UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F

 

(Mark One)

 

☐REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20162018

OR

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-14554

 

BANCO SANTANDER-CHILE
(d/b/a Santander and Banco Santander)
(Exact name of Registrant as specified in its charter)

 

SANTANDER-CHILE BANK
(d/b/a Santander and Banco Santander)
(Translation of Registrant’s name into English)

 

Chile
(Jurisdiction of incorporation or organization)

 

Bandera 140, 20th floor
Santiago, Chile
Telephone: 011-562-320-2000
(Address of principal executive offices)

Robert Moreno Heimlich

Tel: 562-2320-8284, Fax: 562-696-1679, email: robert.moreno@santander.cl

Bandera 140, 20th Floor, Santiago, Chile

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

Name of each exchange on which registered

American Depositary Shares (“ADS”), each representing the right to receive 400 Shares of Common Stock without par valueNew York Stock Exchange
Shares of Common Stock, without par value*New York Stock Exchange

 

* Santander-Chile’s shares of common stock are not listed for trading, but only in connection with the registration of the American Depositary Shares pursuant to the requirements of the New York Stock Exchange.

*Santander-Chile’s shares of common stock are not listed for trading, but only in connection with the registration of the American Depositary Shares pursuant to the requirements of the New York Stock Exchange.

 

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)

 

The number of outstanding shares of each class of common stock of Banco Santander-Chile at December 31, 2016,2018, was:

 

188,446,126,794 Shares of Common Stock, without par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes☒No☐

 

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☐No☒

 

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.

 

Yes☒     No☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

 

Yes☐☒     No☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.filer, or an emerging growth company. See definition of “accelerated filer,” “large accelerated filer” and large accelerated filer”“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer    ☒Accelerated Filer    ☐Non-accelerated Filer    ☐
Emerging growth company ☐

Large Accelerated Filer☒           Accelerated Filer

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.  ☐           Non-accelerated Filer☐

† 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 which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

☐  U.S. GAAP☒    International Financial Reporting Standards as issued by the International Accounting Standards Board☐   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).

 

Yes☐      No☒

 

TABLE OF CONTENTS

 

Page

 

Page
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS2
CERTAIN TERMS AND CONVENTIONS4
PRESENTATION OF FINANCIAL INFORMATION4
PART I7
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS7
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE7
ITEM 3. KEY INFORMATION7
ITEM 4. INFORMATION ON THE COMPANY3941
ITEM 4A. UNRESOLVED STAFF COMMENTS5659
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS5760
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES132140
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS144152
ITEM 8. FINANCIAL INFORMATION150154
ITEM 9. THE OFFER AND LISTING151155
ITEM 10. ADDITIONAL INFORMATION152155
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK170173
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES190
PART II192
PART II195
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES192195
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS192195
ITEM 15. CONTROLS AND PROCEDURES192195
ITEM 16. [RESERVED]194197
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT194197
ITEM 16B. CODE OF ETHICS194197
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES194197
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES195198
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS195198
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT195198
ITEM 16G. CORPORATE GOVERNANCE195198
ITEM 16H. MINE SAFETY DISCLOSURE197200
PART III198201
ITEM 17. FINANCIAL STATEMENTS198201
ITEM 18. FINANCIAL STATEMENTS198201
ITEM 19. EXHIBITS198201

 

1 

Table of Contents

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

 

We have made statements in this Annual Report on Form 20-F that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements appear throughout this report and include statements regarding our intent, belief or current expectations regarding:

 

·●asset growth and alternative sources of fundingfunding;

 

·●growth of our fee-based businessbusiness;

 

·●financing plansplans;

 

·●impact of competitioncompetition;

 

·●impact of regulationregulation;

 

·●exposure to market risks including:

 

·●interest rate riskrisk;

 

·●foreign exchange riskrisk; and

 

·●equity price riskrisk;

 

·●projected capital expendituresexpenditures;

 

·●liquidityliquidity;

 

·●trends affecting:

 

·●our financial conditioncondition; and

 

·●our results of operationoperation.

 

The sections of this Annual Report which contain forward-looking statements include, without limitation, “Item 3. Key Information—Risk Factors,” “Item 4. Information on the Company—B. Business Overview—Competition,” “Item 5. Operating and Financial Review and Prospects,” “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings,” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk.” Our forward-looking statements also may be identified by words such as “believes,” “expects,” “anticipates,” “projects,” “intends,” “should,” “could,” “may,” “seeks,” “aim,” “combined,” “estimates,” “probability,” “risk,” “VaR,” “target,” “goal,” “objective,” “future” or similar expressions.

 

You should understand that the following important factors, in addition to those discussed elsewhere in this Annual Report and in the documents which are incorporated by reference, could affect our future results and could cause those results or other outcomes to differ materially from those expressed in our forward-looking statements:

 

·●changes in capital markets in general that may affect policies or attitudes towards lending to Chile or Chilean companies;

 

·●changes in economic conditions;

 

·●the monetary and interest rate policies of Central Bank (as defined below);

 

·●inflation;

 

·●deflation;

 

·●unemployment;

 

2 


Table of Contents

·●increases in defaults by our customers and in impairment losses;

 

·●decreases in deposits;

 

·●customer loss or revenue loss;

 

·●unanticipated turbulence in interest rates;

 

·●movements in foreign exchange rates;

 

·●movements in equity prices or other rates or prices;

 

·●the effects of non-linear market behavior that cannot be captured by linear statistical models, such as the VaR model we use;

 

·●changes in Chilean and foreign laws and regulations;

 

·●changes in taxes;

 

·●competition, changes in competition and pricing environments;

 

·●our inability to hedge certain risks economically;

 

·●the adequacy of loss allowances;

 

·●technological changes;

 

·●changes in consumer spending and saving habits;

 

·●changes in demographics, consumer spending, investment or saving habits;

 

·●increased costs;

 

·●unanticipated increases in financing and other costs or the inability to obtain additional debt or equity financing on attractive terms;

 

·●changes in, or failure to comply with, banking regulations;

 

·●acquisitions or restructurings of businesses that may not perform in accordance with our expectations;

 

·●our ability to successfully market and sell additional services to our existing customers;

 

·●disruptions in client service;

 

·●damage to our reputation;

 

·●natural disasters;

 

·●implementation of new technologies;

 

·●the Group’s exposure to operational losses (e.g., failed internal or external processes, people and systems); and

 

·●an inaccurate or ineffective client segmentation model.

 

You should not place undue reliance on such statements, which speak only as of the date at which they were made. The forward-looking statements contained in this report speak only as of the date of this Annual Report, and we do not undertake to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

3 

Table of Contents

CERTAIN TERMS AND CONVENTIONS

 

As used in this annual report (the “Annual Report”), “Santander-Chile”, “the Bank”, “we,” “our” and “us” or similar terms refer to Banco Santander-Chile together with its consolidated subsidiaries.

 

When we refer to “Santander Spain,” we refer to our parent company, Banco Santander, S.A.S.A.. References to “the Group,” “Santander Group” or “Grupo Santander” mean the worldwide operations of the Santander Spain conglomerate, as indirectly controlled by Santander Spain and its consolidated subsidiaries, including Santander-Chile.

 

As used in this Annual Report, the term “billion” means one thousand million (1,000,000,000).

 

In this Annual Report, references to “$”, “U.S.$”, “U.S. dollars” and “dollars” are to United States dollars; references to “Chilean pesos,” “pesos” or “Ch$” are to Chilean pesos; references to “JPY” or “JPY$” are to Japanese Yen; references to “AUD” or “AUD$” are to Australian dollars; references to “CHF” or “CHF$” are to Swiss francs; references to “CNY” or “CNY$” are to Chinese yuan renminbi);renminbi; and references to “UF” are toUnidades de Fomento. The UF is an inflation-indexed Chilean monetary unit with a value in Chilean pesos that changes daily to reflect changes in the official Consumer Price Index (“CPI”) of theInstituto Nacional de Estadísticas (the Chilean National Institute of Statistics) for the previous month. See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates” for information regarding exchange rates.

 

As used in this Annual Report, the terms “write-offs” and “charge-offs” are synonyms.

 

In this Annual Report, references to the Audit Committee are to the Bank’sComité de Directores y Auditoría.

 

In this Annual Report, references to “BIS” are to the Bank for International Settlement, and references to “BIS ratio” are to the capital adequacy ratio as calculated in accordance with the Basel Capital Accord. References to the “Central Bank” are to theBanco Central de Chile. References to the SBIF“SBIF” are to the Superintendency of Banks and Financial Institutions. References to the “FMC” are to the Financial Market Commission, which is scheduled to merge with the SBIF on June 1, 2019.

 

Certain figures included in this Annual Report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.

PRESENTATION OF FINANCIAL INFORMATION

 

Santander-Chile is a Chilean bank and maintains its financial books and records in Chilean pesos and prepares its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Any reference to IFRS in this document is to IFRS as issued by the IASB.

 

As required by local regulations, our locally filed consolidated financial statements have been prepared in accordance with the Compendium of Accounting Standards issued by the SBIF, the Chilean regulatory agency (“Chilean Bank GAAP”). Therefore, our locally filed consolidated financial statements have been adjusted to IFRS in order to comply with the requirements of the Securities and Exchange Commission (the “SEC”). Chilean Bank GAAP principles are substantially similar to IFRS but there are some exceptions. For further details and a discussion of the main differences between Chilean Bank GAAP and IFRS, see to “Item 5. Operating and Financial Review and Prospects—Accounting Standards Applied in 2016.2018.”

