being the premium received. Subsequent to initial recognition, the Bank’s liability is measured at the higher of the amount originally recognized less, when appropriate, cumulative amortization recognized in the income statement and the best estimate of expenditure required settling the financial obligation arising as the result of the guarantee. The premium received is recognized in the income statement in “Income from Fees and Commissions” on a straight line basis over the guarantee period.
(viii) | Impairment of loans: |
(viii.1) Overview of the principles of Expected Credit Loss (“ECL”)
The Bank records an allowance for expected credit loss for all loans and other debt financial assets not held at FVPL, together with loan commitments and financial guarantee contracts, all referred to as “financial instruments”. Equity instruments are not subject to impairment under IFRS 9.
In this context, and specifically within the scope of the impairment methodology required by IFRS 9, the following key elements are identified:
● | Estimate of expected loss based on a scenario analysis. | |
● | Calculation based on three stages, each as described below. | |
● | Forward looking analysis of macroeconomic factors and their impact in risk parameters, such as Gross Domestic Product (“GDP”) growth, unemployment rates and Central Banks interest rates. |
(viii.2) Expected Credit Loss (“ECL”)
The expected credit loss reflects an unbiased probability-weighted range of possible economic outcomes. This is achieved by generating three economic scenarios: base, upside and downside.
IFRS 9 requires that a provision be recognized since the date a loan is originated based on its expected credit loss.
IFRS 9 proposes to calculate the expected credit loss based on a staging allocation process that considers three main buckets:
Stage 1: No significant increase in risk
Financial assets whose credit quality has not significantly deteriorated since initial recognition. Twelve months expected losses are recognized. This stage also includes those credits which have been reclassified from stage 2.
F-24
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(i) | Financial asset and liability per financial statement line items, continued: |
Stage 2: | With a significant increase in risk |
Financial assets that experienced a significant increase in credit risk since initial recognition, but that do not have objective evidence of impairment are allocated stage 2 operations and are provisioned considering the financial instrument expected life (lifetime); for the discount of the expected losses, the effective rate at the time of origination is used, calculated on the gross amount in the Bank’s books. This stage also includes those credits which have been reclassified from stage 3.
Stage 3: | Objective impairment evidence |
Financial assets that have objective evidence of impairment at the reporting date are allocated to stage 3, the expected credit losses will consider a lifetime approach. The cash flows discount rate used for this stage corresponds to that of the effective interest rate (“EIR”) applied at the origination of the credit.
POCI: | Purchased or Originated Credit Impaired |
Purchased or originated credit impaired (“POCI”) assets are financial assets that are credit impaired on initial recognition. POCI assets are recorded at fair value at original recognition and interest income is subsequently recognized based on a credit-adjusted EIR. ECLs are only recognized or released to the extent that there is a subsequent change in their expected credit losses.
The classification of the assets is of special relevance due to the different time horizons considered in the calculation of the provision for customers classified in stage 1 and those classified in stage 2.
The definition of significant risk increase (“SRI”) plays a key role since the amount of provision depends on the interpretation of this concept.
Individual classified loans
An individual analysis of debtors is applied to individuals and companies that are of such significance considering size, complexity or level of exposure to the Bank, and they must be analyzed in detail.
The Bank classifies the debtors and their operations related to loans into one of three categories of loan portfolio: Normal, Substandard and Non-complying Loans. This internal rating considers the quantitative variables used to determine the SRI in order to establish the appropriate provisions.
i. | Normal Loans: |
Normal loans correspond to borrowers who are up to date on their payment obligations and no sign of impairment in their credit quality are shown. This situation is reflected in the internal rating that varies from A1 to A6. All exposures rated from A1 to A6 are allocated to stage 1. Exposures rated from A1-A3 downgraded to A5 or exposures rated A1-A4 downgraded to A6 in a 12-month period are allocated to stage 2.
F-25
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(i) | Financial asset and liability per financial statement line items, continued: |
ii. | Substandard Loans: |
Substandard loans include all borrowers with a significant increase in risk and insufficient payment capacity or significant deterioration of payment capacity that it may be reasonably expected that they will not comply with all principal and interest payments obligations set forth in the credit agreement.
This category also includes all loans that are more than 30 days past due.
This situation is reflected in the internal rating that considers four classifications from B1 to B4. All exposures rated at these levels are as allocated to stage 2.
iii. | Non-complying Loans: |
Non-complying loans correspond to borrowers whose payment capacity is seriously at risk and who have a high likelihood of filing for bankruptcy or are renegotiating credit terms to avoid bankruptcy. This category comprises all loans outstanding from debtors for which payments are more than 90 days past due.
This situation is reflected in the internal rating that varies from C1 to C6. All obligors rated at these levels are classified as stage 3.
Group classified loans
The group analysis is used to analyze a large number of loans whose individual amounts are homogenous and not significant. For this analysis, the Bank uses models based on attributes of the debtors and their loans, and on the behavior of a group of loans. The categories used to classify the debtors correspond to “Normal loans” and “Non-complying loans”.
Loans to customers include originated and purchased non-derivative financial assets with fixed or determinable payments that are not quoted on an active market and which the Bank does not intend to sell immediately or in the short-term.
(viii.3) Significant risk increase (“SRI”) (quantitative criteria):
Significant increase in risk is determined on a quantitative manner, based on changes in Lifetime Probability of Default (“LPD”). A loan is impaired whenever LPD at calculation date is significantly greater than LPD estimated at the loan origination date. In order to estimate current LPD, macroeconomic factors and their projections are taken into account. In addition, negative behavior records (delinquency over 60 days, default (considering a 4-month probation period) or written off balances) at the public bureau (reporting entities only, banks under supervision of the local regulator) trigger a transition to stage 2.
(viii.4) Default events
In addition to the quantitative criteria described in the previous section, other aspects are considered as indicators of SRI, for which the following entry conditions to the different stages are considered:
A default event is due whenever payments are more than 90 days past due or for a forbearance of a loan that is more than 60 days past due.
F-26
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(i) | Financial asset and liability per financial statement line items, continued: |
Default events are partially identified on a borrower basis: a default event in any exposure triggers a default across any other exposure except for residential mortgages. Instead, residential mortgages do trigger a default event on every other exposure.
In these cases, loans are classified as stage 3.
(viii.5) Probation period
Probation periods have been set in order to regulate transitions from stage 3 to stage 2, and from stage 2 to stage 1 as well. Transitions from stage 3 to stage 1 are not allowed. Transitions are determined on a monthly basis.
● | Transitions from stage 2 to stage 1: No probation period is used for this transition. |
Wholesale exposures: an exposure will be considered to have a significant increase in risk if any of the following are true:
- | The client is rated in one of the two last grades of stage 1, having been downgraded during the last 12 months. |
- | The client is currently rated in the last grade of stage 1 (even in the case of not having been downgraded). |
- | Any of the client’s obligations are past due 60 days or more. |
- | Renegotiated loans that have been past due between 30 and 59 days. |
Retail exposures: an exposure will be considered to have a significant increase in risk if any of the following are true:
- | The client has rescheduled a loan while it was past due 60 days or more. |
- | The exposure is past due 30 days or more. |
- | The exposure shows an increase in its default risk, quantitatively defined as follows: |
Lifetime PD – PD at inception > Average PD
● | Transitions from stage 3 to stage 2: Probation period is aligned with local statutory accounting, therefore it should accomplish the following criteria: |
- | No obligation of the debtor shows a delay in its payment of more than 30 calendar days. |
- | Have not been granted new refinancing to pay the obligations. |
- | At least one of the payments made includes capital amortization. |
- | If the debtor has some credit with partial payments in periods of less than six months, at least two payments have been made. |
- | If the debtor must pay monthly instalments for one or more credits, at least four consecutive instalments have been paid. |
- | All debtor obligations across the Chilean financial system are current, except for insignificant amounts. |
F-27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(i) | Financial asset and liability per financial statement line items, continued: |
(viii.6) The ECL calculation
The Bank calculates the ECL based on probability-weighted scenarios to measure the expected credit losses discounted at its effective interest rate (“EIR”). Losses are defined as the difference between the cash flows expected to be received by the Bank versus the contractual cash flows.
For the calculation of the ECL, the following key parameters should be considered:
● | Probability of Default (“PD”) | |
The PD provides the likelihood that a borrower will not be able to meet debt obligations within a certain period. Point in time estimates are used. Depending on the stage on which the exposure is classified, the time horizon may vary from one year (for stage 1) to lifetime (for stage 2). Naturally, stage 3 exposures carry a PD = 1.
● | Exposure at Default (“EAD”) and Credit Conversion Factor (“CCF”) | |
The EAD parameter represents an estimate of the amount of loss the bank may face in the event of the borrower’s default. This exposure can be either an asset or a contingent exposure. The latter includes unused limits on revolving facilities such as credit cards, lines of credit, Letters of Credit, etc.; in such cases unused limits are weighted by their CCF, which is an estimate of further utilization before default time.
● | Loss Given Default (“LGD”) | |
The LGD parameter is defined as the likely loss intensity in case of a borrower’s default. It provides an estimation of the exposure that cannot be recovered in a default event and therefore captures the severity of a loss. It is expressed as a percentage of the EAD. Inflows (payments) and outflows are considered in calculating LGD.
(ix) | Loans write-off |
Criteria under which loans are written-off when collection efforts have been exhausted, but not later than the following maximum periods:
Type of Loan | Term | |||
Consumer loans – secured and unsecured | ||||
Other transactions – unsecured | ||||
Commercial loans – secured | ||||
Residential mortgage loans | ||||
Consumer leases | ||||
Other non-real estate lease transactions | ||||
Real estate leases (commercial or residential) |
The term represents the time elapsed by a loan from the date on which the unpaid collection or portion is in default.
Cash recoveries on written-off loans are recorded directly through the income statement.
F-28
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(i) | Financial asset and liability per financial statement line items, continued: |
(x) | Renegotiated loans: |
The Bank attempts to restructure loans rather than to take possession of collateral when economically convenient. This may involve extending the payment arrangements and the agreement of new loan conditions. After having renegotiated contractual terms, any impairment is measured using the original effective interest rate as calculated before the modification of terms and the loan is no longer considered past due. Forbearances are continuously reviewed by management to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original effective interest rate.
(xi) | Modified loans: |
When the contractual cash flows of a debt financial instrument are renegotiated or modified, the Bank distinguishes the modifications that originate in financial difficulties of the debtor, from those that are of a commercial nature.
● | Contractual modifications due to financial difficulties of the debtor: These occur when the Bank modifies the contractual conditions originally agreed so that the debtor can comply with its payment obligations. When the modification is substantial, it is recorded as a derecognition and the new loan is valued at fair value, and when the modification is not substantial, the loan is not derecognized, and its amortized cost must be adjusted based on the difference between the book value before the modification and the present value of the flows of the modified operation using the effective interest rate (EIR) of the original credit. |
● | Contractual modifications for other commercial reasons: These operations normally respond to general market situations at the time of the modification. Such modifications are treated as a total or partial cancellation of the original operation and the recording of a new operation at fair value. |
(xii) | Collateral valuation: |
The Bank seeks to use collateral, where possible, to mitigate its risks on financial assets. The collateral comes in various forms such as mortgages, pledges, securities, other non-financial assets and credit enhancements. The fair value of collateral is generally assessed, at a minimum, at inception through a certified appraiser, considering factors such as location, collateral type, and observable market value, among others. Additionally, the settlement costs, the time required to sell off the assets and the potential adverse market conditions are considered as well. However, some types of collateral, such as securities, are valued daily. To the extent possible, the Bank uses active market data for valuing financial assets held as collateral. (See Note No. 44 for further analysis of collateral).
For impairment of loans estimates, Collateral is not accounted as an EAD mitigation factor, but as an LGD driver instead.
(j) | Financial and operating leases: |
The determination of whether an arrangement is a lease, or it contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.
F-29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(j) | Financial and operating leases, continued: |
(i) The Bank acting as lessor
Assets leased to customers under agreements which transfer substantially all the risks and rewards of ownership, with or without ultimate legal title, are classified as financial leases. When assets held are subject to a financial lease, the leased assets are derecognized and a receivable is recognized which is equal to the present value of the minimum lease payments, discounted at the interest rate implicit in the lease. Initial direct costs incurred in negotiating and arranging a financial lease are incorporated into the receivable through the discount rate applied to the lease. Financial lease income is recognized over the lease term based on a pattern reflecting a constant periodic rate of return on the net investment in the financial lease.
Assets leased to customers under agreements which do not transfer substantially all the risks and rewards of ownership are classified as operating leases. The leased assets are included within premises and equipment on the Group’s statement of financial position and depreciation is provided on the depreciable amount of these assets on a systematic basis over their estimated useful economic lives. Rental income is recognized on a straight-line basis over the period of the lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized as an expense on a straight-line basis over the lease term.
(ii) The Bank acting as lessee
A contract is, or contains a lease, if one party has the right to control the use of an identified asset for a period of time in exchange for a regular payment. On the start date of a lease, a right-to-use assets leased is determined at cost, which includes the amount of the initial measurement of the lease liability plus other disbursements made. The amount of the lease liability is measured at the present value of future lease payments that have not been paid on that date, which are discounted using the Bank’s incremental financing interest rate.
The right-of-use asset is measured using the cost model, less accumulated depreciation and accumulated losses due to impairment of value, depreciation of the right-of-use asset, is recognized in the Income Statement based on the linear depreciation method from the start date and until the end of the lease term.
After the start date, the lease liability is measured by decreasing the carrying amount to reflect the lease payments made and the modifications to the lease.
According to IFRS 16 “Leases” the bank does not apply this rule to contracts whose duration are 12 months or less and those that contain an underlying asset of low value. In these cases, payments are recognized as a lease expense.
(k) | Interest and UF indexation revenue/expense: |
Interest and UF indexation revenue/expense are recognized in the Consolidated Statement of Income using the effective interest rate method. The effective interest rate is the rate which exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument (or a shorter period) where appropriate, to the carrying amount of the financial asset or financial liability. To calculate the effective interest rate, the Bank determines cash flows by taking into account all contractual conditions of the financial instrument, excluding future credit losses.
The effective interest rate calculation includes all fees and other amounts paid or received that form part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the purchase or issuance of a financial asset or liability.
F-30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(l) | Commission income and expense: |
Income and expenses from commissions are recognized in the Consolidated Income Statement using the criteria established in IFRS 15 “Revenue from contracts with customers”.
Under IFRS 15, revenues are recognized considering the terms of the contract with customers. Revenue is recognized when, or as the performance obligation is satisfied by transferring the goods or services committed to the customer.
Under IFRS 15, revenues are recognized using different criteria depending on their nature. The most significant are:
− | Those that correspond to a singular act, when the act that originates them takes place. |
− | Those that originate in transactions or services that are extended over time, during the life of such transactions or services. |
− | Commissions on loan commitments and other fees related to credit operations are deferred (together with the incremental costs directly related to the placement) and recognized as an adjustment to the effective interest rate of the placement. In the case of loan commitments, when there is no certainty of the date of effective placement, the commissions are recognized on a linear basis in the duration period of the commitment. |
The income from commissions corresponds mainly to:
− | Commissions for credit prepayment: These commissions are accrued at the time the credits are prepaid. |
− | Commissions for lines of credit and overdrafts: These commissions are accrued in the period related to the granting of lines of credit and overdrafts in checking accounts. |
− | Commissions for warranty by endorsement and letters of credit: These commissions are accrued in the period related to the granting by the bank of payment guarantees for real or contingent obligations of third parties. |
− | Commissions for card services: Correspond to commissions accrued for the period, related to the use of credit cards, debit cards and other. |
− | Commissions for account management: Includes commissions for the maintenance of current accounts and other deposit accounts. |
− | Commissions for collections and payments: Includes commissions generated by the collection and payment services provided by the Bank. |
− | Commissions for intermediation and management of securities: correspond to income from brokerage service, placements, administration and custody of securities. |
− | Remuneration for administration of mutual funds, investment funds or others: corresponds to the commissions from the General Fund Administrator for the administration of third-party funds. |
− | Remuneration for brokerage and insurance consulting services: Income from brokerage and insurance advice by the Bank or its subsidiaries is included. |
− | Commissions for factoring operations services: Commissions for factoring operations services performed by the Bank are included. |
− | Commissions for services of financial leasing operations: Commissions for services of financial leasing operations carried out by the Bank as lessor are included. |
− | Commissions for financial consulting services: Commissions for financial advisory services performed by the Bank and its subsidiary are included. |
− | Other commissions earned: Includes income generated from foreign currency exchange, issuance bank guarantees, issuance of bank check, use of distribution channels, agreement on the use of a brand and placement of financial products and cash transfers, and recognition of payments associated with commercial alliances, among others. |
F-31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(l) | Commission income and expense, continued: |
Expenses from commission include:
− | Commissions for card operations: Commissions paid for credit and debit card operations are included. |
− | Commissions for licensing the use of card brands |
− | Expenses for obligations of loyalty and merits programs for card customers. |
− | Commissions for operations with securities: Commissions for deposit and custody of securities and brokerage of securities are included. |
− | Other commissions for services received: Commissions are included for guarantees and endorsements of Bank obligations, for foreign trade operations, for correspondent banks in the country and abroad, for ATMs and electronic fund transfer services. |
− | Commissions for compensation of large value payments: Corresponds to commissions paid to entities such as ComBanc, CCLV Contraparte Central, etc. |
(m) | Property and equipment: |
Property and equipment is stated at cost excluding servicing cost, less accumulated depreciation and accumulated impairment. Changes in the expected useful life are accounted for by changing the depreciation period or method, as appropriate, and treated as changes in accounting estimates.
This cost includes expenses that have been directly attributed to the asset’s acquisition.
Depreciation is recognized the Consolidated Statements of Income on a straight-line basis over the estimated useful lives of each part of an item of property and equipment.
Estimated useful lives for 2022 and 2021 are as follows:
Buildings | ||||
Installations (in general) | ||||
Equipment | ||||
Office furniture |
Property and equipment is derecognized on disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognized in “Impairments” in the income statement in the year the asset is derecognized.
F-32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(n) | Intangible assets: |
Intangible assets are identified as non-monetary assets (separated from other assets) without physical substance that arise as the result of a legal transaction or that are developed internally by the consolidated entities. They are assets whose cost can be reliably estimated and for which the consolidated entities consider that it is probable that future economic benefits will be recognized.
(i) | Goodwill |
Goodwill arises on the acquisition of subsidiaries and associates representing the excess of the fair value of the purchase consideration over the net fair value of the Bank’s share of the identifiable assets acquired and the liabilities and contingent liabilities assumed on the date of the acquisition.
For the purpose of calculating goodwill, fair values of acquired assets, liabilities and contingent liabilities are determined by reference to market values or by discounting expected future cash flows to present value. This discounting is either performed using market rates or by using risk-free rates and risk-adjusted expected future cash flows.
Goodwill originating from the acquisition of subsidiaries is capitalized and reviewed for impairment annually or more frequently if there are indications that impairment may have occurred. Impairment is determined by comparing the present value of expected future cash flows from each cash generating unit with the carrying value of its net assets, including attributable goodwill. Goodwill is allocated to cash generating units for the purpose of impairment testing considering the business level at which goodwill is monitored for internal management purposes.
Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
(ii) | Software and computer programs |
Computer software purchased by the Bank and its subsidiaries is accounted for at cost less accumulated amortization and impairment losses.
The subsequent expense in software assets is capitalized only when it increases the future economic benefit for the specific asset. All other expenses are capitalized as an expense as incurred.
Amortization is recorded in income
using the straight-line amortization method based on the estimated useful life of the software, from the date on which it is available
for use. The estimated useful life of software is a maximum of
Expense for internally developed software is recorded in income for each year.
(o) | Collateral repossessed (assets received in lieu of payment): |
Assets received in lieu of payment are classified under “Other Assets” and they are recorded at the lower of carrying amount and fair value, less cost to sell. Assets that are determined better to be sold are immediately transferred to assets held-for-sale at their fair value at the repossession date in line with the Bank’s policy.
F-33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(p) | Investment Properties: |
Investment properties are real estate assets held to earn rental income or for capital appreciation or both, but are not held-for-sale in the ordinary course of business or used for administrative purposes. Investment properties are initially measured at cost, including transaction costs. Subsequent to initial recognition, they are carried at cost less accumulated depreciation and impairments using the same accounting policies as property and equipment.
(q) | Deferred taxes and income taxes: |
The income tax provision of the Bank and its subsidiaries has been determined in conformity with current legal provisions.
The Bank and its subsidiaries recognize, when appropriate, deferred tax assets and liabilities for future estimates of tax effects attributable to temporary differences between the book and tax values of assets and liabilities. Deferred tax assets and liabilities are measured based on the tax rate expected to be applied, in accordance with current tax law, in the year that deferred tax assets are realized or liabilities are settled. The effects of future changes in tax legislation or tax rates are recognized in deferred taxes starting on the date of publication of the law approving such changes.
Deferred tax assets and liabilities are recorded at their book value as of the date the deferred taxes are measured. Deferred tax assets are recognized only when it is likely that future tax profits will be sufficient to recover deductions for temporary differences.
(r) | Debt issued and other financial liabilities: |
Financial instruments issued by the Bank are classified under “Debt issued”, where the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of equity shares.
After initial measurement, debt issued is subsequently measured at amortized cost using the effective interest rate. Amortized cost is calculated by taking into account any discount or premium on the issue and costs that are an integral part of the effective interest rate.
The Bank applies the same accounting policies for its other financial liabilities.
(s) | Derivative instruments: |
A “Derivative instrument” is a financial instrument whose value changes in response to changes in an observable market variable (such as an interest rate, exchange rate, the price of a financial instrument or a market index, including credit ratings), whose initial investment is very small in relation to other financial instruments with a similar response to changes in market conditions and which is generally settled at a future date.
Derivative instruments, which include foreign currency and UF forwards, interest rate forwards, currency and interest rate swaps, currency and interest rate options and other financial derivative instruments, are recorded in the Statement of Financial Position at fair value regardless of whether they are held-for-trading or for non-trading purposes.
F-34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(s) | Derivative instruments, continued: |
The fair value is obtained from market quotes, DCF models and options valuation models, as and where applicable. Derivative contracts are reported as an asset when their fair value is positive and as a liability when negative under the item “Derivative Instruments”.
At inception, a derivative contract must be designated by the Bank as a derivative instrument for trading or hedging purposes.
Changes in the fair value of derivative contracts held for trading purposes are recorded in “Net financial operating income”, in the Consolidated Statement of Comprehensive Income.
If a derivative instrument is classified as a hedging instrument, it can be:
(1) | A hedge of the fair value of existing assets or liabilities or firm commitments, or |
(2) | A hedge of cash flows related to existing assets or liabilities or forecasted transactions. |
A hedge relationship for hedge accounting purposes must comply with all of the following conditions:
(a) | at its inception, the hedge relationship has been formally documented; |
(b) | it is expected that the hedge will be highly effective; |
(c) | the effectiveness of the hedge can be measured in a reasonable manner; and |
(d) | the hedge is highly effective with respect to the hedged risk on an ongoing basis and throughout the entire hedge relationship. |
The Bank has chosen to continue applying the hedge accounting requirements of IAS 39 when adopting IFRS 9.
Certain derivatives transactions that do not qualify for hedge accounting are treated and reported as derivatives for trading purposes even though they provide an effective hedge on the risk of net positions.
Changes in the fair value of derivative contracts that qualify for hedge accounting are recorded, as follows:
● | If derivative contracts qualify for hedge accounting of changes in the fair value of assets, liabilities or unrecognized firm commitments (Fair Value Hedge), changes in the fair value of both the hedged asset (or liability) and the hedging derivative are recognized in the income statement under “Interest revenue and expenses” and/or “Foreign Exchange Transactions, Net”, depending on the risk being hedged. On the other hand, any ineffective portion of the Fair Value Hedge is recognized in the income statement under “Net Financial Operating Income”. |
● | If derivative contracts qualify for hedge accounting of the variability of future cash flows from highly probable future transactions and/or floating rate assets or liabilities (Cash Flow Hedge), the changes in fair value are recorded in Equity under “Other Comprehensive Income”, to the extent that the hedge is effective. Changes in the fair value of the Cash Flow Hedge are subsequently reclassified to the income statement when and where the hedged item affects the Bank’s results (e.g. to Interest Revenues and Expenses and/or Foreign Exchange Transactions when the hedged instrument affects the income statement because of interest rate risk, or exchange rate risk, respectively). On the other hand, any ineffective portion of the Cash Flow Hedge is recognized in the comprehensive statement of income under the “Net Financial Operating Income” line item. |
F-35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(s) | Derivative instruments, continued: |
Finally, if the hedging instrument does not continue qualifying for hedge accounting and/or it is terminated, sold, suspended or executed, the hedge accounting is discontinued prospectively. In this case, gains/losses already accrued will remain in Equity until the expected transactions occur. In that moment, gains/losses will be recorded in the Income Statement (under “Interest Revenues or Expenses” and/or “Foreign Exchange Transactions” depending on the risk being hedged) as long as transactions occur. Otherwise, if transactions are expected to fail, the changes in fair value are immediately recognized in the Income Statement (under “Interest Revenues or Expenses” and/or “Foreign Exchange Transactions” depending on the risk that was used to be hedged)”.
(t) | Customer loyalty programs: |
The Bank maintains a loyalty program to provide incentives to its customers, which allows acquiring goods and/or services, based on the exchange of prize points (“Dolares-Premio”), which are granted based on the purchases made with Bank’s credit cards and the compliance of certain conditions established in said program. The consideration for the prizes is made by a third party. In accordance with IFRS 15, these associated benefit plans have the necessary provisions to meet the delivery of committed future performance obligations.
(u) | Provisions and contingent liabilities: |
Provisions are liabilities that are characterized by uncertainty in either their amount or maturity. Provisions are recorded in the Statement of Financial Position when the following requirements are jointly met:
(i) | a present obligation has arisen from a past event, |
(ii) | as of the date of the Financial Statements it is likely that the Bank or its subsidiaries have to disburse resources to settle the obligation and, |
(iii) | the amount can be reliably measured. |
A contingent asset or liability is any right or obligation that arises from past events whose existence will be confirmed by one or more uncertain future events which are not within the control of the Bank. Contingent assets and liabilities are not recognized in the Statement of Financial Position according to the above mentioned requirements.
Contingent credits are understood as operations or commitments in which the Bank assumes a credit risk by committing itself to third parties, in the event of a future event, to make a payment or disbursement that must be recovered from its clients.
F-36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(u) | Provisions and contingent liabilities, continued: |
The following are classified as contingent credits in the complementary information:
(i) | Undrawn credit lines: Considers the unused amounts of lines of credit that allow customers to make use of credit without prior decisions by the bank. |
(ii) | Undrawn credit lines with immediate termination: Considers those undrawn credit lines, defined in the previous numeral, that the bank can unconditionally cancel at any time and without prior notice, or for which its automatic cancellation is contemplated in case of deterioration of the debtor’s solvency, as permitted by the current legal framework and the contractual conditions established between the parties. |
(iii) | Letters of credit for goods circulation operations: Considers the commitments that arise, both to the issuing bank and to the confirming bank, from self-settled commercial letters of credit with a maturity period of less than 1 year, arising from merchandise circulation operations (for example, confirmed foreign or documentary letters of credit). Includes documentary letters of credit issued by the Bank, which have not yet been negotiated. |
(iv) | Debt purchase commitments in local currency abroad: Note issuance facility (“NIF”) and revolving underwriting facility (“RUF”) are considered. |
(v) | Transactions related to contingent events: Guarantee bonds with promissory notes. |
(vi) | Warranty by endorsement and sureties: Includes warranty by endorsement, sureties and standby letters of credit. In addition, it includes the payment guarantees of buyers in factoring operations. |
(vii) | Other credit commitments: Includes the unplaced amounts of committed credits, which must be disbursed on an agreed future date or processed when the contractually foreseen events occur with the client, as occurs in the case of irrevocable credit lines linked to the progress status of projects. |
(v) | Provisions for minimum dividends: |
The Bank records within liabilities the portion of net income for the year that should be distributed to comply with the Corporations Law. For these purposes, the Bank establishes a provision in a complementary equity account within retained earnings.
Distributable net income is considered for the purpose of calculating a minimum dividends provision, which in accordance with the Bank’s bylaws is defined as that which results from reducing or adding to net income the value of price-level restatement for the concept of restatement or adjustment of paid-in capital and reserves for the year.
F-37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(w) | Employee benefits: |
(i) | Staff accrued vacations |
The annual costs of vacations and staff benefits are recognized on an accrual basis.
(ii) | Other short-term benefits |
The Bank has a yearly bonus plan for its employees based on their ability to meet objectives and their individual contribution to the Company’s results, consisting of a given number or portion of monthly salaries. It is provisioned for based on the estimated amount to be distributed.
(iii) | Staff severance indemnities |
Banco de Chile has recorded a liability
for long-term severance indemnities in accordance with employment contracts it has with certain employees. The liability, which is payable
to specified retiring employees with over
Obligations for this defined benefits
plan are valued according to the projected unit credit actuarial valuation method, using inputs such as staff turnover rates, expected
salary growth in wages and probability that this benefit will be used, discounted at current long-term rates (
The discount rate used corresponds
to the rate of
Actuarial gains and losses are recognized as Other Comprehensive Income at the end of each reporting period. There are no past service costs that would have to be recognized by the Bank.
(x) | Equity reserves: |
The equity reserves recorded in the Bank’s Statement of Financial Position include:
i. | Reserves from Earnings: This item includes all the reserves that were originated from earnings and that by legal or statutory dispositions, or agreements of the shareholders’ meeting, will not be distributed in the form of future dividends. |
ii. | Other reserves: This item includes all the reserves that do not come from earnings and that do not correspond to those indicated in previous items. |
iii. | Other comprehensive income: This item comprises changes in the fair value of cash flow hedges and financial instruments. |
F-38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(y) | Earnings per share: |
The basic earnings per share is determined by dividing the net income attributed to the Bank’s owners in a period and the weighted average number of shares outstanding during that period.
Diluted earnings per share are determined similarly to basic earnings, but the weighted average number of outstanding shares is adjusted to take into account the potential dilutive effect of the options on shares, warrants and convertible debt. As of December 31, 2022 and 2021, there are no dilutive items on basic earnings per share.
(z) | Cash and cash equivalents: |
The Consolidated Statement of Cash Flows shows the changes in cash and cash equivalents derived from operating activities, investment and financing activities during the year. The indirect method has been used in the preparation of this statement of cash flows.
For the preparation of Consolidated Financial Statements of Cash Flow, the following concepts have been considered:
Cash flows: Inflows and outflows of cash and cash equivalents, such as deposits with the Central Bank of Chile, deposits in domestic banks, and deposits in foreign banks.
(i) | Operating activities: corresponds to normal activities of the Bank, as well as other activities that cannot classify, like investing or financing activities. |
(ii) | Investing activities: correspond to the acquisition, sale or disposition other forms, of long-term assets and other investments that not include in cash and cash equivalent. |
(iii) | Financing activities: corresponds to the activities that produce changes in the amount and composition of the equity and the liabilities that are not included in the operating or investing activities. |
(aa) Segment reporting:
The Bank discloses information by segment in accordance with IFRS 8. The Bank’s operating segments are defined based on its different business units, considering the following factors:
(i) | That it develops business activities from which income is obtained and expenses are incurred (including income and expenses relating to transactions with other components of the same entity); |
(ii) | That its operating results are reviewed regularly by the entity’s highest decision-making authority for operating decisions, to determine resource allocation for the segment and evaluate its performance; and |
(iii) | That separate financial information is available. |
(ab) Fiduciary activities:
The Bank provides trust and other fiduciary services that result in the holding or investing of assets on behalf of the clients. Assets held in a fiduciary capacity are not reported in the financial statements, as they are not the assets of the Bank.
F-39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
2. | Summary of Significant Accounting Policies, continued: |
(ac) | Identifying and measuring impairment on non-financial assets |
The Bank assesses at each reporting date and on an ongoing basis whether there is an indication that an asset may be impaired. If any indication exists, or if annual impairment testing for an asset is required, the Bank estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s (“CGU”) fair value less costs to sell and its value in use. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, share prices and other available fair value indicators.
For assets, excluding goodwill, impairment losses recognized in prior years are assessed at each reporting date in case there are any indications that the loss has decreased or disappeared. A previously recognized impairment is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment was recognized. An impairment loss is reversed only to the extent that the book value of the asset does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Such reversal is recognized in the income statement.
Impairment losses relating to goodwill cannot be reversed in future periods.
3. | New and Amended Standards and Interpretations: |
Amendments that resulted from improvements to IFRS to the following standards did not have any significant impact on the accounting policies, financial position or performance of the Bank:
Annual Improvements to the IFRS Standards
2018-2020. IFRS 1 First-time Adoption of International Financial Reporting Standards - Affiliate as first time adopter: The amendment
allows a subsidiary that applies paragraph D16(a) of IFRS 1 to measure cumulative translation differences using the amounts reported by
its parent, based on the parent’s date of transition to IFRS. IFRS 9 Financial Instruments -
Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which specify the costs that an entity must include when evaluating whether a contract will cause losses, these costs include those that are directly related to the contract and may be incremental costs of fulfilling that contract, or an allocation of other costs that relate directly to the fulfillment of contracts
F-40
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
4. | Changes in Accounting policies, Estimates and Disclosures: |
a) | Changes in Estimates - Refinements to ECL models used for calculation |
COVID-19 pandemic and the various Goverment support measures resulted in an economic environment which differed significantly from the historical economic conditions upon which the impairment models were built. As a result, there was a greater need for management judgements to be applied alongside the use of models as of December 31, 2021.
During 2022 the direct impact of the pandemic on economic performance has reduced, resulting in the release of all material judgements required specifically to capture COVID-19 risks.
The assessment of SICRs and the measurement of ECLs required to be based on reasonable and supportable information that is available to an entity without undue cost or effort. The Bank has developed estimates based on the best available information about past events, current conditions and forecasts of economic conditions. In assessing forecast conditions, the Bank has considered the effects of COVID-19 and the government support measures that were taken. Indeed, in September 2022, the Bank completed a calibration of parameters, such as: a) PD models, considering more recent information concerning COVID-19 pandemic and including new macroeconomics, b) SICRs were adjusted, carrying out a more retrospective comparison of credit rating and c) improvements were made regarding the recognition of collateral, obtaining a more precise estimate of the expected credit loss. The impact of calibrations or refinements in the ECL models and assumptions resulted in an inmaterial amount.
b) | Changes in Accounting plan |
During 2022, changes were incorporated into the accounting plan, both in the coding of accounts and in their description. Said changes seek to improve the quality of financial information in order to facilitate the reading, understanding and comparison of the financial statements, along with providing the banking system with more detailed financial information. These changes also ensure that the financial statements comply with the standards of IAS 1 and other applicable accounting standards.
The impacts to these Consolidated Financial Statements according to the changes mentioned above are detailed below:
Consolidated Balance Sheet as of December 31, 2021
as of December 31, 2021 | ||||||||||||||||
Reported Balance | Reclassifications | New Balance | ||||||||||||||
MCh$ | MCh$ | Ref. | MCh$ | |||||||||||||
ASSETS | ||||||||||||||||
Cash and due from banks | ||||||||||||||||
Transactions in the course of collection | ||||||||||||||||
Derivative instruments | ( | ) | a | |||||||||||||
Financial assets held-for-trading | ( | ) | b | |||||||||||||
Financial assets held-for-trading at fair value through profit and loss: | ||||||||||||||||
Derivative financial instruments | a | |||||||||||||||
Debt financial instruments | b | |||||||||||||||
Others | b | |||||||||||||||
Non-trading financial assets mandatorily measured at fair value through profit or loss | ||||||||||||||||
Financial assets at fair value through profit or loss | ||||||||||||||||
Financial assets at fair value through other comprehensive income: | ||||||||||||||||
Debt financial instruments | ||||||||||||||||
Equity instruments | ||||||||||||||||
Derivative financial instruments for hedging purposes | a | |||||||||||||||
Financial assets at amortized cost: | ||||||||||||||||
Rights by resale agreements and securities lending | ||||||||||||||||
Debt financial instruments | ||||||||||||||||
Loans and advances to Banks | ||||||||||||||||
Loans to customers - Commercial loans | ||||||||||||||||
Loans to customers - Residential mortgage loans | ||||||||||||||||
Loans to customers - Consumer loans | ||||||||||||||||
Investments in other companies | ||||||||||||||||
Intangible assets | ||||||||||||||||
Property and equipment | ||||||||||||||||
Right-of-use assets | ||||||||||||||||
Current tax assets | ||||||||||||||||
Deferred tax assets | ||||||||||||||||
Other assets | ( | ) | c;d | |||||||||||||
Non-current assets and disposal groups held for sale | c | |||||||||||||||
Investments properties | ( | ) | d | |||||||||||||
TOTAL ASSETS |
F-41
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
4. | Changes in Accounting policies, Estimates and Disclosures, continued: |
as of December 31, 2021 | ||||||||||||||||
Reported Balance | Reclassifications | New Balance | ||||||||||||||
MCh$ | MCh$ | Ref. | MCh$ | |||||||||||||
LIABILITIES | ||||||||||||||||
Transactions in the course of payments | ||||||||||||||||
Obligations under repurchase agreements | ( | ) | e | |||||||||||||
Derivative instruments | ( | ) | a | |||||||||||||
Financial liabilities held for trading at fair value through profit or loss: | ||||||||||||||||
Derivative financial instruments | a | |||||||||||||||
Others | ||||||||||||||||
Financial liabilities designated as at fair value through profit or loss | ||||||||||||||||
Derivative Financial Instruments for hedging purposes | a | |||||||||||||||
Financial liabilities at amortized cost: | ||||||||||||||||
Current accounts and other demand deposits | ||||||||||||||||
Saving accounts and time deposits | ||||||||||||||||
Obligations by repurchase agreements and securities lending | e | |||||||||||||||
Borrowings from financial institutions | ||||||||||||||||
Debt financial instruments issued | ( | ) | f | |||||||||||||
Other financial obligations | ( | ) | g | |||||||||||||
Lease liabilities | ||||||||||||||||
Debt financial instruments issued for regulatory capital purposes | f | |||||||||||||||
Provisions | ||||||||||||||||
Provision for dividends | ||||||||||||||||
Provisions for contingent loan credit risk | ||||||||||||||||
Other provisions | h | |||||||||||||||
Currents tax liabilities | ||||||||||||||||
Deferred tax liabilities | ||||||||||||||||
Employee benefits | ||||||||||||||||
Other liabilities | ( | ) | g;h | |||||||||||||
Liabilities included in disposal groups held for sale | ||||||||||||||||
TOTAL LIABILITIES | ||||||||||||||||
EQUITY | ||||||||||||||||
Attributable to equity holders of the parent: | ||||||||||||||||
Capital | ||||||||||||||||
Reserves | ||||||||||||||||
Accumulated other comprehensive income | ||||||||||||||||
Retained earnings: | ||||||||||||||||
Retained earnings from previous periods | ||||||||||||||||
Income for the year | ||||||||||||||||
Less: Provision for dividends | ( | ) | ( | ) | ||||||||||||
Non-controlling interest | ||||||||||||||||
TOTAL EQUITY | ||||||||||||||||
TOTAL LIABILITIES AND EQUITY |
F-42
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
4. | Changes in Accounting policies, Estimates and Disclosures, continued: |
Reclassifications:
a) |
b) |
c) |
d) |
e) |
f) |
g) |
h) |
F-43
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
4. | Changes in Accounting policies, Estimates and Disclosures, continued: |
Consolidated Income Statement as of December 31, 2021
as of December 31, 2021 | ||||||||||||||
Reported Balance | Reclassifications | New Balance | ||||||||||||
MCh$ | MCh$ | Ref. | MCh$ | |||||||||||
STATEMENT OF INCOME | ||||||||||||||
Interest revenue | ||||||||||||||
Interest expense | ( | ) | ( | ) | ||||||||||
Net interest income | ||||||||||||||
Income from commissions | ||||||||||||||
Expense from commissions | ( | ) | ( | ) | ||||||||||
Net income from commissions | ||||||||||||||
Net Financial income (expense) | ( | ) | a | |||||||||||
Foreign exchange transactions, net | ( | ) | a | — | ||||||||||
Income attributable to investments in other companies | b | |||||||||||||
Result from non-current assets and disposal groups held for sale not admissible as discontinued operations | c | |||||||||||||
Other operating income | ( | ) | c;d | |||||||||||
TOTAL OPERATING INCOME, BEFORE EXPECTED CREDIT LOSSES | ( | ) | ||||||||||||
Expected credit losses | ( | ) | — | ( | ) | |||||||||
TOTAL OPERATING INCOME, NET OF EXPECTED CREDIT LOSSES | ( | ) | ||||||||||||
Expenses from salaries and employee benefits | ( | ) | ( | ) | ||||||||||
Administrative expenses | ( | ) | ( | ) | ||||||||||
Depreciation and amortization | ( | ) | ( | ) | ||||||||||
Impairment of non-financial assets | ( | ) | ( | ) | ||||||||||
Other operating expenses | ( | ) | c;d | ( | ) | |||||||||
TOTAL OPERATING EXPENSES | ( | ) | ( | ) | ||||||||||
Income attributable to associates | ( | ) | b | |||||||||||
NET OPERATING INCOME | ||||||||||||||
Income taxes | ( | ) | ( | ) | ||||||||||
NET INCOME FOR THE YEAR |
Reclassifications:
a) |
b) |
c) |
d) |
During the year ended December 31, 2022, there have been no other significant accounting changes that affect the presentation of these Consolidated Financial Statements.
F-44
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
5. | Relevant Events: |
(a) | On January 27, 2022, the Board of Directors of Banco de Chile agreed to convene an Ordinary Shareholders Meeting on March 17, 2022 in order to propose, among other matters, the following: |
1. | The following distribution of profits for the year ended on December 31, 2021: |
i. | Deduct and withhold from the net income of the year, an amount equivalent to the effect of inflation of the paid capital and reserves according to the variation of the Consumer Price Index that occurred between November 2020 and November 2021, amounting to Ch$ |
ii. | Distribute in the form of a dividend the remaining liquid profit, corresponding to a dividend of Ch$ |
Consequently,
the distribution as dividend of
2. | The shareholders who choose to, may at their option apply all or part of their dividend to the optional and transitory taxation regime that contemplates a substitute tax payment for the final taxes, called ISFUT (for its Spanish initials), in accordance with the transitory article 25 of Law No. 21,210. |
3. | The dividend, if approved by the Meeting, would be paid on March 31, 2022. |
(b) | On July 19, 2022, the Liquidation Commission of the subsidiary Banchile Securitizadora S.A. en Liquidación agreed to approve in all its parts the end of the liquidation process, the final account and the distribution of capital to its shareholders, according to its balance sheet as of June 30, 2022. This return of capital to each of the shareholders was materialized on July 29, 2022. |
(c) | On September 30, 2022, as reported by an essential event dated November 30, 2021, Banco de Chile, together with the rest of the shareholder banks of the banking support company “Operadora de Tarjeta de Crédito Nexus S.A.” (hereinafter, “Nexus”) reached an agreement with Minsait Payments Systems Chile S.A. (a subsidiary of the Spanish company Indra Sistemas S.A.) for the sale of |
Having
fulfilled the conditions for the closing of the Transaction, on September 30, 2022, the closing of the same has been carried out and,
consequently, Minsait Payments Systems Chile S.A. has acquired
As a result of the foregoing, Minsait, Payments Systems Chile S.A. has taken control of Nexus and Banco de Chile together with the rest of the shareholder banks have ceased to be shareholders of Nexus.
F-45
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
5. | Relevant Events, continued: |
(d) | During the year 2022 Banco de Chile reported as essential fact the following placements in the local market of senior, dematerialized and bearer bonds issued by Banco de Chile and registered in the Securities Registry of the Financial Market Commission: |
Date | Registration number in the Securities Registry | Serie | Amount | Currency | Maturity date | Average rate | ||||||||||
CN | UF | % | ||||||||||||||
CO | UF | % | ||||||||||||||
CQ | UF | % | ||||||||||||||
CK | UF | % | ||||||||||||||
CM | UF | % | ||||||||||||||
DV | CLP | % | ||||||||||||||
DV | CLP | % | ||||||||||||||
DU | CLP | % | ||||||||||||||
BU | UF | % | ||||||||||||||
CM | UF | % | ||||||||||||||
CL | UF | % | ||||||||||||||
CM | UF | % | ||||||||||||||
GJ | UF | % | ||||||||||||||
CJ | UF | % | ||||||||||||||
CJ | UF | % | ||||||||||||||
GK | UF | % |
(e) | On November 7, 2022, the subsidiary Banchile Administradora General de Fondos S.A. (“Banchile AGF”) informed by essential fact the following: |
In Extraordinary Board Meeting No. 9, the Board of Directors of the company adopted the following resolutions that will become effective as of the same date:
i) | Accept the resignation from the position of Director presented by Mr. Julio Guzmán Herrera, who will assume as Advisor to the Board of Directors; |
ii) | Accept the resignation presented by the General Manager of Banchile AGF, Mr. Andrés Lagos Vicuña; |
iii) | Appoint Mr. Andrés Lagos Vicuña as Director of the company; and, |
iv) | Finally, to appoint Mrs. Gabriela Gurovich Camhi as General Manager of Banchile AGF. |
(f) | On December 16, 2022, Banco de Chile reported through an essential fact that on December 15, 2022, the Internal Revenue Service issued the certificate of termination of business of the subsidiary of Banco de Chile, Banchile Securitizadora S.A., Rut 96,932,010-K, dissolved entity. |
F-46
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
6. | Business Segment: |
For
management purposes, the Bank has organized its operations and commercial strategies into
Retail: | This segment focuses on individuals and small and medium-sized companies (SMEs) with annual sales up to UF |
Wholesale: | This segment focused on corporate clients and large companies, whose annual revenue exceed UF |
Treasury: | This segment includes the associated revenues to the management of the investment portfolio and the business of financial transactions and currency trading. |
Transactions with customers carried out by the Treasury are reflected in the respective aforementioned segments. These products are highly transaction-focused and include foreign exchange transactions, derivatives and financial instruments in general, among others.
Subsidiaries: | Corresponds to the businesses generated by the companies controlled by the Bank, which carry out activities complementary to the bank business. The companies that comprise this segment are: |
● | Banchile Administradora General de Fondos S.A. |
● | Banchile Asesoría Financiera S.A. |
● | Banchile Corredores de Seguros Ltda. |
● | Banchile Corredores de Bolsa S.A. |
● | Banchile Securitizadora S.A. en Liquidación (*) |
● | Socofin S.A. |
(*) | See Note No. 5, letter (b). |
F-47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
6. | Business Segment, continued: |
The financial information used to measure the performance of the Bank’s business segments is not comparable with similar information from other financial institutions because each institution relies on its own definitions. The accounting policies applied to the segments is the same as those described in the summary of accounting principles. The Bank obtains the majority of the results from: interest, indexation and commissions and financial operations and changes, discounting provisions for credit risk and operating expenses. Management relies mainly on these concepts to evaluate the performance of the segments and make decisions about the goals and allocations of resources of each unit. Although the results of the segments reconcile with those of the Bank at the total level, this is not necessarily the case in terms of the different concepts, given that management is measured and controlled individually and not on a consolidated basis, applying the following criteria:
● | The net interest margin of loans and deposits is obtained aggregating the net financial margins of each individual operation of credit and uptake made by the Bank. For these purposes, the volume of each operation and its contribution margin are considered, which in turn corresponds to the difference between the effective rate of the customer and the internal transfer price established according to the term and currency of each operation. Additionally, the net margin includes the result of interest and indexation from the accounting hedges. |
● | Provisions for credit risk are determined at the customer and counterparty level based on the characteristics of each of their operations. |
● | The capital and financial impacts on outcome have been assigned to each segment based on the risk-weighted assets. |
● | Operational expenses are recognized at the level of the different functional areas of the Bank. Then, for the business segment purposes, the allocation of expenses from functional areas is done using different allocation criteria, at the level of the different concepts and expense items. |
The
Bank did not enter into transactions with any particular customer or third party that collectively generated more than
Taxes are managed at the consolidated level and are not allocated to business segments.
F-48
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
6. | Business Segments, continued: |
As of December 31, 2022 | ||||||||||||||||||||||||||||||||
Retail | Wholesale | Treasury | Subsidiaries | Subtotal | Reclassifications
and adjustments to conform IFRS | Total | ||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | Note | MCh$ | |||||||||||||||||||||||||
Net interest income and UF indexation | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Net commissions income | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Net financial income | ||||||||||||||||||||||||||||||||
Other income | ( | ) | ||||||||||||||||||||||||||||||
Income attributable to investments in other companies | ( | ) | ||||||||||||||||||||||||||||||
Operating income, before expected credit losses | (1) | |||||||||||||||||||||||||||||||
Expenses for expected credit losses | ( | ) | ( | ) | ( | ) | ( | ) | (2) | ( | ) | |||||||||||||||||||||
Total operating income, after expected credit losses | ||||||||||||||||||||||||||||||||
Expenses from salaries and employee benefits | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
Administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
Depreciation and amortization | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
Impairment of non-financial assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
Other operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
Total operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | (3) | ( | ) | |||||||||||||||||||
Income from operations | ||||||||||||||||||||||||||||||||
Income taxes | ( | ) | ( | ) | (4) | ( | ) | |||||||||||||||||||||||||
Income after income taxes | ||||||||||||||||||||||||||||||||
Assets | ( | ) | ||||||||||||||||||||||||||||||
Current and deferred taxes | ( | ) | ||||||||||||||||||||||||||||||
Total assets | ( | ) | (5) | |||||||||||||||||||||||||||||
Liabilities | ( | ) | ||||||||||||||||||||||||||||||
Current and deferred taxes | ||||||||||||||||||||||||||||||||
Total liabilities | ( | ) | (6) |
F-49
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
6. | Business Segments, continued: |
Reclassifications and adjustments to conform IFRS
(1) | The total effect due to the elimination adjustments to conform the total operating revenue is MCh$( |
(2) | The total effect relates to IFRS adjustments of MCh$ |
(3) | The total effect due to the elimination adjustments to conform total operating expenses is MCh$ |
(4) | The total effect relates to IFRS adjustments of MCh$( |
(5) | The total effect due to the elimination adjustments to conform the consolidated financial position data in assets is MCh$( |
(6) | The total effect due to the elimination adjustments to conform the consolidated financial position data in liabilities is MCh$( |
F-50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
6. | Business Segments, continued: |
As of December 31, 2021 | ||||||||||||||||||||||||||||||||
Retail | Wholesale | Treasury | Subsidiaries | Subtotal | Reclassifications
and adjustments to conform IFRS | Total | ||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | Note | MCh$ | |||||||||||||||||||||||||
Net interest income and UF indexation | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Net commissions income | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Net financial income | ||||||||||||||||||||||||||||||||
Other income | ( | ) | ||||||||||||||||||||||||||||||
Income attributable to investments in other companies | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Operating income, before expected credit losses | (1) | |||||||||||||||||||||||||||||||
Expenses for expected credit losses | ( | ) | ( | ) | ( | ) | ( | ) | (2) | ( | ) | |||||||||||||||||||||
Total operating income, after expected credit losses | ||||||||||||||||||||||||||||||||
Expenses from salaries and employee benefits | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
Administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
Depreciation and amortization | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
Impairment of non-financial assets | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
Other operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
Total operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | (3) | ( | ) | |||||||||||||||||||
Income from operations | ||||||||||||||||||||||||||||||||
Income taxes | ( | ) | ( | ) | (4) | ( | ) | |||||||||||||||||||||||||
Income after income taxes | ||||||||||||||||||||||||||||||||
Assets | ( | ) | ||||||||||||||||||||||||||||||
Current and deferred taxes | ( | ) | ||||||||||||||||||||||||||||||
Total assets | ( | ) | (5) | |||||||||||||||||||||||||||||
Liabilities | ( | ) | ||||||||||||||||||||||||||||||
Current and deferred taxes | ( | ) | ||||||||||||||||||||||||||||||
Total liabilities | ( | ) | (6) |
F-51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
6. | Business Segments, continued: |
Reclassifications and adjustments to conform IFRS
(1) | The total effect due to the elimination adjustments to conform the total operating revenue is MCh$( |
(2) | The total effect relates to IFRS adjustments and reclassifications of MCh$ |
(3) | The total effect due to the elimination adjustments to conform total operating expenses is MCh$ |
(4) | The total effect relates to IFRS adjustments of MCh$( |
(5) | The total effect due to the elimination adjustments to conform the consolidated financial position data
in assets is MCh$( |
(6) | The total effect due to the elimination adjustments to conform the consolidated financial position data
in liabilities is MCh$( |
F-52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
6. | Business Segments, continued: |
As of December 31, 2020 | ||||||||||||||||||||||||||||||||
Retail | Wholesale | Treasury | Subsidiaries | Subtotal | Reclassifications and adjustments to conform IFRS | Total | ||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | Note | MCh$ | |||||||||||||||||||||||||
Net interest income and UF indexation | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Net commissions income | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Net financial income | ( | ) | ||||||||||||||||||||||||||||||
Other income | ( | ) | ||||||||||||||||||||||||||||||
Income attributable to investments in other companies | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
Operating income, before expected credit losses | ( | ) | (1) | |||||||||||||||||||||||||||||
Expenses for expected credit losses | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | (2) | ( | ) | |||||||||||||||||
Total operating income, after expected credit losses | ( | ) | ||||||||||||||||||||||||||||||
Expenses from salaries and employee benefits | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
Administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
Depreciation and amortization | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
Impairment of non-financial assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
Other operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
Total operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | (3) | ( | ) | |||||||||||||||||||
Income from operations | ( | ) | ||||||||||||||||||||||||||||||
Income taxes | ( | ) | (4) | ( | ) | |||||||||||||||||||||||||||
Income after income taxes | ( | ) | ||||||||||||||||||||||||||||||
Assets | ( | ) | ||||||||||||||||||||||||||||||
Current and deferred taxes | ( | ) | ||||||||||||||||||||||||||||||
Total assets | ( | ) | (5) | |||||||||||||||||||||||||||||
Liabilities | ( | ) | ||||||||||||||||||||||||||||||
Current and deferred taxes | ||||||||||||||||||||||||||||||||
Total liabilities | ( | ) | (6) |
F-53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
6. | Business Segments, continued: |
Reclassifications and adjustments to conform IFRS
(1) | The total effect due to the elimination adjustments to conform the total operating revenue is MCh$( |
(2) | The total effect relates to IFRS adjustments of MCh$( |
(3) | The total effect due to the elimination adjustments to conform total operating expenses is MCh$ |
(4) | The total effect relates to IFRS adjustments of MCh$ |
(5) | The total effect due to the elimination adjustments to conform the consolidated financial position data
in assets is MCh$( |
(6) | The total effect due to the elimination adjustments to conform the consolidated financial position data
in liabilities is MCh$( |
F-54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
7. | Cash and Cash Equivalents: |
Details of cash and cash equivalents and its reconciliation to the Statement of Cash Flows at each year-end are as follows:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Cash and due from banks: | ||||||||
Cash (*) | ||||||||
Deposit in Chilean Central Bank (*) | ||||||||
Deposits in domestic banks | ||||||||
Deposits in abroad banks | ||||||||
Subtotal - Cash and due from banks | ||||||||
Net transactions in the course of settlement (**) | ||||||||
Others cash equivalents (***) | ||||||||
Total cash and cash equivalents |
The detail of the balances included under net ongoing clearance operations is as follows:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Assets | ||||||||
Documents drawn on other banks (clearing) | ||||||||
Funds receivable | ||||||||
Subtotal - assets | ||||||||
Liabilities | ||||||||
Funds payable | ( | ) | ( | ) | ||||
Subtotal - liabilities | ( | ) | ( | ) | ||||
Net transactions in the course of settlement |
(*) |
(**) |
(***) |
F-55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
8. | Financial Assets Held for Trading at Fair Value through Profit or Loss: |
The item detail is as follows:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Financial derivative contracts | ||||||||
Debt Financial Instruments | ||||||||
Other financial instruments | ||||||||
Total |
(a) | The Bank as of December 31, 2022 and 2021, maintains the following portfolio of derivative instruments: |
Notional amount of contract with final expiration date in | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Demand | Up to 1 month | Over 1 month and up to 3 months | Over 3 months and up to 12 months | Over 1 year and up to 3 years | Over 3 year and up to 5 years | Over 5 years | Total | Fair Value Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Currency forward | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swap | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate and cross currency swap | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Call currency options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Put currency options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total |
F-56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
8. | Financial Assets Held for Trading at Fair Value through Profit or Loss, continued: |
b) | The detail of Debt Financial Instruments is the following: |
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Instruments issued by the Chilean Government and Central Bank of Chile | ||||||||
Debt financial instruments from the Central Bank of Chile | ||||||||
Bonds and Promissory notes from the General Treasury of the Republic | ||||||||
Other instruments issued in Chile | ||||||||
Debt financial instruments from other domestic banks | ||||||||
Total |
Under “Instruments issued by the
Chilean Government and Central Bank of Chile” are maintained instruments to comply with the requirements for the constitution of
technical reserve for an amount equivalent to Ch$
Under “Other instruments issued
in Chile” are included instruments sold under repurchase agreements to clients and financial institutions by an amount of Ch$
Additionally, the Bank has investments in own-issued letters of credit
for an amount equivalent to Ch$
c) | The detail of other financial instruments is as follows: |
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Mutual fund investments | ||||||||
Funds managed by related companies | ||||||||
Funds managed by third-party | ||||||||
Equity instruments | ||||||||
Domestic equity instruments | ||||||||
Foreign equity instruments | ||||||||
Loans originated and acquired by the entity | ||||||||
Loans and advances to banks | ||||||||
Commercial loans | ||||||||
Residential mortgage loans | ||||||||
Consumer loans | ||||||||
Others | ||||||||
Total |
F-57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
9. | Financial Assets at Fair Value through Other Comprehensive Income: |
As of December 31, 2022 and 2021, financial assets are detailed as follows:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Debt Financial Instruments | ||||||||
Equity Instruments | ||||||||
Total |
(a) | Debt Financial Instruments at fair value through OCI: |
As of December 31, 2022 and 2021 the detail of debt financial instruments is as follows:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Instruments issued by the Chilean Government and Central Bank of Chile | ||||||||
Debt financial instruments from the Central Bank of Chile | ||||||||
Bonds and Promissory notes from the Chilean Government | ||||||||
Other fiscal debt financial instruments | ||||||||
Other Instruments Issued in Chile | ||||||||
Debt financial instruments from other domestic banks | ||||||||
Bonds and trade effects from domestic companies | ||||||||
Other debt financial instruments issued in the country | ||||||||
Instruments Issued Abroad | ||||||||
Financial instruments from foreign Central Banks | ||||||||
Financial instruments from foreign governments and fiscal entities | ||||||||
Debt financial instruments from other foreign banks | ||||||||
Bonds and trade effects from foreign companies | ||||||||
Other debt financial instruments issued abroad | ||||||||
Total |
“Instruments issued by the Chilean
Government and Central Bank of Chile” include instruments sold under repurchase agreements to clients and financial institutions
for an amount of Ch$
Under the same item, instruments that
guarantee margins for cleared derivatives transactions are classified through Comder Contraparte Central S.A. (Chilean clearing-house)
for an amount of Ch$
Under “Other Instruments Issued
in Chile” are classified instruments delivered as collateral as part of FCIC program for an approximate amount of Ch$
As
of December 31, 2022 the credit impairment for debt instruments at fair value through other comprehensive income was Ch$
F-58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
9. | Financial Assets at Fair Value through Other Comprehensive Income, continued: |
(a.1) | The credit ratings of the issuers of debt instruments as of December 31, 2022 and 2021, are as follows: |
As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||||||||
Stage 1 Individual | Stage 2 Individual | Stage 3 Individual | Total Individual | Stage 1 Individual | Stage 2 Individual | Stage 3 Individual | Total Individual | |||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||
Debt Instrument | ||||||||||||||||||||||||||||||||
Investment grade | ||||||||||||||||||||||||||||||||
Non-investment grade | ||||||||||||||||||||||||||||||||
Without rating | ||||||||||||||||||||||||||||||||
Total |
(a.2) | Analysis of changes in the fair value and corresponding allowance for ECL by stage for debt instruments measured at FVOCI as of December 31, 2022 and 2021, is as follows: |
Stage 1 Individual | Stage 2 Individual | Stage 3 Individual | Total | |||||||||||||||||||||||||||||
Fair value MCh$ | ECL MCh$ | Fair value MCh$ | ECL MCh$ | Fair value MCh$ | ECL MCh$ | Fair value MCh$ | ECL MCh$ | |||||||||||||||||||||||||
Balance as of January 1, 2021 | ||||||||||||||||||||||||||||||||
Net change on Balance * | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
Change in fair value | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
Transfer to Stage 1 | ||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Transfer to Stage 3 | ||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year ** | ||||||||||||||||||||||||||||||||
Impact of net re-measurement of year-end ECL | ( | ) | ||||||||||||||||||||||||||||||
Amounts written off | ||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ||||||||||||||||||||||||||||||||
Balance as of December 31, 2021 | ||||||||||||||||||||||||||||||||
Balance as of January 1, 2022 | ||||||||||||||||||||||||||||||||
Net change on Balance * | ( | ) | ||||||||||||||||||||||||||||||
Change in fair value | ||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year ** | ||||||||||||||||||||||||||||||||
Impact of net re-measurement of year-end ECL | ||||||||||||||||||||||||||||||||
Amounts written off | ||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ||||||||||||||||||||||||||||||||
Balance as of December 31, 2022 |
* |
** |
F-59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
9. | Financial Assets at Fair Value through Other Comprehensive Income, continued: |
(b) | Equity instruments at fair value through OCI: |
As of December 31, 2022 and 2021 the detail of equity instruments is as follows:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Equity instruments issued in Chile | ||||||||
Equity instruments issued by foreign institutions | ||||||||
Total |
The equity investments issued by foreign institutions represent shares of currency exchange offices and servicing companies that the Bank is obliged to hold in order to benefit from these services. Shares that do not have an active market and their value cannot be reliably measured are presented at cost, the difference between cost and fair value is not expected to be significant.
(c) | Realized and unrealized profits: |
As
of December 31, 2022, the portfolio of debt financial instruments includes an accumulated unrealized gain of Ch$
Gross realized gains and losses on the sale of debt financial instruments, as of December 31, 2022, 2021 and 2020 are reported under “Net Financial income (expense)” (See Note No. 31). The changes in realized gains and losses at the end of both periods are the following:
2022 | 2021 | 2020 | ||||||||||
MCh$ | MCh$ | MCh$ | ||||||||||
Net gain (loss) on financial assets before income tax | ( | ) | ( | ) | ||||||||
Income tax on other comprehensive income | ||||||||||||
Net effect in equity | ( | ) | ( | ) |
F-60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
10. | Derivative Financial Instruments for hedging purposes: |
(a.1) As of December 31, 2022 and 2021, the Bank has the following portfolio of financial derivative instruments for accounting hedging purposes:
Notional amount of contract with final expiration date in | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Demand | Up to 1 month | Over 1 month and up to 3 months | Over 3 months and up to 12 months | Over 1 year and up to 3 years | Over 3 year and up to 5 years | Over 5 years | Total | Fair value Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives held for fair value hedges | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Currency forward | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swap | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swap and cross currency swap | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Call currency options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Put currency options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash flow hedge derivatives | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Currency forward | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swap | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swap and cross currency swap | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Call currency options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Put currency options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total |
F-61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
10. | Derivative Financial Instruments for hedging purposes, continued: |
(a.2) As of December 31, 2022 and 2021, the Bank has the following debt portfolio of financial derivative instruments for accounting hedging purposes:
Notional amount of contract with final expiration date in | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Demand | Up to 1 month | Over 1 month and up to 3 months | Over 3 months and up to 12 months | Over 1 year and up to 3 years | Over 3 year and up to 5 years | Over 5 years | Total | Fair value Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives held for fair value hedges | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Currency forward | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swap | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swap and cross currency swap | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Call currency options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Put currency options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash flow hedge derivatives | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Currency forward | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swap | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swap and cross currency swap | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Call currency options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Put currency options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total |
F-62
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
10. | Derivative Financial Instruments for hedging purposes, continued: |
(b) | Fair Value Hedges: |
The Bank uses cross-currency swaps and interest rate swaps to hedge its exposure to changes in the fair value of the hedged elements attributable to interest rates. The aforementioned hedge instruments change the effective cost of long-term issuances from a fixed interest rate to a variable interest rate, decreasing the duration and modifying the sensitivity to the shortest segments of the curve.
Below is a detail of the hedged elements and hedge instruments under fair value hedges as of December 31, 2022 and 2021:
As of December 31, | ||||||||
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Notional Amounts | ||||||||
Hedged element | ||||||||
Commercial loans | ||||||||
Corporate bonds | ||||||||
Hedge instrument | ||||||||
Cross currency swap | ||||||||
Interest rate swap |
(c) | Cash flow Hedges: |
(c.1) The Bank uses cross currency swaps to hedge the risk from variability of cash flows attributable to changes in the interest rates and foreign exchange of borrowings from banks and bonds issued abroad in US Dollars, Hong Kong dollars, Swiss Franc, Japanese Yens, Peruvian Sol, Australian Dollars, Euros and Norwegian kroner. The cash flows of the cross currency swaps equal the cash flows of the hedged items, which modify uncertain cash flows to known cash flows derived from a fixed interest rate.
Additionally, these cross currency swap contracts used to hedge the risk from variability of the Unidad de Fomento (“CLF”) in assets flows denominated in CLF until a nominal amount equal to the portion notional of the hedging instrument CLF, whose readjustment daily impact the item “Interest Revenue” of the Income Financial Statements.
F-63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
10. | Derivative Financial Instruments for hedging purposes, continued: |
(c) | Cash flow Hedges, continued: |
(c.2) Below are the cash flows of borrowings from banks and bonds issued abroad objects of these hedges and the cash flows of the asset part of the derivative:
Demand | Up to 1 month | Over 1 month and up to 3 months | Over 3 months and up to 12 months | Over 1 year and up to 3 years | Over 3 years and up to 5 years | Over 5 years | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||||||||||||||||||||||||||
Hedge element | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Outflows: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate Bond EUR | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
Corporate Bond HKD | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
Corporate Bond PEN | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Corporate Bond CHF | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
Corporate Bond USD | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
Obligation USD | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate Bond JPY | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Corporate Bond AUD | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Corporate Bond NOK | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
Hedge instrument | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inflows: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cross Currency Swap EUR | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cross Currency Swap HKD | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cross Currency Swap PEN | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cross Currency Swap CHF | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cross Currency Swap USD | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cross Currency Swap USD | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cross Currency Swap JPY | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cross Currency Swap AUD | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cross Currency Swap NOK | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net cash flows |
F-64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
10. | Derivative Financial Instruments for hedging purposes, continued: |
(c) | Cash flow Hedges, continued: |
(c.2) | Below are the cash flows of the underlying assets portfolio and the cash flow of the liability part of the derivatives: |
Demand | Up to 1 month | Over 1 month and up to 3 months | Over 3 months and up to 12 months | Over 1 year and up to 3 years | Over 3 years and up to 5 years | Over 5 years | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||||||||||||||||||||||||||
Hedge element | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inflows: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash flows in CLF | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hedge instrument | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Outflows: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cross Currency Swap HKD | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Cross Currency Swap PEN | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Cross Currency Swap JPY | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Cross Currency Swap USD | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
Cross Currency Swap CHF | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
Cross Currency Swap EUR | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
Cross Currency Swap AUD | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Cross Currency Swap NOK | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
Forward UF | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net cash flows |
F-65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
10. | Derivative Financial Instruments for hedging purposes, continued: |
(c) | Cash flow Hedges, continued: |
With respect to CLF assets hedged; these are revalued monthly according to the variation of the UF, which is equivalent to monthly reinvest the assets until maturity of the relationship hedging.