 

This Annual Report contains our consolidated financial statements as of December 31, 20162018 and 20152017 and for the years ended December 31, 2016, 20152018, 2017 and 20142016 (the “Audited Consolidated Financial Statements”). Such Audited Consolidated Financial Statements have been prepared in accordance with IFRS as issued by the IASB, and have been audited by the independent registered public accounting firm PricewaterhouseCoopers Consultores Auditores y Compañía Limitada for the year ended December 31, 2016 and by the independent registered accounting firm Deloitte Auditores y Consultores LimitadaSpA for the years ended December 31, 20152018, 2017 and 2014.2016. See page F-2 of the Audited Consolidated Financial Statements as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016 for the audit report preparedissued by PricewaterhouseCoopers Consultores Auditores y Compañía Limitada and page F-4 of the Audited Consolidated Financial Statements for the 2015 and 2014 audit report prepared by Deloitte Auditores y Consultores Limitada.SpA. The Audited Consolidated Financial Statements have been prepared from accounting records maintained by the Bank and its subsidiaries.

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Table of Contents

 

The notes to the Audited Consolidated Financial Statements form an integral part of the Audited Consolidated Financial Statements and contain additional information and narrative descriptions or details of these financial statements.

 


We have formatted our financial information according to the classification format for banks in Chile for purposes of IFRS. We have not reclassified the line items to comply with Article 9 of Regulation S-X. Article 9 is a regulation of the SEC that contains formatting requirements for bank holding company financial statements.

 

Functional and Presentation Currency

 

The Chilean peso is the currency of the primary economic environment in which the Bank operates and the currency that influences its structure of costs and revenues, and in accordance with International Accounting Standard 21 –The Effects of Changes in Foreign Exchange Rates has been defined as the functional and presentation currency. Accordingly, all balances and transactions denominated in currencies other than the Chilean peso are treated as “foreign currency.”

See “Note 1—Summary of Significant Accounting Principles—e) Functional and presentation currency.” For presentationalpresentation purposes, we have translated Chilean pesos (Ch$) into U.S. dollars (U.S.$) using the rate as indicated below under “Exchange Rates,” for the financial information included in this Annual Report. See “Note 1—Summary of Significant Accounting Principles—e) Functional and presentation currency.”

 

Loans

 

Unless otherwise specified, all references herein (except in the Audited Consolidated Financial Statements) to loans are to loans and financial leases before deduction for loan loss allowance, and, except as otherwise specified, all market share data presented herein is based on information published periodically by the SBIF. Non-performing loans include the entire principal amount and accrued but unpaid interest on loans for which either principal or interest is past-due for 90 days or more. Restructured loans for which no payments are past-due are not ordinarily classified as non-performing loans. See “Item 5. Operating and Financial Review and Prospects—C. Selected Statistical Information—Classification of Loan Portfolio Based on the Borrower’s Payment Performance.”

Under IFRS, a loan is evaluated on each financial statement reporting date to determine whether objective evidence of impairment exists. A loan will be impaired if, and only if, objective evidence of impairment exists as a result of one or more events that occurred after the initial recognition of the loan, and such event or events have an impact on the estimated future cash flows of such loan that can be reliably estimated. It may not be possible to identify a single event that was the individual cause of the impairment.

An impairment loss relating to an individually significant loan recorded at amortized cost which has experienced objective evidence of impairment is calculated as the difference between the recorded amount of the loan and the fair value of the collateral less costs to sell (practical expedient as allowed under IAS 39, “Financial Instruments”, Application Guidance paragraph 84).

Those loans individually assessed for impairment and found not to be individually impaired are included in the loans collectively assessed for impairment (so that the collective assessment includes both the remainder of the loans not individually assessed and those not found to be individually impaired) where grouping of such loans on a collective basis is performed using similar credit characteristics.

The reversal of an impairment loss occurs only if it can be objectively related to an event occurring after the initial impairment loss was recorded. In the case of loans recorded at amortized cost, the reversal is recorded in income. See “Item 5. Operating and Financial Review and Prospects—C. Selected Statistical Information—Analysis of Loan Loss Allowances.”

 

Outstanding loans and the related percentages of our loan portfolio consisting of corporate and consumer loans as defined in the section entitled “Item 4. Information on the Company—B. Business Overview” are categorized based on the nature of the borrower. Outstanding loans and related percentages of our loan portfolio consisting of corporate and consumer loans in the section entitled “Item 5. Operating and Financial Review and Prospects—C. Selected Statistical Information” are categorized in accordance with the reporting requirements of the SBIF, which are based on the type and term of loans. This disclosure is consistent with IFRS.

 

5 

TableNon-performing loans are also presented in accordance with reporting requirements of Contents
the SBIF and include the entire principal amount and accrued but unpaid interest on loans for which either principal or interest is past-due for 90 days or more. Restructured loans for which no payments are past-due are not ordinarily classified as non-performing loans. See “Item 5. Operating and Financial Review and Prospects—C. Selected Statistical Information—Classification of Loan Portfolio Based on the Borrower’s Payment Performance.”

At the end of each reporting period the Bank evaluates the impairment of the loan book. For December 31, 2018 this has been assessed in accordance with IFRS 9 and for prior periods in accordance with IAS 39. See “Note 1—Summary of Significant Accounting Principles” in the Audited Consolidated Financial Statements.

 

Effect of Rounding

 

Certain figures included in this Annual Report and in the Audited Consolidated Financial Statements have been rounded up 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, certain percentage amounts in this Annual Report may vary from those obtained by performing the same calculations using the figures in the Audited Consolidated Financial Statements. Certain other amounts that appear in this Annual Report may not sum due to rounding.

 

Economic and Market Data

 

In this Annual Report, unless otherwise indicated, all macroeconomic data related to the Chilean economy is based on information published by the Central Bank, and all market share and other data related to the Chilean financial system is based on information published by the SBIF and our analysis of such information. Information regarding the consolidated risk index of the Chilean financial system as a whole is not available.

 

Exchange Rates

 

This Annual Report contains translations of certain Chilean peso amounts into U.S. dollars at specified rates solely for the convenience of the reader. 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 preparing the Audited Consolidated Financial Statements, could be converted into U.S. dollars at the rate indicated, were converted or will be converted at all.

 


Unless otherwise indicated, all U.S. dollar amounts at any year end, for any period have been translated from Chilean pesos based on the interbank market rate published by Reuters at 1:30 pm on the last business day of the period. On December 31, 20162018 and 2015,2017, the exchange rate in the Informal Exchange Market as published by Reuters at 1:30 pm on these days was Ch$666.00and697.76 and Ch$707.80616.85 respectively, or 0.19% less0.3% more and 0.06%0.26% more, respectively, than the observed exchange rate published by the Central Bank for such date of Ch$667.29695.69 and Ch$707.34615.22, respectively, per U.S.$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for the Chilean peso. For more information on the observed exchange rate, see “Item 3. Key Information—A. Selected Financial Data—Exchange Rates” of the Annual Report.

 

As of December 31, 20162018 and 2015,2017, one UF was equivalent to Ch$26,347.9827,565.79 and Ch$25,629.09,26,798.14, respectively. The U.S. dollar equivalent of one UF was U.S.$39.4939.62 as of December 31, 2016,2018, using the observed exchange rate reported by the Central Bank as of December 30, 20152018 of Ch$36.23695.69 per U.S.$1.00.

6 

Table of Contents

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

 

A.Selected Financial Data

A. Selected Financial Data

 

The following table presents selected historical financial information for Santander-Chile as of the dates and for each of the periods indicated. Financial information for Santander-Chile as of and for the years ended December 31, 2018, 2017, 2016, 2015, 2014, 2013, and 20122014 has been derived from our audited consolidated financial statements prepared in accordance with IFRS. In the F-pages of this Annual Report on Form 20-F, our audited financial statements as of December 31, 20162018 and 20152017 and for the years ended December 31, 2016, 20152018, 2017 and 20142016 are presented. The audited financial statements for 20132015 and 20122014 are not included in this document, but they can be found in our previous Annual Reports on Form 20-F. These consolidated financial statements differ in some respects from our locally filed financial statements as of and for the years ended December 31, 2018, 2017, 2016, 2015 2014, 2013 and 20122014 prepared in accordance with Chilean Bank GAAP. See “Item 4. Information on the Company—Differences between IFRS and Chilean Bank GAAP.”

 

The following table should be read in conjunction with, and is qualified in its entirety by reference to, our Audited Consolidated Financial Statements appearing elsewhere in this Annual Report.

 

 As of and for the years ended December 31, As of and for the years ended December 31, 
 2016 2016 2015 2014 2013 2012 2018  2018  2017  2016  2015  2014 
 In U.S.$ thousands(1) In Ch$ millions (2) In U.S.$ thousands(1) In Ch$ millions (2) 
CONSOLIDATED STATEMENT OF INCOME DATA (IFRS)                         
Net interest income  1,923,973   1,281,366   1,255,206   1,317,104   1,076,762   1,042,734   2,027,012   1,414,368   1,326,691   1,281,366   1,255,206   1,317,104 
Net fee and commission income  382,018   254,424   237,627   227,283   229,836   270,572   416,884   290,885   279,063   254,424   237,627   227,283 
Financial transactions, net (3)  210,748   140,358   145,499   112,565   124,437   82,299   150,599   105,082   129,752   140,358   145,499   112,565 
Other operating income  9,650   6,427   6,439   6,545   88,155   13,105   33,148   23,129   62,016   6,427   6,439   6,545 
Net operating profit before provision for loan losses  2,526,389   1,682,575   1,644,771   1,663,497   1,519,190   1,408,710   2,627,643   1,833,464   1,797,522   1,682,575   1,644,771   1,663,497 
Provision for loan losses  (513,638)  (342,083)  (399,277)  (354,903)  (371,462)  (403,692)  (454,896)  (317,408)  (302,255)  (342,083)  (399,277)  (354,903)
Net operating profit  2,012,751   1,340,492   1,245,494   1,308,594   1,147,728   1,005,018 
Net operating income  2,172,747   1,516,056   1,495,267   1,340,492   1,245,494   1,308,594 
Total operating expenses  (1,135,197)  (756,041)  (719,958)  (683,819)  (610,191)  (599,379)  (1,081,051)  (754,314)  (778,950)  (756,041)  (719,958)  (683,819)
Operating income  877,554   584,451   525,536   624,775   537,537   405,639   1,091,696   761,742   716,317   584,451   525,536   624,775 
Income from investments in associates and other companies  4,523   3,012   2,588   2,165   1,422   267   7,302   5,095   3,963   3,012   2,588   2,165 
Income before tax  882,077   587,463   528,124   626,940   538,959   405,906   1,098,998   766,837   720,280   587,463   528,124   626,940 
Income tax expense  (163,710)  (109,031)  (76,395)  (51,050)  (94,530)  (44,473)  (239,544)  (167,144)  (145,031)  (109,031)  (76,395)  (51,050)
Net income for the year  718,366   478,432   451,729   575,890   444,429   361,433   859,455   599,693   575,249   478,432   451,729   575,890 
Net income for the period attributable to:                                                
Equity holders of the Bank  714,815   476,067   448,466   569,910   442,294   356,808   853,206   595,333   562,801   476,067   448,466   569,910 
Non-controlling interests  3,551   2,365   3,263   5,980   2,135   4,625   6,249   4,360   12,448   2,365   3,263   5,980 
Net income attributable to Equity holders of the Bank per share  3.79   2.53   2.38   3.02   2.35   1.89   4.53   3.16   2.99   2.53   2.38   3.02 
Net income attributable to Equity holders of the Bank per ADS  1,517.28   1,010.51   951.92   1,208.00   938.83   757.37   1,811.09   1,263.71   1,406.96   1,010.51   951.92   1,208.00 
Weighted-average shares outstanding (in millions)  188,446.1   188,446.1   188,446.1   188,446.1   188,446.1   188,446.1   188,446.1   188,446.1   188,446.10   188,446.1   188,446.1   188,446.1 
Weighted-average ADS outstanding (in millions)  471.1   471.1   471.1   471.1   471.1   471.1   471.1   471.1   471.1   471.1   471.1   471.1 


  As of and for the years ended December 31, 
  2018  2018  2017  2016  2015  2014 
  In U.S.$ thousands(1)  In Ch$ millions (2) 
CONSOLIDATED STATEMENT OF FINANCIAL POSITION DATA (IFRS)                        
Cash and deposits in banks  2,960,102   2,065,441   1,452,922   2,279,389   2,064,806   1,608,888 
Cash items in process of collection  506,990   353,757   668,145   495,283   724,521   531,373 
Investments under resale agreements  —   —   —   6,736   2,463   — 
Financial derivative contracts  4,443,698   3,100,635   2,238,647   2,500,782   3,205,926   2,727,563 
Trading investments  —   —   485,736   396,987   324,271   774,815 
Interbank loans, net  —   —   162,213   268,672   9,711   11,942 
Loans and accounts receivable from customers, net  —   —   26,772,544   26,147,154   24,528,745   22,196,390 
Available-for-sale investments          2,574,546   3,388,906   2,044,411   1,651,598 
Financial assets held for trading  110,412   77,041   —   —   —   — 
Loans and account receivable at amortized cost  42,035,945   29,331,001   —   —   —   — 
Loans and account receivable at fair value through other comprehensive income  98,297   68,588   —   —   —   — 
Debt instrument at fair value through other comprehensive income  3,431,442   2,394,323   —   —   —   — 
Equity instruments at fair value through other comprehensive income  692   483   —   —   —   — 
Investments in associates and other companies  45,865   32,003   27,585   23,780   20,309   17,914 
Intangible assets  95,911   66,923   63,219   58,085   51,137   40,983 
Property, plant, and equipment  363,429   253,586   242,547   257,379   240,659   211,561 
Current taxes  —   —   —   —   —   2,241 
Deferred taxes  569,702   397,515   371,091   359,600   320,527   272,118 
Other assets  1,420,569   991,216   764,410   847,272   1,100,174   927,961 
TOTAL ASSETS  56,083,054   39,132,512   35,823,605   37,030,025   34,637,660   30,975,347 
Deposits and other demand  liabilities  12,527,828   8,741,417   7,768,166   7,539,315   7,356,121   6,480,497 
Cash items in process of being cleared  233,666   163,043   486,726   288,473   462,157   281,259 
Obligations under repurchase agreements  69,573   48,545   268,061   212,437   143,689   392,126 
Time deposits and other time liabilities  18,728,243   13,067,819   11,913,945   13,151,709   12,182,767   10,413,940 
Financial derivative contracts  3,608,301   2,517,728   2,139,488   2,292,161   2,862,606   2,561,384 
Interbank borrowing s  2,563,383   1,788,626   1,698,357   1,916,368   1,307,574   1,231,601 
Issued debt instruments  11,630,407   8,115,233   7,093,653   7,326,372   5,957,095   5,785,112 
Other financial liabilities  308,702   215,400   242,030   240,016   220,527   205,125 
Current taxes  11,599   8,093   6,435   29,294   17,796   1,077 
Deferred taxes  22,171   15,470   9,663   7,686   3,906   7,631 
Provisions  437,501   305,271   303,798   292,210   274,998   285,970 
Other liabilities  1,290,427   900,408   745,363   795,785   1,045,869   654,557 
TOTAL LIABILITIES  51,431,801   35,887,053   32,675,685   34,091,826   31,835,105   28,300,279 
Capital  1,277,378   891,303   891,303   891,303   891,303   891,303 
Reserves  2,755,993   1,923,022   1,781,818   1,640,112   1,527,893   1,307,761 
Valuation adjustments  16,269   11,352   (2,312)  6,640   1,288   25,600 
Retained earnings  535,455   373,619   435,228   370,803   351,890   417,321 
Attributable to Equity holders of the Bank  4,585,095   3,199,296   3,106,037   2,908,858   2,772,374   2,641,985 
Non-controlling interest  66,159   46,163   41,883   29,341   30,181   33,083 
TOTAL EQUITY(4)  4,651,254   3,245,459   3,147,920   2,938,199   2,802,555   2,675,068 
TOTAL LIABILITIES AND EQUITY  56,083,054   39,132,512   35,823,605   37,030,025   34,637,660   30,975,347 

  As of and for the years ended December 31, 
  2018  2017  2016  2015  2014 
CONSOLIDATED RATIOS                    
(IFRS)                    
Profitability and performance:                    
Net interest margin(5)  4.3%  4.3%  4.3%  4.4%  4.9%
Return on average total assets(6)  1.6%  1.6%  1.4%  1.3%  1.8%
Return on average equity(7)  18.4%  19.2%  16.8%  16.0%  21.4%
Capital:                    
Average equity as a percentage of average total assets(8)  8.8%  8.5%  8.1%  8.2%  8.2%
Total liabilities as a multiple of equity(9)  11.1   10.4   11.6   11.4   10.6 


  As of and for the years ended December 31, 
  2018  2017  2016  2015  2014 
Credit Quality:                    
Non-performing loans as a percentage of total loans(10)  2.1%  2.3%  2.1%  2.5%  2.8%
Allowance for loan losses as percentage of total loans(11)  2.9%  2.9%  2.9%  3.0%  2.9%
Operating Ratios:                    
Operating expenses /operating revenue(12)  41.1%  43.3%  44.9%  43.8%  41.1%
Operating expenses /average total assets  2.0%  2.3%  2.1%  2.1%  2.1%
                     
OTHER DATA                    
CPI Inflation Rate(13)  2.6%  2.3%  2.7%  4.4%  4.7%
Revaluation (devaluation) rate (Ch$/U.S.$) at year end(13)  (13.1%)  7.8%  5.7%  (16.5%)  (16.0%)
Number of employees at period end  11,305   11,068   11,354   11,723   11,478 
Number of branches and offices at period end  380   385   423   471   474 

 