(c.3) | The unrealized results generated during the year 2022 by
those derivative contracts that conform the hedging instruments in this cash flow hedging strategy, have been recorded with charge to
equity amounting to Ch$ |
The accumulated balance for this concept
as of December 31, 2022 corresponds to a charge in equity amounted to Ch$
(c.4) | The effect of the cash flow hedging derivatives that offset the result of the hedged instruments corresponds to a debit to income of Ch$ |
(c.5) | As of December 31, 2022 and 2021, there was no inefficiency in the Bank’s cash flow hedge, because as both the hedge item and hedge instruments are mirrors of the other, all variation of value attributable to rate and revaluation components are entirely netted. |
(c.6) | As of December 31, 2022, 2021 and 2020, the Bank had no hedges of net investments in foreign businesses. |
11. | Financial assets at amortized cost: |
The item detail is as follows:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Rights by resale agreements and securities lending | ||||||||
Debt financial instruments | ||||||||
Loans and advances to Banks | ||||||||
Loans to customers: | ||||||||
Commercial loans | ||||||||
Residential mortgage loans | ||||||||
Consumer loans | ||||||||
Provisions established for credit risk: | ||||||||
Loans and advances to Banks provisions | ( | ) | ( | ) | ||||
Commercial loans provisions | ( | ) | ( | ) | ||||
Mortgage loans provisions | ( | ) | ( | ) | ||||
Consumer loans provisions | ( | ) | ( | ) | ||||
Total |
F-66
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
11. | Financial assets at amortized cost, continued: |
(a) | Rights arising from resale agreements: |
The Bank provides financing to its customers through resale agreements and securities lending, in which the financial instrument serves as collateral. As of December 31, 2022 and 2021, the Bank has the following receivables resulting from such transactions:
Demand | Up to 1 month | Over
1 month and up to 3 months | Over
3 months and up to 12 months | Over
1 year and up to 3 years | Over
3 years and up to 5 years | Over 5 years | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||||||||||||||||||||||||||
Instruments issued by the Chilean Governments and Central Bank of Chile | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Central Bank bonds | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Central Bank promissory notes | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other instruments issued by the Chilean Government and Central Bank of Chile | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other Financial Instruments issued in Chile | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposit promissory notes from domestic banks | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage bonds from domestic banks | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Bonds from domestic banks | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits in domestic banks | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Bonds from other Chilean companies | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other instruments issued in Chile | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial Instruments issued by foreign institutions | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Instruments from foreign governments or Central Bank | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other instruments from foreign | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total |
Purchased Instruments:
The
Bank and its subsidiaries have received financial instruments that they can sell or give as collateral in case the owner of these instruments
enters into default or in bankruptcy. As of December 31, 2022 the fair value of the instruments received amounts to Ch$
F-67
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
11. | Financial assets at amortized cost, continued: |
(b) | Debt financial instruments: |
At the end of each period, the balances presented under this item are as follows:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Instruments issued by the Chilean Government and Central Bank of Chile | ||||||||
Debt financial instruments from the Central Bank of Chile | ||||||||
Bonds and promissory notes from the General Treasury of the Republic | ||||||||
Other fiscal debt financial instruments | ||||||||
Other Finacial Instruments issued in Chile | ||||||||
Debt financial instruments from other domestic banks | ||||||||
Bonds and trade effects from domestic companies | ||||||||
Other debt financial instruments issued in the country | ||||||||
Financial Instruments issued Abroad | ||||||||
Debt financial instruments from foreign Central Banks | ||||||||
Debt financial instruments from foreign governments and fiscal entities | ||||||||
Debt financial instruments from other foreign banks | ||||||||
Bonds and trade effects from foreign companies | ||||||||
Other debt financial instruments issued abroad | ||||||||
Accumulated Impairment Value of Financial Assets at Amortized Cost Debt Financial Instruments | ||||||||
Financial assets with no significant increase in credit risk since initial recognition (phase 1) | ||||||||
Financial assets with a significant increase in credit risk since initial recognition, but without credit impairment (phase 2) | ||||||||
Financial assets with credit impairment (phase 3) | ||||||||
Total |
Under
Instruments of the Government and the Central Bank of Chile, instruments are classified pledged as collateral as part of the FCIC program
are included for an approximate amount of Ch$
(b.1) | The credit ratings of the issuers of instruments assets at amortized cost as of December 31, 2022 and 2021, are as follows: |
As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||||||||
Stage
1 | Stage
2 | Stage
3 | Total | Stage
1 | Stage
2 | Stage
3 | Total | |||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||
Debt Instrument | ||||||||||||||||||||||||||||||||
Investment grade | ||||||||||||||||||||||||||||||||
Non-investment grade | ||||||||||||||||||||||||||||||||
Without rating | — | |||||||||||||||||||||||||||||||
Total |
F-68
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
11. | Financial assets at amortized cost, continued: |
(b.2) | Analysis of changes in gross carrying amount and corresponding allowance for ECL by stage for financial instruments measured at amortized cost as of December 31, 2022 and 2021, is as follows: |
Stage 1 Individual |
Stage 2 Individual |
Stage 3 Individual |
Total | |||||||||||||||||||||||||||||
Gross carrying amount MCh$ |
ECL MCh$ |
Gross carrying amount MCh$ |
ECL MCh$ |
Gross carrying amount MCh$ |
ECL MCh$ |
Gross carrying amount MCh$ |
ECL MCh$ |
|||||||||||||||||||||||||
Balance as of January 1, 2022 | ||||||||||||||||||||||||||||||||
Net change on Balance * | ||||||||||||||||||||||||||||||||
Change in fair value | ||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year ** | ||||||||||||||||||||||||||||||||
Impact of net re-measurement of year-end ECL | ||||||||||||||||||||||||||||||||
Amounts written off | ||||||||||||||||||||||||||||||||
Balance as of December 31, 2022 |
Stage
1 | Stage
2 | Stage
3 | Total | |||||||||||||||||||||||||||||
Gross MCh$ | ECL MCh$ | Gross MCh$ | ECL MCh$ | Gross MCh$ | ECL MCh$ | Gross MCh$ | ECL MCh$ | |||||||||||||||||||||||||
Balance as of January 1, 2021 | ||||||||||||||||||||||||||||||||
Net change on Balance * | ||||||||||||||||||||||||||||||||
Change in fair value | ||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year ** | ||||||||||||||||||||||||||||||||
Impact of net re-measurement of year-end ECL | ||||||||||||||||||||||||||||||||
Amounts written off | ||||||||||||||||||||||||||||||||
Balance as of December 31, 2021 |
* |
** |
F-69
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
11. | Financial assets at amortized cost, continued: |
(c) | Loans and advances to Banks: At the end of each period, the balances presented under this item are as follows: | |
As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||
Assets before Allowances | Allowances established | Net assets | Assets before Allowances | Allowances established | Net assets | |||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||
Domestic Banks | ||||||||||||||||||||||||
Interbank loans of liquidity | ( | ) | ||||||||||||||||||||||
Interbank loans commercial | ||||||||||||||||||||||||
Current accounts overdrafts | ||||||||||||||||||||||||
Chilean exports foreign trade loans | ||||||||||||||||||||||||
Chilean imports foreign trade loans | ||||||||||||||||||||||||
Credits with third countries | ||||||||||||||||||||||||
Non-transferable deposits in domestic banks | ||||||||||||||||||||||||
Other debts with domestic banks | ||||||||||||||||||||||||
Foreign Banks | ||||||||||||||||||||||||
Interbank loans of liquidity | ||||||||||||||||||||||||
Interbank loans commercial | ( | ) | ( | ) | ||||||||||||||||||||
Current accounts overdrafts | ||||||||||||||||||||||||
Chilean exports foreign trade loans | ( | ) | ( | ) | ||||||||||||||||||||
Chilean imports foreign trade loans | ||||||||||||||||||||||||
Credits with third countries | ( | ) | ||||||||||||||||||||||
Current account deposits with foreign banks for derivatives transactions | ||||||||||||||||||||||||
Other non-transferable deposits with foreign banks | ||||||||||||||||||||||||
Other debts with foreign banks | ||||||||||||||||||||||||
Subtotal Domestic and Foreign Banks | ( | ) | ( | ) | ||||||||||||||||||||
Central Bank of Chile | ||||||||||||||||||||||||
Current account deposits for derivative transactions with a counterparty | ||||||||||||||||||||||||
Other deposits not available | ||||||||||||||||||||||||
Other receivables | ||||||||||||||||||||||||
Foreign Central Banks | — | — | — | |||||||||||||||||||||
Current account deposits for derivatives transactions | ||||||||||||||||||||||||
Other deposits not available | ||||||||||||||||||||||||
Other receivables | ||||||||||||||||||||||||
Subtotal Central Bank of Chile and Foreign Central Banks | ||||||||||||||||||||||||
Total | ( | ) | ( | ) |
F-70
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
11. | Financial assets at amortized cost, continued: |
(c.1) | Impairment allowance for due from banks: |
i. | The credit quality and the maximum exposure to credit risk based on the Bank’s internal credit rating system and year-end stage classification as of December 31, 2022 and 2021, is as follows: |
2022 | 2021 | |||||||||||||||||||||||||||||||
Stage 1 Individual | Stage 2 Individual | Stage 3 Individual | Total | Stage 1 Individual | Stage 2 Individual | Stage 3 Individual | Total | |||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||
Domestic Banks | ||||||||||||||||||||||||||||||||
Normal | ||||||||||||||||||||||||||||||||
Substandard | ||||||||||||||||||||||||||||||||
Non-complying | ||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||
Foreign Banks | ||||||||||||||||||||||||||||||||
Normal | ||||||||||||||||||||||||||||||||
Substandard | ||||||||||||||||||||||||||||||||
Non-complying | ||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||
Central Bank of Chile | ||||||||||||||||||||||||||||||||
Normal | ||||||||||||||||||||||||||||||||
Substandard | ||||||||||||||||||||||||||||||||
Non-complying | ||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||
Total |
F-71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
11. | Financial assets at amortized cost, continued: |
(c.2) Impairment allowance for due from banks, continued:
ii. | Changes in gross carrying amount and corresponding allowance for ECL by stage as of December 31, 2022 and 2021, is as follows: |
Changes as of December 31, 2022 | ||||||||||||||||||||||||||||||||
Stage 1 Individual | Stage 2 Individual | Stage 3 Individual | Total | |||||||||||||||||||||||||||||
Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | |||||||||||||||||||||||||
ECL allowances as of January 1, 2022 | ||||||||||||||||||||||||||||||||
Net change on Balance * | ||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year ** | ||||||||||||||||||||||||||||||||
Refinements to models used for calculation | ||||||||||||||||||||||||||||||||
Amounts written off | ||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
Total |
Changes as of December 31, 2021 | ||||||||||||||||||||||||||||||||
Stage 1 Individual | Stage 2 Individual | Stage 3 Individual | Total | |||||||||||||||||||||||||||||
Gross carrying MCh$ | ECL MCh$ | Gross carrying MCh$ | ECL MCh$ | Gross carrying MCh$ | ECL MCh$ | Gross carrying MCh$ | ECL MCh$ | |||||||||||||||||||||||||
ECL allowances as of January 1, 2021 | ||||||||||||||||||||||||||||||||
Net change on Balance * | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
Transfer to Stage 1 | ||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year ** | ||||||||||||||||||||||||||||||||
Refinements to models used for calculation | ||||||||||||||||||||||||||||||||
Amounts written off | ||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ||||||||||||||||||||||||||||||||
Total |
* |
** |
F-72
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
11. | Financial assets at amortized cost, continued: |
(d) | Loans to Customers: At the end of each period, the balances presented under this item are as follows: |
As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||
Assets before Allowances | Allowances established | Net assets | Assets before Allowances | Allowances established (2) | Net assets | |||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||
Commercial loans | ( | ) | ( | ) | ||||||||||||||||||||
Chilean exports foreign trade loans | ( | ) | ( | ) | ||||||||||||||||||||
Accrediting foreign trade loans negotiated in terms of Chilean imports | ( | ) | ( | ) | ||||||||||||||||||||
Chilean imports foreign trade loans | ( | ) | ( | ) | ||||||||||||||||||||
Current account debtors | ( | ) | ( | ) | ||||||||||||||||||||
Credit card debtors | ( | ) | ( | ) | ||||||||||||||||||||
Factoring transactions | ( | ) | ( | ) | ||||||||||||||||||||
Commercial lease transactions (1) | ( | ) | ( | ) | ||||||||||||||||||||
Student loans | ( | ) | ( | ) | ||||||||||||||||||||
Other loans and accounts receivable | ( | ) | ( | ) | ||||||||||||||||||||
Subtotal | ( | ) | ( | ) | ||||||||||||||||||||
Mortgage loans | ||||||||||||||||||||||||
Mortgage bonds | ( | ) | ( | ) | ||||||||||||||||||||
Endorsable mortgage mutual loans | ( | ) | ( | ) | ||||||||||||||||||||
Mortgage mutual financed with mortgage bonds | ||||||||||||||||||||||||
Other mortgage mutual loans | ( | ) | ( | ) | ||||||||||||||||||||
Residential lease transactions (1) | ||||||||||||||||||||||||
Other loans and accounts receivable | ( | ) | ( | ) | ||||||||||||||||||||
Subtotal | ( | ) | ( | ) | ||||||||||||||||||||
Consumer loans | ||||||||||||||||||||||||
Consumer loans in installments | ( | ) | ( | ) | ||||||||||||||||||||
Current account debtors | ( | ) | ( | ) | ||||||||||||||||||||
Credit card debtors | ( | ) | ( | ) | ||||||||||||||||||||
Consumer lease transactions (1) | ( | ) | ( | ) | ||||||||||||||||||||
Other loans and accounts receivable | ( | ) | ( | ) | ||||||||||||||||||||
Subtotal | ( | ) | ( | ) | ||||||||||||||||||||
Total | ( | ) | ( | ) |
(1) |
(2) |
F-73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
11. | Financial assets at amortized cost, continued: |
(d.1) Impairment allowance for loans to customers:
i. | The credit quality and the maximum exposure to credit risk based on the Bank’s internal credit rating system and year-end stage classification as of December 31, 2022 and 2021, are as follows: |
2022 | ||||||||||||||||||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | ||||||||||||||||||||||||||||||
Individual | Group | Individual | Group | Individual | Group | POCI | Total | |||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||||||||||
Normal | ||||||||||||||||||||||||||||||||
Substandard | ||||||||||||||||||||||||||||||||
Non-complying | ||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||
Mortgage loans | ||||||||||||||||||||||||||||||||
Normal | ||||||||||||||||||||||||||||||||
Non-complying | ||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||
Consumer loans | ||||||||||||||||||||||||||||||||
Normal | ||||||||||||||||||||||||||||||||
Non-complying | ||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||
Total |
2021 | ||||||||||||||||||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | ||||||||||||||||||||||||||||||
Individual | Group | Individual | Group | Individual | Group | POCI | Total | |||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||||||||||
Normal | ||||||||||||||||||||||||||||||||
Substandard | ||||||||||||||||||||||||||||||||
Non-complying | ||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||
Mortgage loans | ||||||||||||||||||||||||||||||||
Normal | ||||||||||||||||||||||||||||||||
Non-complying | ||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||
Consumer loans | ||||||||||||||||||||||||||||||||
Normal | ||||||||||||||||||||||||||||||||
Non-complying | ||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||
Total |
F-74
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
11. | Financial assets at amortized cost, continued: |
(d.1) Impairment allowance for loans to customers, continued:
ii. | Changes in gross carrying amount and corresponding allowance for ECL by stage as of December 31, 2022 and 2021, is as follows: |
Changes as of December 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individual | Group | Individual | Group | Individual | Group | POCI | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | |||||||||||||||||||||||||||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of January 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change on Balance * | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year ** | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Refinements to models used for calculation | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amounts written off | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Subtotal Commercial loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of January 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change on Balance * | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year ** | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Refinements to models used for calculation | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amounts written off | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal Mortgage loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of January 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change on Balance * | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year ** | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Refinements to models used for calculation | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amounts written off | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal Consumer loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total |
* |
** |
F-75
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
11. | Financial assets at amortized cost, continued: |
(d.1) Impairment allowance for loans to customers, continued:
Changes as of December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individual | Group | Individual | Group | Individual | Group | POCI | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | |||||||||||||||||||||||||||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of January 1, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change on Balance * | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year** | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Refinements to models used for calculation | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Amounts written off | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal Commercial loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of January 1, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change on Balance* | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year** | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Refinements to models used for calculation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amounts written off | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal Mortgage loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of January 1, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change on Balance * | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year** | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Refinements to models used for calculation | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amounts written off | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal Consumer loans | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total |
* | Net change between assets originated and assets repaid excluding write offs. |
** | Represents the change in the year-end ECLs of exposures that were transferred from one stage to another during the year. |
F-76
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
11. | Financial assets at amortized cost, continued: |
(e) | Loans by industry sector: |
The following table details the Bank’s loan portfolio (before allowances for loans losses) as of December 31, 2022 and 2021 by the customer’s industry sector and their respective economic activity:
Credit and Contingent loans Exposure | Allowances Established | |||||||||||||||||||||||||||||||||||||||||||||||
Domestic loans | Foreign loans | Total | Total | Domestic loans | Foreign loans | Total | Total | |||||||||||||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||||||||||||||
Loans and advances to Banks | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||||||||||||||||||||||||||
Agriculture and livestock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Fruit | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Forestry | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Fishing | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Mining | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Oil and natural gas | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Product manufacturing industries: | ||||||||||||||||||||||||||||||||||||||||||||||||
Foods, beverages and tobacco | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Textiles, leather goods and footwear | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Woods and furnitures | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Cellulose, Paper and printing | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Chemicals and petroleum products | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Metal, non-metal, machine or others | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Electricity, gas and water | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Residential construction | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Non-residential construction (office, civil engineering) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Wholesale | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Retail, restaurants and hotels | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Transport and storage | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Communications | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Financial services | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Business services | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Real estate services | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Student loans | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Government administration, defence and police force | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Social services and other community services | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Personal services | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Subtotal | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Residential mortgage loans | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Consumer loans | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Contingent loan exposure | ( | ) | ( | ) | ( | ) | ( | ) |
F-77
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
11. | Financial assets at amortized cost, continued: |
(f) | Loans and their provisions for loan losses by tranches of days past-due |
The concentration of credit risk by days past due is as follows:
Financial assets before allowances | Allowances established | Net financial assets | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||
Loans and advances to Banks | ||||||||||||||||||||||||
0 days | ( | ) | ( | ) | ||||||||||||||||||||
1 to 29 days | ( | ) | ( | ) | ||||||||||||||||||||
30 to 59 days | ||||||||||||||||||||||||
60 to 89 days | ||||||||||||||||||||||||
> = 90 days | ||||||||||||||||||||||||
Subtotal | ( | ) | ( | ) | ||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||
0 days | ( | ) | ( | ) | ||||||||||||||||||||
1 to 29 days | ( | ) | ( | ) | ||||||||||||||||||||
30 to 59 days | ( | ) | ( | ) | ||||||||||||||||||||
60 to 89 days | ( | ) | ( | ) | ||||||||||||||||||||
> = 90 days | ( | ) | ( | ) | ||||||||||||||||||||
Subtotal | ( | ) | ( | ) | ||||||||||||||||||||
Residential mortgage loans | ||||||||||||||||||||||||
0 days | ( | ) | ( | ) | ||||||||||||||||||||
1 to 29 days | ( | ) | ( | ) | ||||||||||||||||||||
30 to 59 days | ( | ) | ( | ) | ||||||||||||||||||||
60 to 89 days | ( | ) | ( | ) | ||||||||||||||||||||
> = 90 days | ( | ) | ( | ) | ||||||||||||||||||||
Subtotal | ( | ) | ( | ) | ||||||||||||||||||||
Consumer loans | ||||||||||||||||||||||||
0 days | ( | ) | ( | ) | ||||||||||||||||||||
1 to 29 days | ( | ) | ( | ) | ||||||||||||||||||||
30 to 59 days | ( | ) | ( | ) | ||||||||||||||||||||
60 a 89 days | ( | ) | ( | ) | ||||||||||||||||||||
> = 90 days | ( | ) | ( | ) | ||||||||||||||||||||
Subtotal | ( | ) | ( | ) | ||||||||||||||||||||
Total Loans | ( | ) | ( | ) |
F-78
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
11. | Financial assets at amortized cost, continued: |
(g) | Financial Lease Contracts: |
As of December 31, 2022 and 2021, the Bank’s scheduled cash flows to be received from financial leasing contracts have the following maturities as follows:
Total receivable | Unearned income | Net lease receivable (*) | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||
Due within one year | ( | ) | ( | ) | ||||||||||||||||||||
Due after 1 year but within 2 years | ( | ) | ( | ) | ||||||||||||||||||||
Due after 2 years but within 3 years | ( | ) | ( | ) | ||||||||||||||||||||
Due after 3 years but within 4 years | ( | ) | ( | ) | ||||||||||||||||||||
Due after 4 years but within 5 years | ( | ) | ( | ) | ||||||||||||||||||||
Due after 5 years | ( | ) | ( | ) | ||||||||||||||||||||
Total | ( | ) | ( | ) |
(*) |
The
Bank maintains financial lease operations associated with real estate, industrial machinery, vehicles and transportation equipment. These
leases contracts have an average term between
Other disclosures:
As of December 31, 2022, under the
Commercial Loans item, operations are maintained that guarantee obligations maintained with the Central Bank of Chile as part of the Loan
Increase Conditional Credit Facility (FCIC by its Spanish initials) program for an approximate amount of Ch$
F-79
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
11. | Financial assets at amortized cost, continued: |
(h) | Purchase of loan portfolio: |
During the year 2022 and 2021 no portfolio purchases were made.
(i) | Sale or transfer of credits from the loans to customers: |
During 2022 and 2021 the Bank has carried out transactions of sale or transfer of the loan portfolio according to the following:
As of December 31, 2022 | ||||||||||||||||
Carrying amount | Allowances released | Sale price | Effect
on income (loss) gain (*) | |||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||
Sale of outstanding loans | ( | ) | ||||||||||||||
Sale of write-off loans | ||||||||||||||||
Total | ( | ) |
As of December 31, 2021 | ||||||||||||||||
Carrying amount | Allowances released | Sale price | Effect
on income (loss) gain (*) | |||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||
Sale of outstanding loans | ( | ) | ||||||||||||||
Sale of write-off loans | ||||||||||||||||
Total | ( | ) |
(*) |
(j) | Securitization of own assets: |
During the years 2022 and 2021, there is no securitization transactions executed involving its own assets.
F-80
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
12. | Investments in Other Companies: |
(a) | This item includes investments in other companies for an amount of Ch$ |
% Ownership Interest | Equity | Assets | ||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||
Company | Shareholder | % | % | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||
Associates | ||||||||||||||||||||||||||
Transbank S.A. | Banco de Chile | |||||||||||||||||||||||||
Administrador Financiero del Transantiago S.A. | Banco de Chile | |||||||||||||||||||||||||
Centro de Compensación Automatizado S.A. | Banco de Chile | |||||||||||||||||||||||||
Sociedad Imerc OTC S.A. | Banco de Chile | |||||||||||||||||||||||||
Redbanc S.A. | Banco de Chile | |||||||||||||||||||||||||
Sociedad Operadora de la Cámara de Compensación de Pagos de Alto Valor S.A. | Banco de Chile | |||||||||||||||||||||||||
Sociedad Interbancaria de Depósitos de Valores S.A. | Banco de Chile | |||||||||||||||||||||||||
Subtotal Associates | ||||||||||||||||||||||||||
Joint Venture | ||||||||||||||||||||||||||
Servipag Ltda. | Banco de Chile | |||||||||||||||||||||||||
Artikos Chile S.A. | Banco de Chile | |||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||
Total |
F-81
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
12. | Investments in Other Companies, continued: |
(b) | The total carrying amount of the Bank’s associates as of December 31, 2022 and 2021 is explained as follows: |
2022 | ||||||||||||||||||||||||||||||||
Associate’s statement of financial position | Centro
de Compensación Automatizado S.A. | Sociedad
Operadora de la Cámara de Compensación de Pagos de Alto Valor S.A. | Sociedad
Interbancaria | Redbanc S.A. | Transbank S.A. | Administrador Financiero del Transantiago S.A. | Sociedad
Imerc OTC S.A. | Total | ||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||||||||||
Non-current assets | ||||||||||||||||||||||||||||||||
Total Assets | ||||||||||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||||||||||
Non-current liabilities | ||||||||||||||||||||||||||||||||
Total Liabilities | ||||||||||||||||||||||||||||||||
Equity | ||||||||||||||||||||||||||||||||
Minority interest | ||||||||||||||||||||||||||||||||
Total Liabilities and Equity | ||||||||||||||||||||||||||||||||
Associate’s revenue and profit | ||||||||||||||||||||||||||||||||
Operating income | ||||||||||||||||||||||||||||||||
Operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
Other income (expenses) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Gain before tax | ||||||||||||||||||||||||||||||||
Income tax | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Gain for the year |
2021 | ||||||||||||||||||||||||||||||||
Associate’s statement of financial position | Centro de Compensación Automatizado S.A. | Sociedad Operadora de la Cámara de Compensación de Pagos de Alto Valor S.A. | Sociedad Interbancaria de Depósitos de Valores S.A. | Redbanc S.A. | Transbank S.A. | Administrador Financiero del Transantiago S.A. | Sociedad Imerc OTC S.A. | Total | ||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||||||||||
Non-current assets | ||||||||||||||||||||||||||||||||
Total Assets | ||||||||||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||||||||||
Non-current liabilities | ||||||||||||||||||||||||||||||||
Total Liabilities | ||||||||||||||||||||||||||||||||
Equity | ||||||||||||||||||||||||||||||||
Minority interest | — | |||||||||||||||||||||||||||||||
Total Liabilities and Equity | ||||||||||||||||||||||||||||||||
Associate’s revenue and profit | ||||||||||||||||||||||||||||||||
Operating income | ||||||||||||||||||||||||||||||||
Operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
Other income (expenses) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
Gain before tax | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Income tax | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
Gain for the year | ( | ) | ( | ) |
F-82
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
12. | Investments in Other Companies, continued: |
(c) | Joint Ventures: |
The Bank has a
The table below presents summarized financial information as of December 31, 2022 and 2021 of the entities the Bank controls jointly:
Artikos Chile S.A. | Servipag Ltda. | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||
Current assets | ||||||||||||||||
Non-current assets | ||||||||||||||||
Total Assets | ||||||||||||||||
Current liabilities | ||||||||||||||||
Non-current liabilities | ||||||||||||||||
Total Liabilities | ||||||||||||||||
Equity | ||||||||||||||||
Total Liabilities and Equity | ||||||||||||||||
Operating income | ||||||||||||||||
Operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Other income (expenses) | ( | ) | ||||||||||||||
Profit before tax | ||||||||||||||||
Income tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Profit for the year |
(d) | The reconciliation between opening and ending balance of investments in other companies that are not consolidated in 2022, 2021 and 2020 is detailed as follows: |
2022 | 2021 | 2020 | ||||||||||
MCh$ | MCh$ | MCh$ | ||||||||||
Balance as of January 1, | ||||||||||||
Capital increase | ||||||||||||
Participation in net income | ( | ) | ||||||||||
Dividends received | ( | ) | ( | ) | ( | ) | ||||||
Non-current assets Nexus (*) | ( | ) | ||||||||||
Other | ( | ) | ( | ) | ||||||||
Balance as of December 31, |
(*) | See Note No. 5 letter c). |
(e) | During the year ended as of December 31, 2022 and 2021 no impairment has incurred in these investments. |
F-83
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
13. | Intangible Assets: |
(a) | As of December 31, 2022 and 2021 intangible assets are detailed as follows: |
Useful Life | Average
remaining amortization period | Gross balance | Accumulated Amortization | Net balance | ||||||||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||
Years | Years | Years | Years | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||||||||
Other Intangible Assets: | ||||||||||||||||||||||||||||||||||||||||
Goodwill | ||||||||||||||||||||||||||||||||||||||||
Intangible assets arising from business combinations | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Software or computer programs | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Total | ( | ) | ( | ) |
(b) | Changes in intangible assets during the year 2022 and 2021 are as follows: |
Goodwill (1) | Intangible
assets arising from business combinations (2) | Software
or computer programs | Total | |||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||
Gross Balance | ||||||||||||||||
Balance as of January 1, 2022 | ||||||||||||||||
Acquisitions | ||||||||||||||||
Disposals/write-downs | ( | ) | ( | ) | ||||||||||||
Reclassification | ( | ) | ( | ) | ||||||||||||
Impairment (*) (***) | ( | ) | ( | ) | ||||||||||||
Total | ||||||||||||||||
Accumulated Amortization | ||||||||||||||||
Balance as of January 1, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||
Amortization for the year (**) | ( | ) | ( | ) | ||||||||||||
Disposals/write-downs | ||||||||||||||||
Reclassification | ||||||||||||||||
Impairment (*) (***) | ||||||||||||||||
Total | ( | ) | ( | ) | ( | ) | ||||||||||
Balance as of December 31, 2022 |
F-84
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
13. | Intangible Assets, continued: |
Goodwill (1) | Intangible
assets arising from business combinations (2) | Software
or computer programs | Total | |||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||
Gross Balance | ||||||||||||||||
Balance as of January 1, 2021 | ||||||||||||||||
Acquisitions | ||||||||||||||||
Disposals/write-downs | ( | ) | ( | ) | ||||||||||||
Reclassification | ( | ) | ( | ) | ||||||||||||
Impairment (*) (***) | ( | ) | ( | ) | ||||||||||||
Total | ||||||||||||||||
Accumulated Amortization | ||||||||||||||||
Balance as of January 1, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||
Amortization for the year (**) | ( | ) | ( | ) | ||||||||||||
Disposals/write-downs | ||||||||||||||||
Reclassification | ( | ) | ( | ) | ||||||||||||
Impairment (*) (***) | ||||||||||||||||
Total | ( | ) | ( | ) | ( | ) | ||||||||||
Balance as of December 31, 2021 |
(1) |
(2) |
(*) |
(**) |
(***) |
As of December 31, 2022 and 2021, the Bank had made the following commitments for technological developments:
Amount of Commitment | ||||||||
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Software and licenses |
F-85
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
13. | Intangible Assets, continued: |
(c) | Impairment testing of Goodwill: |
For goodwill impairment purposes, testing is carried out at the level of business segments described above and in Note No. 5 to the financial statements. This methodology is in line with IAS 36, where business segments represent the lowest level within the entity at which the goodwill is monitored for internal management purposes.
Accordingly, for impairment testing purposes, goodwill acquired through business combinations has been allocated to four individual business segments, as follows:
2022 | 2021 | |||||||
Business Segments | MCh$ | MCh$ | ||||||
Retail | ||||||||
Wholesale | ||||||||
Treasury and money market operations | ||||||||
Subsidiaries | ||||||||
Total |
Below are the key assumptions used for determining the value in use for impairment testing purposes:
● | The Bank determines the recoverable amount of its business segments on the basis of value in use by employing a Discounted Cash Flows (“DCF”) valuation model. The DCF model determines the present value of the estimated future earnings that would be distributed to shareholders in the way of dividens, once satisfied the capital regulatory requirements. |
● | For purposes of the goodwill impairment testing, the DCF model considers earnings projections for a ten-year period, which is deemed as the period in which the Bank is able to achieve the goals set in its long-term business strategy. |
● | Earnings projections result from business growth, particularly associated with projected expansion rates for the local economy, the industry’s loan book and the Bank’s strategic goals. Then, based on historical data and a linear regression analysis, the Bank determines a loan growth multiplier (in real terms) over GDP growth for the local economy. This multiplier is expected to return to normal levels, after the downturn prompted by the COVID-19 and the second round effects of one-time policies adopted in order to deal with the pandemic. Accordingly, the loan growth multiplier would achieve 1.60 times since 2027. |
● | Following the estimated growth rates for the Chilean economy (measured as GDP) and the banking industry in terms of loans to customers, expansion rates of the Bank’s loan book are determined by considering the achievement of the Bank’s long-term strategic goals. Therefore, real growth rates are considered to be slightly higher than the industry rates within the ten-year period, assuming that a market share of |
F-86
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
13. | Intangible Assets, continued: |
(c) | Impairment testing of Goodwill, continued: |
● | For purposes of business segments valuation, the DCF model considers
discount rates that are determined by carrying out a linear regression analysis based on historical data of daily stock returns for the
Bank and the market portfolio (IGPA index in Chile). In order to do this, an index linear model is applied, which is widely used in finance
for these purposes. After estimating the model parameters (alpha and beta), the Capital Asset Pricing Model (“CAPM”) is utilized
to determine the cost of equity or discount rate for shareholders’ cash flows. When using CAPM, a |
(d) | Annual goodwill impairment test: |
The annual goodwill impairment tests for the years ended December 31, 2022 and 2021 did not result in an impairment loss on the goodwill of the Bank’s business segments as their economic values were higher than their carrying amounts.
(e) | Restrictions: |
Banco de Chile and its subsidiaries have no restrictions on intangible assets as of December 31, 2022 and 2021. Additionally, no intangible assets have been pledged as collateral to secure the fulfillment of any financial obligation. Moreover, there are no amounts owed by the Bank on intangible assets as of the aforementioned dates.
14. | Property and Equipment: |
(a) | The properties and equipment as of December 31, 2022 and 2021 are composed as follows: |
Useful Life | Average
remaining depreciation | Gross balance | Accumulated Depreciation | Net balance | ||||||||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||
Years | Years | Years | Years | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||||||||
Type of property and equipment: | ||||||||||||||||||||||||||||||||||||||||
Land and Buildings | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Equipment | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Others | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
Total | ( | ) | ( | ) |
F-87
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
14. | Property and Equipment, continued: |
(b) | As of December 31, 2022 and 2021, this account and its changes are detailed as follows: |
December 2022 | ||||||||||||||||
Land
and Buildings | Equipment | Others | Total | |||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||
Gross Balance | ||||||||||||||||
Balance as of January 1, 2022 | ||||||||||||||||
Additions | ||||||||||||||||
Write-downs and sales of the year | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Transfers | ( | ) | ||||||||||||||
Impairment (***) | ( | ) | ( | ) | ||||||||||||
Total | ||||||||||||||||
Accumulated Depreciation | ||||||||||||||||
Balance as of January 1, 2022 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Reclassification | ||||||||||||||||
Depreciation of the year (*) (**) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Write-downs and sales of the year | ||||||||||||||||
Transfers | ( | ) | ||||||||||||||
Impairment (***) | ||||||||||||||||
Total | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Balance as of December 31, 2022 |
December 2021 | ||||||||||||||||
Land
and Buildings | Equipment | Others | Total | |||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||
Gross Balance | ||||||||||||||||
Balance as of January 1, 2021 | ||||||||||||||||
Additions | ||||||||||||||||
Write-downs and sales of the year | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Impairment (***) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total | ||||||||||||||||
Accumulated Depreciation | ||||||||||||||||
Balance as of January 1, 2021 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Reclassification | ||||||||||||||||
Depreciation of the year (*) (**) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Write-downs and sales of the year | ||||||||||||||||
Impairment (***) | ||||||||||||||||
Total | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Balance as of December 31, 2021 |
(*) |
(**) |
(***) |
F-88
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
15. | Right-of-use assets and Lease liabilities: |
(a) | The composition of the rights over leased assets as of December 31, 2022 and 2021 is as follows: |
Gross
| Accumulated Depreciation | Net
| ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||
Categories | ||||||||||||||||||||||||
Buildings | ( | ) | ( | ) | ||||||||||||||||||||
Floor space for ATMs | ( | ) | ( | ) | ||||||||||||||||||||
Improvements to leased properties | ( | ) | ( | ) | ||||||||||||||||||||
Total | ( | ) | ( | ) |
(b) | The changes of the rights over leased assets as of December 31, 2022 and 2021 is as follows: |
2022 | ||||||||||||||||
Buildings | Floor
space | Improvements
to leased properties | Total | |||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||
Gross Balance | ||||||||||||||||
Balance as of January 1, 2022 | ||||||||||||||||
Additions | ||||||||||||||||
Write-downs | ( | ) | ( | ) | ( | ) | ||||||||||
Remeasurement | ( | ) | ( | ) | ( | ) | ||||||||||
Total | ||||||||||||||||
Accumulated Depreciation | ||||||||||||||||
Balance as of January 1, 2022 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Depreciation of the year (*) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Write-downs | ||||||||||||||||
Total | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Balance as of December 31, 2022 |
(*) |
F-89
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
15. | Right-of-use assets and Lease liabilities, continued: |
2021 | ||||||||||||||||
Buildings | Floor
space | Improvements
to leased properties | Total | |||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||
Gross Balance | ||||||||||||||||
Balance as of January 1, 2021 | ||||||||||||||||
Additions | ||||||||||||||||
Write-downs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Remeasurement | ( | ) | ( | ) | ||||||||||||
Others | ||||||||||||||||
Total | ||||||||||||||||
Accumulated Depreciation | ||||||||||||||||
Balance as of January 1, 2021 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Depreciation of the year (*) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Write-downs | ||||||||||||||||
Others | ( | ) | ( | ) | ||||||||||||
Total | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Balance as of December 31, 2021 |
(*) | See Note No.37 Depreciation and Amortization. |
(c) | The future maturities (including unearned interest) of the lease liabilities as of December 31, 2022 and 2021: |
December 2022 | ||||||||||||||||||||||||||||||||
Demand | Up to 1 month | Over
1 month and up to 3 months | Over
3 months and up to 12 months | Over
1 year and up to 3 years | Over
3 years and up to 5 years | Over 5 years | Total | |||||||||||||||||||||||||
Lease associated to: | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||||||||
Buildings | ||||||||||||||||||||||||||||||||
ATMs | ||||||||||||||||||||||||||||||||
Total |
December 2021 | ||||||||||||||||||||||||||||||||
Demand | Up to 1 month | Over
1 month and up to 3 months | Over
3 months and up to 12 months | Over
1 year and up to 3 years | Over
3 years and up to 5 years | Over 5 years | Total | |||||||||||||||||||||||||
Lease associated to: | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||||||||
Buildings | ||||||||||||||||||||||||||||||||
ATMs | ||||||||||||||||||||||||||||||||
Total |
F-90
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
15. | Right-of-use assets and Lease liabilities, continued: |
The Bank and its subsidiaries maintain contracts with certain renewal options and for which there is reasonable certainty that said option shall be carried out. In such cases, the lease period used to measure the liability and assets corresponds to an estimate of future renewals.
The changes of the obligations for lease liabilities and the flows for the years 2022 and 2021 are as follows:
Total cash flow for the year | ||||
Lease liability | MCh$ | |||
Balances as of January 1, 2021 | ||||
Liabilities for new lease agreements | ||||
Interest accrued expenses | ||||
Payments of capital and interests | ( | ) | ||
Remeasurement | ( | ) | ||
Derecognized contracts | ( | ) | ||
Readjustments | ||||
Balances as of December 31, 2021 | ||||
Liabilities for new lease agreements | ||||
Interest accrued expenses | ||||
Payments of capital and interests | ( | ) | ||
Remeasurement | ( | ) | ||
Derecognized contracts | ( | ) | ||
Others | ||||
Balances as of December 31, 2022 |
(d) | The future cash flows related to short-term lease agreements in effect as of December 31, 2022 correspond to Ch$ |
F-91
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
16. | Current tax and deferred taxes: |
(a) | Current Tax: |
The Bank and its subsidiaries at the end of each year, have constituted a First Category Income Tax Provision, which was determined based on current tax regulations, and has been reflected in the statement of financial position net of taxes to be recovered or payable, as applicable, as of December 31, 2022 and 2021, according to the following detail:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Income taxes | ||||||||
Less: | ||||||||
Monthly prepaid taxes (PPM) | ( | ) | ( | ) | ||||
Credit for training expenses | ( | ) | ( | ) | ||||
Other | ( | ) | ( | ) | ||||
Total tax (receivable) payable, net | ( | ) | ||||||
Tax Rate | % | % |
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Current tax assets | ― | |||||||
Current tax liabilities | ( | ) | ( | ) | ||||
Total tax receivable (payable), net | ( | ) |
F-92
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
16. | Current tax and deferred taxes, continued: |
(b) | Income Tax: |
The Bank’s tax expense recorded for the years ended December 31, 2022, 2021 and 2021 is detailed as follows:
2022 | 2021 | 2020 | ||||||||||
MCh$ | MCh$ | MCh$ | ||||||||||
Income tax expense: | ||||||||||||
Current year taxes | ||||||||||||
Tax from previous period | ||||||||||||
Subtotal | ||||||||||||
(Credit) charge for deferred taxes: | ||||||||||||
Origin and reversal of temporary differences | ( | ) | ( | ) | ||||||||
Subtotal | ( | ) | ( | ) | ||||||||
Others | ( | ) | ||||||||||
Net charge to income for income taxes |
(c) | Reconciliation of effective tax rate: |
The following table reconciles the income tax rate to the effective rate applied to determine the Bank’s income tax expense as of December 31, 2022, 2021 and 2021:
2022 | 2021 | 2020 | ||||||||||||||||||||||
Tax
rate % | MCh$ | Tax
rate % | MCh$ | Tax
rate % | MCh$ | |||||||||||||||||||
Income tax calculated on net income before tax | ||||||||||||||||||||||||
Additions or deductions (*) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
Other | ( | ) | ( | ) | ||||||||||||||||||||
Effective rate and income tax expense |
(*) |
F-93
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
16. | Current tax and deferred taxes, continued: |
(d) | Effect of deferred taxes on income and equity: |
The effects of deferred taxes on assets, liabilities and income accounts are detailed as follows:
Balance as of | Effect | Balance as of | Effect | Balance as of | ||||||||||||||||||||||||
January 1, 2021 | Income | OCI | December 31, 2021 | Income | OCI | December 31, 2022 | ||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||||||
Deferred tax assets: | ||||||||||||||||||||||||||||
Allowances for loan losses | ( | ) | ||||||||||||||||||||||||||
Personnel provisions | ( | ) | ||||||||||||||||||||||||||
Staff vacations | ||||||||||||||||||||||||||||
Accrued interest and indexation adjustments from past due loans | ||||||||||||||||||||||||||||
Staff severance indemnities provision | ( | ) | ( | ) | ||||||||||||||||||||||||
Provisions of credit card expenses | — | ( | ) | — | ||||||||||||||||||||||||
Provisions of accrued expenses | ( | ) | ( | ) | ||||||||||||||||||||||||
Derivative instruments adjustments | ( | ) | ||||||||||||||||||||||||||
Adjustment for valuation and impairment of financial assets at fair value through OCI | ||||||||||||||||||||||||||||
Leasing | ||||||||||||||||||||||||||||
Other adjustments | ( | ) | ||||||||||||||||||||||||||
Total Deferred tax assets | ( | ) | ||||||||||||||||||||||||||
Deferred tax liabilities: | ||||||||||||||||||||||||||||
Depreciation of property and equipment and investment properties | ( | ) | ( | ) | ||||||||||||||||||||||||
Adjustment for valuation and impairment of financial assets at fair value through OCI | ( | ) | ||||||||||||||||||||||||||
Transitory assets | ||||||||||||||||||||||||||||
Derivative instruments adjustments | ||||||||||||||||||||||||||||
Accrued interest to effective rate | ( | ) | ||||||||||||||||||||||||||
Advance payment of lump-sum under union contracts | ( | ) | ||||||||||||||||||||||||||
Intangible assets amortization | ||||||||||||||||||||||||||||
Other adjustments | ||||||||||||||||||||||||||||
Total Deferred tax liabilities | ( | ) | ( | ) | ||||||||||||||||||||||||
Total Assets (Liabilities) tax, net | ( | ) |
F-94
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
17. | Other Assets: |
As of December 31, 2022 and 2021, other assets are detailed as follows:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Cash collateral provided for derivative financial transactions | ||||||||
Accounts receivable from third parties | ||||||||
Debtors from brokerage of financial instruments | ||||||||
Assets to be leased out as lessor (*) | ||||||||
Prepaid expenses | ||||||||
Investment properties (**) | ||||||||
Income from regular activities from contracts with customers | ||||||||
Recoverable income taxes | ||||||||
Pending transactions | ||||||||
Other provided cash collateral | ||||||||
VAT receivable | ||||||||
Accumulated impairment in respect of other assets receivable | ( | ) | ( | ) | ||||
Other Assets | ||||||||
Total |
(*) |
Estimated useful lives applied by the Bank are presented in Note No. 2(m) Property and equipment. |
(**) |
In 2022, the Bank earned income of Ch$ |
F-95
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
18. | Non-current assets and disposal groups held for sale and Liabilities included in disposal groups for sale: |
(a) | At the end of each year, the item is composed as follows: |
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Assets received in lieu of payment or awarded at judicial sale (*) | ||||||||
Assets awarded at judicial sale | ||||||||
Assets received in lieu of payment | ||||||||
Provision for assets received in lieu of payment or awarded | ( | ) | ( | ) | ||||
Non-current assets for sale | ||||||||
Investments in other companies (**) | ||||||||
Assets for recovery of assets transferred in financial leasing operations | ||||||||
Disposal groups held for sale | ||||||||
Total |
(*) | Assets received in lieu of payment are assets received as
payment of customers’ past-due debts. The assets acquired must not exceed the aggregate |
(**) | Corresponds to the participation in Sociedad Operadora de Tarjetas de Crédito Nexus S.A., which has been reclassified as a non-current asset. |
(b) | The changes of the provision for assets received in lieu of payment during the periods 2022 and 2021 are as follows: |
Provision for assets received in lieu of payment | MCh$ | |||
Balance as of January 1, 2021 | ||||
Provisions used | ( | ) | ||
Provisions established | ||||
Provisions released | ||||
Balance as of December 31, 2021 | ||||
Provisions used | ( | ) | ||
Provisions established | ||||
Provisions released | ||||
Balance as of December 31, 2022 |
(c) | The Bank does not present liabilities included in the disposal group for sale during the years 2022 and 2021. |
F-96
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
19. | Financial liabilities held for trading at fair value through profit or loss: |
The item detail is as follows:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Financial derivative contracts | ||||||||
Other financial instruments | ||||||||
Total |
a) | As of December 31, 2022 and 2021, the Bank maintains the following debt portfolio of derivative instruments: |
Notional amount of contract with final expiration date in | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Demand | Up to 1 month | Over 1 month and up to 3 months | Over 3 months and up to 12 months | Over 1 year and up to 3 years | Over 3 year and up to 5 years | Over 5 years | Total | Fair value Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Currency forward | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swap | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swap and cross currency swap | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Call currency options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Put currency options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total |
F-97
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
20. | Financial liabilities at amortized cost: |
The item detail is as follows:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Current accounts and other demand deposits | ||||||||
Saving accounts and time deposits | ||||||||
Obligations by repurchase agreements and securities lending | ||||||||
Borrowings from financial institutions | ||||||||
Debt financial instruments issued | ||||||||
Other financial obligations | ||||||||
Total |
(a) | Current accounts and other demand deposits: |
As of December 31, 2022 and 2021, the composition of current accounts and other demand deposits is as follows:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Current accounts | ||||||||
Other demand obligations | ||||||||
Demand deposits accounts | ||||||||
Other demand deposits | ||||||||
Total |
(b) | Saving accounts and time deposits: |
As of December 31, 2022 and 2021, the composition of saving accounts and time deposits is as follows:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Time deposits | ||||||||
Term savings accounts | ||||||||
Other term balances payable | ||||||||
Total |
F-98
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
20. | Financial liabilities at amortized cost, continued: |
(c) | Obligations by repurchase agreements and securities lending: |
The Bank obtains financing by selling financial instruments and agreeing to repurchase them in the future, plus interest at a prefixed rate. As of December 31, 2022 and 2021, the repurchase agreements are the following:
Demand | Up to 1 month | Over 1 month and up to 3 months | Over 3 months and up to 12 months | Over 1 year and up to 3 years | Over 3 years and up to 5 years | Over 5 years | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||
MCh | $MCh | $MCh | $MCh | $MCh | $MCh | $MCh | $MCh | $MCh | $MCh | $MCh | $MCh | $MCh | $MCh | $MCh | $MCh$ | |||||||||||||||||||||||||||||||||||||||||||||||||
Instruments issued by the Chilean Governments and Central Bank of Chile | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Central Bank bonds | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Central Bank promissory notes | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other instruments issued by the Chilean Government and Central Bank of Chile | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other Financial Instruments issued in Chile | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposit promissory notes from domestic banks | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mortgage bonds from domestic banks | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Bonds from domestic banks | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deposits in domestic banks | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Bonds from other Chilean companies | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other instruments issued in Chile | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial Instruments issued by Foreign Institutions | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Instruments from foreign governments or central bank | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other instruments issued by foreign | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total |
Securities sold:
The fair value of the financial instruments delivered as
collateral by the Bank and its subsidiaries, in sales transactions with repurchase agreement and securities lending as of December 31,
2022 amounts to Ch$
F-99
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
20. | Financial liabilities at amortized cost, continued: |
(d) | Borrowings from Financial Institutions: |
As of December 31, 2022 and 2021, borrowings from financial institutions are detailed as follows:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Domestic banks | ||||||||
Banco Santander | ||||||||
Subtotal domestic banks | ||||||||
Foreign banks | ||||||||
Foreign trade financing | ||||||||
Wells Fargo Bank | ||||||||
Bank of Nova Scotia | ||||||||
HSBC | — | |||||||
Standard Chartered Bank | ||||||||
Bank of America | ||||||||
Bank of New York Mellon | ||||||||
Citibank N.A. United State | ||||||||
Industrial and Commercial Bank of China | ||||||||
Commerzbank AG | ||||||||
Bank of Tokyo | ||||||||
Sumitomo Mitsui Banking | ||||||||
Borrowings and other obligations | ||||||||
Wells Fargo Bank | ||||||||
Citibank N.A. United Kingdom | ||||||||
Standard Chartered Bank | ||||||||
Deutsche Bank AG | ||||||||
Commerzbank AG | ||||||||
Citibank N.A. United State | ||||||||
Others | ||||||||
Subtotal foreign banks | ||||||||
Chilean Central Bank (*) | ||||||||
Total |
(*) |
F-100
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
20. | Financial liabilities at amortized cost, continued: |
(e) | Debt financial instruments issued: |
As of December 31, 2022 and 2021, the composition of debt financial instruments issued as follows:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Letters of credit | ||||||||
Letters of credit for housing | ||||||||
Letters of credit for general purposes | ||||||||
Bonds | ||||||||
Current Bonds | ||||||||
Mortgage bonds | ||||||||
Total |
During the year ended December 31,
2022 Banco de Chile has placed bonds for Ch$
Short-term Current Bonds
Counterparty | Currency | Amount MCh$ | Annual interest rate % | Issued date | Maturity date | ||||||||||
Wells Fargo Bank | |||||||||||||||
Wells Fargo Bank | |||||||||||||||
Citibank N.A. | |||||||||||||||
Citibank N.A. | |||||||||||||||
Wells Fargo Bank | |||||||||||||||
Citibank N.A. | |||||||||||||||
Wells Fargo Bank | |||||||||||||||
Wells Fargo Bank | |||||||||||||||
Total as of December 31, 2022 |
F-101
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
20. | Financial liabilities at amortized cost, continued: |
(e) | Debt financial instruments issued, continued: |
Long-Term Current Bonds
Serie | Currency | Amount MCh$ |
Terms Years | Annual interest rate % | Issued date | Maturity date | |||||||||||||
BCHIBS0815 | |||||||||||||||||||
BCHIBS0815 | |||||||||||||||||||
BCHICF0815 | |||||||||||||||||||
BCHICP0815 | |||||||||||||||||||
BCHIBS0815 | |||||||||||||||||||
BCHICQ1015 | |||||||||||||||||||
BCHICN0815 | |||||||||||||||||||
BCHICO1215 | |||||||||||||||||||
BCHICK0815 | |||||||||||||||||||
BCHICM1215 | |||||||||||||||||||
BCHIDV1116 | |||||||||||||||||||
BCHIDV1116 | |||||||||||||||||||
BCHIBU0815 | |||||||||||||||||||
BCHIDU0716 | |||||||||||||||||||
BCHICM1215 | |||||||||||||||||||
BCHICM1215 | |||||||||||||||||||
BCHICL1015 | |||||||||||||||||||
BCHIGJ0522 | |||||||||||||||||||
BCHICJ1215 | |||||||||||||||||||
BCHICJ1215 | |||||||||||||||||||
BCHIGK1221 | |||||||||||||||||||
Subtotal UF | |||||||||||||||||||
BONO PEN | |||||||||||||||||||
Subtotal others currency | |||||||||||||||||||
Total as of December 31, 2022 |
During the year 2021, Banco de Chile
has placed bonds for Ch$
Short-term Bonds
Counterparty | Currency | Amount MCh$ | Annual interest rate % | Issued date | Maturity date | ||||||||||
Wells Fargo Bank | |||||||||||||||
Wells Fargo Bank | |||||||||||||||
Citibank N.A. | |||||||||||||||
Wells Fargo Bank | |||||||||||||||
Citibank N.A. | |||||||||||||||
Wells Fargo Bank | |||||||||||||||
Citibank N.A. | |||||||||||||||
Citibank N.A. | |||||||||||||||
Wells Fargo Bank | |||||||||||||||
Wells Fargo Bank | |||||||||||||||
Citibank N.A. | |||||||||||||||
Wells Fargo Bank | |||||||||||||||
Citibank N.A. | |||||||||||||||
Wells Fargo Bank | |||||||||||||||
Citibank N.A. | |||||||||||||||
Total as of December 31, 2021 |
F-102
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
20. | Financial liabilities at amortized cost, continued: |
(e) | Debt financial instruments issued, continued: |
Long-Term Current Bonds
Series | Currency | Amount MCh$ | Terms Years | | Annual issue rate % | | Issue date | Maturity date | |||||||||||
BCHIER1117 | |||||||||||||||||||
BCHICD0815 | |||||||||||||||||||
BCHIEU0917 | |||||||||||||||||||
Subtotal UF | |||||||||||||||||||
BONO JPY | |||||||||||||||||||
BONO AUD | |||||||||||||||||||
BONO CHF | |||||||||||||||||||
BONO USD | |||||||||||||||||||
BONO USD | |||||||||||||||||||
Subtotal Others currency | |||||||||||||||||||
Total as of December 31, 2021 |
As of December 31, 2022 and 2021, the Bank has not presented defaults in the payment of principal and interest on its debt instruments. Likewise, there have been no breaches of covenants and other commitments associated with the debt instruments issued.