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Table of Contents

  As of and for the years ended December 31,
  2016 2016 2015 2014 2013 2012
  In U.S.$ thousands(1) In Ch$ millions (2)
CONSOLIDATED STATEMENT OF FINANCIAL POSITION DATA (IFRS)                        
Cash and deposits in banks  3,422,506   2,279,389   2,064,806   1,608,888   1,571,810   1,250,414 
Cash items in process of collection  743,668   495,283   724,521   531,373   604,077   520,267 
Trading investments  596,077   396,987   324,271   774,815   287,567   338,287 
Investments under resale agreements  10,114   6,736   2,463   —   17,469   6,993 
Financial derivative contracts  3,754,928   2,500,782   3,205,926   2,727,563   1,494,018   1,293,212 
Interbank loans, net  403,411   268,672   9,711   11,942   124,954   90,414 
Loans and accounts receivable from customers, net  39,259,991   26,147,154   24,528,745   22,196,390   20,320,874   18,326,190 
Available-for-sale investments  5,088,447   3,388,906   2,044,411   1,651,598   1,700,993   1,826,158 
Investments in associates and other companies  35,706   23,780   20,309   17,914   9,681   7,614 
Intangible assets  87,215   58,085   51,137   40,983   66,703   87,347 
Property, plant, and equipment  386,455   257,379   240,659   211,561   180,215   162,214 
Current taxes  —   —   —   2,241   1,643   10,227 
Deferred taxes  539,940   359,600   320,527   272,118   227,285   181,875 
Other assets  1,272,180   847,272   1,100,174   927,961   514,938   657,890 
TOTAL ASSETS  55,600,638   37,030,025   34,637,660   30,975,347   27,122,227   24,759,102 
Deposits and other demand  liabilities  11,320,293   7,539,315   7,356,121   6,480,497   5,620,763   4,970,019 
Cash items in process of being cleared  433,143   288,473   462,157   281,259   276,379   284,953 
Obligations under repurchase agreements  318,974   212,437   143,689   392,126   208,972   304,117 
Time deposits and other time liabilities  19,747,311   13,151,709   12,182,767   10,413,940   9,675,272   9,112,213 
Financial derivative contracts  3,441,683   2,292,161   2,862,606   2,561,384   1,291,785   1,146,161 
Interbank borrowing  2,877,429   1,916,368   1,307,574   1,231,601   1,682,377   1,438,003 
Issued debt instruments  11,000,559   7,326,372   5,957,095   5,785,112   5,198,658   4,571,289 
Other financial liabilities  360,384   240,016   220,527   205,125   189,781   192,611 
Current taxes  43,985   29,294   17,796   1,077   50,242   525 
Deferred taxes  11,541   7,686   3,906   7,631   26,753   9,544 
Provisions  438,754   292,210   274,998   285,970   217,310   191,892 
Other liabilities  1,194,872   795,785   1,045,869   654,557   311,479   341,274 
TOTAL LIABILITIES  51,188,928   34,091,826   31,835,105   28,300,279   24,749,771   22,562,601 
Capital  1,338,293   891,303   891,303   891,303   891,303   891,303 
Reserves  2,462,631   1,640,112   1,527,893   1,307,761   1,130,991   975,460 
Valuation adjustments  9,970   6,640   1,288   25,600   (5,964)  (3,781)
Retained earnings  556,761   370,803   351,890   417,321   327,622   299,254 
Attributable to Equity holders of the Bank  4,367,655   2,908,858   2,772,374   2,641,985   2,343,952   2,162,236 
Non-controlling interest  44,056   29,341   30,181   33,083   28,504   34,265 
TOTAL EQUITY (4)  4,411,710   2,938,199   2,802,555   2,675,068   2,372,456   2,196,501 
TOTAL LIABILITIES AND EQUITY  55,600,638   37,030,025   34,637,660   30,975,347   27,122,227   24,759,102 

  As of and for the years ended December 31,
  2016 2015 2014 2013 2012
CONSOLIDATED RATIOS                    
(IFRS)                    
Profitability and performance:                    
Net interest margin (5)  4.3%  4.4%  4.9%  4.6%  4.8%
Return on average total assets (6)  1.4%  1.3%  1.8%  1.6%  1.4%
Return on average equity (7)  16.8%  16.0%  21.4%  18.9%  16.5%
Capital:                    
Average equity as a percentage of average total assets (8)  8.1%  8.2%  8.2%  8.7%  8.7%
Total liabilities as a multiple of equity (9)  11.6   11.4   10.6   10.4   10.3 
Credit Quality:                    
Non-performing loans as a percentage of total loans (10)  2.1%  2.5%  2.8%  2.9%  3.2%
Allowance for loan losses as percentage of total loans  2.9%  3.0%  2.9%  2.9%  2.9%
Operating Ratios:                    
Operating expenses /operating revenue (11)  44.9%  43.8%  41.1%  40.2%  42.5%
Operating expenses /average total assets  2.1%  2.1%  2.1%  2.3%  2.4%
                     
OTHER DATA                    
CPI Inflation Rate (12)  2.7%  4.4%  4.7%  3.0%  1.5%
Revaluation (devaluation) rate (Ch$/U.S.$) at year end (12)  5.7%  (16.5%)  (16.0%)  (9.4%)  8.2%
Number of employees at period end  11,354   11,723   11,478   11,516   11,713 
Number of branches and offices at period end  423   471   474   493   504 

8 

Table of Contents

 

(1)Amounts stated in U.S. dollars at and for the year ended December 31, 20162018 have been translated from Chilean pesos at the interbank market exchange rate of Ch$666.00697.76 = U.S.$1.00 as of December 31, 20162018 based on the interbank market rate published by Reuters at 1:30 pm on the last business day of the period.

 

(2)Except per share data, percentages and ratios, share numbers, employee numbers and branch numbers.

 

(3)Net income (expense) from financial operations and net foreign exchange gain.

 

(4)Total equity includes equity attributable to Equity holders of the Bank plus non-controlling interests.

 

(5)Net interest income divided by average interest earning assets (as presented in “Item 5. Operating and Financial Review and Prospects— C. Selected Statistical Information”).

 

(6)Net income for the year divided by average total assets (as presented in “Item 5. Operating and Financial Review and Prospects— C. Selected Statistical Information”).

 

(7)Net income for the year divided by average equity (as presented in “Item 5. Operating and Financial Review and Prospects—C. Selected Statistical Information”).

 

(8)This ratio is calculated using total average equity (as presented in “Item 5. Operating and Financial Review and Prospects— C. Selected Statistical Information”) including non-controlling interest.

 

(9)Total liabilities divided by equity.

 

(10)Non-performing loans include the aggregate unpaid principal and accrued but unpaid interest on all loans with at least one installment over 90 days past-due. Total loans in 2018 corresponds to loans at amortized cost.

(11) Allowance for loan losses as of December 31, 2018 corresponds to allowances for loans at fair value through other comprehensive income at amortized cost according to IFRS 9. Prior periods are in accordance with IAS 39.

 

(11)(12)The efficiency ratio is equal to operating expenses over operating income. Operating expenses includes personnel salaries and expenses, administrative expenses, depreciation and amortization, impairment and other operating expenses. Operating income includes net interest income, net fee and commission income, net income from financial operations (net trading income), foreign exchange profit (loss),gain, net and other operating income.

 

(12)(13)Based on information published by the Central Bank.

 

Exchange Rates

 

Chile has two currency markets, theMercado Cambiario Formal, or the Formal Exchange Market, and theMercado Cambiario Informal, or the Informal Exchange Market. According to Law 18,840, the organic law of the Central Bank and the Central Bank Act (Ley Orgánica Constitucional del Banco Central de Chile), the Central Bank determines which purchases and sales of foreign currencies must be carried out in the Formal Exchange Market. Pursuant to Central Bank regulations currently in effect, all payments, remittances or transfers of foreign currency abroad which are required to be effected through the Formal Exchange Market may be effected with foreign currency procured outside the Formal Exchange Market. The Formal Exchange Market is comprised of the banks and other entities so authorized by the Central Bank. The Informal Exchange Market is comprised of entities that are not expressly authorized to operate in the Formal Exchange Market, such as certain foreign exchange houses and travel agencies, among others. The Central Bank is empowered to require that certain purchases and sales of foreign currencies be carried out on the Formal Exchange Market. The conversion from pesos to U.S. dollars of all payments and distributions with respect to the ADSs described in this Annual Report must be transacted at the spot market rate in the Formal Exchange Market.

 


Both the Formal and Informal Exchange Markets are driven by free market forces. Current regulations require that the Central Bank be informed of certain transactions and that they be effected through the Formal Exchange Market. In order to keep the average exchange rate within certain limits, the Central Bank may intervene by buying or selling foreign currency on the Formal Exchange Market.

 

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Table of Contents

The U.S.$ Observed Exchange Rate (dólar observado), which is reported by the Central Bank and published daily in the Chilean newspapers, is the weighted average exchange rate of the previous business day’s transactions in the Formal Exchange Market. The Central Bank has the power to intervene by buying or selling foreign currency on the Formal Exchange Market to attempt to maintain the Observed Exchange Rate within a desired range. Even though the Central Bank is authorized to carry out its transactions at the Observed Exchange Rate, it generally uses spot rates for its transactions. Other banks generally carry out authorized transactions at spot rates as well.

 

Purchases and sales of foreign currencies may be legally carried out in the Informal Exchange Market. The Informal Exchange Market reflects transactions carried out at informal exchange rates by entities not expressly authorized to operate in the Formal Exchange Market. There are no limits imposed on the extent to which the rate of exchange in the Informal Exchange Market can fluctuate above or below the Observed Exchange Rate. In recent years, the variation between the Observed Exchange Rate and the Informal Exchange Rate has not been significant. On December 31, 20152018 and 20162017 the exchange rate in the Informal Exchange Market as published by Reuters at 1:30 pm on these days was Ch$707.80697.76 and Ch$666.00616.85 respectively, or 0.06%0.30% more and 0.19% less,0.26% more, respectively, than the Central Bank’s published observed exchange rate for such date of Ch$707.34695.69 and Ch$667.29,615.22, respectively, per U.S.$1.00.

The following table sets forth the annual low, high, average and period-end observed exchange rate for U.S. dollars for each of the following periods, as reported by the Central Bank. We make no representation that the Chilean peso or the U.S. dollar amounts referred to herein actually represent, could have been or could be converted into U.S. dollars or Chilean pesos, as the case may be, at the rates indicated, at any particular rate or at all. The Federal Reserve Bank of New York does not report a noon buying rate for pesos.

  Daily Observed Exchange Rate Ch$ Per U.S.$(1)
Year Low(2) High(2) Average(3) Period End
         
2012   469.65   519.69   494.99   478.60 
2013   466.50   533.95   495.09   523.76 
2014   524.61   621.41   570.01   607.38 
2015   597.10   715.66   654.25   707.34 
2016   645.22   730.31   676.83   667.29 

  Daily Observed Exchange Rate Ch$ Per U.S.$(1)
Month Low(2) High(2) Average(3) Period End
October 2016 651.65    670.88    663.92    651.65   
November 2016   650.72   679.24   666.12   675.48 
December 2016   649.40   677.11   667.17   667.29 
January 2017   648.31   673.36   661.19   648.87 
February 2017   638.35   646.97   643.21   645.19 
March 2017 (through March 22, 2017)   648.88   669.52   660.29   657.83 

Source: Central Bank.

(1)Nominal figures.

(2)Exchange rates are the actual low and high, on a day-by-day basis for each period.

(3)The average of monthly average rates during the year.

 

Dividends

 

Under the current General Banking Law, a Chilean bank may only pay a single dividend per year (i.e., interim dividends are not permitted). Santander-Chile’s annual dividend is proposed by its Board of Directors and is approved by the shareholders at the annual ordinary shareholders’ meeting held the year following that in which the dividend is generated. For example, the 20162018 dividend must be proposed and approved during the first four months of 2017.2019. Following shareholder approval, the proposed dividend is declared and paid. Historically, the dividend for a particular year has been declared and paid no later than one month following the shareholders’ meeting. Dividends are paid to shareholders of record on the fifth day preceding the date set for payment of the dividend. The applicable record dates for the payment of dividends to holders of ADSs will, to the extent practicable, be the same.

10 

Table of Contents

 

Under the General Banking Law, a bank must distribute cash dividends in respect of any fiscal year in an amount equal to at least 30% of its net income for that year, as long as the dividend does not result in the infringement of minimum capital requirements. The balances of our distributable net income are generally retained for use in our business (including for the maintenance of any required legal reserves). Although our Board of Directors currently intends to pay regular annual dividends, the amount of dividend payments will depend upon, among other factors, our then current level of earnings, capital and legal reserve requirements, as well as market conditions, and there can be no assurance as to the amount or timing of future dividends.

 

Dividends payable to holders of ADSs are net of foreign currency conversion expenses of The Bank of New York Mellon, as depositary (the “Depositary”) and will be subject to the Chilean withholding tax currently at the rate of 35% (subject to credits in certain cases as described in “Item 10. Additional Information—E. Taxation—Material Tax Consequences of Owning Shares of Our Common Stock or ADSs”).

 

Under the Foreign Investment Contract (as defined herein), the Depositary, on behalf of ADS holders, is granted access to the Formal Exchange Market to convert cash dividends from Chilean pesos to U.S. dollars and to pay such U.S. dollars to ADS holders outside Chile, net of taxes, and no separate registration by ADS holders is required. In the past, Chilean law required that holders of shares of Chilean companies who were not residents of Chile to register as foreign investors under one of the foreign investment regimes contemplated by Chilean law in order to have dividends, sale proceeds or other amounts with respect to their shares remitted outside Chile through the Formal Exchange Market. On April 19, 2001, the Central Bank deregulated the Exchange Market and eliminated the need to obtain approval from the Central Bank in order to remit dividends, but at the same time this eliminated the possibility of accessing the Formal Exchange Market. These changes do not affect the current Foreign Investment Contract, which was signed prior to April 19, 2001, which grants access to the Formal Exchange Market with prior approval of the Central Bank. See “Item 10. Additional Information—D. Exchange Controls.”

 


The following table presents dividends declared and paid by us in nominal terms in the past four years:

 

Year

Dividend
Ch$ millions (1) 

Dividend
U.S.$ millions (2) 

Per share Ch$/share (3) 

Per ADS U.S.$/ADS (4) 

% over earnings (5) 

% over earnings (6) 

 Dividend
Ch$ millions (1)		 Dividend
U.S.$ millions (2)		 Per share Ch$/share (3) Per ADS U.S.$/ADS (4) % over
earnings (5)		 % over
earnings (6)		 
2013232,780493.11.241.056065
2014265,156476.01.411.0160
2015330,198540.41.751.156058 330,198 540.4  1.75 1.15  60  58 
2016336,659503.71.791.0775 336,659 503.7  1.79 1.07  75  75 
2017(7)330,646496.51.751.057069
2017 330,646 496.5  1.75 1.05  70  69 
2018 423,611 702.3  2.25 1.49  75  75 

 

 

(1)Millions of nominal pesos.

 

(2)Millions of U.S.$ using the observed exchange rate of the day the dividend was approved at the annual shareholders’ meeting, except for 2017 when the exchange rate used is Ch$666.00.meeting.

 

(3)Calculated on the basis of 188,446 million shares.

 

(4)Dividend in U.S.$ million divided by the number of ADS, which was calculated on the basis of 1,039 shares per ADS for 2012. For 2013, 2014, 2015 and 2016, it is calculated on the basis of 400 shares per ADS.

 

(5)Calculated by dividing dividend paid in the year by net income attributable to the equity holders of the Bank for the previous year under Chilean Bank GAAP. This is the payment ratio determined by shareholders.

 

(6) Calculated by dividing dividend paid in the year by net income attributable to the equity holders of the Bank for the previous year under IFRS.

 

(7)Dividend proposed by the Board for shareholders’ approval on April 26, 2017.

B. Capitalization and Indebtedness

B.Capitalization and Indebtedness

 

Not applicable.

 

11 

TableC. Reasons for the Offer and Use of Contents

Proceeds

C.Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D.Risk Factors

D. Risk Factors

 

You should carefully consider the following risk factors, which should be read in conjunction with all the other information presented in this Annual Report. 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. 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 subject to market risks that are presented both in this subsection and in “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”

 

Risks Associated with Our Business

 

We are vulnerable to disruptions and volatility in the global financial markets.

 

In the recent past, financial systems worldwide have experienced difficult credit and liquidity conditions and disruptions leading to less liquidity and greater volatility (such as volatility in spreads). Global economic conditions deteriorated significantly between 2007 and 2009, and many countries fell into recession. Although mostmany countries have begun to recover,recovered, this recovery may not be sustainable. Many major financial institutions, including some of the world’s largest global commercial banks, investment banks, mortgage lenders, mortgage guarantors and insurance companies experienced, and some continue to experience, significant difficulties. Around the world, there have also beenwere runs on deposits at several financial institutions, numerous institutions have sought additional capital or have beenwere assisted by governments, and many lenders and institutional investors have reduced or ceased providing funding to borrowers (including to other financial institutions).

 


In particular, we face, among others, the following risks related to the economic downturn:

 

·●Reduced demand for our products and services.

 

·●Increased regulation of our industry. Compliance with such regulation will continue to increase our costs and may affect the pricing for our products and services, increase our conduct and regulatory risks to non-compliance and limit our ability to pursue business opportunities.

 

·●Inability of our borrowers to timely or fully comply with their existing obligations. Macroeconomic shocks may negatively impact the household income of our retail customers and may adversely affect the recoverability of our retail loans, resulting in increased loan losses.

 

·●The process we use to estimate losses inherent in our credit exposure requires complex judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. The degree of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the sufficiency of our loan loss allowances.

 

·●The value and liquidity of the portfolio of investment securities that we hold may be adversely affected.

 

·●Any worsening of global economic conditions may delay the recovery of the international financial industry and impact our financial condition and results of operations.

 

Despite recent improvements in certain segments of the global economy, uncertainty remains concerning the future economic environment. Such economic uncertainty could have a negative impact on our business and results of operations. A slowing or failing of the economic recovery would likely aggravate the adverse effects of these difficult economic and market conditions on us and on others in the financial services industry.

 

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Increased volatilityA return to volatile conditions in the global financial markets could have a material adverse effect on us, including on our ability to access capital and liquidity on financial terms acceptable to us, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers and become unable to maintain certain liability maturities. Any such increase in capital markets funding availability or costs or in deposit rates could have a material adverse effect on our interest margins and liquidity.

 

Additionally, the results of the 2016 United States presidential and congressional elections generated volatility in the global capital and currency markets and created uncertainty about the relationship between the United States and its major trade partners. The uncertainty persists in relation to the United States trade policy, in particular with respect to any further protectionist shift.

If all or some of the foregoing risks were to materialize, this could have a material adverse effect on our financing availability and terms and, more generally, on our results, financial condition and prospects.

Additionally, the results of the 2016 United States presidential and congressional elections have generated volatility in the global capital and currency markets and have created uncertainty about the relationship between the United States and Latin American countries. Any material change to United States trade policy with respect to Chile could have a material adverse effect on the economy, which could in turn materially harm our financial condition and results of operations.

 

Credit, market and liquidity risk may have an adverse effect on our credit ratings and our cost of funds. Any downgrade in Chile’s, our controlling shareholders or our credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative contracts and adversely affect our interest margins and results of operations.

 

Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us, and their ratings of our debt are based on a number of factors, including our financial strength and conditions affecting the financial services industry generally. In addition, due to the methodology of the main rating agencies, our credit rating is affected by the rating of Chile’s sovereign debt. If Chile’s sovereign debt is downgraded, our credit rating would also likely be downgraded by an equivalent amount.

 


In December 2016, Moody’s Investors ServicesAugust 2017, Fitch Ratings Ltd. (“Moody’s”Fitch”) concludeddowngraded our main ratings from A+ to A following a reviewsimilar action on the sovereign rating of the Bank’s ratings and downgraded the baseline credit assessments from a2 to a3 due to their belief that the prospectsRepublic of a continued slowdown in the Chilean economy and relevant market shift have changed the competitive landscape. Moody’s confirmed our other ratings, maintaining a stable outlook. Also in December 2016, Fitch changed their outlook on the Bank from stable to negative due to concerns over the sovereign ratings for Chile. Standard and Poor’s Ratings Services (“S&P”) announcedplaced the same actionBank’s ratings on Outlook Negative in JanuaryAugust 2017 and reaffirmed this rating and outlook in November 2017. In August 2018, the Bank’s outlook changed from negative to stable after the outlook for the sovereign rating of the Republic of Chile was changed to stable in July 2017 and the Bank’s A rating was affirmed in August 2017.