(f) | Other Financial Obligations: |
As of December 31, 2022 and 2021, the composition of other financial obligations as follows:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Other Chilean financial obligations | ||||||||
Other financial obligations with the Public sector | ||||||||
Total |
21. | Regulatory capital financial instruments: |
a) | At the end of each period, this item is composed as follows: |
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Subordinated bonds with transitory recognition | ||||||||
Subordinated bonds | ||||||||
Bonds with no fixed term of maturity | ||||||||
Preferred stock | ||||||||
Total |
b) | Issuances of regulatory capital financial instruments in the period: |
During the period ended December 31, 2022 and 2021, no issues of regulatory capital financial instruments have been made.
F-103
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
21. | Regulatory capital financial instruments, continued: |
c) | Changes in regulatory capital financial instruments: |
Subordinated bonds | Bonds with no maturity | Preferred shares | ||||||||||
MCh$ | ||||||||||||
Balance as of January 1, 2021 | ||||||||||||
Emissions made | ||||||||||||
Transaction costs | ||||||||||||
Transaction costs amortization | ||||||||||||
Accrued interest | ||||||||||||
Acquisition or redemption by the issuer | ||||||||||||
Modification of the issuance conditions | ||||||||||||
Interest and UF indexation payments to the holder | ( | ) | ||||||||||
Principal payments to the holder | ( | ) | ||||||||||
Accrued UF indexation | ||||||||||||
Exchange rate differences | ||||||||||||
Depreciation | ||||||||||||
Reappraisal | ||||||||||||
Expiration | ||||||||||||
Conversion to common shares | ||||||||||||
Balance as of December 31, 2021 | ||||||||||||
Balance as of January 1, 2022 | ||||||||||||
Emissions made | ||||||||||||
Transaction costs | ||||||||||||
Transaction costs amortization | ||||||||||||
Accrued interest | ||||||||||||
Acquisition or redemption by the issuer | ||||||||||||
Modification of the issuance conditions | ||||||||||||
Interest and UF indexation payments to the holder | ( | ) | ||||||||||
Principal payments to the holder | ( | ) | ||||||||||
Accrued UF indexation | ||||||||||||
Exchange rate differences | ||||||||||||
Depreciation | ||||||||||||
Reappraisal | ||||||||||||
Expiration | ||||||||||||
Conversion to common shares | ||||||||||||
Balance as of December 31, 2022 |
F-104
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
21. | Regulatory capital financial instruments, continued: |
d) | Below is the detail of the subordinated bonds due as of December 31, 2022 and 2021: |
December 2022 | ||||||||||||||||||||
Serie | Currency | Issuance currency amount | Interest rate % | Registration date | Maturity date | Balance due MCh$ | ||||||||||||||
C1 | ||||||||||||||||||||
C1 | ||||||||||||||||||||
C1 | ||||||||||||||||||||
C1 | ||||||||||||||||||||
C1 | ||||||||||||||||||||
C1 | ||||||||||||||||||||
D2 | ||||||||||||||||||||
D2 | ||||||||||||||||||||
D1 | ||||||||||||||||||||
F | ||||||||||||||||||||
F | ||||||||||||||||||||
F | ||||||||||||||||||||
F | ||||||||||||||||||||
F | ||||||||||||||||||||
F | ||||||||||||||||||||
F | ||||||||||||||||||||
F | ||||||||||||||||||||
F | ||||||||||||||||||||
G | ||||||||||||||||||||
G | ||||||||||||||||||||
G | ||||||||||||||||||||
G | ||||||||||||||||||||
G | ||||||||||||||||||||
G | ||||||||||||||||||||
G | ||||||||||||||||||||
G | ||||||||||||||||||||
J | ||||||||||||||||||||
J | ||||||||||||||||||||
J | ||||||||||||||||||||
I | ||||||||||||||||||||
F-105
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
21. | Regulatory capital financial instruments, continued: |
December 2021 | ||||||||||||||||||||
Serie | Currency | Issuance currency amount | Interest rate % | Registration date | Maturity date | Balance due MCh$ | ||||||||||||||
C1 | ||||||||||||||||||||
C1 | ||||||||||||||||||||
C1 | ||||||||||||||||||||
C1 | ||||||||||||||||||||
C1 | ||||||||||||||||||||
C1 | ||||||||||||||||||||
C2 | ||||||||||||||||||||
C2 | ||||||||||||||||||||
C2 | ||||||||||||||||||||
A7 | ||||||||||||||||||||
A7 | ||||||||||||||||||||
A7 | ||||||||||||||||||||
A7 | ||||||||||||||||||||
A7 | ||||||||||||||||||||
A7 | ||||||||||||||||||||
A7 | ||||||||||||||||||||
C2 | ||||||||||||||||||||
C2 | ||||||||||||||||||||
C2 | ||||||||||||||||||||
C2 | ||||||||||||||||||||
C2 | ||||||||||||||||||||
D2 | ||||||||||||||||||||
D2 | ||||||||||||||||||||
D1 | ||||||||||||||||||||
F | ||||||||||||||||||||
F | ||||||||||||||||||||
F | ||||||||||||||||||||
F | ||||||||||||||||||||
F | ||||||||||||||||||||
F | ||||||||||||||||||||
F | ||||||||||||||||||||
F | ||||||||||||||||||||
F | ||||||||||||||||||||
G | ||||||||||||||||||||
G | ||||||||||||||||||||
G | ||||||||||||||||||||
G | ||||||||||||||||||||
G | ||||||||||||||||||||
G | ||||||||||||||||||||
G | ||||||||||||||||||||
G | ||||||||||||||||||||
J | ||||||||||||||||||||
J | ||||||||||||||||||||
J | ||||||||||||||||||||
I | ||||||||||||||||||||
F-106
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
22. | Provision for dividends: |
As of December 31, 2022 and 2021, this item is composed as follows:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Provisions for dividends | ||||||||
Total |
(a) | The changes at the end of each period are as follows: |
Provisions for dividends | Total | |||||||
MCh$ | MCh$ | |||||||
Balances as of January 1, 2021 | ||||||||
Provisions established | ||||||||
Provisions used | ( | ) | ( | ) | ||||
Provisions released | ||||||||
Balances as of December 31, 2021 | ||||||||
Provisions established | ||||||||
Provisions used | ( | ) | ( | ) | ||||
Provisions released | ||||||||
Balances as of December 31, 2022 |
23. | Provisions for contingent loans credit risk: |
As of December 31, 2022 and 2021, for credit risk for contingent loans is composed as follows:
Outstanding exposure | ECL | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||
Warranty by endorsement and sureties | ||||||||||||||||
Confirmed foreign letters of credit | ||||||||||||||||
Issued foreign letters of credit | ||||||||||||||||
Performance guarantees | ||||||||||||||||
Undrawn credit lines | ||||||||||||||||
Other commitments | ||||||||||||||||
Total |
a) | The changes of provisions for credit risk for contingent loans is as follows: |
Provisions for credit risk for contingent loans | Total | |||||||
MCh$ | MCh$ | |||||||
Balances as of January 1, 2021 | ||||||||
Provisions established | ||||||||
Provisions used | ( | ) | ( | ) | ||||
Provisions released | ||||||||
Foreign exchange adjustments | ||||||||
Balances as of December 31, 2021 | ||||||||
Provisions established | ||||||||
Provisions used | ||||||||
Provisions released | ||||||||
Foreign exchange adjustments | ||||||||
Balances as of December 31, 2022 |
F-107
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
23. | Provisions for contingent loans credit risk, continued: |
(b) | Impairment losses on contingent loan risks: |
An analysis of changes in the gross carrying amount and the corresponding allowance for impairment losses in relation to each contingent loan risk is as follow:
a. | Warranty by endorsement and sureties: |
The table below shows the credit quality and the maximum exposure to credit risk based on the Bank’s internal credit rating system and year-end stage classification as of December 31, 2022 and 2021.
As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | Stage 1 | Stage 2 | Stage 3 | |||||||||||||||||||||||||||||||
Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Total MCh$ |
Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Total MCh$ |
|||||||||||||||||||||||
Normal | ||||||||||||||||||||||||||||||||||||
Substandard | ||||||||||||||||||||||||||||||||||||
Non-complying | ||||||||||||||||||||||||||||||||||||
Total |
An analysis of changes in the outstanding exposures and corresponding allowance for ECL during the 2022 and 2021 periods are as follows:
Stage 1 | Stage 2 | Stage 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individual | Group | Individual | Group | Individual | Group | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | |||||||||||||||||||||||||||||||||||||||||||
Outstanding exposure as of January 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change on exposures | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year** | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Refinements to models used for calculation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Outstanding exposure as of January 1, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change on exposures | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year** | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Refinements to models used for calculation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total |
F-108
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
23. | Provisions for contingent loans credit risk, continued: |
(b) | Impairment losses on contingent loan risks, continued: |
b. | Confirmed foreign letters of credit: |
The table below shows the credit quality and the maximum exposure to credit risk based on the Bank’s internal credit rating system and year-end stage classification as of December 31, 2022 and 2021.
As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | Stage 1 | Stage 2 | Stage 3 | |||||||||||||||||||||||||||||||
Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Total MCh$ |
Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Total MCh$ |
|||||||||||||||||||||||
Normal | ||||||||||||||||||||||||||||||||||||
Substandard | ||||||||||||||||||||||||||||||||||||
Non-complying | ||||||||||||||||||||||||||||||||||||
Total |
An analysis of changes in the outstanding exposures and corresponding allowance for ECL during the 2022 and 2021 periods are as follows:
Stage 1 | Stage 2 | Stage 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individual | Group | Individual | Group | Individual | Group | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | |||||||||||||||||||||||||||||||||||||||||||
Outstanding exposure as of January 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change on exposures | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year** | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Refinements to models used for calculation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Outstanding exposure as of January 1, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change on exposures | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year** | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Refinements to models used for calculation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total |
F-109
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
23. | Provisions for contingent loans credit risk, continued: |
(b) | Impairment losses on contingent loan risks, continued: |
c. | Issued foreign letters of credit: |
The table below shows the credit quality and the maximum exposure to credit risk based on the Bank’s internal credit rating system and year-end stage classification as of December 31, 2022 and 2021.
As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | Stage 1 | Stage 2 | Stage 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Total MCh$ | Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Total MCh$ | |||||||||||||||||||||||||||||||||||||||||||
Normal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-complying | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total |
An analysis of changes in the outstanding exposures and corresponding allowance for ECL during the 2022 and 2021 periods are as follows:
Stage 1 | Stage 2 | Stage 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individual | Group | Individual | Group | Individual | Group | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | |||||||||||||||||||||||||||||||||||||||||||
Outstanding exposure as of January 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change on exposures | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year** | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Refinements to models used for calculation | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Outstanding exposure as of January 1, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change on exposures | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year** | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Refinements to models used for calculation | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total |
F-110
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
23. | Provisions for contingent loans credit risk, continued: |
(b) | Impairment losses on contingent loan risks, continued: |
d. | Performance guarantees: |
The table below shows the credit quality and the maximum exposure to credit risk based on the Bank’s internal credit rating system and year-end stage classification as of December 31, 2022 and 2021.
As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | Stage 1 | Stage 2 | Stage 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Total MCh$ | Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Total MCh$ | |||||||||||||||||||||||||||||||||||||||||||
Normal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-complying | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total |
An analysis of changes in the outstanding exposures and corresponding allowance for ECL during the 2022 and 2021 periods are as follows:
Stage 1 | Stage 2 | Stage 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individual | Group | Individual | Group | Individual | Group | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | |||||||||||||||||||||||||||||||||||||||||||
Outstanding exposure as of January 1, 2022 | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change on exposures | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year** | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Refinements to models used for calculation | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
Total | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Outstanding exposure as of January 1, 2022 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change on exposures | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | — | — | — | |||||||||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year** | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Refinements to models used for calculation | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | ( | ) |
F-111
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
23. | Provisions for contingent loans credit risk, continued: |
(b) | Impairment losses on contingent loan risks, continued: |
e. | Undrawn credit lines: |
The table below shows the credit quality and the maximum exposure to credit risk based on the Bank’s internal credit rating system and year-end stage classification as of December 31, 2022 and 2021.
As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | Stage 1 | Stage 2 | Stage 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Total MCh$ | Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Total MCh$ | |||||||||||||||||||||||||||||||||||||||||||
Normal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-complying | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total |
An analysis of changes in the outstanding exposures and corresponding allowance for ECL during the 2022 and 2021 periods are as follows:
Stage 1 | Stage 2 | Stage 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individual | Group | Individual | Group | Individual | Group | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | |||||||||||||||||||||||||||||||||||||||||||
Outstanding exposure as of January 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change on exposures | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year** | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Refinements to models used for calculation | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Outstanding exposure as of January 1, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change on exposures | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year** | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Refinements to models used for calculation | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total |
F-112
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
23. | Provisions for contingent loans credit risk, continued: |
(b) | Impairment losses on contingent loan risks, continued: |
f. | Other commitments: |
The table below shows the credit quality and the maximum exposure to credit risk based on the Bank’s internal credit rating system and year-end stage classification as of December 31, 2022 and 2021.
As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stage 1 | Stage 2 | Stage 3 | Stage 1 | Stage 2 | Stage 3 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Total MCh$ | Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Individual MCh$ | Group MCh$ | Total MCh$ | |||||||||||||||||||||||||||||||||||||||||||
Normal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Substandard | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-complying | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total |
An analysis of changes in the outstanding exposures and corresponding allowance for ECL during the 2022 and 2021 periods are as follows:
Stage 1 | Stage 2 | Stage 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individual | Group | Individual | Group | Individual | Group | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | Gross carrying amount MCh$ | ECL MCh$ | |||||||||||||||||||||||||||||||||||||||||||
Outstanding exposure as of January 1, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change on exposures | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year** | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Refinements to models used for calculation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Outstanding exposure as of January 1, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net change on exposures | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to Stage 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact on year-end ECL of exposures transferred between stages during the year** | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Refinements to models used for calculation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange adjustments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total |
F-113
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
24. | Other provisions: |
As of December 31, 2022 and 2021, this item is composed as follows:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Provisions for obligations of customer loyalty and merit programs | ||||||||
Provisions for operational risk | ||||||||
Provisions for lawsuits and litigation | ||||||||
Other provisions for contingencies | ||||||||
Total |
(a) |
Provisions for obligations of customer loyalty and merit programs | Provisions for operational risk | Provisions and | Other provisions for contingencies | Total | ||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||
Balances as of January 1, 2021 | ||||||||||||||||||||
Provisions established | ||||||||||||||||||||
Provisions used | ||||||||||||||||||||
Provisions released | ( | ) | ( | ) | ||||||||||||||||
Balances as of December 31, 2021 | ||||||||||||||||||||
Balances as of January 1, 2022 | ||||||||||||||||||||
Provisions established | ||||||||||||||||||||
Provisions used | ||||||||||||||||||||
Provisions released | ( | ) | ( | ) | ||||||||||||||||
Balances as of December 31, 2022 |
F-114
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
25. | Employee Benefits: |
As of December 31, 2022 and 2021, this item is composed as follows:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Short-term employee benefits | ||||||||
Benefits to employees for contract termination | ||||||||
Share-based employee benefits | ||||||||
Total |
(a) | Short-term employee benefits: |
(i) | Compliance bonuses provision: |
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Balances as of January 1 | ||||||||
Net provisions established | ||||||||
Provisions used | ( | ) | ( | ) | ||||
Total |
(ii) | Vacation provision: |
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Balances as of January 1 | ||||||||
Net provisions established | ||||||||
Provisions used | ( | ) | ( | ) | ||||
Total |
(iii) | Other benefits provision: |
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Balances as of January 1 | ||||||||
Net provisions established | ||||||||
Provisions used | ( | ) | ( | ) | ||||
Total |
F-115
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
25. | Employee Benefits, continued: |
(b) | Benefits to employees for contract termination: |
(i) | Changes of the provision for employee benefits due to the termination of the employment contract: |
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Present value of the obligations at the beginning of the period | ||||||||
Increase in provision | ||||||||
Benefit paid | ( | ) | ( | ) | ||||
Effect of change in actuarial factors | ( | ) | ||||||
Total |
(ii) | Net benefits expenses: |
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Increase (decrease) in provisions | ||||||||
Interest cost of benefits obligations | ||||||||
Effect of change in actuarial factors | ( | ) | ||||||
Net benefit expenses |
(iii) | Factors used in the calculation: |
The main assumptions used in the determination of severance indemnity obligations for the Bank’s plan are shown below:
December 31, 2022 | December 31, 2021 | |||||||
% | % | |||||||
Discount rate | ||||||||
Salary increase rate | ||||||||
Payment probability |
The most recent actuarial valuation of the staff severance indemnities provision was carried out during the fourth quarter of 2022.
(c) | Share-based compensation programs: |
As of December 31, 2022 and 2021, the Bank and its subsidiaries do not have a stock-based compensation plan.
F-116
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
26. | Other Liabilities: |
As of December 31, 2022 and 2021, this item is composed as follows:
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Accounts payable to third parties | ||||||||
Creditors for intermediation of financial instruments | ||||||||
Liability for income from usual activities from contracts with customers | ||||||||
Securities to be settled | ||||||||
Agreed dividends payable | ||||||||
VAT debit | ||||||||
Outstanding transactions | ||||||||
Other cash guarantees received | ||||||||
Other liabilities | ||||||||
Total |
27. | Equity: |
(a) | Capital |
(i) | Authorized, subscribed and paid shares: |
As of December 31, 2022, the paid-in
capital of Banco de Chile is represented by
As of December 31, 2022 | ||||||||
Corporate Name or Shareholders’s name | Number of Shares | % of Equity Holding | ||||||
LQ Inversiones Financieras S.A. | % | |||||||
Banco Santander on behalf foreign investors | % | |||||||
Banchile Corredores de Bolsa S.A. | % | |||||||
Inversiones LQ-SM Limitada | % | |||||||
Banco de Chile on behalf State Street | % | |||||||
Banco de Chile on behalf of non-resident third parties | % | |||||||
Banco de Chile on behalf Citibank New York | % | |||||||
Ever Chile SPA | % | |||||||
Inversiones Avenida Borgoño SPA | % | |||||||
Ever 1 BAE SPA | % | |||||||
Larraín Vial S.A. Corredora de Bolsa | % | |||||||
J P Morgan Chase Bank | % | |||||||
Banco Santander Chile | % | |||||||
A.F.P Cuprum S.A. for A Fund | % | |||||||
A.F.P Habitat S.A. for A Fund | % | |||||||
BCI Corredores de Bolsa S.A. | % | |||||||
Valores Security S.A. Corredores de Bolsa | % | |||||||
Inversiones CDP SPA | % | |||||||
A.F.P Capital S.A. for A Fund | % | |||||||
Santander S.A. Corredores de Bolsa Limitada | % | |||||||
Subtotal | % | |||||||
Others shareholders | % | |||||||
Total | % |
F-117
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
27. | Equity, continued: |
(a) | Capital, continued: |
(i) Authorized, subscribed and paid shares, continued:
As of December 31, 2021 | ||||||||
Corporate Name or Shareholders’s name | Number of Shares | % of Equity Holding | ||||||
LQ Inversiones Financieras S.A. | % | |||||||
Banchile Corredores de Bolsa S.A. | % | |||||||
Inversiones LQ-SM Limitada | % | |||||||
Banco Santander on behalf foreign investors | % | |||||||
Banco de Chile on behalf State Street | % | |||||||
Banco de Chile on behalf of non-resident third parties | % | |||||||
Ever Chile SPA | % | |||||||
Ever 1 BAE SPA | % | |||||||
Banco de Chile on behalf Citibank New York | % | |||||||
Inversiones Aspen Ltda. | % | |||||||
Inversiones Avenida Borgoño SPA | % | |||||||
Larraín Vial S.A. Corredora de Bolsa | % | |||||||
J P Morgan Chase Bank | % | |||||||
A.F.P Habitat S.A. for A Fund | % | |||||||
Santander S.A. Corredores de Bolsa Limitada | % | |||||||
BCI Corredores de Bolsa S.A. | % | |||||||
Inversiones CDP SPA | % | |||||||
Valores Security S.A. Corredores de Bolsa | % | |||||||
BICE Inversiones Corredores de Bolsa S.A. | % | |||||||
A.F.P Cuprum S.A. for A Fund | % | |||||||
Subtotal | % | |||||||
Others shareholders | % | |||||||
Total | % |
(ii) Shares:
The following table shows the share movements from December 31, 2020 to December 31, 2022:
Total | ||||
Ordinary Shares | ||||
Total shares as of December 31, 2020 | ||||
Total shares as of December 31, 2021 | ||||
Total shares as of December 31, 2022 |
(b) | Approval and payment of dividends: |
At the Bank Ordinary Shareholders’
Meeting held on March 17, 2022, the distribution and payment of dividend No. 210 of Ch$
At the Bank Ordinary Shareholders’
Meeting held on March 25, 2021, the distribution and payment of dividend No. 209 of Ch$
(c) | Provision for minimum dividends: |
The Chilean Corporations Law mandates
a minimum distribution of
F-118
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
27. | Equity, continued: |
(d) | Earnings per share: |
(i) | Basic earnings per share: |
Basic earnings per share are determined by dividing the net income attributable to the Bank ordinary equity holders in a period between the weighted average number of shares outstanding during that period, excluding the average number of own shares held throughout the period.
(ii) | Diluted earnings per share: |
In order to calculate the diluted earnings per share, both the amount of income attributable to common shareholders and the weighted average number of shares outstanding, net of own shares, must be adjusted for all the inherent dilutive effects to the potential common shares (stock options, warrants and convertible debt).
The following table shows the income and share data used in the calculation of EPS:
As of December 31, | ||||||||||||
2022 | 2021 | 2020 | ||||||||||
Basic earnings per share: | ||||||||||||
Net profits attributable to ordinary equity holders of the bank (in million Chilean pesos) | ||||||||||||
Weighted average number of ordinary shares | ||||||||||||
Earning per shares (in Chilean pesos) | ||||||||||||
Diluted earnings per share: | ||||||||||||
Net profits attributable to ordinary equity holders of the bank (in million Chilean pesos) | ||||||||||||
Weighted average number of ordinary shares | ||||||||||||
Assumed conversion of convertible debt | ||||||||||||
Adjusted number of shares | ||||||||||||
Diluted earnings per share (in Chilean pesos) |
As of December 31, 2022 and 2021, the Bank does not have instruments that generate dilutive effects.
F-119
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
27. | Equity, continued: |
(e) | Other comprehensive income: |
Below is the composition and changes of accumulated other comprehensive income as of December 31, 2022 and 2021:
Elements that will not be reclassified in profit or loss | Elements that can be reclassified in profit or loss | |||||||||||||||||||||||||||||||||||||||
New measurements of net defined benefit liability and actuarial results for other employee benefit plans | Fair value changes of equity instruments designated as at fair value through other comprehensive income | Income tax | Subtotal | Fair value changes of financial assets at fair value through other comprehensive income | Cash flow accounting hedge | Participation in other comprehensive income of entities registered under the equity method | Income tax | Subtotal | Total | |||||||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||||||||
Opening balances as of January 1, 2020 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
Other comprehensive income for the period | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
Balances as of December 31, 2020 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
Opening balances as of January 1, 2021 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
Other comprehensive income for the period | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
Balances as of December 31, 2021 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
Opening balances as of January 1, 2022 | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
Other comprehensive income for the period | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Reclassifications from reserves | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
Balances as of December 31, 2022 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) |
(f) | Retained earnings from previous years: |
During the year 2022, the Ordinary Shareholders
Meeting of Banco de Chile agreed to deduct and withhold from the year 2021 liquid income, an amount equivalent to the value effect of
the monetary unit of paid capital and reserves according to the variation in the Consumer Price Index, which occurred between November
2020 and November 2021, amounting to Ch$
F-120
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
28. | Contingencies and Commitments: |
(a) | The Bank and its subsidiaries have exposures associated with contingent loans and other liabilities according to the following detail: |
(a.1) | Contingent loans: |
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Guarantees and sureties | ||||||||
Guarantees and sureties in chilean currency | ||||||||
Guarantees and sureties in foreign currency | ||||||||
Letters of credit for goods circulation operations | ||||||||
Debt purchase commitments in local currency abroad | ||||||||
Transactions related to contingent events | ||||||||
Transactions related to contingent events in chilean currency | ||||||||
Transactions related to contingent events in foreign currency | ||||||||
Undrawn credit lines with immediate termination | ||||||||
Balance of lines of credit and agreed overdraft in current account – commercial loans | ||||||||
Balance of lines of credit on credit card – commercial loans | ||||||||
Balance of lines of credit and agreed overdraft in current account – consumer loans | ||||||||
Balance of lines of credit on credit card – consumer loans | ||||||||
Balance of lines of credit and agreed overdraft in current account – due from banks loans | ||||||||
Undrawn credit lines | ||||||||
Balance of lines of credit and agreed overdraft in current account – commercial loans | ||||||||
Balance of lines of credit on credit card – commercial loans | ||||||||
Balance of lines of credit and agreed overdraft in current account – consumer loans | ||||||||
Balance of lines of credit on credit card – consumer loans | ||||||||
Balance of lines of credit and agreed overdraft in current account – due from banks loans | ||||||||
Other commitments | ||||||||
Credits for higher studies Law No. 20,027 (CAE) | ||||||||
Other irrevocable credit commitments | ||||||||
Other credit commitments | ||||||||
Total |
F-121
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
28. | Contingencies and Commitments, continued: |
(a.2) | Responsibilities assumed to meet customer needs: |
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Transactions on behalf of third parties | ||||||||
Collections | ||||||||
Placement or sale of financial instruments | ||||||||
Transferred financial assets managed by the bank | ||||||||
Third-party resources managed by the bank | ||||||||
Subtotal | ||||||||
Securities custody | ||||||||
Securities safekept by a banking subsidiary | ||||||||
Securities safekept by the Bank | ||||||||
Securities safekept deposited in another entity | ||||||||
Securities issued by the bank | ||||||||
Subtotal | ||||||||
Total |
(b) | Lawsuits and legal proceedings: |
(b.1) | Normal judicial contingencies in the industry: |
At the date of issuance of these Consolidated
Financial Statements, there are legal actions filed against the Bank related with the ordinary course operations. As of December 31, 2022,
the Bank maintain provisions for judicial contingencies amounting to Ch$
The estimated end dates of the respective legal contingencies are as follows:
As of December 31, 2022 | ||||||||||||||||||||
2023 | 2024 | 2025 | 2026 | Total | ||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||
Legal contingencies |
(b.2) | Contingencies for significant lawsuits: |
As of December 31, 2022 and 2021, there are not significant lawsuits in court that affect or may affect these Consolidated Financial Statements.
F-122
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
28. | Contingencies and Commitments, continued: |
(c) | Guarantees granted by operations: |
(i) | In subsidiary Banchile Administradora General de Fondos S.A.: |
In
compliance with Article No, 12 of Law No. 20,712, Banchile Administradora General de Fondos S.A., has designated Banco de Chile as the
representative of the beneficiaries of the guarantees it has established, and in such role the Bank has issued bank guarantees totaling
UF 4,153,500 maturing January 6, 2023 (UF
As of December 31, 2022 and 2021, the Bank has not guaranteed mutual funds.
(ii) | In subsidiary Banchile Corredores de Bolsa S.A.: |
For
the purposes of ensuring correct and complete compliance with all of its obligations as broker-dealer entity, in conformity with the
provisions from Article 30 and subsequent of Law No. 18,045 on Securities Markets, the subsidiary established a guarantee in an insurance
policy for UF
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Guarantees: | ||||||||
Shares delivered to guarantee forward sales transactions covered simultaneously: | ||||||||
Santiago Securities Exchange, Stock Exchange | ||||||||
Electronic Chilean Securities Exchange, Stock Exchange | ||||||||
Fixed income securities to guarantee CCLV system: | ||||||||
Santiago Securities Exchange, Stock Exchange | ||||||||
Fixed Income securities to guarantee equity short sale and Hedging Loan: | ||||||||
Santiago Securities Exchange, Stock Exchange | ||||||||
Shares delivered to guarantee equity lending and short-selling: | ||||||||
Santiago Securities Exchange, Stock Exchange | ||||||||
Cash guarantees received for operations with derivatives | ||||||||
Cash guarantees for operations with derivatives | ||||||||
Equity securities received for operations with derivatives | ||||||||
Electronic Chilean Securities Exchange, Stock Exchange | ||||||||
Depósito Central de Valores S.A. | ||||||||
Financial intermediation securities received for operations with derivatives | ||||||||
Internal custody | ||||||||
Total |
F-123
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
28. | Contingencies and Commitments, continued: |
(c) | Guarantees granted by operations, continued: |
In
conformity with the internal regulation of the stock exchange in which this subsidiary participates, and for the purpose of securing
the broker’s correct performance, the Company established a pledge over
Banchile
Corredores de Bolsa S.A. keeps an insurance policy current with Chubb Seguros Chile S.A. that expires May 2, 2023, this considers matters
of employee fidelity, physical losses, falsification or adulteration, and currency fraud with a coverage amount equivalent to US$
It
also provided a bank guarantee in the amount of UF
It
also provided a cash guarantee in the amount of US$
A
guarantee corresponding to UF
(iii) | In subsidiary Banchile Corredores de Seguros Ltda. |
According to established in article 58, letter D of D.F.L. 251, as of December 31, 2022 the entity maintains two insurance policies with effect from April 15, 2022 to April 14, 2023 which protect it against of potential damages caused by infractions of the law, regulations and complementary rules that regulate insurance brokers, especially when the non-compliance comes from acts, errors or omissions of the broker, its representatives, agents or dependents that participate in the intermediation.
The policies contracted are:
Matter insured | Amount Insured (UF) | |||
Errors and omissions liability policy | ||||
Civil responsibility policy |
(d) | Exempt Resolution No. 270 dated October 30, 2014, the Superintendency of Securities and Insurance (current Commission for the Financial Market) imposed a fine of UF |
The company has not made provisions considering that the Bank’s legal advisors in charge of the procedure estimate that there are solid grounds that the claim filed by Banchile Corredores de Bolsa S.A. can be accepted.