In July 2018, Moody’s downgraded our main rating to A1 from Aa3, after revising the sovereign rating of the Republic of Chile to A1 as well. Moody’s currently has a stable outlook on the Republic of Chile’s sovereign rating and on our rating as well.

 

In addition, our ratings may be adversely affected by any downgrade in the ratings of our parent company, Santander Spain. The long-term debt of Santander Spain is currently rated investment grade by the major rating agencies: A3A2 (stable) by Moody’s, A- (positive)A (stable) by S&P and A- (stable) by Fitch Ratings Ltd. (“Fitch”).Fitch.

 

Any downgrade in our debt credit ratings would likely increase our borrowing costs and may require us to post additional collateral or take other actions under some of our derivative contracts, and could limit our access to capital markets and adversely affect our commercial business. For example, a ratings downgrade could adversely affect our ability to sell or market certain of our products, engage in certain longer-term and derivatives transactions and retain our customers, particularly customers who need a minimum rating threshold in order to invest. In addition, under the terms of certain of our derivative contracts and other financial commitments we may be required to maintain a minimum credit rating or terminate such contracts or post collateral. Any of these results of a ratings downgrade could reduce our liquidity and have an adverse effect on us, including our operating results and financial condition.

 

While certain potential impacts of these downgrades are contractual and quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they depend upon numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of our long-term credit rating precipitates downgrades to our short-term credit rating, and assumptions about the potential behaviors of various customers, investors and counterparties. Actual outflows could be higher or lower than the preceding hypothetical examples, depending upon certain factors including which credit rating agency downgrades our credit rating, any management or restructuring actions that could be taken to reduce cash outflows and the potential liquidity impact from loss of unsecured funding (such as from money market funds) or loss of secured funding capacity. Although unsecured and secured funding stresses are included in our stress testing scenarios and a portion of our total liquid assets is held against these risks, a credit rating downgrade could still have a material adverse effect on us.

 

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In addition, if we were required to cancel our derivatives contracts with certain counterparties and were unable to replace such contracts, our market risk profile could be altered.

 

There can be no assurance that the rating agencies will maintain the current ratings or outlooks. Failure to maintain favorable ratings and outlooks could increase our cost of funding and adversely affect interest margins, which could have a material adverse effect on us.

 

Increased competition, including from non-traditional providers of banking services such as financial technology providers, and industry consolidation may adversely affect our results of operations.

 

The Chilean market for financial services is highly competitive. We compete with other private sector Chilean and non-Chilean banks, with Banco del Estado de Chile, the principal government-owned sector bank, with department stores and with larger supermarket chains that make consumer loans and sell other financial products to a large portion of the Chilean population. The lower to middle-income segments of the Chilean population and the small- and mid- sized corporate segments have become the target markets of several banks and competition in these segments may increase. In addition, there has been a trend towards consolidation in the Chilean banking industry in recent years, which has created larger and stronger banks with which we must now compete.There can be no assurance that this increased competition will not adversely affect our growth prospects, and therefore our operations.We also face competition from non-bank (such as department stores, insurance companies,cajas de compensaciónandcooperativas) and non-finance competitors (principally department stores, auto-lenders and larger supermarket chains) with respect to some of our credit products, such as credit cards, consumer loans and insurance brokerage. In addition, we face competition from non-bank finance competitors, such as leasing, factoring and automobile finance companies, with respect to credit products, and from mutual funds, pension funds and insurance companies with respect to savings products.

 


Non-traditional providers of banking services, such as internet based e-commerce providers, mobile telephone companies and internet search engines may offer and/or increase their offerings of financial products and services directly to customers. These non-traditional providers of banking services currently have an advantage over traditional providers because they are not subject to banking regulation. Several of these competitors may have long operating histories, large customer bases, strong brand recognition and significant financial, marketing and other resources. They may adopt more aggressive pricing and rates and devote more resources to technology, infrastructure and marketing.

New competitors may enter the market or existing competitors may adjust their services with unique product or service offerings or approaches to providing banking services. If we are unable to successfully compete with current and new competitors, or if we are unable to anticipate and adapt our offerings to changing banking industry trends, including technological changes, our business may be adversely affected. In addition, our failure to effectively anticipate or adapt to emerging technologies or changes in customer behavior, including among younger customers, could delay or prevent our access to new digital-based markets, which would in turn have an adverse effect on our competitive position and business.

The rise in customer use Furthermore, the widespread adoption of new technologies, including cryptocurrencies and payment systems, could require substantial expenditures to modify or adapt our existing products and services as we continue to grow our internet and mobile banking platformscapabilities. Our customers may choose to conduct business or offer products in recent yearsareas that may be considered speculative or risky. Such new technologies could negatively impact our investments in bank premises, equipment and personnel for our branch network.

The persistence or acceleration of this shift in demand towards internet and mobile banking may necessitate changes to our retail distribution strategy, which may include closing and/or selling certain branches and restructuring our remaining branches and work force. These actions could lead to losses on these assets and may lead to increased expenditures to renovate, reconfigure or close a number of our remaining branches or to otherwise reform our retail distribution channel. Furthermore, our failure to swiftly and effectively implement such changes to our distribution strategy could have an adverse effect our competitive position.

 

Increasing competition could also require that we increase ourthe rates offered on deposits or lower the rates we charge on loans, which could also have a material adverse effect on us, including our profitability. It may also negatively affect our business results and prospects by, among other things, limiting our ability to increase our customer base and expand our operations and increasing competition for investment opportunities.

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If our customer service levels were perceived by the market to be materially below those of our competitor financial institutions, we could lose existing and potential business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on our operating results, financial condition and prospects.

 

Our ability to maintain our competitive position depends, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties, and we may not be able to manage various risks we face as we expand our range of products and services that could have a material adverse effect on us.

 

The success of our operations and our profitability depends, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties. However, we cannot guarantee that our new products and services will be responsive to client demands, or that they will be successful. In addition, our clients’ needs or desires may change over time, and such changes may render our products and services obsolete, outdated or unattractive and we may not be able to develop new products that meet our clients’ changing needs. Our success is also dependent on our ability to anticipate and leverage new and existing technologies that may have an impact on products and services in the banking industry. Technological changes may further intensify and complicate the competitive landscape and influence client behavior. If we cannot respond in a timely fashion to the changing needs of our clients, we may lose clients, which could in turn materially and adversely affect us.

 

As we expand the range of our products and services, some of which may be at an early stage of development in the markets of certain regions where we operate, we will be exposed to new and potentially increasingly complex risks and development expenses in those markets, with respect to which our experience and the experience of our partners may not be sufficient. Our employees and our risk management systems may not be sufficient to enable us to properly manage such risks. In addition, the cost of developing products that are not launched is likely to affect our results of operations. Any or all of these factors, individually or collectively, could have a material adverse effect on us.

 


Our strong position in the credit card market is in part due to our credit card co-branding agreement with Chile’s largest airline. This agreement expireswas renewed in August 2020 andJanuary 2019 for seven more years. Once this agreement expires, no assurance can be given that it will be renewed, which may materially and adversely affect our results of operations and financial condition in the credit card business.

While we have successfully increased our customer service levels in recent years, should these levels ever be perceived by the market to be materially below those of our competitor financial institutions, we could lose existing and potential business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on our operating results, financial condition and prospects.

 

The financial problems faced by our customers could adversely affect us.

 

Market turmoil and economic recession could materially and adversely affect the liquidity, credit ratings, businesses and/or financial conditions of our borrowers, which could in turn increase our non-performing loan ratios, impair our loan and other financial assets and result in decreased demand for borrowings in general. In addition, our customers may further significantly decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds, which would adversely affect our fee and commission income. We may also be adversely affected by the negative effects of the heightened regulatory environment on our customers due to the high costs associated with regulatory compliance and proceedings. Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.

 

We may generate lower revenues from fee and commission based businesses.

 

The fees and commissions that we earn from the different banking and other financial services that we provide represent a significant source of our revenues. Our customers may significantly decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds for a number of reasons, including a market downturn, which would adversely affect us, including our fee and commission income.

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Banco Santander Chile sold its asset management business in 2013 and signed a management service agreement for a 10 year-period with the acquirer of this business in which we sell asset management funds on their behalf. Therefore, even in the absence of a market downturn, below-market performance by the mutual funds of the firm we broker for may result in a reduction in revenue we receive from selling asset management funds and adversely affect our results of operations.

 

Market conditions have resulted, and could result, in material changes to the estimated fair values of our financial assets. Negative fair value adjustments could have a material adverse effect on our operating results, financial condition and prospects.

 

In the recent past, financial markets have been subject to significant stress resulting in steep falls in perceived or actual financial asset values, particularly due to volatility in global financial markets and the resulting widening of credit spreads. We have material exposures to securities, loans and other investments that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Asset valuations in future periods, reflecting then-prevailing market conditions, may result in negative changes in the fair values of our financial assets and these may also translate into increased impairments. In addition, the value ultimately realized by us on disposal may be lower than the current fair value. Any of these factors could require us to record negative fair value adjustments, which may have a material adverse effect on our operating results, financial condition or prospects.

 

In addition, to the extent that fair values are determined using financial valuation models, such values may be inaccurate or subject to change, as the data used by such models may not be available or may become unavailable due to changes in market conditions, particularly for illiquid assets, and particularly in times of economic instability. In such circumstances, our valuation methodologies require us to make assumptions, judgments and estimates in order to establish fair value, and reliable assumptions are difficult to make and are inherently uncertain and valuation models are complex, making them inherently imperfect predictors of actual results. Any consequential impairments or write-downs could have a material adverse effect on our operating results, financial condition and prospects.

 


The credit quality of our loan portfolio may deteriorate and our loan loss reserves could be insufficient to cover our actual loan losses, which could have a material adverse effect on us.

 

Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of our businesses. Non-performing or low credit quality loans have in the past negatively impacted our results of operations and could do so in the future. In particular, the amount of our reported non-performing loans may increase in the future as a result of growth in our total loan portfolio, including as a result of loan portfolios that we may acquire in the future (the credit quality of which may turn out to be worse than we had anticipated), or factors beyond our control, such as adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in economic conditions in Chile or in global economic and political conditions. If we were unable to control the level of our non-performing or poor credit quality loans, this could have a material adverse effect on us.

 

As of December 31, 2016,2018, our non-performing loans were Ch$564,131631,649 million, and the ratio of our non-performing loans to total loans was 2.1%. As of December 31, 2016,2018, our allowance for loan losses was Ch$790,605882,450 million, and the ratio of our allowance for loan losses to total loans was 2.9%.2.9 %. For additional information on our asset quality, see “Item 5. Operating and Financial Review and Prospects—C. Selected Statistical Information–Information—Classification of Loan Portfolio Based on the Borrower’s Payment Performance.”

 

Our current allowance for loan losses may not be adequate to cover an increase in the amount of non-performing loans or any future deterioration in the overall credit quality of our total loan portfolio. Our allowance for loan losses is based on our current assessment of and expectations concerning various factors affecting us, including the quality of our loan portfolio. These factors include, among other things, our borrowers’ financial condition, repayment abilities and repayment intentions, the realizable value of any collateral, the prospects for support from any guarantor, Chile’s economy, government macroeconomic policies, interest rates and the legal and regulatory environment. As the recent global2008 financial crisis has demonstrated, many of these factors are beyond our control. In addition, as these factors evolve, the models we use to determine the appropriate level of allowance for loan losses and other assets require recalibration, which can lead to increased provision expense. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results–Results of Operations for the Years ended December 31, 2016, 20152018, 2017 and 2014—2016—Provision for loan losses, net of recoveries.”

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As a result, there is no precise method for predicting loan and credit losses, and we cannot assure you that our allowance for loan losses will be sufficient in the future to cover actual loan and credit losses. If our assessment of and expectations concerning the above-mentioned factors differ from actual developments, if the quality of our total loan portfolio deteriorates, for any reason, including the increase in lending to individuals and small and medium enterprises, the volume increase in the consumer loan portfolio and the introduction of new products, or if the future actual losses exceed our estimates of incurred losses, we may be required to increase our provisions and allowance for loan losses, which may adversely affect us. If we are unable to control or reduce the level of our non-performing or poor credit quality loans, this could have a material adverse effect on us.

 

The value of the collateral securing our loans may not be sufficient, and we may be unable to realize the full value of the collateral securing our loan portfolio.

 

The value of the collateral securing our loan portfolio may fluctuate or decline due to factors beyond our control, including macroeconomic factors affecting Chile’s economy. The value of the collateral securing our loan portfolio may be adversely affected by force majeure events, such as natural disasters, particularly in locations where a significant portion of our loan portfolio is composed of real estate loans. Natural disasters such as earthquakes and floods may cause widespread damage, which could impair the asset quality of our loan portfolio and could have an adverse impact on Chile’s economy. The real estate market is particularly vulnerable in the current economic climate and this may affect us, as real estate represents a significant portion of the collateral securing our residential mortgage loan portfolio. We may also not have sufficiently recent information on the value of collateral, which may result in an inaccurate assessment for impairment losses of our loans secured by such collateral. If any of the above were to occur, we may need to make additional provisions to cover actual impairment losses of our loans, which may materially and adversely affect our results of operations and financial condition.

 


The growth of our loan portfolio may expose us to increased loan losses. Our exposure to individuals and small and mid-sized businesses could lead to higher levels of past due loans, allowances for loan losses and charge-offs.

 

The further expansion of our loan portfolio (particularly in the consumer, small- and mid-sized companies and real estate segments) can be expected to expose us to a higher level of loan losses and require us to establish higher levels of provisions for loan losses. See “Note 8—Interbank Loans”9—Loans and Account Receivable at Amortized Cost – under IFRS 9” and “Note 9—10—Loans and Accounts Receivables from Customers”Account Receivable at Fair Value through Other Comprehensive Income – under IFRS 9” in our Audited Consolidated Financial Statements for a description and presentation of our loan portfolio as well as “Item 5-Selected5. Operating and Financial Review and Prospects—C. Selected Statistical Information—Loan Portfolio.”

 

Retail customers represent 68.4%68.8% of the value of the total loan portfolio at amortized cost as of December 31, 2016.2018. As part of our business strategy, we seek to increase lending and other services to retail clients, which are more likely to be adversely affected by downturns in the Chilean economy. In addition, as of December 31, 2016,2018, our residential mortgage loan portfolio totaled Ch$8,619,35510,150,981 million, representing 31.7%33.6% of our total loans. See “Note 9—Loans and Accounts Receivables from Customers”Account Receivable at Amortized Cost – under IFRS 9” in our Audited Consolidated Financial Statements for a description and presentation of our residential mortgage loan portfolio. If the economy and real estate market in Chile experience a significant downturn, this could materially adversely affect the liquidity, businesses and financial conditions of our customers, which may in turn cause us to experience higher levels of past-due loans, thereby resulting in higher provisions for loan losses and subsequent charge-offs. This may materially and adversely affect our asset quality, results of operations and financial condition.

 

OurThe growth rate of our loan portfolio may not continue to grow at the same rate andbe affected by economic turmoil, maywhich could also lead to a contraction in our loan portfolio.

 

There can be no assurance that our loan portfolio will continue to grow at similar rates to the historical growth rate described above.rates. A reversal of the rate of growth of the Chilean economy, a slowdown in the growth of customer demand, an increase in market competition or changes in governmental regulations could adversely affect the rate of growth of our loan portfolio and our risk index and, accordingly, increase our required allowances for loan losses. An economicEconomic turmoil could materially adversely affect the liquidity, businesses and financial condition of our customers as well as lead to a general decline in consumer spending and a rise in unemployment. All this could in turn lead to decreased demand for borrowings in general.

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Our financial results are constantly exposed to market risk. We are subject to fluctuations in interest rates and other market risks, which may materially and adversely affect us and our profitability.

 

Market risk refers to the probability of variations in our net interest income or in the market value of our assets and liabilities due to volatility of interest rate, inflation, exchange rate or equity price. Changes in interest rates affect the following areas, among others, of our business:

 

·●net interest income;

 

·●the volume of loans originated;

 

·●credit spreads;

 

·●the market value of our securities holdings;

 

·●the value of our loans and deposits; and

 

·●the value of our derivatives transactions.

 

Interest rates are sensitive to many factors beyond our control, including increased regulation of the financial sector, the reserve policies of the Central Bank, deregulation of the financial sector in Chile, monetary policies and domestic and international economic and political conditions. Variations in interest rates could affect the interest earned on our assets and interest paid on our borrowings, thereby affecting our net interest income, which comprises the majority of our revenue, reducing our growth rate and potentially resulting in losses. Interest rate variations could adversely affect us, including our net interest income, reducing our growth rate or even resulting in losses. When interest rates rise, we may be required to pay higher interest on our floating-rate borrowings while interest earned on our predominately fixed-rate assets may not rise as quickly, which could cause profits to grow at a reduced rate or decline in some parts of our portfolio.

 


Increases in interest rates may reduce the volume of loans we originate. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets. Increases in interest rates may also reduce the propensity of our customers to prepay or refinance fixed-rate loans. Increases in interest rates may reduce the value of our financial assets and may reduce gains or require us to record losses on sales of our loans or securities.

 

If interest rates decrease, although this is likely to decrease our funding costs, it is likely to adversely impact the income we receive from our investments in securities as well as loans with similar maturities. In addition, we may also experience increased delinquencies in a low interest rate environment when such an environment is accompanied by high unemployment and recessionary conditions.

 

The market value of a security with a fixed interest rate generally decreases when the prevailing interest rates rise, which may have an adverse effect on our earnings and financial condition. In addition, we may incur costs as we implement strategies to reduce interest rate exposure in the future (which, in turn, will impact our results). The market value of an obligation with a floating interest rate can be adversely affected when interest rates increase, due to a lag in the implementation of repricing terms or an inability to refinance at lower rates.

 

We are also exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities denominated in different currencies. Fluctuations in the exchange rate between currencies may negatively affect our earnings and value of our assets and securities. Therefore, while the Bank seeks to avoid significant mismatches between assets and liabilities due to foreign currency exposure, from time to time, we may have mismatches. “See Item 11. Quantitative and Qualitative Disclosure About Market Risks—E. Market Risks—Foreign exchange fluctuations.”

 

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financial markets may cause changes in the value of our investment and trading portfolios. The volatility of world equity markets due to the continued economic uncertainty and sovereign debt crisis has had a particularly strong impact on the financial sector. Continued volatility may affect the value of our investments in equity securities and, depending on their fair value and future recovery expectations, could become a permanent impairment which would be subject to write-offs against our results. To the extent any of these risks materialize, our interest income / (charges) or the market value of our assets and liabilities could be materially adversely affected.