F-124
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
29. | Interest and UF indexation revenue and expenses: |
(a) | At the end of the period, the summary is as follows: |
2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||
Interest | UF indexation | Total | Interest | UF indexation | Total | Interest | UF indexation | Total | ||||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||||||||||||
Interest revenue | ||||||||||||||||||||||||||||||||||||
Interest expenses | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Total net interest income |
(b) | The composition of interest is as follows: |
2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||
Interest | UF indexation | Total | Interest | UF indexation | Total | Interest | UF indexation | Total | ||||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||||||||||||
Financial assets at amortized cost | ||||||||||||||||||||||||||||||||||||
Rights by resale agreements and securities lending | ||||||||||||||||||||||||||||||||||||
Debt financial instruments | — | |||||||||||||||||||||||||||||||||||
Loans and advances to Banks | ||||||||||||||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||||||||||||||
Residential mortgage loans | ||||||||||||||||||||||||||||||||||||
Consumer Loans | ||||||||||||||||||||||||||||||||||||
Other financial instruments | ||||||||||||||||||||||||||||||||||||
Financial assets at fair value through other comprehensive income | ||||||||||||||||||||||||||||||||||||
Debt financial instruments | ||||||||||||||||||||||||||||||||||||
Other financial instruments | ||||||||||||||||||||||||||||||||||||
Income of accounting hedges of interest rate risk | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Total |
F-125
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
29. | Interest and UF indexation revenue and expenses, continued: |
(c) | The composition of interest expenses is as follows: |
2022 | 2021 | 2021 | ||||||||||||||||||||||||||||||||||
Interest | UF indexation | Total | Interest | UF indexation | Total | Interest | UF indexation | Total | ||||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||||||||||||
Financial liabilities at amortized cost | ||||||||||||||||||||||||||||||||||||
Current accounts and other demand deposits | ||||||||||||||||||||||||||||||||||||
Saving accounts and time deposits | ||||||||||||||||||||||||||||||||||||
Obligations by repurchase agreements and securities lending | ||||||||||||||||||||||||||||||||||||
Borrowings from financial institutions | ||||||||||||||||||||||||||||||||||||
Debt financial instruments issued | ||||||||||||||||||||||||||||||||||||
Other financial obligations | ||||||||||||||||||||||||||||||||||||
Lease liabilities | ||||||||||||||||||||||||||||||||||||
Financial instruments of regulatory capital issued | ||||||||||||||||||||||||||||||||||||
Income of accounting hedges of interest rate risk | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
Total |
(d) | As of December 31, 2022, 2021 and 2020, the Bank uses cross currency and interest rate swaps to hedge its position on changes on the fair value of corporate bonds and commercial loans and cross currency swaps to hedge the risk of variability of obligations flows with foreign banks and bonds issued in foreign currency. |
2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest | UF indexation | Total | Interest | UF indexation | Total | Interest | UF indexation | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income | Expense | Income | Expense | Income | Expense | Income | Expense | Income | Expense | Income | Expense | Income | Expense | Income | Expense | Income | Expense | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gain from fair value accounting hedges | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loss from fair value accounting hedges | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gain from cash flow accounting hedges | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loss from cash flow accounting hedges | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
Net gain on hedge items | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) |
F-126
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
30. | Income and Expenses from commissions: |
The income and expenses from commissions shown in the Consolidated Statement of Income for the years ended December 31, 2022, 2021 and 2020 refer to the following items:
2022 | 2021 | 2020 | ||||||||||
MCh$ | MCh$ | MCh$ | ||||||||||
Income from commissions and services rendered | ||||||||||||
Comissions from debit and credit card services | ||||||||||||
Remuneration from administration of mutual funds, investment funds or others | ||||||||||||
Comissions from collections and payments | ||||||||||||
Comissions from portfolio management | ||||||||||||
Remuneration from brokerage and insurance advisory | ||||||||||||
Comissions from guarantees and letters of credit | ||||||||||||
Use of distribution channel | ||||||||||||
Brand use agreement | ||||||||||||
Comissions from trading and securities management | ||||||||||||
Financial advisory services | ||||||||||||
Comissions from lines of credit and current account overdrafts | ||||||||||||
Comissions from factoring operations services | ||||||||||||
Other commission earned | ||||||||||||
Total | ||||||||||||
Expenses from commissions and services received | ||||||||||||
Commissions from card transactions | ||||||||||||
Interbank transactions | ||||||||||||
Expenses from obligations of loyalty and merit card customers programs | ||||||||||||
Commissions from use of card brands license | ||||||||||||
Comissions from securities transaction | ||||||||||||
Collections and payments | ||||||||||||
Other commissions from services received | ||||||||||||
Total |
F-127
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
31. | Net financial income (expense): |
The amount of net financial income (expense) shown in the Consolidated Income Statement for the year corresponds to the following concepts:
2022 | 2021 | 2020 | ||||||||||
MCh$ | MCh$ | MCh$ | ||||||||||
Financial result from: | ||||||||||||
Financial assets held for trading at fair value through profit or loss: | ||||||||||||
Financial derivative contracts | ||||||||||||
Debt Financial Instruments | ||||||||||||
Other financial instruments | ||||||||||||
Financial liabilities held for trading at fair value through profit or loss | ||||||||||||
Financial derivative contracts | ( | ) | ( | ) | ( | ) | ||||||
Other financial instruments | ( | ) | ( | ) | ||||||||
Subtotal | ( | ) | ||||||||||
Derecognition of financial assets and liabilities at amortized cost and financial assets at fair value through other comprehensive income: | ||||||||||||
Financial assets at amortized cost | ||||||||||||
Financial assets at fair value through other comprehensive income | ( | ) | ||||||||||
Financial liabilities at amortized cost | ( | ) | ||||||||||
Financial instruments of regulatory capital issued | ||||||||||||
Subtotal | ( | ) | ||||||||||
Exchange, indexation and accounting hedging of foreign currency | ||||||||||||
Gain (loss) from foreign currency exchange | ( | ) | ||||||||||
Gain (loss) from indexation for exchange rate | ( | ) | ||||||||||
Net gain (loss) from derivatives in accounting hedges of foreign currency risk | ( | ) | ( | ) | ||||||||
Subtotal | ( | ) | ||||||||||
Ineffective accounting hedges: | ||||||||||||
Gain (loss) from ineffective cash flow accounting hedges | ( | ) | ||||||||||
Gain (loss) from ineffective accounting hedges of net investment abroad | ||||||||||||
Total |
F-128
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
32. | Income attributable to investments in other companies: |
The income obtained from investments in companies detailed in note No. 12 corresponds to the following:
2022 | 2021 | 2020 | ||||||||||||
Company | Shareholder | MCh$ | MCh$ | MCh$ | ||||||||||
Associates | ||||||||||||||
Transbank S.A. | ( | ) | ( | ) | ||||||||||
Centro de Compensación Automatizado S.A. | ||||||||||||||
Administrador Financiero del Transantiago S.A. | ||||||||||||||
Redbanc S.A. | ( | ) | ||||||||||||
Sociedad Interbancaria de Depósitos de Valores S.A. | ||||||||||||||
Sociedad Operadora de la Cámara de Compensación de Pagos de Alto Valor S.A. | ||||||||||||||
Sociedad Imerc OTC S.A. | ( | ) | ||||||||||||
Sociedad Operadora de Tarjetas de Crédito Nexus S.A. | ( | ) | ||||||||||||
Subtotal Associates | ( | ) | ||||||||||||
Joint Ventures | ||||||||||||||
Servipag Ltda. | ||||||||||||||
Artikos Chile S.A. | ||||||||||||||
Subtotal Joint Ventures | ||||||||||||||
Total | ( | ) |
33. | Result from non-current assets and disposal groups held for sale not admissible as discontinued operations: |
2022 | 2021 | 2020 | ||||||||||
MCh$ | MCh$ | MCh$ | ||||||||||
Net income from assets received in payment or adjudicated in judicial auction | ||||||||||||
Gain (loss) on sale of assets received in lieu of payment or foreclosed at judicial auction | ||||||||||||
Other income from assets received in payment or foreclosed at judicial auction | ||||||||||||
Provisions for adjustments to net realizable value of assets received in lieu of payment or foreclosed at judicial auction | ( | ) | ( | ) | ( | ) | ||||||
Charge-off assets received in lieu of payment or foreclosed at judicial auction | ( | ) | ( | ) | ||||||||
Expenses to maintain assets received in lieu of payment or foreclosed at judicial auction | ( | ) | ( | ) | ( | ) | ||||||
Non-current assets held for sale | ||||||||||||
Investments in other companies | ( | ) | ||||||||||
Intangible assets | ||||||||||||
Property and equipment | ||||||||||||
Assets for recovery of assets transferred in financial leasing operations | ||||||||||||
Other assets | ||||||||||||
Disposal groups held for sale | ||||||||||||
Total | ( | ) |
F-129
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
34. | Other operating Income and Expenses: |
a) | During the year 2022, 2021 and 2020, the Bank and its subsidiaries present other operating income, according to the following: |
2022 | 2021 | 2020 | ||||||||||
MCh$ | MCh$ | MCh$ | ||||||||||
Revaluation of prepaid monthly payments | ||||||||||||
Income from investment properties | ||||||||||||
Income from correspondent banks | ||||||||||||
Expense recovery | ||||||||||||
Fiduciary and trustee commissions | ||||||||||||
Tax management income | ||||||||||||
Foreign trade income | ||||||||||||
Expense recovery income | ||||||||||||
Others income | ||||||||||||
Total |
b) | During the year 2022, 2021 and 2020, the Bank and its subsidiaries present other operating expenses, according to the following: |
2022 | 2021 | 2020 | ||||||||||
MCh$ | MCh$ | MCh$ | ||||||||||
Write-offs for operating risks | ||||||||||||
Card administration | ||||||||||||
Correspondent banks | ||||||||||||
Expenses for credit operations of financial leasing | ||||||||||||
Legal expenses | ||||||||||||
Expense of provisions for operational risk | ||||||||||||
Tax fines | ||||||||||||
Renegotiated loan insurance premium | ||||||||||||
Life ensurance | ||||||||||||
Expenses for charge-off leased assets recoveries | ||||||||||||
Provisions for trials and litigation | ||||||||||||
Contribution to other organisms | ||||||||||||
Provision for pending operations | ( | ) | ||||||||||
Expense recovery from operational risk events | ( | ) | ( | ) | ( | ) | ||||||
Others expenses | ||||||||||||
Total |
35. | Expenses from salaries and employee benefits: |
The composition of the expense for employee benefit obligations during the period 2022 and 2021 is as follows:
2022 | 2021 | 2020 | ||||||||||
MCh$ | MCh$ | MCh$ | ||||||||||
Expenses for short-term employee benefit | ||||||||||||
Expenses for employee benefits due to termination of employment contract | ||||||||||||
Training expenses | ||||||||||||
Expenses for nursery and kindergarten | ||||||||||||
Other personnel expenses | ||||||||||||
Total |
F-130
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
36. | Administrative expenses: |
This item is composed as follows:
2022 | 2021 | 2020 | ||||||||||
MCh$ | MCh$ | MCh$ | ||||||||||
General administrative expenses | ||||||||||||
Information technology and communications | ||||||||||||
Maintenance and repair of property and equipment | ||||||||||||
External advisory services and professional services fees | ||||||||||||
Surveillance and securities transport services | ||||||||||||
Office supplies | ||||||||||||
Insurance premiums except to cover operational risk events | ||||||||||||
Energy, heating and other utilities | ||||||||||||
External service of financial information and fraud prevention | ||||||||||||
Postal box, mail, postage and home delivery services | ||||||||||||
External service of custody of documentation | ||||||||||||
Legal and notary expenses | ||||||||||||
Other expenses of obligations for lease contracts | ||||||||||||
Expenses for short-term leases | ||||||||||||
Representation and travel expenses | ||||||||||||
Fees for other technical reports | ||||||||||||
Fees for review and audit of the financial statements by the external auditor | ||||||||||||
Expenses for leases low value | ||||||||||||
Fines applied by other agencies | ||||||||||||
Other general administrative expenses | ||||||||||||
Outsource services | ||||||||||||
Technological developments expenses, certification and technology testing | ||||||||||||
Data processing | ||||||||||||
External credit evaluation service | ||||||||||||
External human resources administration services and supply of external personnel | ||||||||||||
External cleaning service, casino, custody of files and documents, storage of furniture and equipment | ||||||||||||
Call Center service for sales, marketing, quality control customer service | ||||||||||||
Board expenses | ||||||||||||
Board of Directors Compensation | ||||||||||||
Other Board expenses | ||||||||||||
Marketing | ||||||||||||
Taxes, contributions and other legal charges | ||||||||||||
Contribution to the banking regulator | ||||||||||||
Real estate contributions | ||||||||||||
Taxes other than income tax | ||||||||||||
Municipal patents | ||||||||||||
Other legal charges | ||||||||||||
Total |
F-131
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
37. | Depreciation and Amortization: |
The amounts corresponding to charges to results for depreciation and amortization during the year 2022, 2021 and 2020, are detailed as follows:
2022 | 2021 | 2020 | ||||||||||
MCh$ | MCh$ | MCh$ | ||||||||||
Amortization of intangibles assets | ||||||||||||
Other intangible assets arising from business combinations | ||||||||||||
Other independently originated intangible assets | ||||||||||||
Depreciation of property and equipment | ||||||||||||
Buildings and land | ||||||||||||
Other property and equipment | ||||||||||||
Depreciation and impairment of leased assets | ||||||||||||
Buildings and land | ||||||||||||
Other property and equipment | ||||||||||||
Depreciation for improvements in leased real estate as leased of right-to-use assets | ||||||||||||
Amortization for the right-to-use other intangible assets under lease | ||||||||||||
Depreciation of other assets for investment properties | ||||||||||||
Amortization of other assets per activity income asset | ||||||||||||
Total |
38. | Impairment of non-financial assets: |
As of December 31, 2022, 2021 and 2020, the composition of the item for impairment of non-financial assets is composed as follows:
2022 | 2021 | 2020 | ||||||||||
MCh$ | MCh$ | MCh$ | ||||||||||
Impairment of intangible assets | ||||||||||||
Impairment of property and equipment | ||||||||||||
Impairment of assets from income from ordinary activities from contracts with customers | ( | ) | ||||||||||
Total |
F-132
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
39. | Expected credit losses: |
(a) | The composition is as follows: |
2022 | 2021 | 2020 | ||||||||||
MCh$ | MCh$ | MCh$ | ||||||||||
Expense of allowances established for credit risk | ||||||||||||
Expense of provisions for contingent loans | ( | ) | ||||||||||
Recovery of written-off credits | ( | ) | ( | ) | ( | ) | ||||||
Impairments for credit risk from financial assets at fair value through other comprehensive income | ( | ) | ||||||||||
Total |
(b) | Summary of the expense of provisions constituted for credit risk and expected credit losses: |
Expense of provisions constituted in the year | ||||||||||||
Evaluation | ||||||||||||
As of December 31, 2022 | Individual | Group | Total | |||||||||
MCh$ | MCh$ | MCh$ | ||||||||||
Loans and advances to Banks | ||||||||||||
Allowances established | ||||||||||||
Allowances released | ||||||||||||
Subtotal | ||||||||||||
Commercial loans | ||||||||||||
Allowances established | ||||||||||||
Allowances released | ||||||||||||
Subtotal | ||||||||||||
Residential mortgage loans | ||||||||||||
Allowances established | ||||||||||||
Allowances released | ||||||||||||
Subtotal | ||||||||||||
Consumer loans | ||||||||||||
Allowances established | ||||||||||||
Allowances released | ||||||||||||
Subtotal | ||||||||||||
Expense of allowances established for credit risk | ||||||||||||
Contingent loans | ||||||||||||
Loans and advances to Banks | ||||||||||||
Commercial loans | ||||||||||||
Consumer loans | ||||||||||||
Expenses of provisions for contingent loans | ||||||||||||
Impairments for credit risk from financial assets at fair value through other comprehensive income | ||||||||||||
Recovery of written-off credits | ||||||||||||
Loans and advances to Banks | ||||||||||||
Commercial loans | ( | ) | ||||||||||
Residential mortgage loans | ( | ) | ||||||||||
Consumer loans | ( | ) | ||||||||||
Subtotal | ( | ) | ||||||||||
Total Expected Credit Losses |
F-133
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
39. | Expected credit losses, continued: |
Expense of provisions constituted in the year | ||||||||||||
Evaluation | ||||||||||||
As of December 31, 2021 | Individual | Group | Total | |||||||||
MCh$ | MCh$ | MCh$ | ||||||||||
Loans and advances to Banks | ||||||||||||
Allowances established | ||||||||||||
Allowances released | ( | ) | ( | ) | ||||||||
Subtotal | ( | ) | ( | ) | ||||||||
Commercial loans | ||||||||||||
Allowances established | ||||||||||||
Allowances released | ( | ) | ( | ) | ||||||||
Subtotal | ( | ) | ( | ) | ||||||||
Residential mortgage loans | ||||||||||||
Allowances established | ||||||||||||
Allowances released | ||||||||||||
Subtotal | ||||||||||||
Consumer loans | ||||||||||||
Allowances established | ||||||||||||
Allowances released | ||||||||||||
Subtotal | ||||||||||||
Expense of allowances established for credit risk | ( | ) | ||||||||||
Contingent loans | ||||||||||||
Loans and advances to Banks | ||||||||||||
Commercial loans | ||||||||||||
Consumer loans | ( | ) | ||||||||||
Expenses of provisions for contingent loans | ( | ) | ||||||||||
Impairments for credit risk from financial assets at fair value through other comprehensive income | ||||||||||||
Recovery of written-off credits | ||||||||||||
Loans and advances to Banks | ||||||||||||
Commercial loans | ( | ) | ||||||||||
Residential mortgage loans | ( | ) | ||||||||||
Consumer loans | ( | ) | ||||||||||
Subtotal | ( | ) | ||||||||||
Total Expected Credit Losses |
F-134
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
39. | Expected credit losses, continued: |
Expense of provisions constituted in the year | ||||||||||||
As of December 31, 2020 | Evaluation | |||||||||||
Individual | Group | Total | ||||||||||
MCh$ | MCh$ | MCh$ | ||||||||||
Loans and advances to Banks | ||||||||||||
Allowances established | ||||||||||||
Allowances released | ||||||||||||
Subtotal | ||||||||||||
Commercial loans | ||||||||||||
Allowances established | ||||||||||||
Allowances released | ||||||||||||
Subtotal | ||||||||||||
Residential mortgage loans | ||||||||||||
Allowances established | ||||||||||||
Allowances released | ||||||||||||
Subtotal | ||||||||||||
Consumer loans | ||||||||||||
Allowances established | ||||||||||||
Allowances released | ||||||||||||
Subtotal | ||||||||||||
Expense of allowances established for credit risk | ||||||||||||
Contingent loans | ||||||||||||
Loans and advances to Banks | ||||||||||||
Commercial loans | ||||||||||||
Consumer loans | ||||||||||||
Expenses of provisions for contingent loans | ||||||||||||
Impairments for credit risk from financial assets at fair value through other comprehensive income | ( | ) | ||||||||||
Recovery of written-off credits | ||||||||||||
Loans and advances to Banks | ||||||||||||
Commercial loans | ( | ) | ||||||||||
Residential mortgage loans | ( | ) | ||||||||||
Consumer loans | ( | ) | ||||||||||
Subtotal | ( | ) | ||||||||||
Total Expected Credit Losses |
40. | Related Party Disclosures: |
Related parties are considered to be those natural or legal persons who are in positions to directly or indirectly have significant influence through their ownership or management of the Bank and its subsidiaries.
According to the above, the Bank has
considered as related parties those natural or legal persons who have a direct participation or through third parties on bank ownership,
where such participation exceeds
F-135
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
40. | Related Party Transactions, continued: |
(a) | Assets and liabilities with related parties: |
Related Party Type | ||||||||||||||||||||
Type of current assets and liabilities with related
parties As of December 31, 2022 | Parent Entity MCh$ | Other Legal Entity MCh$ | Key Personnel of the Consolidated Bank MCh$ | Other Related Party MCh$ | Total MCh$ | |||||||||||||||
ASSETS | ||||||||||||||||||||
Financial assets held for trading at fair value through profit or loss | ||||||||||||||||||||
Derivative Financial Instruments | ||||||||||||||||||||
Debt financial instruments | ||||||||||||||||||||
Other financial instruments | — | — | — | |||||||||||||||||
Non-trading financial assets mandatorily measured at fair value through profit or loss | ||||||||||||||||||||
Financial assets designated as at fair value through profit or loss | ||||||||||||||||||||
Financial assets at fair value through other comprehensive income | ||||||||||||||||||||
Derivative Financial Instruments for hedging purposes | ||||||||||||||||||||
Financial assets at amortized cost | ||||||||||||||||||||
Rights by resale agreements and securities lending | ||||||||||||||||||||
Debt financial instruments | ||||||||||||||||||||
Commercial loans | ||||||||||||||||||||
Residential mortgage loans | ||||||||||||||||||||
Consumer Loans | ||||||||||||||||||||
Allowances established – Loans | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
Other assets | ||||||||||||||||||||
Contingent loans | ||||||||||||||||||||
LIABILITIES | ||||||||||||||||||||
Financial liabilities held for trading at fair value through profit or loss | ||||||||||||||||||||
Derivative Financial Instruments | ||||||||||||||||||||
Financial liabilities designated as at fair value through profit or loss | ||||||||||||||||||||
Derivative Financial Instruments for hedging purposes | ||||||||||||||||||||
Financial liabilities at amortized cost | ||||||||||||||||||||
Current accounts and other demand deposits | ||||||||||||||||||||
Saving accounts and time deposits | ||||||||||||||||||||
Obligations by repurchase agreements and securities lending | ||||||||||||||||||||
Borrowings from financial institutions | ||||||||||||||||||||
Debt financial instruments issued | ||||||||||||||||||||
Other financial obligations | ||||||||||||||||||||
Lease liabilities | ||||||||||||||||||||
Other liabilities |
F-136
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
40. | Related Party Transactions, continued: |
(a) | Assets and liabilities with related parties, continued: |
Related Party Type | ||||||||||||||||||||
Type of current assets and
liabilities with related parties As of December 31, 2021 | Parent Entity MCh$ | Other Legal Entity MCh$ | Key Personnel of the Consolidated Bank MCh$ | Other Related Party MCh$ | Total MCh$ | |||||||||||||||
ASSETS | ||||||||||||||||||||
Financial assets held for trading at fair value through profit or loss | ||||||||||||||||||||
Derivative Financial Instruments | ||||||||||||||||||||
Debt financial instruments | ||||||||||||||||||||
Other financial instruments | — | — | — | |||||||||||||||||
Non-trading financial assets mandatorily measured at fair value through profit or loss | ||||||||||||||||||||
Financial assets designated as at fair value through profit or loss | ||||||||||||||||||||
Financial assets at fair value through other comprehensive income | ||||||||||||||||||||
Derivative Financial Instruments for hedging purposes | ||||||||||||||||||||
Financial assets at amortized cost | ||||||||||||||||||||
Rights by resale agreements and securities lending | ||||||||||||||||||||
Debt financial instruments | ||||||||||||||||||||
Commercial loans | — | |||||||||||||||||||
Residential mortgage loans | ||||||||||||||||||||
Consumer Loans | ||||||||||||||||||||
Allowances established – Loans | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
Other assets | ||||||||||||||||||||
Contingent loans | ||||||||||||||||||||
LIABILITIES | ||||||||||||||||||||
Financial liabilities held for trading at fair value through profit or loss | ||||||||||||||||||||
Derivative Financial Instruments | ||||||||||||||||||||
Financial liabilities designated as at fair value through profit or loss | ||||||||||||||||||||
Derivative Financial Instruments for hedging purposes | ||||||||||||||||||||
Financial liabilities at amortized cost | ||||||||||||||||||||
Current accounts and other demand deposits | ||||||||||||||||||||
Saving accounts and time deposits | ||||||||||||||||||||
Obligations by repurchase agreements and securities lending | — | — | ||||||||||||||||||
Borrowings from financial institutions | ||||||||||||||||||||
Debt financial instruments issued | ||||||||||||||||||||
Other financial obligations | ||||||||||||||||||||
Lease liabilities | ||||||||||||||||||||
Other liabilities |
F-137
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
40. | Related Party Disclosures, continued: |
(b) | Income and expenses from related party transactions (*): |
As of December 31, 2022 | Parent Entity | Other Legal Entity | Key personnel of the consolidated Bank | Other Related party | Total | |||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||
Interest and UF indexation revenue | ||||||||||||||||||||
Income from commissions | ||||||||||||||||||||
Net Financial income (expense) | ||||||||||||||||||||
Other income | ||||||||||||||||||||
Total Income | ||||||||||||||||||||
Interest and UF indexation expense | ||||||||||||||||||||
Expenses from commissions | ||||||||||||||||||||
Expenses credit losses | ( | ) | ||||||||||||||||||
Expenses from salaries and employee benefits | ||||||||||||||||||||
Administrative expenses | ||||||||||||||||||||
Other expenses | ||||||||||||||||||||
Total Expenses |
As of December 31, 2021 | Parent Entity | Other Legal Entity | Key personnel of the consolidated Bank | Other Related party | Total | |||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||
Interest and UF indexation revenue | ||||||||||||||||||||
Income from commissions | ||||||||||||||||||||
Net Financial income (expense) | ||||||||||||||||||||
Other income | ||||||||||||||||||||
Total Income | ||||||||||||||||||||
Interest and UF indexation expense | ||||||||||||||||||||
Expenses from commissions | ||||||||||||||||||||
Expenses credit losses | ||||||||||||||||||||
Expenses from salaries and employee benefits | ||||||||||||||||||||
Administrative expenses | ||||||||||||||||||||
Other expenses | ||||||||||||||||||||
Total Expenses |
F-138
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
40. | Related Party Disclosures, continued: |
(b) | Income and expenses from related party transactions (*), continued: |
As of December 31, 2020 | Parent Entity | Other Legal Entity | Key personnel of the consolidated Bank | Other Related party | Total | |||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||
Interest and UF indexation revenue | ||||||||||||||||||||
Income from commissions | ||||||||||||||||||||
Net Financial income (expense) | ( | ) | ( | ) | ||||||||||||||||
Other income | ||||||||||||||||||||
Total Income | ||||||||||||||||||||
Interest and UF indexation expense | ||||||||||||||||||||
Expenses from commissions | ||||||||||||||||||||
Expenses credit losses | ( | ) | ( | ) | ||||||||||||||||
Expenses from salaries and employee benefits | ||||||||||||||||||||
Administrative expenses | ||||||||||||||||||||
Other expenses | ||||||||||||||||||||
Total Expenses |
(*) | This does not constitute a Statement of Income from operations with related parties since the assets with these parties are not necessarily equal to the liabilities and in each of them the total income and expenses are reflected and not those corresponding to matched operations. |
F-139
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
40. | Related Party Disclosures, continued: |
(c) | Transactions with related parties: |
As of December 31, 2022
Description of the transaction | Effect on Income | Effect on Financial position | ||||||||||||||||||||||||||||
Company name | Nature of the relationship with the Bank | Type of service | Term | Renewal conditions | Transactions under equivalence conditions to those transactions with mutual independence between the parties | Amount | Income | Expenses |
Accounts receivable | Accounts payable | ||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||||||||||
Ionix SPA | ||||||||||||||||||||||||||||||
Canal 13 | ||||||||||||||||||||||||||||||
Servipag Ltda. | ||||||||||||||||||||||||||||||
Bolsa de Comercio de Santiago | ||||||||||||||||||||||||||||||
Enex S.A. | ||||||||||||||||||||||||||||||
Redbanc S.A. | ||||||||||||||||||||||||||||||
Sistemas Oracle de Chile Ltda. | ||||||||||||||||||||||||||||||
Depósito Central de Valores | ||||||||||||||||||||||||||||||
Inmobiliaria e inversiones Capitolio S.A. | ||||||||||||||||||||||||||||||
Tagle y Compañía limitada | ||||||||||||||||||||||||||||||
Manantial S.A | ||||||||||||||||||||||||||||||
Radio difusión SPA | ||||||||||||||||||||||||||||||
Nexus S.A. | ||||||||||||||||||||||||||||||
Artikos Chile S.A. | ||||||||||||||||||||||||||||||
DCV registros S.A | ||||||||||||||||||||||||||||||
Soc operadora de la Cámara de Compensación | ||||||||||||||||||||||||||||||
Comder Contraparte Central S.A. | ||||||||||||||||||||||||||||||
Bolsa Electrónica de Chile S.A. | ||||||||||||||||||||||||||||||
Transbank S.A. | ||||||||||||||||||||||||||||||
Centro de Compensación Automatizado S.A. | ||||||||||||||||||||||||||||||
Citibank |
F-140
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
40. | Related Party Disclosures, continued: |
(d) | Payments to the Board of Directors and to key personnel of the management of the Bank and its subsidiaries: |
2022 | 2021 | |||||||
MCh$ | MCh$ | |||||||
Directory: | ||||||||
Payment of remuneration and attendance fees of the Board of Directors - Bank and its subsidiaries | ||||||||
Key Personnel of the Management of the Bank and its Subsidiaries: | ||||||||
Payment for benefits to short-term employees | ||||||||
Payment for benefits to employees for termination of employment contract | ||||||||
Subtotal | ||||||||
Total |
(e) | Composition of the Board of Directors and key personnel of the Management of the Bank and its subsidiaries: |
2022 | 2021 | |||||||
No. Executives | ||||||||
Directory: | ||||||||
Directors – Bank and its subsidiaries | ||||||||
Key Personnel of the Management of the Bank and its Subsidiaries: | ||||||||
CEO – Bank | ||||||||
CEOs – Subsidiaries | ||||||||
Division Managers / Area – Bank | ||||||||
Division Managers / Area – Subsidiaries | ||||||||
Subtotal | ||||||||
Total |
F-141
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
41. | Fair Value of Financial Assets and Liabilities: |
Banco de Chile and its subsidiaries have defined a corporate framework for valuation and control related with the process to the fair value measurement.
Within the established framework includes the Product Control Unit, which is independent of the business areas and reports to the Financial Management Control and Productivity Division Manager. This function befalls to the Financial Control, Treasury and Capital Manager, through the Financial Risk Information and Control Section, is responsible for independent verification of price and results of trading (including derivatives) and investment operations and all fair value measurements.
To achieve the appropriate measurements and controls, the Bank and its subsidiaries, take into account at least the following aspects:
(i) | Industry standard valuation. |
To value financial instruments, Banco de Chile uses industry standard modeling; quota value, share price, discounted cash flows and valuation of options through Black-Scholes-Merton, according to the case. The input parameters for the valuation correspond to rates, prices and levels of volatility for different terms and market factors that are traded in the national and international market and that are provided by the main sources of the market.
(ii) | Quoted prices in active markets. |
The fair value for instruments with quoted prices in active markets is determined using daily quotes from electronic systems information (such as Bolsa de Comercio de Santiago, Bloomberg, LVA and Risk America, etc). This quote represents the price at which these instruments are regularly traded in the financial markets.
(iii) | Valuation techniques. |
If no specific quotes are available for the instrument to be valued, valuation techniques will be used to determine the fair value.
Due to, in general, the valuation models require a set of market parameters as inputs, the aim is to maximize information based on observable or price-related quotations for similar instruments in active markets. To the extent there is no information in direct from the markets, data from external suppliers of information, prices of similar instruments and historical information are used to validate the valuation parameters.
(iv) | Fair value adjustments. |
Part of the fair value process considers two adjustments to the market value of each instrument calculated based on the market parameters. The Bid/offer adjustment represents the impact on the valuation of an instrument depending on whether the position corresponds to a long (bought) or a short (sold). To calculate this adjustment is used the direct quotes from active markets or indicative prices or derivatives of similar assets depending on the instrument, considering the Bid, Mid and Offer, respectively. Finally, the adjustment made for CVA and DVA for derivatives corresponds to the credit risk recognition of the issuer, either of the counterparty (CVA) or of Banco de Chile (DVA).
(v) | Fair value control. |
A process of independent verification of prices and interest rates is executed daily, in order to control that the market parameters used by Banco de Chile in the valuation of the financial instruments relating to the current state of the market and from them the best estimate derived of the fair value. The objective of this process is to control that the official market parameters provided by the respective business areas, before being entered into the valuation, are within acceptable ranges of differences when compared to the same set of parameters prepared independently by the Financial Risk Information and Control Section. As a result, value differences are obtained at the level of currency, product and portfolio. In the event significant differences exist, these differences are scaled according to the amount of individual materiality of each market factor and aggregated at the portfolio level, according to the grouping levels within previously defined ranges. These ranges are approved by the Finance, International and Financial Risk Committee.
Complementary and in parallel, the Financial Risk Information and Control Section generates and reports on a daily basis Profit and Loss (“P&L”) and Exposure to Market Risks, which allow for proper control and consistency of the parameters used in the valuation.
F-142
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
41. | Fair Value of Financial Assets and Liabilities, continued: |
(vi) | Judgmental analysis and information to Management. |
In particular cases, where there are no market quotations for the instrument to be valued and there are no prices for similar transactions instruments or indicative parameters, a specific control and a reasoned analysis must be carried out in order to estimate the fair value of the operation. Within the valuation framework described in the Reasonable Value Policy (and its procedure) approved by the Board of Directors of Banco de Chile, a required level of approval is set in order to carry out transactions where market information is not available or it is not possible to infer prices or rates from it.
(a) | Hierarchy of instrument valued at Fair value: |
Banco de Chile and its subsidiaries, classify all the financial instruments among the following levels:
Level 1: | These are financial instruments whose fair value is calculated at quoted prices (unadjusted) in extracted from liquid and deep markets. For these instruments there are quotes or prices (return internal rates, quote value, price) the observable market, so that assumptions are not required to determine the value. |
In this level, the following instruments are considered: currency futures, debt instruments issued by the Treasury and the Central Bank of Chile, which belong to benchmarks, mutual fund investments and equity shares. |
For the instruments of the Central Bank of Chile and the General Treasury of the Republic, all those mnemonics belonging to a Benchmark, in other words corresponding to one of the following categories published by the Santiago Stock Exchange, will be considered as Level 1: Pesos-02, Pesos-03, Pesos-04, Pesos-05, Pesos-07, Pesos-10, UF-02, UF-04, UF-05, UF-07, UF-10, UF-20, UF-30. A Benchmark corresponds to a group of mnemonics that are similar in duration and are traded in an equivalent way, i.e., the price (return internal rates in this case) obtained is the same for all the instruments that make up a Benchmark. This feature defines a greater depth of market, with daily quotations that allow classifying these instruments as Level 1. |
In the case of debt issued by the Chilean Government, the internal rate of return of the market is used to discount all flows to present value. In the case of mutual funds and equity shares, the current market price per share, which multiplied by the number of instruments results in the fair value. |
The preceding described valuation methodology is equivalent to the one used by the Bolsa de Comercio de Santiago (Santiago Stock Exchange) and corresponds with the standard methodology used in the market and is in accordance with standards used in IFRS. |
Level 2: | They are financial instruments whose fair value is calculated based on prices other than in quoted in Level 1 that are observable for the asset or liability, directly (that is, as prices or internal rates of return) or indirectly (that is, derived from prices or internal rates of return from similar instruments). These categories include: |
a) | Quoted prices for similar assets or liabilities in active markets. |
b) | Quoted prices for identical or similar assets or liabilities in markets that are not active. |
c) | Inputs data other than quoted prices that are observable for the asset or liability. |
d) | Inputs data corroborated by the market. |
At this level there are mainly derivatives instruments, debt issued by banks, debt issues of Chilean and foreign companies, issued in Chile or abroad, mortgage claims, financial brokerage instruments and some issuances by the Central Bank of Chile and the General Treasury of the Republic, which do not belong to benchmarks.
To value derivatives, depends on whether they are impacted by volatility as a relevant market factor in standard valuation methodologies; for options the Black-Scholes-Merton formula is used; for the rest of the derivatives, forwards and swaps, discounted cash flows method is used.
For the remaining instruments at this level, as for debt issues of level 1, the valuation is done through cash flows model by using an internal rate of return that can be derived or estimated from internal rates of return of similar securities as mentioned above.
In the event that there is no observable price for an instrument in a specific term, the price will be inferred from the interpolation between periods that have observable quoted price in active markets. These models incorporate various market variables, including the credit quality of counterparties, exchange rates and interest rate curves.
F-143
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
41. | Fair Value of Financial Assets and Liabilities, continued: |
Valuation Techniques and Inputs for Level 2 Instrument:
Type of Financial Instrument |
Valuation Method | Description: Inputs and Sources |
Local Bank and Corporate Bonds |
Discounted cash flows model |
Prices (internal rates of return) are provided by third party price providers that are widely used in the Chilean market.
Model is based on a Base Yield (Central Bank Bonds) and issuer spread.
The model is based on daily prices and risk/maturity similarities between Instruments. |
Offshore Bank and Corporate Bonds |
Prices (internal rates of return) are provided by third party price providers that are widely used in the Chilean market.
Model is based on daily prices. | |
Local Central Bank and Treasury Bonds |
Prices (internal rates of return) are provided by third party price providers that are widely used in the Chilean market.
Model is based on daily prices. | |
Mortgage Notes |
Prices (internal rates of return) are provided by third party price providers that are widely used in the Chilean market.
Model is based on a Base Yield (Central Bank Bonds) and issuer spread.
The model takes into consideration daily prices and risk/maturity similarities between instruments. | |
Time Deposits |
Prices are provided by third party price providers that are widely used in the Chilean market.
Model is based on daily prices and considers risk/maturity similarities between instruments. | |
Cross Currency Swaps, Interest Rate Swaps, FX Forwards, Inflation Forwards |
Forward Points, Inflation forecast and local swap rates are provided by market brokers that are widely used in the Chilean market
Offshore rates and spreads are obtained from third party price providers that are widely used in the Chilean market.
Zero Coupon rates are calculated by using the bootstrapping method over swap rates. | |
FX Options | Black-Scholes Model |
Prices for volatility surface estimates are obtained from market brokers that are widely used in the Chilean market. |
Level 3: | These are financial instruments whose fair value is determined using non-observable inputs data neither for the assets or liabilities under analysis nor for similar instruments. An adjustment to an input that is significant to the entire measurement can result in a fair value measurement classified within Level 3 of the fair value hierarchy, if the adjustment uses significant non-observable data entry. |
The instruments likely to be classified as Level 3 are mainly Corporate Debt by Chilean and foreign companies, issued both in Chile and abroad.
Valuation Techniques and Inputs for Level 3 Instrument:
Type of Financial Instrument |
Valuation Method | Description: Inputs and Sources |
Local Bank and Corporate Bonds | Discounted cash flows model | Since inputs for these types of securities are not observable by the market, we model interest rate of returns for them based on a Base Yield (Central Bank Bonds) and issuer spread. These inputs (base yield and issuer spread) are provided on a daily basis by third party price providers that are widely used in the Chilean market. |
Offshore Bank and Corporate Bonds | Discounted cash flows model | Since inputs for these types of securities are not observable by the market, we model interest rate of returns for them based on a Base Yield (US-Libor) and issuer spread. These inputs (base yield and issuer spread) are provided on a weekly basis by third party price providers that are widely used in the Chilean market. |
F-144
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
41. | Fair Value of Financial Assets and Liabilities, continued: |
(b) | Level chart: |
The following table shows the classification by levels, for financial instruments registered at fair value.
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||
Financial Assets | ||||||||||||||||||||||||||||||||
Financial Assets held for trading at fair value through profit or loss | ||||||||||||||||||||||||||||||||
Derivative contracts financial: | ||||||||||||||||||||||||||||||||
Forwards | ||||||||||||||||||||||||||||||||
Swaps | ||||||||||||||||||||||||||||||||
Call Options | ||||||||||||||||||||||||||||||||
Put Options | ||||||||||||||||||||||||||||||||
Futures | ||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||
Debt Financial Instruments: | ||||||||||||||||||||||||||||||||
From the Chilean Government and Central Bank | ||||||||||||||||||||||||||||||||
Other debt financial instruments issued in Chile | ||||||||||||||||||||||||||||||||
Financial debt instruments issued Abroad | ||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||
Others | ||||||||||||||||||||||||||||||||
Financial Assets at fair value through Other Comprehensive Income | ||||||||||||||||||||||||||||||||
Debt Financial Instruments: (1) | ||||||||||||||||||||||||||||||||
From the Chilean Government and Central Bank | ||||||||||||||||||||||||||||||||
Other debt financial instruments issued in Chile | ||||||||||||||||||||||||||||||||
Financial debt instruments issued Abroad | ||||||||||||||||||||||||||||||||
Equity Instruments: | ||||||||||||||||||||||||||||||||
Instruments issued in Chile | ||||||||||||||||||||||||||||||||
Instruments issued abroad | ||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||
Derivative contracts financial for hedging purposes | ||||||||||||||||||||||||||||||||
Forwards | ||||||||||||||||||||||||||||||||
Swaps | ||||||||||||||||||||||||||||||||
Call Options | ||||||||||||||||||||||||||||||||
Put Options | ||||||||||||||||||||||||||||||||
Futures | ||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||
Financial Liabilities | ||||||||||||||||||||||||||||||||
Financial liabilities held for trading at fair value through profit or loss | ||||||||||||||||||||||||||||||||
Derivative contracts financial: | ||||||||||||||||||||||||||||||||
Forwards | ||||||||||||||||||||||||||||||||
Swaps | ||||||||||||||||||||||||||||||||
Call Options | ||||||||||||||||||||||||||||||||
Put Options | ||||||||||||||||||||||||||||||||
Futures | ||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||
Others | ||||||||||||||||||||||||||||||||
Derivative contracts financial for hedging purposes | ||||||||||||||||||||||||||||||||
Forwards | ||||||||||||||||||||||||||||||||
Swaps | ||||||||||||||||||||||||||||||||
Call Options | ||||||||||||||||||||||||||||||||
Put Options | ||||||||||||||||||||||||||||||||
Futures | ||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||
Total |
(1) |
F-145
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
41. | Fair Value of Financial Assets and Liabilities, continued: |
(c) | Level 3 Reconciliation: |
The following table shows the reconciliation between the balances at the beginning and at the end of year for those instruments classified in Level 3, whose fair value is reflected in the Consolidated Financial Statements:
2022 | ||||||||||||||||||||||||||||||||
Balance as of January 1, 2022 | Gain (Loss) Recognized in Income (1) | Gain (Loss) Recognized in Equity (2) | Purchases | Sales | Transfer from Level 1 and 2 | Transfer to Level 1 and 2 | Balance as of December 31, 2022 | |||||||||||||||||||||||||
MCh | $MCh | $MCh | $MCh | $MCh | $MCh | $MCh | $MCh$ | |||||||||||||||||||||||||
Financial Assets held for trading at fair value through profit or loss | ||||||||||||||||||||||||||||||||
Debt Financial Instruments: | ||||||||||||||||||||||||||||||||
Other debt financial instruments issued in Chile | ( | ) | ||||||||||||||||||||||||||||||
Subtotal | ( | ) | ||||||||||||||||||||||||||||||
Financial Assets at fair value through Other Comprehensive Income: | ||||||||||||||||||||||||||||||||
Debt Financial Instruments: | ||||||||||||||||||||||||||||||||
Other debt financial instruments issued in Chile | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Equity Instruments: | ||||||||||||||||||||||||||||||||
Instruments issued abroad | ||||||||||||||||||||||||||||||||
Subtotal | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Total | ( | ) | ( | ) |
2021 | ||||||||||||||||||||||||||||||||
Balance as of January 1, 2021 | Gain (Loss) Recognized in Income (1) | Gain (Loss) Recognized in Equity (2) | Purchases | Sales | Transfer from Level 1 and 2 | Transfer to Level 1 and 2 | Balance as of December 31, 2021 | |||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||
Financial Assets held for trading at fair value through profit or loss | ||||||||||||||||||||||||||||||||
Debt Financial Instruments: | ||||||||||||||||||||||||||||||||
Other debt financial instruments issued in Chile | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Subtotal | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Financial Assets at fair value through Other Comprehensive Income: | ||||||||||||||||||||||||||||||||
Debt Financial Instruments: | ||||||||||||||||||||||||||||||||
Other debt financial instruments issued in Chile | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
Equity Instruments: | ||||||||||||||||||||||||||||||||
Instruments issued abroad | ( | ) | ||||||||||||||||||||||||||||||
Subtotal | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
Total | ( | ) | ( | ) | ( | ) |
(1) |
(2) |
F-146
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
41. | Fair Value of Financial Assets and Liabilities, continued: |
(d) | Sensitivity of instruments classified in Level 3 to changes in key assumptions of models: |
The following table shows the sensitivity, by type of instrument, of those instruments classified in Level 3 using alternative in key valuation assumptions:
As of December 31, 2022 | As of December 31, 2021 | |||||||||||||||
Level 3 | Sensitivity to changes in key assumptions of models | Level 3 | Sensitivity to changes in key assumptions of models | |||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||
Financial Assets held for trading at fair value through profit or loss | ||||||||||||||||
Debt Financial Instruments: | ||||||||||||||||
Other debt financial instruments issued in Chile | ( | ) | ( | ) | ||||||||||||
Subtotal | ( | ) | ( | ) | ||||||||||||
Financial Assets at fair value through Other Comprehensive Income | ||||||||||||||||
Debt Financial Instruments: | ||||||||||||||||
Other debt financial instruments issued in Chile | ( | ) | ( | ) | ||||||||||||
Equity Instruments: | ||||||||||||||||
Instruments issued abroad | ||||||||||||||||
Subtotal | ( | ) | ( | ) | ||||||||||||
Total | ( | ) | ( | ) |
With the purpose of determining the sensitivity of the financial investments to changes in significant market factors, the Bank has made alternative calculations at fair value, changing those key parameters for the valuation and which are not directly observable in screens. In the case of the financial assets listed in the table above, which correspond to Bank Bonds and Corporate Bonds, it was considered that, since there are no current observables prices, the input prices will be based on brokers’ quotes. The prices are usually calculated as a base rate plus a spread. For Local Bonds it was determined to apply a 10% impact on the price, while for the Off Shore Bonds it was determined to apply a 10% impact only on the spread, since the base rate is covered by interest rate swaps instruments in the so-called accounting hedges. The 10% impact is considered reasonable, taking into account the market performance of these instruments and comparing it against the bid / offer adjustment that is provisioned by these instruments.
F-147
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
41. | Fair Value of Financial Assets and Liabilities, continued: |
(e) | Other assets and liabilities: |
The following table summarizes the fair values of the Bank’s main financial assets and liabilities that are not recorded at fair value in the Statement of Financial Position. The values shown in this note are not attempt to estimate the value of the Bank’s income-generating assets, nor forecast their future behavior. The estimated fair value is as follows:
Book Value | Estimated Fair Value | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||
Assets | ||||||||||||||||
Cash and due from banks | ||||||||||||||||
Transactions in the course of collection | ||||||||||||||||
Subtotal | ||||||||||||||||
Financial assets at amortized cost | ||||||||||||||||
Rights by resale agreements and securities lending | ||||||||||||||||
Debt financial instruments | ||||||||||||||||
Loans and advances to Banks | ||||||||||||||||
Domestic banks | ||||||||||||||||
Central Bank of Chile | ||||||||||||||||
Foreign banks | ||||||||||||||||
Subtotal | ||||||||||||||||
Loans to customers, net | ||||||||||||||||
Commercial loans | ||||||||||||||||
Residential mortgage loans | ||||||||||||||||
Consumer loans | ||||||||||||||||
Subtotal | ||||||||||||||||
Total | ||||||||||||||||
Liabilities | ||||||||||||||||
Transactions in the course of payment | ||||||||||||||||
Financial liabilities at amortized cost | ||||||||||||||||
Current accounts and other demand deposits | ||||||||||||||||
Saving accounts and time deposits | ||||||||||||||||
Obligations by repurchase agreements and securities lending | ||||||||||||||||
Borrowings from financial institutions | ||||||||||||||||
Debt financial instruments issued | ||||||||||||||||
Letters of credit for residential purposes | ||||||||||||||||
Letters of credit for general purposes | ||||||||||||||||
Bonds | ||||||||||||||||
Other financial obligations | ||||||||||||||||
Subtotal | ||||||||||||||||
Debt financial instruments issued for regulatory capital purposes | ||||||||||||||||
Subordinate bonds | ||||||||||||||||
Total |
Other financial assets and liabilities not measured at their fair value, but for which a fair value is estimated, even if not managed based on such value, include assets and liabilities such as placements, deposits and other time deposits, debt issued, and other financial assets and obligations with different maturities and characteristics. The fair value of these assets and liabilities is calculated using the Discounted Cash Flow model and the use of various data sources such as yield curves, credit risk spreads, etc. In addition, due to some of these assets and liabilities are not traded on the market, periodic reviews and analyzes are required to determine the suitability of the inputs and determined fair values.
F-148
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
41. | Fair Value of Financial Assets and Liabilities, continued: |
(f) | Levels of other assets and liabilities: |
The table below sets forth the fair value of Financial Assets/Liabilities not measured at fair value on the balance sheet, for the years ended December 31, 2022 and 2021:
Level
1 Estimated Fair Value | Level
2 Estimated Fair Value | Level
3 Estimated Fair Value | Total Estimated Fair Value | |||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Cash and due from banks | ||||||||||||||||||||||||||||||||
Transactions in the course of collection | ||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||
Financial assets at amortized cost | ||||||||||||||||||||||||||||||||
Rights by resale agreements and securities lending | ||||||||||||||||||||||||||||||||
Debt financial instruments | ||||||||||||||||||||||||||||||||
Loans and advances to Banks | ||||||||||||||||||||||||||||||||
Domestic banks | ||||||||||||||||||||||||||||||||
Central Bank of Chile | ||||||||||||||||||||||||||||||||
Foreign banks | ||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||
Loans to customers, net | ||||||||||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||||||||||
Residential mortgage loans | ||||||||||||||||||||||||||||||||
Consumer loans | ||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
Transactions in the course of payment | ||||||||||||||||||||||||||||||||
Financial liabilities at amortized cost | ||||||||||||||||||||||||||||||||
Current accounts and other demand deposits | ||||||||||||||||||||||||||||||||
Saving accounts and time deposits | ||||||||||||||||||||||||||||||||
Obligations by repurchase agreements and securities lending | ||||||||||||||||||||||||||||||||
Borrowings from financial institutions | ||||||||||||||||||||||||||||||||
Debt financial instruments issued | ||||||||||||||||||||||||||||||||
Letters of credit for residential purposes | ||||||||||||||||||||||||||||||||
Letters of credit for general purposes | ||||||||||||||||||||||||||||||||
Bonds | ||||||||||||||||||||||||||||||||
Other financial obligations | ||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||
Debt financial instruments issued for regulatory capital purposes | ||||||||||||||||||||||||||||||||
Subordinate bonds | ||||||||||||||||||||||||||||||||
Total |
F-149
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
41. | Fair Value of Financial Assets and Liabilities, continued: |
(f) | Levels of other assets and liabilities, continued: |
The Bank determines the fair value of these assets and liabilities according to the following:
● | Short-term assets and liabilities: For assets and liabilities with short-term maturity, it is assumed that the book values approximate to their fair value. This assumption is applied to the following assets and liabilities: |
Assets | Liabilities | ||
- Cash and due from banks | - Current accounts and other demand deposits | ||
- Transactions in the course of collection | - Transactions in the course of payments | ||
- Investment under resale agreements and securities loans | - Obligations under repurchase agreements and securities loans | ||
- Loans and advance to domestic banks |
● | Loans to Customers and Advance to foreign banks: Fair value is determined by using the discounted cash flow model and internally generated discount rates, based on internal transfer rates derived from our internal transfer price process. Once the present value is determined, we deduct the related loan loss allowances in order to incorporate the credit risk associated with each contract or loan. As we use internally generated parameters for valuation purposes, we categorize these instruments in Level 3. |
● | Debt financial instruments at amortized cost: The fair value is calculated with the methodology of the Stock Exchange, using the IRR observed in the market. Because the instruments that are in this category correspond to Treasury Bonds that are Benchmark, they are classified in Level 1. |
● | Letters of Credit and Bonds: In order to determine the present value of contractual cash flows, we apply the discounted cash flow model by using market interest rates that are available in the market, either for the instruments under valuation or instruments with similar features that fit valuation needs in terms of currency, maturities and liquidity. The market interest rates are obtained from third party price providers widely used by the market. As a result of the valuation technique and the quality of inputs (observable) used for valuation, we categorize these financial liabilities in Level 2. |
● | Saving Accounts, Time Deposits, Borrowings from Financial Institutions, Subordinated Bonds and Other borrowings financial: The discounted cash flow model is used to obtain the present value of committed cash flows by applying a bucket approach and average adjusted discount rates that derived from both market rates for instruments with similar features and our internal transfer price process. As we use internally generated parameters and/or apply significant judgmental analysis for valuation purposes, we categorize these financial liabilities in Level 3. |
F-150
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
42. | Maturity according to their remaining Terms of Financial Assets and Liabilities: |
The table below details the main financial assets and liabilities grouped in accordance with their remaining maturity, including capitals and accrued interest as of December 31, 2022 and 2021. As these are for trading and Financial instrument at fair value through other comprehensive income are included at their fair value:
2022 | ||||||||||||||||||||||||||||||||||||||||
Demand | Up to 1 month | Over 1 month and up to 3 months | Over 3 month and up to 12 months | Subtotal up to 1 year | Over 1 year and up to 3 years | Over 3 year and up to 5 years | Over 5 years | Subtotal over 1 year | Total | |||||||||||||||||||||||||||||||
Assets | MCh $ | MCh $ | MCh $ | MCh $ | MCh $ | MCh $ | MCh $ | MCh $ | MCh $ | MCh$ | ||||||||||||||||||||||||||||||
Cash and due from banks | ||||||||||||||||||||||||||||||||||||||||
Transactions in the course of collection | ||||||||||||||||||||||||||||||||||||||||
Financial assets held for trading at fair value through profit or loss | ||||||||||||||||||||||||||||||||||||||||
Derivative contracts financial | ||||||||||||||||||||||||||||||||||||||||
Debt financial instruments | ||||||||||||||||||||||||||||||||||||||||
Others | ||||||||||||||||||||||||||||||||||||||||
Financial assets at fair value through other comprehensive income | ||||||||||||||||||||||||||||||||||||||||
Debt Financial Instruments | ||||||||||||||||||||||||||||||||||||||||
Equity Instruments | ||||||||||||||||||||||||||||||||||||||||
Derivative contracts financial for hedging purposes | ||||||||||||||||||||||||||||||||||||||||
Financial assets at amortized cost | ||||||||||||||||||||||||||||||||||||||||
Rights by resale agreements and securities lending | ||||||||||||||||||||||||||||||||||||||||
Debt financial instruments | ||||||||||||||||||||||||||||||||||||||||
Loans and advances to Banks (*) | ||||||||||||||||||||||||||||||||||||||||
Loans to customers, net (*) | ||||||||||||||||||||||||||||||||||||||||
Total financial assets |
F-151
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
42. | Maturity according to their remaining Terms of Financial Assets and Liabilities, continued: |
2022 | ||||||||||||||||||||||||||||||||||||||||
Demand | Up to 1 month | Over 1 month and up to 3 months | Over 3 month and up to 12 months | Subtotal up to 1 year | Over 1 year and up to 3 years | Over 3 year and up to 5 years | Over 5 years | Subtotal over 1 year | Total | |||||||||||||||||||||||||||||||
Liabilities | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||||||||||||||
Transactions in the course of payment | ||||||||||||||||||||||||||||||||||||||||
Financial liabilities held for trading at fair value through profit or loss | ||||||||||||||||||||||||||||||||||||||||
Derivative contracts financial | ||||||||||||||||||||||||||||||||||||||||
Others | ||||||||||||||||||||||||||||||||||||||||
Derivative contracts financial for hedging purposes | ||||||||||||||||||||||||||||||||||||||||
Financial liabilities at amortized cost | ||||||||||||||||||||||||||||||||||||||||
Current accounts and other demand deposits | ||||||||||||||||||||||||||||||||||||||||
Saving accounts and time deposits (**) | ||||||||||||||||||||||||||||||||||||||||
Obligations by repurchase agreements and securities lending | ||||||||||||||||||||||||||||||||||||||||
Borrowings from financial institutions | ||||||||||||||||||||||||||||||||||||||||
Debt financial instruments issued | ||||||||||||||||||||||||||||||||||||||||
Letters of credit | ||||||||||||||||||||||||||||||||||||||||
Bonds | ||||||||||||||||||||||||||||||||||||||||
Other financial obligations | ||||||||||||||||||||||||||||||||||||||||
Lease liabilities | ||||||||||||||||||||||||||||||||||||||||
Debt financial instruments issued for regulatory capital purposes | ||||||||||||||||||||||||||||||||||||||||
Total financial liabilities |
(*) |
(**) |
F-152
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
42. | Maturity according to their remaining Terms of Financial Assets and Liabilities, continued: |
2021 | ||||||||||||||||||||||||||||||||||||||||
Demand | Up to 1 month | Over
1 month and up to 3 months | Over
3 month and up to 12 months | Subtotal
up to 1 year | Over
1 year and up to 3 years | Over
3 year and up to 5 years | Over 5 years | Subtotal
over 1 year | Total | |||||||||||||||||||||||||||||||
Assets | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||||||||||||||
Cash and due from banks | ||||||||||||||||||||||||||||||||||||||||
Transactions in the course of collection | ||||||||||||||||||||||||||||||||||||||||
Financial assets held for trading at fair value through profit or loss | ||||||||||||||||||||||||||||||||||||||||
Derivative contracts financial | ||||||||||||||||||||||||||||||||||||||||
Debt financial instruments | ||||||||||||||||||||||||||||||||||||||||
Others | ||||||||||||||||||||||||||||||||||||||||
Financial assets at fair value through other comprehensive income | ||||||||||||||||||||||||||||||||||||||||
Debt Financial Instruments | ||||||||||||||||||||||||||||||||||||||||
Equity Instruments | ||||||||||||||||||||||||||||||||||||||||
Derivative contracts financial for hedging purposes | ||||||||||||||||||||||||||||||||||||||||
Financial assets at amortized cost | ||||||||||||||||||||||||||||||||||||||||
Rights by resale agreements and securities lending | ||||||||||||||||||||||||||||||||||||||||
Debt financial instruments | ||||||||||||||||||||||||||||||||||||||||
Loans and advances to Banks (*) | ||||||||||||||||||||||||||||||||||||||||
Loans to customers, net (*) | ||||||||||||||||||||||||||||||||||||||||
Total financial assets |
F-153
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
42. | Maturity according to their remaining Terms of Financial Assets and Liabilities, continued: |
2021 | ||||||||||||||||||||||||||||||||||||||||
Demand | Up to 1 month | Over
1 month and up to 3 months | Over
3 month and up to 12 months | Subtotal
up to 1 year | Over
1 year and up to 3 years | Over 3 year and up to 5 years | Over 5 years | Subtotal over 1 year | Total | |||||||||||||||||||||||||||||||
Liabilities | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||||||||||||||
Transactions in the course of payment | ||||||||||||||||||||||||||||||||||||||||
Financial liabilities held for trading at fair value through profit or loss | ||||||||||||||||||||||||||||||||||||||||
Derivative contracts financial | ||||||||||||||||||||||||||||||||||||||||
Others | ||||||||||||||||||||||||||||||||||||||||
Derivative contracts financial for hedging purposes | ||||||||||||||||||||||||||||||||||||||||
Financial liabilities at amortized cost | ||||||||||||||||||||||||||||||||||||||||
Current accounts and other demand deposits | ||||||||||||||||||||||||||||||||||||||||
Saving accounts and time deposits (**) | ||||||||||||||||||||||||||||||||||||||||
Obligations by repurchase agreements and securities lending | ||||||||||||||||||||||||||||||||||||||||
Borrowings from financial institutions | ||||||||||||||||||||||||||||||||||||||||
Debt financial instruments issued | ||||||||||||||||||||||||||||||||||||||||
Letters of credit | ||||||||||||||||||||||||||||||||||||||||
Bonds | ||||||||||||||||||||||||||||||||||||||||
Other financial obligations | ||||||||||||||||||||||||||||||||||||||||
Lease liabilities | ||||||||||||||||||||||||||||||||||||||||
Debt financial instruments issued for regulatory capital purposes | ||||||||||||||||||||||||||||||||||||||||
Total financial liabilities |
(*) |
(**) |
F-154
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
43. | Financial and Non-Financial Assets and Liabilities by Currency: |
As of December 31, 2022 | CLP | CLF | FX Indexation | USD | GBP | EUR | CHF | JPY | CNY | Others | TOTAL | |||||||||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||||||||||||||||||||||
Non-Financial assets | ||||||||||||||||||||||||||||||||||||||||||||
Total Assets | ||||||||||||||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||||||||||||||||||||
Non-Financial liabilities | ||||||||||||||||||||||||||||||||||||||||||||
Total Liabilities | ||||||||||||||||||||||||||||||||||||||||||||
Mismatch of Financial Assets and Liabilities (*) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) |
(*) |
As of December 31, 2021 | CLP | CLF | FX Indexation | USD | GBP | EUR | CHF | JPY | CNY | Others | TOTAL | |||||||||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||||||||||||||||||||||
Non-Financial assets | — | — | ||||||||||||||||||||||||||||||||||||||||||
Total Assets | ||||||||||||||||||||||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||||||||||||||||||||
Non-Financial liabilities | ||||||||||||||||||||||||||||||||||||||||||||
Total Liabilities | ||||||||||||||||||||||||||||||||||||||||||||
Mismatch of Financial Assets and Liabilities (*) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) |
(*) | This value does not consider non-financial assets and liabilities and the notional values of derivative instruments, which are disclosed at fair value. |
F-155
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report: |
(1) | Introduction |
Banco de Chile seeks to maintain a risk profile that ensures the sustainable growth that is aligned with its strategic objectives, maximizing value creation and guarantee its long-term solvency.
Our risk management policies are established in order to identify and analyze the risks faced by the Bank, set appropriate risk limits, alerts and controls, monitor risks and compliance with limits and alerts in order to carry out the necessary action plans. Through its administration policies and procedures, the Bank develops a disciplined and constructive control environment. Policies as well as risk management standards, procedures and systems are regularly reviewed.
For this, the Bank has teams with extensive experience and knowledge in each area associated with risks, ensuring comprehensive and consolidated management of the same, including the Bank and its subsidiaries.
(a) | Risk Management Structure |
Credit, Market and Operational Risk Management are at the all levels of the Organization, with a Corporate Governance structure that recognizes the relevance of the different risk areas that exist.
The Board of Directors of Banco de Chile is responsible for establishing the policies, the risk appetite framework, the guidelines for the development, validation and monitoring of models. Likewise, it approves the provision models, the Additional Provisions Policy and pronounces annually on the sufficient provisions. Also, it ratifies the strategies, policies, functional structure and comprehensive management model of Operational Risk and is in charge of guaranteeing the consistency of this model with the Bank’s strategy, ensuring proper implementation of the model in the organization. Along with this, it establishes the Subsidiary Risk Control Policy, describing the supervision scheme that the Bank applies to the relevant subsidiaries to control the risks that affect them. For its part, the Administration is responsible both for the establishment of standards and associated procedures as well as for the control and compliance with the disposed by the Board of Directors, ensuring that there is consistency between the criteria applied by the Bank and its subsidiaries, maintaining strict coordination at the corporate level and informing the Board of Directors in the defined instances.
The Bank’s Corporate Governance considers the active participation of the Board, acting directly or through different committees made up of Directors and Senior Management. It is permanently informed of the evolution of the different risk areas, participating through its Finance, International and Financial Risk, Credit, Portfolio Risk Committee and Higher Operational Risk Committee, in which the status of credit, market and operational risks are reviewed. These committees are described in the next paragraphs.
Risk Management is developed jointly by the Wholesale Credit Risk Division, the Retail Credit Risk and Global Risk Control Division and the Cybersecurity Division, which constitute the corporate risk governance structure, which by having highly experienced and specialized teams, together with a robust regulatory framework, allow optimal and effective management of the matters they address
The Wholesale Credit Risk Division and the Retail Credit Risk and Global Risk Control Division are responsible for credit risk in the admission, monitoring and recovery phases for the different business segments. Additionally, the Wholesale Credit Risk Division has under its supervision the Market Risk Management that performs the function of measuring, limiting, controlling and reporting said risk together with the definition of valuation and management standards for the Bank’s assets and liabilities.
F-156
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(1) | Introduction, continued: |
(a) | Risk Management Structure, continued: |
In turn, in the Retail Credit Risk and Global Risk Control Division, the Admissions Area, among its functions, develops the regulatory framework in matters of credit risk, and the Risk Models Area, which develops the different methodologies related to credit risk. Likewise, in this Division, model monitoring, validation and model risk management are carried out by the respective Areas that deal with these matters, ensuring the independence of the function.
This Division also has the Operational Risk and Business Continuity Management, in charge of managing and supervising the application of the policies, rules and procedures in each of these areas within the Bank and Subsidiaries. For purposes, the Operational Risk Management is in charge of guaranteeing the identification and efficient management of operational risks and promoting a culture in terms of risks to prevent financial losses and improve the quality of the processes, as well as proposing continuous improvements to risk management, aligned with business objectives. In addition to the above, the Business Continuity Management aims to manage the strategy and control of business continuity in the operational and technological field for the Bank, maintaining alternative operation plans and controlled tests to reduce the impact of disruptive events that may affect the organization. Both in Operational Risk and in Business Continuity, its methodologies, controls and scope are applied at the Banco de Chile level and are replicated in the subsidiaries, guaranteeing their homologation to the Bank’s global management model.
For its part, the Cybersecurity Division is responsible for defining, implementing and reporting the progress of the Strategic Cybersecurity Plan in line with the Bank’s business strategy, one of its main focuses being to protect internal information, that of its customers and collaborators.
This Division is comprises by the Cybersecurity Engineering Management, the Cyber Defense Management and the Strategic Management Deputy Management. The Technological Risk Management and the Cybersecurity Assurance Deputy Management also constitute it, as control units. Numeral 5 of this Note describes the responsibilities of the indicated managers and deputy managers.
(i) | Finance, International and Financial Risk Committee |
This committee functions are to design policies and procedures related to price and liquidity risk; design a structure of limits and alerts of financial exposures, review the proposal to the Board of Directors of the Risk Appetite Framework, and ensure a correct and timely measurement, control and reporting thereof; track exposures and financial risks; analyze impacts on the valuation of operations and / or results due to potential adverse movements in the values of market variables or liquidity narrowness; review the stress test assumptions and establish action plans where appropriate ; ensure the existence of independent units that value financial positions, and analyze the results of financial positions; review and approve the Comprehensive Risk Measurement in the area of market and liquidity risk; track the international financial exposure of liabilities; review the main credit exposures of Treasury products (derivatives, bonds); ensure that the management guidelines for price and liquidity risks in subsidiaries are consistent with those of the Bank, and be aware of the evolution of their main financial risks.
The Finance, International and Financial Risk Committee, session monthly and is comprises by the Chairman of the Board, four Directors or Advisors to the Board, General Manager, Financial Management Control and Productivity Division Manager, Wholesale Credit Risk Division Manager, Treasury Division Manager and Market Risk Area Manager. If deemed appropriate, the Committee may invite certain persons to participate, on a permanent or occasional basis, in one or more sessions.
(ii) | Credit Committees |
The credit approval process is done mainly through various credit committees, which are composed of qualified professionals and with the sufficient attributions to take decisions required.
Each committee is responsible for defining the terms and conditions under which the Bank accepts counterparty risks and the Wholesale Credit Risk and Retail Credit Risk Divisions and Global Risk Control participate independently and autonomously of the commercial areas. They are constituted according to the commercial segments and the amounts to approve and have different meeting periodicities.
Within the risk management structure
of the Bank, the maximum approval instance is the Credit Committee of Directors. Sessions weekly and is comprises by the Chairman of
the Board, regular and alternate directors, General Manager and the Wholesale Credit Risk Division Manager. This Committee is responsible
for knowing, analyzing and resolving all credit operations associated with clients and / or economic groups whose total amount subject
for approval is equal to or greater than UF
F-157
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(1) | Introduction, continued: |
(a) | Risk Management Structure, continued: |
(iii) | Portfolio Risk Committee |
The main function is to know the evolution of the composition, concentration and risk of the loan portfolio of the different banks and segments, covering the complete cycle of credit risk management with the processes of admission, monitoring and recovery of the credits granted. Review the main debtors and the different risk indicators of the portfolio, proposing differentiated management strategies. Approves and proposes to the Board the different credit risk policies. It is responsible for reviewing, approving and recommending to the Board of Directors, for its final approval, the different portfolio evaluation methodologies and provision models. It is also responsible for reviewing and analyzing the adequacy of provisions for the different banks and segments. Also to review the guidelines and methodological advances for the development of internal models of credit risk, together with monitoring the concentration by sectors and segments according to the sectoral limits policy. Reviews and approves both the Comprehensive Risk Measurement (CRM) and the Credit Risk Appetite Framework (RAF) in the area of credit risk, ensuring their due approval by the Board of Directors. Defines the metrics that are part of the Risk Appetite Framework and their acceptable levels. Verifies the consistency of the credit risk policies of the subsidiaries in relation to those of the Bank, controls them globally and becomes aware of the credit risk management carried out by the subsidiaries. In general, know and analyze any relevant aspect in matters of Credit Risk in the portfolio of Banco de Chile.
The Portfolio Risk Committee meets monthly and is comprises by the Chairman of the Board, two regular and alternate Directors, General Manager, Wholesale Credit Risk Division Manager, Retail Credit Risk Division Manager and Global Risk Control, Commercial Division Manager, Risk Management and Information Control Manager.
(iv) | Technical Committee for the Supervision of Internal Models |
The main function of the Committee is to provide a framework of methodological guidelines for the Development, Follow-up and Documentation of the mathematical models that are used in the massive segments for credit risk management, such as Management Models (Admission, Follow-up, Collection and Rating, among others) and the regulatory models (Capital and Provisions, specific for credit risk or additional, under local or international regulations), among others. The Committee may exceptionally evaluate alternative methodologies, other than those related to credit risk, at the request of its Chairman.
The Committee has the functions of defining the main criteria and guidelines to be used for the construction of new models; Review and approve methodologies associated with non-regulatory models (eg admission, collection), which must be submitted for the consideration of the Portfolio Risk Committee, so that it can rule on their ratification; In the case of regulatory models, the Technical Committee is limited to their review, leaving approval in the hands of the Portfolio Risk Committee and the Board of Directors. Establish minimum standards to monitor the quality of internal models. Establish the minimum standards to document the different areas related to the development, construction, monitoring, and operation of the models.
In terms of its composition, it is comprises by the manager of the Retail Credit Risk and Global Risk Control Division, the managers of the Risk Monitoring, Studies and Management, People Business Development, Risk Models Areas, Retail Monitoring and Models, and the Deputy Managers of Big Data and Regulatory Systems, of Models Validation, of Pre-approved Admission, of Regulatory Models, of Management and Infrastructure Models and of the Head of the Personnel Risk Department. The Committee meets monthly.
(v) | Operational Risk Higher Committee |
It is enforceable and is empowered to sanction the necessary changes in the processes, procedures, controls and computer systems that support the operation of the Bank, in order to mitigate its operational risks, ensuring that the different areas properly manage and control these risks. Additionally, it must be aware of the operational risk management carried out by the subsidiary companies and reported in their respective Operational Risk Committee, including the issues of Information Security and Business Continuity. Likewise, know the corrective measures adopted in the event of deviations or contingency scenarios that could affect the subsidiaries and/or the Bank in this type of risk.
The Operational Risk Higher Committee is comprises by the Chairman of the Board, three Directors, regular or alternate, appointed by the Bank’s Board of Directors, General Manager, Retail Credit Risk Divisions and Global Risk Control Manager, Operations and Technology Division Manager, Commercial Division Manager, Cybersecurity Division Manager, Marketing and Digital Banking Division Manager and Operational Risk Manager. The Committee meets monthly and can be summoned in an extraordinary manner.
F-158
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(1) | Introduction, continued: |
(a) | Risk Management Structure, continued: |
(vi) | Operational Risk Committee |
It is empowered to trigger the necessary changes in the processes, procedures, controls and information systems that support the operation of Banco de Chile, in order to mitigate its operational risks, ensuring that the different areas properly manage and control these risks.
The Operational Risk Committee is comprises by the Retail Credit Risk Divisions and Global Risk Control Manager, Financial Management Control and Productivity Division Manager, Cybersecurity Division Manager, Operational Risk Manager, Technological Risk Manager, Business Continuity Manager, Operations Area Manager, Planning and PMO Manager, Customer Area Manager, Large Companies Group Manager, Customer Service Manager, Chief Attorney and Operational Risk Management Deputy Manager. The Committee session monthly and can be summoned extraordinarily.
(vii) | Capital Management Committee |
This committee meets quarterly and is comprised by two members of the Board of Directors; the General Manager; the Financial Management Control and Productivity Division Manager; the Wholesale Credit Risk Division Manager; the Retail Credit Risk and Global Risk Control Division Manager; and the Treasury and Capital Financial Control Area Manager. The Presidency of the Committee is in charge of a member of the board of Directors. In case of absence of the Chairman, he is subrogated by the other member of the board of Directors.
The Capital Management Committee’s main function is to monitor and supervise the capital management of the Bank and its subsidiaries, and ensure its compliance in accordance with the Corporate Capital Management Policy and related regulations, being responsible for: (i) review and propose to the Board of Directors, for its approval, the Corporate Capital Management Policy, at least annually, (ii) review and approve the governance documentation associated with capital management, at least annually, (iii) ensure that the Bank has sufficient capital to meet both its current needs and those arising from stress scenarios, over a three-year horizon, (iv) review and approve, on an annual basis, the Capital Plan and propose Internal Capital Objectives, for their subsequent approval by the Board of Directors, (v) review and approve the Comprehensive Risk Measurement (CRM) and the Business and Capital Risk Appetite Framework (RAF), (vi) review and approve the results of the Stress Tests (previously approved by the specialized Committees), in their integrated version, for inclusion in the Capital Plan, as well as the Bank’s CRM and RAF, in their integrated versions, and propose adjustments to the Specialized Committees if deemed necessary, (vii) review and propose to the Board of Directors, for its approval, the Effective Equity Self-Assessment Report, (viii) periodically monitor the different metrics defined for the Bank’s capital management, as well as the variables that affect those parameters, (ix) keep the Board of Directors informed of compliance with the Capital Plan, the Bank’s Integrated RAF, including the Business and Capital RAF, as well as the evolution of the variables that affect capital management, (x) propose the activation and supervise the execution of the Contingency Plans associated with non-compliance with the RAF for Businesses and Capital, prior to their approval by the Board of Directors, as well as reviewing their updates annually, (xi) know and approve the methodologies and criteria used in regulatory and internal measurements related to capital management, and risk management with an impact on capital, associated with Pillars 1 and 2 of Basel, (xii) know and approve the information disclosed to the market within the framework of Pillar 3 of Basel, (xiii) review the results of the validation of the models associated with capital management and quarterly monitor the status of the observations generated from the validations, (xiv) be aware of the results of the internal control evaluation of the Capital Self-Assessment Process, prior to the issuance of the Total or Regulatory Capital Self-Assessment Report.
F-159
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(1) | Introduction, continued: |
(b) | Internal Audit |
The risk management processes of the entire Bank are permanently audited by the Internal Audit Area, which examines the sufficiency of the procedures and their compliance. Internal Audit discusses the results of all evaluations with the administration and reports its findings and recommendations to the Board of Directors through the Audit Committee.
(c) | Measurement Methodology |
Regarding to Credit Risk, loan loss provision and write offs are the fundamental metrics of the credit quality of our portfolio.
Banco de Chile permanently evaluates its loan portfolio, timely recognizing its risks. The bank has a set of guidelines related to modelling techniques for decision model development (scoring, campaigns and collection models), expected credit losses (both under local regulations, as well as under IFRS 9) and stress testing. These guidelines and the resulting models are approved by the Board of Directors.
As a result of this evaluation, on both individual and group portfolios, expected credit losses are determined.
The individual portfolio encompasses companies that due to their size, complexity or indebtedness, require a more detailed and a case-by-case analysis. Each obligor is assigned one of 16 risk categories (according to qualitative criteria based on the Bank’s internal credit rating system and a scale proposed by the regulator), in order to establish its expected credit losses in a timely and appropriate manner. The review of these classifications is carried out permanently considering the financial situation, payment behavior and the environment of each client.
The group portfolio encompasses natural persons and smaller companies. These assessments are carried out monthly through statistical models that estimate the appropriate level of expected credit losses. The consistency of these models is assessed through an independent validation and, subsequently, through the model monitoring process (i.e. retrospective tests) that compare actual vs expected losses.
Each year, the sufficiency of these expected credit losses under our Chilean GAAP is assessed and the results of that are presented to the Board of Directors. The Board of Directors then must issue a written opinion about it. As a result of this assessment, no supplementary provisions are required.
The monitoring and control of risks are carried through a set of limits established by the Board of Directors. These limits reflect the Bank’s business and market strategy, as well as the level of risk that it is willing to accept.
F-160
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(2) | Credit Risk |
Credit risk considers the likelihood that the counterparty in the credit operation will not be able to fulfill its contractual obligation due to incapacity or financial insolvency, and this leads to a potential credit loss.
The Bank seeks an adequate risk-return relation and an appropriate balance of the risks assumed, through a permanent credit risk management considering the processes of admission, monitoring and recovery of the loans granted. Likewise, it continuously manages risk knowledge, from a comprehensive approach, in order to contribute to the business and anticipate threats that could damage the solvency, quality of the portfolio, permeating a unique risk culture towards the Corporation, promoting the training and permanent formation of the Corporation’s personnel.
The foregoing has the permanent challenge of establishing the risk management framework for the different business segments served by the Bank, responding to regulatory requirements and commercial dynamism, being part of the digital transformation, and contributing from the perspective of risks to the various businesses addressed, through a vision of the portfolio that allows managing, resolving and controlling the business approval and monitoring process efficiently and proactively.
In the business segments, the application of additional management processes is taken into consideration, to the extent required, for those financing requests that that will have a greater exposure to environmental and/or social risks.
The Bank integrates the socio-environmental criteria in its evaluations for the granting of financing destined to the development of projects, whether national or regional and that can generate an impact of this type, where they are executed. For the financing of projects, they must have the corresponding permits, authorizations, patents and studies, according to the impact they generate. In addition, the Bank has specialized units for serving large clients, through which the financing of project development is concentrated, including those of Public Works concessions that contemplate the construction of infrastructure, mining, electrical, real estate developments that can generate an environmental impact.
Credit policies and processes materialize in the following management principles, which are addressed with a specialized approach according to the characteristics of the different markets and segments served, recognizing the singularities of each one of them:
1. | Apply a rigorous evaluation in the admission process, based on established credit policies, standards and procedures, together with the availability of sufficient and accurate information. Thus, it corresponds to analyze the generation of flows and solvency of the client to meet their payment commitments and, when the characteristics of the operation merit it, must constitute adequate collateral that allow mitigating the risk incurred with the client. |
2. | Have permanent and robust portfolio tracking processes, through systems that alert both the potential signs of impairment of clients, with respect to the conditions of origin, and also the possible business opportunities with those that present a better payments quality and behavior. |
3. | To develop credit risk modeling guidelines, in regulatory aspects and management, for efficient decision-making at different stages of the credit process. |
4. | Have a collection structure with timely, agile and effective processes that allow management to be carried out in accordance with the different types of clients and the types of breaches that arise, always in strict adherence to the regulatory framework and the Bank’s reputational definitions. |
5. | Maintain an efficient administration in work teams organization, tools and availability of information that allow an optimal credit risk management. |
F-161
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(2) | Credit Risk, continued: |
Based on these management principles, the credit risk divisions contribute to the business and anticipate threats that may affect the solvency and quality of the portfolio. In particular, during the last three years the solidity of these principles and the role of credit risk have made it possible to respond adequately to the challenges derived from the pandemic, providing timely responses to clients while maintaining the solid fundamentals that characterize the Bank’s portfolio in its different segments and products.
Within the framework of risk management, during 2022, a permanent and focused monitoring of the behavior of the portfolios has continued, including the evolution of the credits associated with the Fogape Covid and Fogape Reactivation programs.
(a) | Retail Segment |
In these segments, admission management is carried out mainly through a risk evaluation that uses scoring tools and an adequate credit attribution model to approve each operation. These evaluations take into consideration the level of indebtedness, payment capacity and the maximum acceptable exposure for the client.
For these segments, the Bank’s risk functions are segregated and distributed in the following areas:
− | Retail Admission and Regulatory Area, performs the evaluation of operations and clients, with specialization by products and segments. Maintains a framework of policies and standards that ensure the quality of the portfolio according to the desired risk, defining guidelines for the admission of clients and their respective parameterization in the evaluation systems. These definitions are released to commercial and risk areas through programs and continuous training, and their application is monitored through credit review processes. |
− | Risk Model Area, is responsible for developing, maintaining and updating credit risk models, whether for regulatory or management uses, in accordance with local and international regulations, determining the most appropriate functional specifications and statistical techniques for the development of the required models. These models are validated by the Model Validation Area and presented to the corresponding government bodies, such as the “Technical Committee for the Supervision and Development of Internal Models”, the Portfolio Risk Committee or the Board of Directors, as appropriate. |
− | Model Risk and Internal Control Area, its purpose is to manage the risks associated with models and their processes, for which it relies on the functions of model validation, model risk management and internal control. |
Model validation is responsible for carrying out an independent review of risk models, including risk-weighted assets and stress tests, both in the construction and implementation stages. It considers the validation of compliance with the guidelines established by the Board of Directors, addressing aspects such as governance, data quality, modeling techniques, implementation, methodological and parametric analysis, and documentation. The results of the review are presented and placed in consideration of the respective Committees, as appropriate.
For its part, model risk management is responsible for monitoring and ensuring compliance with the activities associated with the state in which the models are according to their life cycle
Finally, internal
control aims to ensure the reliability and transparency of the financial information generated by the Bank. For this, a periodic evaluation
process is carried out, based on the materiality of the risks in relation to their impact on the financial statements, carried out through
the evaluation of the design and operational effectiveness of the internal control environment. Additionally, and complying with the
same previous framework, the internal control process for Basel III has been implemented, which consists of an independent review of
the capital management function.
F-162
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(2) | Credit Risk, continued: |
(a) | Retail Segment, continued: |
− | Retail Tracking and Models Area, is in charge of measuring the behavior of portfolios especially through the monitoring of the main indicators of the aggregate portfolio and the analysis of layers, reported in management reports, generating relevant information for decision-making in different instances defined. Also, special follow-ups are generated according to relevant events in the environment. This Area ensures that the different strategies executed meet the risk quality objectives that determined their implementation. |
For its part, through the risk model monitoring function, they are monitored, ensuring compliance with the standards defined to ensure their predictive and discriminating power.
Additionally, this Area is responsible for managing the process for calculating provisions for credit risk, ensuring the correct execution of the processes and results obtained
− | Collection Area performs a cross-collection management in the Bank and defines refinancing criteria through the establishment of predefined renegotiation guidelines to solve the indebtedness of viable customers and with payment intentions, maintaining an adequate risk-return ratio, together with the incorporation of robust tools for a differentiated collection management according to the institutional policies and with strict adherence to the current regulatory framework. |
In this sense, the Bank has specific regulations related to the collection and normalization of clients, which makes it possible to ensure the quality of the portfolio in accordance with credit policies and the desired risk appetite framework. Through collection management, the attention of clients with temporary flow problems is favored, debt normalization plans are proposed to viable clients, in such a way that it is possible to maintain the relationship in the long term once their situation is regularized, the recovery of assets at risk is maximized and the necessary collection actions are carried out, in a timely manner, to ensure the recovery of debts or reduce potential loss.
(b) | Wholesale Segment |
In these segments, admission management is carried out through an individual evaluation of the client and the relationship of the rest of the group with the Bank is also considered if it belongs to a group of companies. This individual evaluation - and group if applicable - considers, among others, generation capacity, financial capacity with emphasis on equity solvency, exposure levels, industry variables, evaluation of partners and management, and aspects of the operation such as financing structure, term, products and possible collaterals.
The indicated evaluation is supported by a rating model that allows greater homogeneity in the evaluation of the client and his group. This evaluation also includes specialized areas in some segments that by their nature require expert knowledge, such as real estate, construction, agriculture, financial, international, among others.
In a centralized manner, a permanent monitoring of the portfolio is carried at the individual level off business segments and economic sectors, based on periodically updated information from both the client and the industry. Through this process, alerts are generated that ensure the correct and timely recognition of the risk of the individual portfolio and the special conditions established in the admission stage are monitored, such as controls of financial covenants, coverage of certain collaterals and conditions imposed at the time of approval.
Additionally, within the Admission areas, joint monitoring tasks are carried out that allow monitoring the development of operations from their gestation to their recovery, with the aim of ensuring the correct and timely identification of portfolio risks, and to manage in advance those cases with higher risk levels.
F-163
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(2) | Credit Risk, continued |
(b) | Wholesale Segment, continued: |
Upon detection of clients that show signs of impairment or default with any condition, the commercial area to which the client belongs, together with the Wholesale Credit Risk Division, establish action plans for their regularization. In those more complex cases where specialized management is required, the Special Assets Management area, belonging to the Wholesale Credit Risk Division, is directly in charge of collection management, establishing action plans and negotiations based on the particular characteristics of each client.
(c) | Derivative Transactions |
We produce own models which are used for credit risk management purposes, known as the pre-settlement exposure (PSE). Generally, the PSE is computed as follows:
PSE = Maximum (CMTM + CEF * Notional, 0)
CMTM: Current Mark-to-Market of the transaction
Notional: Transaction notional amount
CEF: Credit Exposure Factor, which
reflects the peak exposure within the life of the transaction, under
The portfolio approach is taken into account when computing exposures of several transactions closed with one single counterpart.
Credit mitigating conditions for derivative transactions have become popular in the local financial markets. There are financial institutions that have accepted early termination clauses, and netting is also possible with corporations when appropriate documentation under a regular Master Agreement is signed.
Collateral agreements have been requested by certain banks for inter-banking transactions within other financial institutions, but its effective application under Chilean Law make advisable not to include it in the exposure measurement.
Derivative transactions closed with counterparts residing abroad (mostly global banks) are documented utilizing ISDA and CSA. Netting and cash collateral above a certain threshold level are the typical credit mitigations schemes in place for this kind of transactions.
This metric is used for measuring, limiting, controlling and reporting credit exposures by counterparty.
F-164
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(2) | Credit Risk, continued: |
(d) | Portfolio Concentration: |
The maximum exposure to credit risk,
by client or counterparty, without taking into account guarantees or other credit enhancements as of December 31, 2022 and 2021, does
not exceed
The following tables show credit risk exposure per balance sheet item, including derivatives, detailed by both geographic region and industry sector as of December 31, 2022:
Chile | United States | England | Brazil | Others | Total | |||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||
Financial Assets | ||||||||||||||||||||||||
Cash and Due from Banks | ||||||||||||||||||||||||
Financial assets held for trading at fair value through profit or loss | ||||||||||||||||||||||||
Derivative contracts Financial | ||||||||||||||||||||||||
Forwards (*) | ||||||||||||||||||||||||
Swaps (**) | ||||||||||||||||||||||||
Call Options | ||||||||||||||||||||||||
Put Options | ||||||||||||||||||||||||
Futures | ||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||
Debt Financial Instruments | ||||||||||||||||||||||||
From the Chilean Government and Central Bank | ||||||||||||||||||||||||
Other debt financial instruments issued in Chile | ||||||||||||||||||||||||
Financial debt instruments issued Abroad | ||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||
Others Financial Instruments | ||||||||||||||||||||||||
Investments in mutual funds | ||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||
Financial Assets at fair value through other comprehensive income | ||||||||||||||||||||||||
Debt Financial Instruments | ||||||||||||||||||||||||
From the Chilean Government and Central Bank | ||||||||||||||||||||||||
Other debt financial instruments issued in Chile | ||||||||||||||||||||||||
Financial debt instruments issued Abroad | ||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||
Equity Instruments | ||||||||||||||||||||||||
Equity instruments issued in Chile | ||||||||||||||||||||||||
Equity instruments issued by foreign institutions | ||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||
Derivative contracts financial for hedging purposes | ||||||||||||||||||||||||
Forwards | ||||||||||||||||||||||||
Swaps | ||||||||||||||||||||||||
Call Options | ||||||||||||||||||||||||
Put Options | ||||||||||||||||||||||||
Futures | ||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||
Financial assets at amortized cost | ||||||||||||||||||||||||
Rights by resale agreements and securities lending | ||||||||||||||||||||||||
Debt Financial Instruments | ||||||||||||||||||||||||
From the Chilean Government and Central Bank | ||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||
Loans and advances to Banks | ||||||||||||||||||||||||
Central Bank of Chile | ||||||||||||||||||||||||
Domestic banks | ||||||||||||||||||||||||
Foreign banks | ||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||
Loans to Customers, Net | ||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||
Residential mortgage loans | ||||||||||||||||||||||||
Consumer loans | ||||||||||||||||||||||||
Subtotal |
(*) |
(**) |
F-165
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(2) | Credit Risk, continued: |
(d) | Portfolio Concentration, continued: |
Central Bank of Chile | Government | Retail (Individuals) | Financial Services | Trade | Manufacturing | Mining | Electricity, Gas and Water | Agriculture and Livestock | Fishing | Transportation and Telecom | Construction | Services | Others | Total | ||||||||||||||||||||||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||||||||||||||||||||||||||||||
Cash and Due from Banks | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial Assets held for trading at fair value through profit or loss | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative contracts Financial | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Forwards | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Swaps | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Call Options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Put Options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Futures | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt Financial Instruments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
From the Chilean Government and Central Bank | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other debt financial instruments issued in Chile | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial debt instruments issued Abroad | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Others Financial Instruments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investments in mutual funds | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial Assets at fair value through Other Comprehensive Income | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt Financial Instruments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
From the Chilean Government and Central Bank | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other debt financial instruments issued in Chile | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial debt instruments issued Abroad | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity Instruments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity instruments issued in Chile | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity instruments issued by foreign institutions | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative contracts financial for hedging purposes | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Forwards | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Swaps | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Call Options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Put Options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Futures | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial assets at amortized cost (*) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Rights by resale agreements | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt financial instruments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
From the Chilean Government and Central Bank | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to Banks | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Central Bank of Chile | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic banks | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign banks | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal |
(*) | Economic activity of Loans and accounts receivable from customers disclosed in Note No. 11 e). |
F-166
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(2) | Credit Risk, continued: |
(d) | Portfolio Concentration, continued: |
The following tables show credit risk exposure per balance sheet item, including derivatives, detailed by both geographic region and industry sector as of December 31, 2021:
Chile | United States | England | Brazil | Others | Total | |||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||
Financial Assets | ||||||||||||||||||||||||
Cash and Due from Banks | ||||||||||||||||||||||||
Financial assets held for trading at fair value through profit or loss | ||||||||||||||||||||||||
Derivative contracts Financial | ||||||||||||||||||||||||
Forwards | ||||||||||||||||||||||||
Swaps | ||||||||||||||||||||||||
Call Options | ||||||||||||||||||||||||
Put Options | ||||||||||||||||||||||||
Futures | ||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||
Debt Financial Instruments | ||||||||||||||||||||||||
From the Chilean Government and Central Bank | ||||||||||||||||||||||||
Other debt financial instruments issued in Chile | ||||||||||||||||||||||||
Financial debt instruments issued Abroad | ||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||
Others Financial Instruments | ||||||||||||||||||||||||
Investments in mutual funds | ||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||
Financial Assets at fair value through Other Comprehensive Income | ||||||||||||||||||||||||
Debt Financial Instruments | ||||||||||||||||||||||||
From the Chilean Government and Central Bank | ||||||||||||||||||||||||
Other debt financial instruments issued in Chile | ||||||||||||||||||||||||
Financial debt instruments issued Abroad | ||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||
Equity Instruments | ||||||||||||||||||||||||
Equity instruments issued in Chile | ||||||||||||||||||||||||
Equity instruments issued by foreign institutions | ||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||
Derivative contracts financial for hedging purposes | ||||||||||||||||||||||||
Forwards | ||||||||||||||||||||||||
Swaps | ||||||||||||||||||||||||
Call Options | ||||||||||||||||||||||||
Put Options | ||||||||||||||||||||||||
Futures | ||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||
Financial assets at amortized cost | ||||||||||||||||||||||||
Rights by resale agreements and securities lending | ||||||||||||||||||||||||
Debt Financial Instruments | ||||||||||||||||||||||||
From the Chilean Government and Central Bank | ||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||
Loans and advances to Banks | ||||||||||||||||||||||||
Central Bank of Chile | ||||||||||||||||||||||||
Domestic banks | ||||||||||||||||||||||||
Foreign banks | ||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||
Loans to Customers, Net | ||||||||||||||||||||||||
Commercial loans | ||||||||||||||||||||||||
Residential mortgage loans | ||||||||||||||||||||||||
Consumer loans | ||||||||||||||||||||||||
Subtotal |
F-167
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(2) | Credit Risk, continued: |
(d) | Portfolio Concentration, continued: |
Central Bank of Chile | Government | Retail (Individuals) | Financial Services | Trade | Manufacturing | Mining | Electricity, Gas and Water | Agriculture and Livestock | Fishing | Transportation and Telecom | Construction | Services | Others | Total | ||||||||||||||||||||||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||||||||||||||||||||||||||||||
Cash and Due from Banks | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial Assets held for trading at fair value through profit or loss | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative contracts Financial | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Forwards | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Swaps | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Call Options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Put Options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Futures | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt Financial Instruments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
From the Chilean Government and Central Bank | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other debt financial instruments issued in Chile | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial debt instruments issued Abroad | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Others Financial Instruments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investments in mutual funds | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial Assets at fair value through Other Comprehensive Income | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt Financial Instruments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
From the Chilean Government and Central Bank | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other debt financial instruments issued in Chile | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial debt instruments issued Abroad | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity Instruments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity instruments issued in Chile | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity instruments issued by foreign institutions | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative contracts financial for hedging purposes | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Forwards | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Swaps | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Call Options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Put Options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Futures | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial assets at amortized cost (*) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Rights by resale agreements | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Debt financial instruments | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
From the Chilean Government and Central Bank | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and advances to Banks | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Central Bank of Chile | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Domestic banks | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign banks | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subtotal |
F-168
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(2) | Credit Risk, continued: |
(e) | Collateral and Other Credit Enhancements: |
The amount and type of collateral required depends on the counterparty’s credit risk assessment.
The Bank has guidelines regarding the acceptability of types of collateral and valuation parameters.
The main types of collateral obtained are:
- | For commercial loans: Residential and non-residential real estate, liens and inventory. | |
- | For retail loans: Mortgages loans on residential property. |
The Bank also obtains collateral from parent companies for loans granted to their subsidiaries.
Management makes sure its collateral
is acceptable according to both external standards and internal policies guidelines and parameters. The Bank has approximately
The following table contains guarantees values as of December 31, 2022 and 2021:
Fair value of collateral and credit enhancements held as of December 31, 2022 | ||||||||||||||||||||||||||||
Maximum exposure to credit risk | Mortgages | Pledge | Securities | Warrants | Net collateral | Net exposure | ||||||||||||||||||||||
Loans to customers: | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||
Corporate lending | ||||||||||||||||||||||||||||
Small business lending | ||||||||||||||||||||||||||||
Consumer lending | ||||||||||||||||||||||||||||
Mortgage lending | ||||||||||||||||||||||||||||
Total |
Fair value of collateral and credit enhancements held as of December 31, 2021 | ||||||||||||||||||||||||||||
Maximum exposure to credit risk | Mortgages | Pledge | Securities | Warrants | Net collateral | Net exposure | ||||||||||||||||||||||
Loans to customers: | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||
Corporate lending | ||||||||||||||||||||||||||||
Small business lending | ||||||||||||||||||||||||||||
Consumer lending | ||||||||||||||||||||||||||||
Mortgage lending | ||||||||||||||||||||||||||||
Total |
The Bank also uses mitigating tactics for credit risk on derivative transactions. To date, the following mitigating tactics are used:
● | Accelerating transactions and net payment using market values at the date of default of one of the parties. | |
● | Option for both parties to terminate early any transactions with a counterparty at a given date, using market values as of the respective date. | |
● | Margins established with time deposits by customers that close FX forwards with subsidiary Banchile Corredores de Bolsa S.A. |
F-169
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(2) | Credit Risk, continued: |
(e) | Collateral and Other Credit Enhancements, continued: |
The value of the guarantees that the
Bank maintains related to the loans individually classified as impaired as of December 31, 2022 and 2021 amounted Ch$
The value guarantees related to past
due loans but no impaired as of December 31, 2022 and 2021 amounted Ch$
(f) | Credit Quality by Asset Class: |
The Bank determines the credit quality of financial assets using internal credit ratings. The rating process is linked to the Bank’s approval and monitoring processes and is carried out in accordance with risk categories established by current standards. Credit quality is continuously updated based on any favorable or unfavorable developments to customers or their environments, considering aspects such as commercial and payment behavior as well as financial information.
The Bank also carries out reviews focused on companies that participate in specific economic sectors, which are affected either by macroeconomic variables or variables of the sector. In this way, it is possible to timely establish the necessary and sufficient level of provisions to cover the losses due to the eventual non-recoverability of the credits granted.
The credit quality by asset class for Consolidated Statements of Financial Position sheet items, based on the Bank’s credit rating system, is presented in Note No. 11 letter (d).
Below is the detail of the default but not impaired portfolio:
Past due but not impaired(*) | ||||||||||||||||||||||||
As of | Neither past due nor impaired | Up to 30 days | Over 30 days and up to 60 days | Over 60 days and up to 90 days | Over 90 days | Total | ||||||||||||||||||
December 31, | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||
2022 | ||||||||||||||||||||||||
2021 |
(*) |
(g) | Assets Received in Lieu of Payment: |
The Bank has received assets in lieu
of payment totaling Ch$
F-170
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(2) | Credit Risk, continued: |
(h) | Renegotiated Assets: |
The impaired loans are considered to be renegotiated when the corresponding financial commitments are restructured and the Bank assesses the probability of recovery as sufficiently high.
The following table details the book value of loans with renegotiated terms per financial asset class:
2022 | 2021 | |||||||
Financial assets | MCh$ | MCh$ | ||||||
Loans and advances to banks | ||||||||
Domestic banks | ||||||||
Foreign banks | ||||||||
Subtotal | ||||||||
Loans to Customers at amortized cost | ||||||||
Commercial loans | ||||||||
Residential mortgage loans | ||||||||
Consumer loans | ||||||||
Subtotal | ||||||||
Total renegotiated financial assets |
There is an increase in the stock of renegotiated commercial and mortgage loans, while there is a decrease in the stock of renegotiated consumer loans. This decrease is due to a lower flow of renegotiated operations, which is not enough to offset amortizations and accounting debt write-offs.
The Bank calculates ECLs either on a group or an individual basis, which are described in more detail in Note 2 (i) (viii).
The renegotiated portfolio of Banco
de Chile represents
The most common type of modification is to extend the term of the loan. For payment extensions, depending on the characteristics of each credit, the Bank can agree with the client changes in the initial conditions in terms of interest rate and payment schedule. With regard to the forgiveness of the principal, the Bank normally does not give this benefit. The Board of Directors might on rare occasions approve debt forgiveness for a portion of principal on certain credit-operations that have been impaired and provisioned previously. Only those borrowers which are considered viable are renegotiated. If the debtor is not considered to be financially viable, the Bank proceeds to the legal collection of debts.
The table below includes Stage 2 and 3 assets that were modified and, therefore, treated as forborne during the 2022 period, with the related modification loss suffered by the Bank.
2022 MCh$ | ||||
Amortized costs of financial assets modified during the period | ||||
Net modification loss |
F-171
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(2) | Credit Risk, continued: |
(h) | Renegotiated Assets, continued: |
Although the Bank does not have systematized information related to the balance of modified loans by type of concession, it continuously monitors its impaired portfolio as defined in note 2 (i) (viii). Also, for internal purposes the renegotiated loan portfolio is analyzed and reviewed as part of the impaired portfolio. Therefore, for management and regulatory (local and IFRS) reporting purposes the Bank does not frequently use information on loans modified by types of concession.
The table below shows the gross carrying amount of previously modified financial assets for which loss allowances has changed to 12 month Expected Credit Losses (12mECL) measurement during the 2022 period:
December 31, 2022 | ||||||||||||||||
Post modification | Pre-modification | |||||||||||||||
Gross carrying amount MCh$ | Corresponding ECL MCh$ | Gross carrying amount MCh$ | Corresponding ECL MCh$ | |||||||||||||
Facilities that have cured since modification and are now measured using 12mECLs (Stage 1) | ||||||||||||||||
Facilities that reverted to (Stage 2/3) lifetime ECLs having once cured |
The Bank determines the appropriate amount of allowance for expected credit losses as follows:
The commercial loan renegotiations are always evaluated and approved individually by the credit committee with all the background and history of previous approvals, including financial records, delinquencies or other previous renegotiations of the debtor. In this step of renegotiation approval, a reevaluation of the provision level is always carried out for each debtor.
Among the variables that the credit committee considers in establishing the level of provisions for the individual portfolio are payment behavior, payment capacity and collateral coverage are mainly considered.
On the other hand, for the portfolio evaluated for provisioning purposes as a group, the models contain past behavior variables, incorporating delinquencies and default prior to renegotiation for six months, recognizing the increased risk and generating a higher level of provisions. The provision can only be decreased if the renegotiated client has good payment behavior (an overdue period of less than 30 days), in a period of over seven months.
In both segments, the approvals of the renegotiation operations are submitted to specialized credit committees, whose members have attributions adjusted to this risk.
Moreover, an operation identified as renegotiation never leaves this classification for purposes of monitoring and provisioning.
F-172
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(2) | Credit Risk, continued: |
(i) | Compliance with credit limit granted to related debtors |
Below are detailed the figures for compliance with the credit limit granted to debtors related to the ownership or management of the Bank and subsidiaries, in accordance with the Article 84 No. 2 of the General Banking Law, which establishes that in no case the total of these credits may exceed the amount of its Total or Regulatory Capital:
December 2022 | December 2021 | |||||||
MCh$ | MCh$ | |||||||
Total related debt | ||||||||
Consolidated Total or Regulatory Capital | ||||||||
Limit used % | % | % |
(j) | Measures associated with the COVID-19 Contingency: |
Due to the health emergency caused by the COVID-19 pandemic, the Bank implemented measures that sought to make payments more flexible on a temporary basis and provided financing that allows to sustain working capital during this period, having in the first case credit refinancing (mortgage, commercial, consumer) and in the second case and by order of the Chilean Government, through the Ministry of Finance, Central Bank of Chile and the Commission for the Financial Market, measures to facilitate the granting of loans with state guarantee (FOGAPE-COVID) with the aim of being used as working capital or reactivating the activities of companies that demonstrate having been affected by the COVID-19 pandemic.
The objective of the FOGAPE-COVID
initiative was to facilitate access to working capital loans for individuals and legal entities with annual sales of less than UF
In order to cover the Bank’s exposure
to potential losses associated with granting these state-guaranteed loans, a provision equivalent to
The payment behavior of these loans (COVID refinancing and FOGAPE-COVID) in both cases have a similar behavior to the rest of the Bank’s loan portfolio.
F-173
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(3) | Market Risk: |
Market Risk refers to the loss that the Bank could face due to a liquidity shortage to honor the payments, or to close financial transactions in a timely manner (Liquidity Risk), or due to adverse movements in the values of market variables (Risk Price). For its correct management, the guidelines of the Liquidity Risk Management Policy and the Market Risk Management Policy are considered, both are subject to review, at least annually, by the Market Risk Manager and approval by the Bank’s Board of Directors, at least annually.
(a) | Liquidity Risk: |
Liquidity Risk Measurement and Limits
The Bank manages the Liquidity Risk in accordance with the established on the Liquidity Risk Management Policy, managing separately for each sub-category thereof; this is for Trading Liquidity Risk and Funding Liquidity Risk.
Trading Liquidity Risk is the inability to close, at current market prices, the financial positions opened mainly from the Trading Book (which is daily valued at market prices and the value differences instantly reflected in the Income Statement). This risk is controlled by establishing limits on the positions amounts of the Trading Book in accordance with what is estimated to be closed in a short time period. Additionally, the Bank incorporates a negative impact on the Income Statement whenever it considers that the size of a certain position in the Trading Book exceeds the reasonable amount, negotiated in the secondary markets, which would allow the exposure to be offset without altering market prices.
Funding Liquidity Risk refers to the Bank’s inability to obtain sufficient cash to meet its immediate obligations. This risk is managed by a minimum amount of highly liquid assets called liquidity buffer, and establishing limits and controls of internal metrics, among which the Market Access Report (“MAR”) stands out, which estimates the amount of funding that the Bank would need from wholesale financial counterparties, for the next 30 and 90 days in each of the relevant currencies of the balance sheet, to face a cash need as a result of the operation under business as usual conditions.
F-174
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(3) | Market Risk, continued: |
(a) | Liquidity Risk, continued: |
The use of MAR within year 2022 is illustrated below (LCCY = local currency; FCCY = foreign currency):
MAR LCCY + FCCY MMM$ | MAR FCCY MMUS$ | |||||||||||||||
1 – 30 days | 1 – 90 days | 1 – 30 days | 1 – 90 days | |||||||||||||
Maximum | ||||||||||||||||
Minimum | - | - | ||||||||||||||
Average | - |
The Bank also monitors the amount of assets denominated in local currency that is funded by liabilities denominated in foreign currency, including all tenors and the cash flows generated by full delivery derivatives payments. This metric is referred to as Cross Currency Funding. The bank oversees and limits this amount in order to take precautions against not only Banco de Chile’s event but also against a systemic adverse environment generated by a country risk event that might trigger lack of foreign currency funding.
The use of Cross Currency Funding within year 2022 is illustrated below:
Cross Currency Funding MMUS$ | ||||
Maximum | ||||
Minimum | ||||
Average |
The Bank establishes thresholds that alert behaviors outside the expected ranges at a normal or prudent level of operation, in order to protect other dimensions of liquidity risk such as, for example, maturities concentration of fund providers, the diversification of sources of funds either by type of counterparty or type of product, among others.
The evolution over time of the statement of financial ratios of the Bank is monitored in order to detect structural changes in the characteristics of the balance sheet, such as those presented in the following table and whose relevant values of use during the year 2022 are shown below:
Liquid Assets/ Net Funding <30 days | Liabilities>1 year/ Assets >1 year | Deposits/ Loans | ||||||||||
Maximum | % | % | % | |||||||||
Minimum | % | % | % | |||||||||
Average | % | % | % |
F-175
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(3) | Market Risk, continued: |
(a) | Liquidity Risk, continued: |
Additionally, some market index, prices and monetary decisions taken by the Central Bank of Chile are monitored to detect structural changes in market conditions that can trigger a liquidity shortage or even a financial crisis.
Furthermore, the Liquidity Risk Management Policy enforces to perform stress tests periodically which are controlled against potentially accessible action plans in each modeled scenario, according with the guidelines established in the Liquidity Contingency Plan. This process is essential in determining the liquidity risk appetite framework of the institution.
The Bank measures and controls the mismatch of cash flows under regulatory standards with the C46 index report, which represents the net cash flows expected over time as a result of the contractual maturity of almost all assets and liabilities. Additionally, the Commission for the Financial Market (hereinafter, “CMF”) authorized Banco de Chile, among others, to report the adjusted C46 index. This allows the Bank to report, in addition to the regular C46 index, outflow behavior assumptions of certain specific elements of the liability, such as demand deposits and time deposits. In addition, the regulator also requires some rollover assumptions for the loan portfolio.
The CMF establish the following limits for the C46:
Foreign Currency balance sheet items: 1-30 days, Regulatory Limit C46 index < 1 x Tier-1 Capital
The use of this index in year 2022 is illustrated below:
Adjusted C46 All CCYs as part of Tier-1 Capital | Adjusted C46 FCCY as part of Tier-1 Capital | |||||||||||
1 – 30 days | 1 – 90 days | 1 – 30 days | ||||||||||
Maximum | ( | ) | ||||||||||
Minimum | ( | ) | ( | ) | ||||||||
Average | ( | ) | ( | ) | ||||||||
Regulatory Limit |
F-176
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(3) | Market Risk, continued: |
(a) | Liquidity Risk, continued: |
The individual and consolidated term liquidity gap are presented below:
STATEMENT OF INDIVIDUAL LIQUIDITY SITUATION | ||||||||||||||||
AS OF DECEMBER 31, 2022 CONTRACTUAL BASIS | ||||||||||||||||
Values in MCh$ | ||||||||||||||||
CONSOLIDATED CURRENCY | From 0 to 7 days | From 0 to 15 days | From 0 to 30 days | From 0 to 90 days | ||||||||||||
Cash flow receivable (assets) and income | ||||||||||||||||
Cash flow payable (liabilities) and expenses | ||||||||||||||||
Liquidity Gap |
FOREIGN CURRENCY | From 0 to 7 days | From 0 to 15 days | From 0 to 30 days | From 0 to 90 days | ||||||||||||
Cash flow receivable (assets) and income | ||||||||||||||||
Cash flow payable (liabilities) and expenses | ||||||||||||||||
Liquidity Gap | ||||||||||||||||
Limits: | ||||||||||||||||
One time capital | ||||||||||||||||
AVAILABLE MARGIN |
* | In the limit up to 30 days, in consolidated currency, the Bank has a liquidity situation of Ch$ |
STATEMENT OF INDIVIDUAL LIQUIDITY SITUATION | ||||||||||||||||
AS OF DECEMBER 31, 2022 ADJUSTED BASIS | ||||||||||||||||
Values in MCh$ | ||||||||||||||||
CONSOLIDATED CURRENCY | From 0 to 7 days | From 0 to 15 days | From 0 to 30 days | From 0 to 90 days | ||||||||||||
Cash flow receivable (assets) and income | ||||||||||||||||
Cash flow payable (liabilities) and expenses | ||||||||||||||||
Liquidity Gap | ( | ) | ( | ) | ( | ) | ( | ) |
FOREIGN CURRENCY | From 0 to 7 days | From 0 to 15 days | From 0 to 30 days | From 0 to 90 days | ||||||||||||
Cash flow receivable (assets) and income | ||||||||||||||||
Cash flow payable (liabilities) and expenses | ||||||||||||||||
Liquidity Gap | ||||||||||||||||
Limits: | ||||||||||||||||
One time capital | ||||||||||||||||
AVAILABLE MARGIN |
* | In the limit up to 30 days, in consolidated currency, the Bank has a liquidity situation of Ch$ |
F-177
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(3) | Market Risk, continued: |
(a) | Liquidity Risk, continued: |
STATEMENT OF CONSOLIDATED LIQUIDITY SITUATION | ||||||||||||||||
AS OF DECEMBER 31, 2022 CONTRACTUAL BASIS | ||||||||||||||||
Values in MCh$ | ||||||||||||||||
CONSOLIDATED CURRENCY | From 0 to 7 days | From 0 to 15 days | From 0 to 30 days | From 0 to 90 days | ||||||||||||
Cash flow receivable (assets) and income | ||||||||||||||||
Cash flow payable (liabilities) and expenses | ||||||||||||||||
Liquidity Gap |
FOREIGN CURRENCY | From 0 to 7 days | From 0 to 15 days | From 0 to 30 days | From 0 to 90 days | ||||||||||||
Cash flow receivable (assets) and income | ||||||||||||||||
Cash flow payable (liabilities) and expenses | ||||||||||||||||
Liquidity Gap | ||||||||||||||||
Limits: | ||||||||||||||||
One time capital | ||||||||||||||||
AVAILABLE MARGIN |
* | In the limit up to 30 days, in consolidated currency, the Bank has a liquidity situation of Ch$ |
STATEMENT OF CONSOLIDATED LIQUIDITY SITUATION
AS OF DECEMBER 31, 2022 ADJUSTED BASIS
Values in MCh$
CONSOLIDATED CURRENCY | From 0 to 7 days | From 0 to 15 days | From 0 to 30 days | From 0 to 90 days | ||||||||||||
Cash flow receivable (assets) and income | ||||||||||||||||
Cash flow payable (liabilities) and expenses | ||||||||||||||||
Liquidity Gap | ( | ) | ( | ) | ( | ) | ( | ) |
FOREIGN CURRENCY | From 0 to 7 days | From 0 to 15 days | From 0 to 30 days | From 0 to 90 days | ||||||||||||
Cash flow receivable (assets) and income | ||||||||||||||||
Cash flow payable (liabilities) and expenses | ||||||||||||||||
Liquidity Gap | ||||||||||||||||
Limits: | ||||||||||||||||
One time capital | ||||||||||||||||
AVAILABLE MARGIN |
* | In the limit up to 30 days, in consolidated currency, the Bank has a liquidity situation of Ch$ |
F-178
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(3) | Market Risk, continued: |
(a) | Liquidity Risk, continued: |
Liquid Assets Consolidated Balance Statement as of December 31, 2022, values in MMM$
Source: Financial Statements Banco de Chile as of December 31, 2022.
Additionally,
LCR | NSFR | |||||||
Maximum | ||||||||
Minimum | ||||||||
Average | ||||||||
Regulatory Limit |
(*) |
(**) |
F-179
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(3) | Market Risk, continued: |
(a) | Liquidity Risk, continued: |
The contractual maturity profile of the financial liabilities of Banco de Chile and its subsidiaries (consolidated basis), to December 2022 and 2021, is as follows:
Up to 1 month | 1 to 3 months | 3 to 12 months | 1 to 3 years | 3 to 5 years | Over 5 years | Total | ||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||||||
Liabilities as of December 31, 2022 | ||||||||||||||||||||||||||||
Transactions in the course of payment | ||||||||||||||||||||||||||||
Full delivery derivative transactions | ||||||||||||||||||||||||||||
Financial liabilities at amortized cost | ||||||||||||||||||||||||||||
Current accounts and other demand deposits | ||||||||||||||||||||||||||||
Saving accounts and time deposits | ||||||||||||||||||||||||||||
Obligations by repurchase agreements and securities lending | ||||||||||||||||||||||||||||
Borrowings from financial institutions | ||||||||||||||||||||||||||||
Debt financial instruments issued (all currencies) | ||||||||||||||||||||||||||||
Other financial obligations | ||||||||||||||||||||||||||||
Financial instruments of regulatory capital issued (subordinated bonds) | ||||||||||||||||||||||||||||
Total (excluding non-delivery derivative transactions) | ||||||||||||||||||||||||||||
Non-delivery derivative transactions |
Up to 1 month | 1 to 3 months | 3 to 12 months | 1 to 3 years | 3 to 5 years | Over 5 years |
Total | ||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||||||
Liabilities as of December 31, 2021 | ||||||||||||||||||||||||||||
Transactions in the course of payment | ||||||||||||||||||||||||||||
Full delivery derivative transactions | ||||||||||||||||||||||||||||
Financial liabilities at amortized cost | ||||||||||||||||||||||||||||
Current accounts and other demand deposits | ||||||||||||||||||||||||||||
Saving accounts and time deposits | ||||||||||||||||||||||||||||
Obligations by repurchase agreements and securities lending | ||||||||||||||||||||||||||||
Borrowings from financial institutions | ||||||||||||||||||||||||||||
Debt financial instruments issued (all currencies) | ||||||||||||||||||||||||||||
Other financial obligations | ||||||||||||||||||||||||||||
Total (excluding non-delivery derivative transactions) | ||||||||||||||||||||||||||||
Non-delivery derivative transactions |
F-180
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(3) | Market Risk, continued: |
(b) | Price Risk: |
Price Risk Measurement and Limits
The Price Risk measurement and management processes are carried out in accordance with the established on the Market Risk Management Policy, by using internal metrics developed by the Bank, both for the Trading Book and for the Accrual Book (the Accrual Book includes all balance sheet items, including those in the Trading Book but in such case these are reported at an interest rate adjustment term of one day, thus not generating accrual interest rate risk). In addition, the portfolio recorded under the Fair Value Through Other Comprehensive Income (hereinafter FVOCI) is considered, which is a sub-set of the Accrual Book, which given its nature is relevant to measure it independently. In addition, the Bank reports metrics to regulatory entities according to the models defined by them.
The Bank has established internal limits for the exposures of the Trading Book. In fact, FX positions (FX delta), interest rate sensitivities generated by the derivatives and debt securities portfolios (DV01 or also referred as to rho) and the FX options volatility sensitivity (vega) are measured, reported and controlled against their limits. Limits are established on an aggregate basis but also for some specific tenor points. The use of these limits is daily monitored, controlled and reported by independent control functions to the senior management of the bank. The internal governance framework also establishes that these limits must be approved by the board and reviewed at least annually.
The Bank measures and controls the risk for the Trading Book portfolios using the Value-at-Risk (VaR). The model uses a 99% confidence level and the most recent one-year observed rates, prices and yields data.
The use of VaR within year 2022 is illustrated below:
Value-at-Risk 99% one-day confidence level MCh$ |
||||
Maximum | ||||
Minimum | ||||
Average |
Additionally, the Bank performs measuring, limiting, controlling and reporting interest rate exposures and risks for the Accrual Book using internally developed methodologies based on the differences in the amounts of assets and liabilities considering the interest rate repricing dates. Exposures are measured according to the Interest Rate Exposure or IRE metric and their corresponding risks using the Earnings-at-Risk or EaR metric. Within these metrics, Prepayment Risk is considered, which corresponds to the customer’s ability to pay, totally or partially, their debt before maturity. For this, a loan flow allocation model is generated with exposure to interest rate fluctuations, according to their prepayment behavior, finally reflecting a decrease in their average maturity term.
F-181
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(3) | Market Risk, continued: |
(b) | Price Risk, continued: |
The use of EaR within year 2022 is illustrated below:
12- months Earnings-at-Risk 99% confidence level 3 months defeasance period MCh$ |
||||
Maximum | ||||
Minimum | ||||
Average |
The regulatory risk measurement for the Trading Book (APRM report, from the spanish Activos Ponderados por Riesgo Mercado) is produced by utilizing guidelines provided by the Central Bank of Chile (hereinafter, “BCCh”) and the CMF. The referred methodologies estimate the potential loss that the bank may incur considering standardized fluctuations of the value of market factors such as FX rates, interest rates and volatilities that may adversely impact the value of FX spot positions, interest rate exposures, and volatility exposures, respectively. In addition, correlation factors are included to represent non-parallel changes in the yield curve.
The risk measurement for the Banking Book, according to regulatory guidelines (C40 report), as a result of interest rate fluctuations is carried out through the use of standardized methodologies provided by regulatory entities (BCCh and CMF). The report includes models for reporting interest rate gaps and standardized adverse interest rate fluctuations. In addition to this, the regulatory entity has requested banks to establish internal limits, separately for short-term and long-term balances, for these regulatory measurements.
The results effectively realized during the month for trading activities are controlled against defined loss levels and if these levels are exceeded, senior management is notified in order to evaluate potential corrective actions.
In addition to the above, the Market Risk Management Policy of Banco de Chile enforces to perform daily stress tests for the Trading Book and monthly for the Accrual Book. Additionally, the stress test for the FVOCI portfolio is included, which is reported daily. The output of the stress testing process is monitored against corresponding alert levels; in the case those triggers are breached, the senior management is notified in order to implement further actions, if necessary. In addition, the results during the month for the trading activities are controlled against defined loss levels and in case such levels are exceeded, senior management is also notified.
F-182
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(3) | Market Risk, continued: |
(b) | Price Risk, continued: |
The following table illustrates the interest rate cash-flows of the Banking Book, considering the interest rate repricing dates on an individual basis, as of December 31, 2022 and 2021:
Up
to 1 | 1 to 3 months | 3 to 12 months | 1 to 3 years | 3 to 5 years | Over |
Total | ||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||||||
Assets as of December 31, 2022 | ||||||||||||||||||||||||||||
Cash and due from banks | ||||||||||||||||||||||||||||
Transactions in the course of collection | ||||||||||||||||||||||||||||
Financial assets at fair value through other comprehensive income | ||||||||||||||||||||||||||||
Debt financial instruments | ||||||||||||||||||||||||||||
Derivative financial instruments for hedging purposes | ||||||||||||||||||||||||||||
Financial assets at amortized cost | ||||||||||||||||||||||||||||
Rights by resale agreements and securities lending | ||||||||||||||||||||||||||||
Debt financial instruments | ||||||||||||||||||||||||||||
Loans and advances to Banks | ||||||||||||||||||||||||||||
Loans to customers, net | ||||||||||||||||||||||||||||
Total Assets |
Up to 1 month | 1 to 3 months |
3 to 12 months |
1 to 3 years |
3 to 5 years |
Over 5 years | Total | ||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||||||
Assets as of December 31, 2021 | ||||||||||||||||||||||||||||
Cash and due from banks | ||||||||||||||||||||||||||||
Transactions in the course of collection | ||||||||||||||||||||||||||||
Financial assets at fair value through other comprehensive income | ||||||||||||||||||||||||||||
Debt financial instruments | ||||||||||||||||||||||||||||
Derivative financial instruments for hedging purposes | ||||||||||||||||||||||||||||
Financial assets at amortized cost | ||||||||||||||||||||||||||||
Rights by resale agreements and securities lending | ||||||||||||||||||||||||||||
Debt financial instruments | ||||||||||||||||||||||||||||
Loans and advances to Banks | ||||||||||||||||||||||||||||
Loans to customers, net | ||||||||||||||||||||||||||||
Total Assets |
F-183
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(3) | Market Risk, continued: |
(b) | Price Risk, continued: |
Up to 1 month | 1 to 3 months |
3 to 12 months |
1 to 3 years |
3 to 5 years |
Over 5 years | Total | ||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||||||
Liabilities as of December 31, 2022 | ||||||||||||||||||||||||||||
Transactions in the course of payment | ||||||||||||||||||||||||||||
Derivative Financial Instruments for hedging purposes | ||||||||||||||||||||||||||||
Financial liabilities at amortized cost | ||||||||||||||||||||||||||||
Current accounts and other demand deposits | ||||||||||||||||||||||||||||
Saving accounts and time deposits | ||||||||||||||||||||||||||||
Obligations by repurchase agreements and securities lending | ||||||||||||||||||||||||||||
Borrowings from financial institutions | ||||||||||||||||||||||||||||
Debt financial instruments issued (*) | ||||||||||||||||||||||||||||
Financial instruments of regulatory capital issued (subordinated bonds) | ||||||||||||||||||||||||||||
Other liabilities | ||||||||||||||||||||||||||||
Total liabilities |
Up to 1 month |
1 to 3 months |
3 to 12 months |
1 to 3 years |
3 to 5 years |
Over 5 years |
Total | ||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | ||||||||||||||||||||||
Liabilities as of December 31, 2021 | ||||||||||||||||||||||||||||
Transactions in the course of payment | ||||||||||||||||||||||||||||
Derivative Financial Instruments for hedging purposes | ||||||||||||||||||||||||||||
Financial liabilities at amortized cost | ||||||||||||||||||||||||||||
Current accounts and other demand deposits | ||||||||||||||||||||||||||||
Saving accounts and time deposits | ||||||||||||||||||||||||||||
Obligations by repurchase agreements and securities lending | ||||||||||||||||||||||||||||
Borrowings from financial institutions | ||||||||||||||||||||||||||||
Debt financial instruments issued (*) | ||||||||||||||||||||||||||||
Other liabilities | — | |||||||||||||||||||||||||||
Total liabilities |
(*) | Amounts shown here are different from those reported in the liabilities report which is part of the liquidity analysis, due to differences in the treatment of mortgage bonds issued by the Bank in both reports. |
F-184
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(3) | Market Risk, continued: |
(b) | Price Risk, continued: |
Price Risk Sensitivity Analysis
The Bank uses stress tests as the main sensitivity analysis tool for Price Risk. The analysis is implemented for the Trading Book, Accrual Book and the FVOCI portfolio separately. The Bank has adopted this tool as it is considered more useful than fluctuations in business as usual scenario, such as VaR or EaR, given that:
(i) | The financial crisis show market factors fluctuations that are materially larger than those used in the VaR with |
(ii) | The financial crisis also show that correlations between these fluctuations are materially different from those used in the VaR computation, since a crisis precisely indicates severe disconnections between the behaviors of market factors fluctuations respect to the patterns observed under normal conditions. |
(iii) | Trading liquidity dramatically diminishes during financial distress and especially in emerging markets. Therefore, the overnight VaR number might not be representative of the loss for trading portfolios in such environment since closing exposures period may exceed one business day. This may also happen when calculating EaR, even considering three months as the closing period. |
The impacts are determined by mathematical simulations of fluctuations in the values of market factors, and also, estimating the changes of the economic and /or accounting value of the financial positions.
In order to comply with IFRS 7.40, the following exercise was included illustrating an estimation of the impact of extreme but reasonable fluctuations of interest rates, swaps yields, FX rates and exchange volatility, which are used for valuing Trading Book, Accrual Book and the FVOCI portfolio. Given that the Bank’s portfolio includes positions denominated in nominal and real interest rates, these fluctuations must be aligned with extreme but realistic Chilean inflation changes forecasts.
For the Trading Book, the exercise is implemented by multiplying the sensitivities by the fluctuations obtained as the results of mathematical simulations over a two-week time horizon and using the maximum historical volatility, within a significant period of time, in each of the market factor present. In the case of the FVOCI portfolio a four-week time horizon is used due to liquidity constrains; Accrual Book impacts are estimated by multiplying cumulative gaps by forward interest rates fluctuations modeled over a three-month time horizon and using the maximum historical volatility of interest fluctuations but limited by maximum fluctuations and / or levels observed within a significant period of time. It is relevant to note that the methodology might ignore some portion of the interest rates convexity, since it is not captured properly when large fluctuations are modeled. In any case, given the magnitude of the changes, the methodology may be reasonable enough for the purposes and scope of the analysis.
F-185
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(3) | Market Risk, continued: |
(b) | Price Risk, continued: |
The following table illustrates the fluctuations resulting from the main market factors in the maximum stress test exercise, or more adverse, for the Trading Book.
The directions or signs of these fluctuations are those that correspond to those that generate the most adverse impact at the aggregate level.
Average Fluctuations of Market Factors for Maximum Stress Scenario Trading Book | ||||||||||||||||||||||||
CLP Derivatives (bps) | CLP Bonds (bps) | CLF Derivatives (bps) | CLF Bonds (bps) | USD Offshore Libor Derivatives (bps) | Spread USD On/Off Derivatives (bps) | |||||||||||||||||||
Less than 1 year | | ( | ) | ( | ) | |||||||||||||||||||
Greater than 1 year | ( | ) |
bps = basis points
The worst impact on the Bank’s Trading Book as of December 31, 2022, as a result of the simulation process described above, is as follows:
Most
Adverse Stress Scenario P&L Impact Trading Book (MCh$) | ||||||||
CLP Interest Rate | ( | ) | ||||||
Derivatives | ( | ) | ||||||
Debt instruments | ( | ) | ||||||
CLF Interest Rate | ( | ) | ||||||
Derivatives | ||||||||
Debt instruments | ( | ) | ||||||
Interest rate USD offshore | ( | ) | ||||||
Domestic/offshore interest rate spread USD | ( | ) | ||||||
Banking spread | ||||||||
Total Interest rates | ( | ) | ||||||
Total FX and FX Options | ( | ) | ||||||
Total | ( | ) |
The modeled scenario would generate
losses in the Trading Book for approximately Ch$
F-186
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(3) | Market Risk, continued: |
(b) | Price Risk, continued: |
The impact on the Accrual Book as of December 31, 2022, which does not necessarily mean a net loss(gain) but a greater(lower) net income from funds generation (resulting net interest rate generation), is illustrated below:
Most Adverse Stress Scenario 12-Month Revenue Accrual Book (MCh$) | ||||
Impact by Base Interest Rate shocks | ( | ) | ||
Impact due to Spreads Shocks | ( | ) | ||
Higher / (Lower) Net revenues | ( | ) |
The impact on the FVOCI portfolio it is show in the followings tables. First are the main fluctuation in the market factors, due to the scenarios provided for the stress test meltdown (more adverse), for this portfolio.
The sign of the fluctuation below, correspond to the ones that generate the most adverse impact.
Average Fluctuations of Market Factors for Maximum Stress Scenario
AFS Portfolio
CLP Bonds (bps) | CLF Bonds (bps) | USD Offshore Libor Derivatives (bps) | Spread USD On/Off Derivatives
(bps) | |||||||||||||
Less than 1 year | ||||||||||||||||
Greater than 1 year |
bps = basis points
The worst impact on the Bank’s FVOCI portfolio as of December 31, 2022, as a result of the simulation process described above, is as follows:
Most Adverse Stress Scenario P&L Impact
FVOCI portfolio
(MCh$)
CLP Debt Instrument | ( | ) | ||
CLF Debt Instrument | ( | ) | ||
Interest rate USD offshore | ( | ) | ||
Domestic/offshore interest rate spread USD | ||||
Banking spread | ( | ) | ||
Corporative spread | ( | ) | ||
Total | ( | ) |
The modeled scenario would generate
losses in the AFS portfolio for approximately MCh$
The main negative impact on the Trading Book would occur as a result of an increase in debt instruments in CLF over 1 year, followed by an increase in debt instruments in CLP under 1 year, while in the case of the Portfolio FVTOCI portfolio the main impact comes from upward fluctuations in interest rates on debt instruments in both CLP and CLF. For its part, the lowest potential income in the next 12 months in the Accrual Book would occur in a scenario of a sharp decline in inflation and nominal rates.
F-187
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(4) | Other Information related to Financial Risks |
a) | Libor transition project: |
As a consequence of the decisions made by the Financial Conduct Authority (FCA) of the United Kingdom and the recommendations of the Alternative Reference Rates Committee (ARRC) made up of the Federal Reserve Board and the New York FED, since 12-31-2021 Libor rates in currencies other than US$ are no longer published, as of 06-30-2023 Libor in US$ is no longer published and as of 01-01-2022 new Libor-based operations are no longer processed. Only US$ Libor may be used in contracts in force as of 12-31-2021 and until the last date of publication of this.
Because of this, since 2020 the Bank has been enabling and implementing, in its different dimensions, the new risk-free reference rates (“RFR”) for carrying out operations in foreign currency as of 01-01-2022.
The process has been structured in 5 phases:
● | 1st phase |
- | Identification of the risks associated with the Libor transition process through the collection of information regarding the number of operations, amounts involved, remaining terms, types of products and course coins. |
- | Periodic exchange of information with the main global banks regarding the RFRs that were being defined as a replacement for Libor rates. |
- | Review of the documents published by the ARRC with its recommendations. |
● | 2nd phase |
- | Preparation and presentation to the CMF in the year 2021 of the situational analysis of Banco de Chile regarding the end of Libor. This included reporting on the information research carried out in the 1st stage and the impact that the end of the Libor rate had both at the level of products and at the level of Bank areas. |
● | 3rd phase |
- | Definition of the new RFRs to be used in the different currencies (daily SOFR, term SOFR, TONAR, SONIA, etc.) |
- | Implementation of the RFR in the Bank’s systems |
● | 4th phase |
- | Carrying out tests of course of financial operations to review the correct accrual of the new RFR. |
- | Preparation of documentation with the RFR. |
F-188
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(4) | Other Information related to Financial Risks, continued: |
a) | Libor transition project, continued: |
These phases were successfully completed at the end of 2021 and since the beginning of 2022 the Bank is already operating with the new RFRs.
● | 5th phase, currently in process: |
- | Renegotiation of contracts with impacted clients |
Current portfolio affected by the transition process of the libor rate with maturity after June 30, 2023:
● | Credit operations in US$ of Foreign Trade, Commercial Credits and Leasing contracts: |
o | USD |
● | Derivative contracts portfolio |
o | Assets USD |
o | Liabilities USD |
b) | Offsetting of financial assets and liabilities: |
The Bank trades financial derivatives with foreign counterparties using ISDA Master Agreement (International Swaps and Derivatives Association, Inc.), under legal jurisdiction of the City of New York – USA or London – United Kingdom. Legal framework in these jurisdictions, along with documentation mentioned, it allows Banco de Chile the right to anticipate the maturity of the transaction and then, offset the net value of those transactions in case of default of counterparty. Additionally, the Bank has negotiated with these counterparties an additional annex (CSA Credit Support Annex), that includes other credit mitigating, such as entering margins on a certain amount of net value of transactions, early termination (optional or mandatory) of transactions at certain dates in the future, coupon adjustment of transaction in exchange for payment of the debtor counterpart over a certain threshold amount, etc.
Below are detail the contracts susceptible to offset:
Fair Value | Negative Fair Value of contracts with right to offset | Positive Fair Value of contracts with right to offset | Financial Collateral | Net Fair Value | ||||||||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||
MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | MCh$ | |||||||||||||||||||||||||||||||
Derivative financial assets | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Derivative financial liabilities | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) |
F-189
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(5) | Operational risk |
One of the Bank’s objectives is to monitor, control and maintain at adequate levels, the risk of losses resulting from a lack of adequacy or a failure of processes, personnel and/or internal systems, or due to external events. This definition includes legal risk and excludes strategic and reputational risk.
Operational risk is inherent in all activities, products and systems, and cuts across the entire organization in its strategic, business and support processes. It is the responsibility of all the Bank’s collaborators to manage and control the risks generated within their scope of action, since their materialization may lead to direct or indirect financial losses.
To face this risk, the Bank has defined a Regulatory Framework and a governance structure according to the volume and complexity of its activities. The Retail Credit Risk and Global Risk Control Division administer the management of this risk, through the establishment of an Operational Risk Management. Likewise, the “Superior Committee for Operational Risk” and the “Committee for Operational Risk” supervise it.
The Operational Risk Policy defines a comprehensive management framework that considers the identification, evaluation, control, mitigation, monitoring and reporting of these risks. This comprehensive management considers the execution of a series of structured activities in the following fields of action:
- | Process Evaluation: Its objective is to identify, evaluate and monitor the risks and controls associated with the Bank’s processes, together with analyzing and determining the acceptable risk levels and mitigation actions to be applied in the event of deviation from these levels, allowing the maintenance of an adequate control environment over the operational risks. For this, the Operational Risk Management has a process map that allows organizing and planning the evaluation, according to different perspectives of criticality. |
- | Control Testing: consists of evaluating the operational effectiveness of documented controls for operational risk through effectiveness tests. This process makes it possible to verify whether the controls are correctly designed and implemented to prevent or detect a material error, ensuring a reasonable level of assurance. |
- | Event Management: those significant Operational Risk events, whether or not they constitute losses, are analyzed, controlled and reported to the defined government instances, with the aim of promoting mitigating measures that ensure an adequate control environment and thus prevent these events from happening again. |
- | Loss base management: consists of controlling, registering, accounting and reporting the operational losses registered by the different areas, ensuring compliance with the regulatory requirements established in the methodology for the computation of operational risk weighted assets. |
- | Fraud Management: this field considers the permanent analysis of information (both internal and external), in order to identify sources of risk and analyze their different behaviors, which allows defining and promoting various mitigation actions, seeking to improve security for our clients and reduce the economic losses associated with this concept. To ensure adequate mitigation of these risks, the Bank has established a fraud management and prevention model, which includes: a governance structure, roles and responsibilities of the different areas involved and a definition of the processes that are part of the management of these risks. |
F-190
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(5) | Operational risk, continued: |
- | Operational risk assessment for projects: the Bank is constantly working on the development of projects, including from the creation of new products and services, large technological implementations to operational changes in its processes. The implementation of these projects may lead to the appearance of new risks that must be correctly mitigated prior to their implementation, through the design of robust controls. For this, there is a methodological framework and specific tools that allow carrying out an evaluation of the different risks and controls, establishing a general level of exposure to operational risk, and determining mitigation actions in cases where it is necessary. |
- | Supplier management: its objective is to identify, manage and monitor the risks that may arise from the outsourcing of services. For this, the Bank has a governance framework, a regulatory framework and a supplier management model that considers an analysis of the criticality and risk associated with the contracted services and an evaluation and monitoring scheme with a special focus on those considered relevant or critical to the entity. |
- | Risk Appetite Profile and Framework: operational risk management is aligned with the statements established in Banco de Chile’s Risk Appetite Framework (RAF), for which metrics are defined with management thresholds that allow monitoring compliance with the risk appetite of the corporation. On the other hand, the Comprehensive Risk Measurement (CRM) exercise is carried out annually, the objective of which is to determine the inherent risk profile of the institution, through methodologies that allow quantifying the profile in all areas of operational risk management. |
- | Self-assessment Matrix: its objective is to comply with the annual exercise, in which the Bank’s administration analyzes and pronounces on the development of its management, particularly in relation to Operational Risk. |
- | Relations with external entities: consists of the coordination, preparation and delivery of information for supervisions carried out by entities external to Operational Risk. |
- | Control of Subsidiaries: consists of verifying the Operational Risk policy of the subsidiaries in relation to the Bank. On the other hand, knowledge is taken of the management carried out by the subsidiary companies and they report to their respective government instances. Finally, the corrective measures adopted in the event of deviations or contingency scenarios that could affect subsidiaries and/or the Bank are known. |
- | Corporate Training Plan: in order to constantly disseminate the operational risk management culture throughout the corporation and promote the importance and responsibility of each one of the collaborators in the face of adequate risk management, the Bank establishes an annual training plan, which considers the different areas of Operational Risk management, which is developed through the use of different communication tools and methods. |
The combination of all the areas previously indicated, together with the regulatory framework and the corresponding governance structure, constitute the comprehensive management of Operational Risk. This management focuses on the identification of the root cause of the risks to prevent their occurrence and the mitigation of their possible consequences. Each of the areas can give rise to the definition of action plans or indicators that allow adequate monitoring of each risk.
F-191
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(5) | Operational risk, continued: |
Below is the exposure to net loss, gross loss and recoveries due to operational risk events as of December 31, 2022 and 2021:
December 2022 | December 2021 | |||||||||||||||||||||||
Category | Lost Gross MCh$ | Recoveries MCh$ | Lost Net MCh$ | Lost Gross MCh$ | Recoveries MCh$ | Lost Net MCh$ | ||||||||||||||||||
Internal fraud | ( | ) | ||||||||||||||||||||||
External fraud | ( | ) | ( | ) | ||||||||||||||||||||
Work practices and safety in the business position | ( | ) | ||||||||||||||||||||||
Customers, products and business practices | ( | ) | ||||||||||||||||||||||
Damage to physical assets | ( | ) | ( | ) | ||||||||||||||||||||
Business interruption and system failures | ( | ) | ||||||||||||||||||||||
Execution, delivery and process management | ( | ) | ( | ) | ||||||||||||||||||||
Total | ( | ) | ( | ) |
Business Continuity
The Bank has a Business Continuity Management (BCM), which is in charge of the Business Continuity Management, responsible for managing and supervising the application of the policies, rules and procedures of each of these areas within the Bank and Subsidiaries.
In addition to the above, the Business Continuity Management defines the global and regulatory framework with the aims to manage the strategy and control of business continuity in the operational and technological lines for the Bank, maintaining alternative operation plans and controlled tests to reduce the impact of disruptive events, in addition to granting resilience to the organization, promote comprehensive strategies to ensure the safety of employees, protect the Bank’s assets against catastrophic scenarios, maintain up-to-date the necessary documentation and carry out training and simulations associated with this matter.
That is why Business Continuity has methodologies and controls that contribute to the application of the integrated model within the corporation, mainly represented in the following management areas:
- | Documentary management: It consists of carrying out methodological processes to update the documentation that supports Business Continuity, with the aim of keeping current and aware of the strategy implemented in the Bank under the BCM guidelines. The documents managed are, Business Continuity Policy, Business Continuity Standards, Business Continuity Testing Standard, Crisis Management Manual, Continuity Plans and Technological Recovery Procedures. |
F-192
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(5) | Operational risk, continued: |
- | Business continuity tests: refers to simulations of contingencies scheduled annually, which address the 5 risk scenarios defined for the Bank in the operational and technological fields (Failure in the Technological Infrastructure, Failure in the Physical Infrastructure, Mass Absence of Personnel, Critical Provider Service Failure and Cybersecurity), allowing to maintain critical staff that operates the payment chain in constant trained, under the defined contingency procedures that support the Bank’s critical products and services. |
- | Crisis management: internal Bank process that maintains and trains the main executive roles associated with the Crisis Groups in conjunction with the main strategic recovery processes and the structures defined in the BCM model. In such a way to constantly strengthen the different areas necessary for the preparation, execution and monitoring, which will allow facing crisis events in the Bank. |
- | Management with critical suppliers: constitutes the management, control and testing of the Business Continuity Plans implemented by the suppliers involved in the processing of critical products and services for the Bank, associated with the established risk scenarios and with the direct relation to the contracted service. |
- | Alternate sites management: contemplates the administration and control of secondary physical locations for the critical units of the Bank, to keep the operation active in case of failure in the main work location. The objective is to protect and maintain the validity of the technological and operational functionalities of the alternative sites, to reduce recovery times in the event of a crisis and that the activation be effective when their use is required. |
- | Relationship with subsidiaries and external organizations: consists of the permanent control, management and leveling of the compliance of subsidiaries under the methodology and strategic lines established by the Bank in crisis environments and Business Continuity management. It also includes global management with the requirements of internal and external regulators. |
- | Continuous Improvement: considers the application of automation processes and adaptation of the resources used in the internal processes of the business continuity model, with the aim of improving response times before the delivery and analysis of information in contingencies, complementing the processes managed by the BCM. |
- | Training: Includes the development and implementation of processes and instances prepared under different learning methodologies to strengthen and empower collaborators in the areas of the business continuity model. |
The administration and unification of the areas described, together with compliance with the regulations implemented and structured governance, constitute the Business Continuity model of Banco de Chile.
F-193
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
44. | Risk Management and Report, continued: |
(5) | Operational risk, continued: |
Cybersecurity
The Cyber Defense Management is responsible for safeguarding information assets by proactively detecting, responding and containing threats. Likewise, this department is responsible for managing cybersecurity incidents in an assertive and timely manner, minimizing the impact and improving response times, with the aim of protecting the bank’s operations. The Engineering Department is in charge of defining, implementing and maximizing existing protection technologies against cyber threats, and defining and maintaining the security architecture. The Technological Risk Management is in charge of identifying, evaluating, treating and reporting information security, technological and cybersecurity risks, this includes the management of technological risks in the Bank’s projects. The Strategic Management Deputy Manager is responsible for defining and managing and complying with the Strategic Plan of the Cybersecurity Division, guaranteeing the effective and efficient use of resources, and imparting and controlling the Cybersecurity guidelines to suppliers. Finally, the Assurance Deputy Manager is responsible for reviewing compliance with the Strategic Plan, the policies, procedures and the regulatory framework regarding cybersecurity. Also to develop and implement the Corporation Cybersecurity Awareness Program.
45. | Information on Regulatory Capital and Capital Adequacy Ratios: |
Requirements and Capital Management:
The main objectives of the Bank’s capital management are to ensure the adequacy and quality of its capital, at a consolidated level, based on the adequate management of the risks it faces in its operations, establishing sufficient capital levels, through the definition of an internal objective, which supports both the business strategy in normal scenarios, as well as stress scenarios in the short and medium terms, thus ensuring compliance with regulatory requirements, coverage of its material risks, a solid credit classification and the generation of adequate capital clearances. During 2022, the Bank has comfortably met the required capital requirements and its internal sufficiency objectives.
As part of its Capital Management Policy, the Bank has established capital adequacy alerts and limits, which are monitored by the governance structures that the Bank has established for these purposes, including the Capital Management Committee. During 2022, none of the internal alerts defined by the Bank were activated as part of the Capital Risk Appetite Framework.
The Bank manages capital based on its strategic objectives, its risk profile and its ability to generate cash flows, as well as the economic and business context in which it operates. Consequently, the Bank may modify the amount of payment of dividends to its shareholders or issue basic capital, additional tier 1 capital or tier 2 capital instruments. The adequacy of the Bank’s capital is monitored using, among other measures, the indices and rules established by the CMF, as well as the alerts and internal limits that the Capital Management Committee and board of directors have defined for such purposes.
Capital Requirements
In accordance with the General Banking
Law, the effective equity of a bank may not be less than
Adoption of the Basel III standard
In 2019, the CMF began the regulatory process for the implementation of Basel III standards in Chile, as established in Law No. 21,130 that modernizes banking legislation. During the years 2020 and 2021, the CMF promulgated the different regulations for the adoption of the Basel III standard for local banking, which are applicable as of December 1, 2021. The regulation includes the standard methodologies to determine, among others, Credit, Operational and Market Risk-Weighted Assets, regulatory capital, leverage ratio and systemically important banks. Additionally, the regulations describe requirements and conditions applicable to: (i) the application of internal models for the calculation of certain risk-weighted assets, (ii) the issuance of additional tier 1 and tier 2 capital hybrid instruments, (iii) market disclosure requirements (Pillar 3), (iv) the principles for determining capital buffers (countercyclical and conservation), (v) additional requirements to which banks defined as systemically important and (vi) the criteria by which banks with deficiencies identified in the supervision process (Pillar 2) could be subject to additional capital requirements, among others.
F-194
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
45. | Information on Regulatory Capital and Capital Adequacy Ratios, continued: |
The aforementioned Basel III banking solvency standards consider a series of transitory regulations. These measures include: i) the gradual adoption of the conservation buffer, requirements for systemic banks and repeal of the requirements of article 35 of the LGB, ii) the gradual application of adjustments to regulatory capital, iii) the temporary substitution of additional tier 1 capital (AT1) for tier 2 capital instruments, that is, subordinated bonds and additional provisions and iv) gradualness to continue recognizing subordinated bonds issued by banking subsidiaries as effective equity, among other matters. During 2022, the CMF has continued to refine and clarify the application of capital regulation.
Information on regulatory capital and capital adequacy indicators is presented below:
Total assets, risk-weighted assets and components of the | Local and Overall consolidated | Local and Overall consolidated | ||||||||
effective equity according to Basel III | Dec -2022 | Dec-2021 | ||||||||
Item No. | Item description | MCh$ | MCh$ | |||||||
1 | Total assets according to the statement of financial position | |||||||||
2 | Non-consolidated investment in subsidiaries | |||||||||
3 | Assets discounted from regulatory capital, other than item 2 | |||||||||
4 | Derivative credit equivalents | |||||||||
4.1 | Financial derivative contracts | |||||||||
5 | Contingent loans | |||||||||
6 | Assets generated by the intermediation of financial instruments | |||||||||
7 | = (1-2-3+4-4.1+5-6) Total assets for regulatory purposes | |||||||||
8.a | Credit risk weighted assets, estimated according to the standard methodology (CRWA) | |||||||||
8.b | Credit risk weighted assets, estimated according to internal methodologies (CRWA) | |||||||||
9 | Market risk weighted assets (MRWA) | |||||||||
10 | Operational risk weighted assets (ORWA) | |||||||||
11.a | = (8.a/8.b+9+10) Risk-weighted assets (RWA) | |||||||||
11.b | = (8.a/8.b+9+10) Risk-weighted assets, after application of the output floor (RWA) | |||||||||
12 | Owner’s equity | |||||||||
13 | Non-controlling interest | |||||||||
14 | Goodwill | |||||||||
15 | Excess minority investments | |||||||||
16 | = (12+13-14-15) Core Tier 1 Capital (CET1) | |||||||||
17 | Additional deductions to core tier 1 capital, other than item 2 | ( | ) | |||||||
18 | = (16-17-2) Core Tier 1 Capital (CET1) | |||||||||
19 | Voluntary provisions (additional) imputed as additional Tier 1 capital (AT1) | |||||||||
20 | Subordinated bonds imputed as additional tier 1 capital (AT1) | |||||||||
21 | Preferred shares allocated to additional tier 1 capital (AT1) | |||||||||
22 | Bonds without a fixed term of maturity imputed to additional tier 1 capital (AT1) | |||||||||
23 | Discounts applied to AT1 | |||||||||
24 | = (19+20+21+22-23) Additional Tier 1 Capital (AT1) | | ||||||||
25 | = (18+24) Tier 1 Capital | |||||||||
26 | Voluntary provisions (additional) imputed as Tier 2 capital (T2) | |||||||||
27 | Subordinated bonds imputed as Tier 2 capital (T2) | |||||||||
28 | = (26+27) Equivalent tier 2 capital (T2) | |||||||||
29 | Discounts applied to T2 | |||||||||
30 | = (28-29) Tier 2 capital (T2) | |||||||||
31 | = (25+30) Effective equity | |||||||||
32 | Additional basic capital required for the constitution of the conservation buffer | |||||||||
33 | Additional basic capital required to set up the countercyclical buffer | |||||||||
34 | Additional basic capital required for banks qualified as systemic | |||||||||
35 | Additional capital required for the evaluation of the adequacy of effective equity (Pillar 2) |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
45. | Information on Regulatory Capital and Capital Adequacy Ratios, continued: |
Local
and Overall consolidated | Local and Overall consolidated | |||||||
December -2022 | December -2021 | |||||||
Capital Adequacy Ratios and Regulatory Compliance according to Basel III | % | % | ||||||
Leverage Ratio | % | % | ||||||
Leverage Ratio that the bank must meet, considering the minimum requirements | % | % | ||||||
CET 1 Capital Ratio | % | % | ||||||
CET 1 Capital Ratio that the bank must meet, considering the minimum requirements | % | % | ||||||
Capital buffer shortfall | % | % | ||||||
Tier 1 Capital Ratio | % | % | ||||||
Tier 1 Capital Ratio that the bank must meet, considering the minimum requirements | % | % | ||||||
Total or Regulatory Capital Ratio | % | % | ||||||
Total or Regulatory Capital Ratio that the bank must meet, considering the minimum requirements | % | % | ||||||
Total or Regulatory Capital Ratio that the bank must meet, considering the charge for article 35 bis | % | % | ||||||
Total or Regulatory Capital Ratio that the bank must meet, considering the minimum requirements, conservation buffer and countercyclical buffer | % | % | ||||||
Credit rating | ||||||||
Regulatory compliance for Capital Adequacy | ||||||||
Additional provisions computed in Tier 2 capital (T2) in relation to CRWA | % | % | ||||||
Subordinated bonds computed as Tier 2 capital (T2) in relation to CET 1 Capital | % | % | ||||||
Additional Tier 1 Capital (AT1) in relation to CET 1 Capital | % | % | ||||||
Voluntary (additional) provisions and subordinated bonds computed as AT1 in relation to RWAs | % | % |
F-196
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
46. | New Accounting Pronouncements: |
The following is a summary of new standards, interpretations and improvements to the International Financial Reporting Standards issued by the International Accounting Standards Board (IASB) that are not yet effective as of December 31, 2022:
IAS 28 – Investments in Associates and Joint Venture, and IFRS 10 – Consolidated Financial Statements.
In September 2014, the IASB published this modification, which clarifies the scope of the profits and losses recognized in a transaction, that involves an associate or joint venture, and that this depends on whether the asset sold or contribution constitutes a business. Therefore, the IASB concluded that all gains or losses must be recognized against loss of control of a business.
Likewise, the gains or losses that result from the sale or contribution of a subsidiary that does not constitute a business (definition of IFRS 3) to an associate or joint venture must be recognized only to the extent of unrelated interests in the associate or joint venture.
During December 2015, the IASB agreed to set the effective date of this modification in the future, allowing its immediate application.
Banco de Chile and its subsidiaries will have no impact on the Consolidated Financial Statements as a result of the application of this amendment.
IAS 1 – Presentation of Financial Statements and IFRS Practice Statement No. 2 Accounting Policy Disclosures.
In February 2021, the IASB published amendments to IAS 1 to require companies to disclose material information in order to improve the disclosures of their accounting policies and provide useful information to investors and other users of financial statements.
To help entities apply the amendments to IAS 1, the Board also amended IFRS Practice Statement No. 2 to illustrate how an entity can judge whether accounting policy information is material to its financial statements.
The amendments to IAS 1 will be effective for Financial Statement presentation periods beginning on or after January 1, 2023. Early application is allowed. If an entity applies those amendments to prior periods, it must disclose that fact.
The application of this amendment will generate impacts only in the disclosure of accounting policies in the Consolidated Financial Statements of Banco de Chile and its subsidiaries.
IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors. Definition of Accounting Estimate.
In February 2021, the IASB incorporated changes to the definition of accounting estimates contained in IAS 8, the amendments are intended to help entities distinguish changes in accounting estimates from changes in accounting policies.
The amendments to IAS 8 will be effective for Financial Statement presentation periods beginning on or after January 1, 2023. Early application is allowed.
The application of this amendment will not have an impact on the Consolidated Financial Statements of Banco de Chile and its subsidiaries.
F-197
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
46. | New Accounting Pronouncements, continued: |
IAS 12 – Income Tax. Deferred taxes related to assets and liabilities arising from a single transaction.
In May 2021, the IASB published amendments to IAS 12, to specify how companies should account for deferred taxes on transactions such as leases and decommissioning obligations.
IAS 12 Income Tax specifies how a company accounts for income tax, including deferred tax, which represents tax to be paid or recovered in the future. In certain circumstances, companies are exempt from recognizing deferred taxes when they first recognize assets or liabilities. Prior to the amendment, there was some uncertainty as to whether the exemption applied to transactions such as leases and decommissioning obligations, transactions for which companies recognize both an asset and a liability.
The amendments clarify that the exemption does not apply and that companies are required to recognize deferred taxes on such transactions. The purpose of the amendments is to reduce the differences in reporting deferred tax on leases and decommissioning obligations.
The amendments are effective for the presentation periods of the Financial Statements beginning on January 1, 2023, and early application is allowed.
The implementation of this amendment will not have a material impact on Banco de Chile and its subsidiaries.
IFRS 16 – Leases. Recognition of the lease liability in a sale with leaseback.
In September 2022, the IASB published an amendment to IFRS 16 related to the recognition of the lease liability in a sale with leaseback.
The amendment specifies the requirements that a seller-lessee must use to quantify the lease liability that arises on sale and leaseback so that the seller-lessee does not recognize any gain or loss related to the right of use that it retains.
The modifications are effective for the periods of presentation of the Financial Statements that begin on or after January 1, 2024, and early application is allowed.
The implementation of this amendment will have no impact for Banco de Chile and its subsidiaries.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
47. | Subsequent Events: |
a) | On January 6, 2023, a placement in the local market of senior,
dematerialized and bearer bonds, issued by Banco de Chile and registered in the Securities Registry of the Financial Market Commission
under number |
The specific conditions of said
placement were the following: GI Series Bond, for a total amount of UF
b) | On January 26, 2023, the Board of Directors of Banco de Chile agreed to convene an Ordinary Shareholders’ Meeting for March 23, 2023 in order to propose, among other matters, the following distribution of profits for the year ended on December 31, 2022: |
i. | Deduct and withhold from the net income of the year, an amount
equivalent to the effect of inflation of the paid capital and reserves according to the variation of the Consumer Price Index that occurred
between November 2021 and November 2022, amounting to Ch$ |
ii. | Distribute in the form of dividend the remaining profit, corresponding
to a dividend of Ch$ |
Consequently, it will be proposed
a distribution as dividend of
c) | On March 3, 2023, Banco de Chile informed the Financial Markets Commission that Mr. Alfredo Ergas Segal has ceased to hold office as Director of the Bank due to a supervening cause of incapacity arising from circumstances beyond his control. This was due to the fact that, within the framework of the corresponding periodic update at the Board meeting on December 22, 2022, a company in which Mr. Ergas is a Director was included as one of the Bank’s main clients, thus constituting the situation outlined in numeral 5 of subsection 3 of article 50 bis of Law 18,046 on corporations. |
The aforementioned factual circumstances and the corresponding communication to the Superintendence of Pensions previously made by Mr. Ergas regarding the same matter, were reported by the Bank to the Commission for the Financial Market on December 30th.
In turn, by Resolution No. E-250 of March 3, 2021, the Superintendence of Pensiones has established the disability of Mr. Ergas, based on the verification of the cause of supervening disability referred to above.
By virtue of the foregoing, the Independent Alternate Director Mr. Paul Fürst Gwinner has assumed the role of Independent Regular Director, replacing Mr. Ergas in accordance with the procedure set forth in the Bank’s Bylaws.
d) | On March 16, 2023, a placement in the local market of senior, dematerialized and bearer bonds, issued
by Banco de Chile and registered in the Securities Registry of the Financial Market Commission under number |
The specific conditions of said
placement were the following: DG Series Bond, for a total amount of Ch$
F-199
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, continued
47. | Subsequent Events, continued: |
e) | On March 23, 2023, a placement in the local market of senior, dematerialized and bearer bonds, issued
by Banco de Chile and registered in the Securities Registry of the Financial Market Commission under number |
The specific conditions of said placement
were the following: DG Series Bond, for a total amount of Ch$
f) | On March 23, 2023, at the Bank’s Ordinary Shareholders’ Meeting, our shareholders proceeded to the complete renewal of the Board of Directors, due to the end of the legal and statutory three-year term with respect to the Board of Directors that has ceased in its functions. |
After the corresponding voting at the aforesaid meeting, the following persons were appointed as the Bank’s Directors for a new three-year term:
Directors: | Raúl Anaya Elizalde | |||
Hernán Büchi Buc | ||||
Andrés Ergas Heymann | ||||
Jaime Estévez Valencia | (Independent) | |||
Julio Santiago Figueroa | ||||
Pablo Granifo Lavín |
||||
Ana Holuigue Barros | (Independent) | |||
Andrónico Luksic Craig | ||||
Jean Paul Luksic Fontbona | ||||
Sinéad O’Connor | ||||
Francisco Pérez Mackenna | ||||
First Alternate Director: | Paul Fürst Gwinner | (Independent) | ||
Second Alternate Director: | Sandra Marta Guazzotti |
Moreover, on March 23, 2023, in its Ordinary Session No. BCH 2,986, the Board of Directors of the Bank agreed to the following officer nominations and appointments:
Chairman: | Pablo Granifo Lavín | |||
Vice Chairman: | Andrónico Luksic Craig | |||
Vice Chairman: | Julio Santiago Figueroa |
g) | On April 11, 2023, a placement in the local market of senior, dematerialized and bearer bonds, issued
by Banco de Chile and registered in the Securities Registry of the Financial Market Commission under number |
The specific conditions of said
placement were the following: GG Series Bond, for a total amount of UF
These Consolidated Financial Statements of Banco de Chile for the year ended December 31, 2022 were approved by the Directors on April 27, 2023.
In Management’s opinion, there are no other significant subsequent events that affect or could affect the Consolidated Financial Statements of Banco de Chile and its subsidiaries between December 31, 2022 and the date of issuance of these Consolidated Financial Statements.
F-200