 

Failure to successfully implement and continue to improve our risk management policies, procedures and methods, including our credit risk management system, could materially and adversely affect us, and we may be exposed to unidentified or unanticipated risks.

 

The management of risk is an integral part of our activities. We seek to monitor and manage our risk exposure through a variety of separate but complementary financial, credit, market, operational, compliance and legal reporting systems. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, such techniques and strategies may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we fail to identify or anticipate.

 

Some of our qualitative tools and metrics for managing risk are based upon our use of observed historical market behavior. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These qualitative tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses thus could be significantly greater than the historical measures indicate. In addition, our quantified modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. We could face adverse consequences as a result of decisions, which may lead to actions by management, based on models that are poorly developed, implemented or used, or as a result of the modelled outcome being misunderstood or the use of such information for purposes for which it was not designed. In addition, if existing or potential customers or counterparties believe our risk management is inadequate, they could take their business elsewhere or seek to limit their transactions with us. This could have a material adverse effect on our reputation, operating results, financial condition and prospects.

 


As a commercial bank, one of the main types of risks inherent in our business is credit risk. For example, an important feature of our credit risk management system is to employ an internal credit rating system to assess the particular risk profile of a customer. As this process involves detailed analyses of the customer, taking into account both quantitative and qualitative factors, it is subject to human or IT systems errors. In exercising their judgment on current or future credit risk behavior of our customers, our employees may not always be able to assign an accurate credit rating, which may result in our exposure to higher credit risks than indicated by our risk rating system.

 

Failure to effectively implement, consistently followmonitor or continuously refine our credit risk management system may result in an increase in the level of non-performing loans and a higher risk exposure for us, which could have a material adverse effect on us.

 

The effectiveness of our credit risk management is affected by the quality and scope of information available in Chile.

 

In assessing customers’ creditworthiness, we rely largely on the credit information available from our own internal databases, the SBIF, DicomDirectorio de Información Comercial (Dicom) en Capital, a Chilean nationwide credit bureau, and other sources. Due to limitations in the availability of information and the developing information infrastructure in Chile, our assessment of credit risk associated with a particular customer may not be based on complete, accurate or reliable information. In addition, although we have been improving our credit scoring systems to better assess borrowers’ credit risk profiles, we cannot assure you that our credit scoring systems will collect complete or accurate information reflecting the actual behavior of customers or that their credit risk can be assessed correctly. Without complete, accurate and reliable information, we will have to rely on other publicly available resources and our internal resources, which may not be effective. As a result, our ability to effectively manage our credit risk and subsequently our loan loss allowances may be materially adversely affected.

 

Liquidity and funding risks are inherent in our business and could have a material adverse effect on us.

 

Liquidity risk is the risk that we either do not have available sufficient financial resources to meet our obligations as they fall due or can secure them only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of enterprise-specific factors, including over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. While we implement liquidity management processes to seek to mitigate and control these risks, unforeseen systemic market factors make it difficult to eliminate completely these risks. Continued constraints in the supply of liquidity, including in inter-bank lending, has affected and may materially and adversely affect the cost of

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funding our business, and extreme liquidity constraints may affect our current operations and our ability to fulfill regulatory liquidity requirements as well as limit growth possibilities.

 

Increases in prevailing market interest rates and in our credit spreads can significantly increase the cost of our funding. Changes in our credit spreads may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile.

 

We rely, and will continue to rely, primarily on commercial deposits to fund lending activities. The ongoing availability of this type of funding is sensitive to a variety of factors outside our control, such as general economic conditions and the confidence of commercial depositors in the economy and in the financial services industry, and the availability and extent of deposit guarantees, as well as competition between banks or with other products, such as mutual funds, for deposits. Any of these factors could significantly increase the amount of commercial deposit withdrawals in a short period of time, thereby reducing our ability to access commercial deposit funding on appropriate terms, or at all, in the future. If these circumstances were to arise, this could have a material adverse effect on our operating results, financial condition and prospects.

 

We anticipate that our customers will continue, in the near future, to make short-term deposits (particularly demand deposits and short-term time deposits), and we intend to maintain our emphasis on the use of banking deposits as a source of funds. As of December 31, 2016, 99.1%2018, 98.8% of our customer deposits had remaining maturities of one year or less, or were payable on demand. A significant portion of our assets have longer maturities, resulting in a mismatch between the maturities of liabilities and the maturities of assets. Historically, one of our principal sources of funds has been time deposits. Time deposits represented 35.5%33.4% and 35.2%33.3% of our total liabilities and equity as of December 31, 20162018 and 2015,2017, respectively. The Chilean time deposit market is concentrated given the importance in size of various large institutional investors such as pension funds and corporations relative to the total size of the economy. As of December 31, 2016,2018, the Bank’s top 20 time deposits represented 29.5%19.7% of total time deposits, or 10.5%6.6% of total liabilities and equity, and totaled U.S.$5.83.7 billion. No assurance can be given that future economic stability in the Chilean market will not negatively affect our ability to continue funding our business or to maintain our current levels of funding without incurring increased funding costs, a reduction in the term of funding instruments or the liquidation of certain assets. If this were to happen, we could be materially adversely affected.

 


The short-term nature of this funding source could cause liquidity problems for us in the future if deposits are not made in the volumes we expect or are not renewed. If a substantial number of our depositors withdraw their demand deposits or do not roll over their time deposits upon maturity, we may be materially and adversely affected.

 

Central banks have taken extraordinary measures to increase liquidity in the financial markets as a response to the financial crisis. If current facilities were rapidly removed or significantly reduced, this could have an adverse effect on our ability to access liquidity and on our funding costs.

 

We cannot assure that in the event of a sudden or unexpected shortage of funds in the banking system, we will be able to maintain levels of funding without incurring high funding costs, a reduction in the term of funding instruments or the liquidation of certain assets. If this were to happen, we could be materially adversely affected.

 

Finally, the implementation of internationally accepted liquidity ratios might require changes in business practices that affect our profitability. The liquidity coverage ratio (“LCR”) is a liquidity standard that measures if banks have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. At December 31, 2018, our LCR ratio was 151.6%, above the 100% minimum requirement. The net stable funding ratio (NSFR) provides a sustainable maturity structure of assets and liabilities such that banks maintain a stable funding profile in relation to their activities. The final definition of the NSFR approved by the Basel Committee in October 2014, has not yet come into effect. The Basel requirement still needs to be written into the CRR, which is expected to be published in 2019.

We are subject to regulatory capital and liquidity requirements that could limit our operations, and changes to these requirements may further limit and adversely affect our operating results, financial condition and prospects.

 

Chilean banks are required by the General Banking Law to maintain regulatory capital of at least 8% of risk-weighted assets, net of required loan loss allowance and deductions, and paid-in capital and reserves (“core capital”) of at least 3% of total assets, net of required loan loss allowances. As we are the result of the merger between two predecessors with a relevant market share in the Chilean market, we are currently required to maintain a minimum regulatory capital to risk-weighted assets ratio of 11%. As of December 31, 2016,2018, the ratio of our regulatory capital to risk-weighted assets, net of loan loss allowance and deductions, was 13.4% and our core capital ratio was 10.5%10.6%. Certain developments could affect our ability to continue to satisfy the current capital adequacy requirements applicable to us, including:

 

·●the increase of risk-weighted assets as a result of the expansion of our business or regulatory changes;

 

·●the failure to increase our capital correspondingly;

 

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·●losses resulting from a deterioration in our asset quality;

 

·●declines in the value of our investment instrument portfolio;

 

·●changes in accounting standards;

 

·●changes in provisioning guidelines that are charged directly against our equity or net income; and

 

·●changes in the guidelines regarding the calculation of the capital adequacy ratios of banks in Chile.

 

Chilean banks are gradually being required to adopt the guidelines set forth under the Basel III Capital Accord with adjustments incorporated by the SBIF once these changes are approved byOn January 19, 2019, the Chilean Congressgovernment passed a law that amends, among others, the General Banking Law (the General Banking Law, as amended, is referred to herein as the “New General Banking Law”) and establishes new capital regulation for banks in 2017 or 2018. Following this approval, Chilean banks will most likely have to fully complyChile in line with Basel III requirementsstandards and the merger of the banking regulator with the FMC, with all current SBIF attributions being transferred to the FMC. The FMC was created by 2018Law 21,000 in 2017 and started operations December 14, 2017 (eliminating the Superintendency of Securities and Insurance as of January 15, 2018).


This will lead to the FMC becoming the sole supervisor for the Chilean financial system overseeing insurance companies, companies with publicly traded securities, credit unions, credit card and prepaid card issuers, and banks. This commission is responsible for the proper functioning, development and stability of the financial market, facilitating the participation of market agents and defending public faith in the financial markets. To do so, it must maintain a general and systemic vision of the market, considering the interests of investors and policyholders. It is also responsible for ensuring that the persons or 2019. This could resultentities audited, from their initiation until the end of their liquidation, comply with the laws, regulations, statutes and other provisions that govern them.

The Commission will be in charge of a different levelCouncil, which will be composed of five members, who are appointed and are subject to the following rules:

●A Commissioner appointed by the President of Chile, of recognized professional or academic prestige in matters related to the financial system, which will have the character of President of the Commission.

●Four commissioners appointed by the President of Chile, from among persons of recognized professional or academic prestige in matters related to the financial system, by supreme decree issued through the Ministry of Finance, after ratification of the Senate by the four sevenths of its members in exercise, in session specially convened for that purpose.  

The Council’s responsibilities include regulation, sanctioning and the definition of general supervision policies. In addition, there is a prosecutor in charge of investigations and the Chairman is responsible for supervision. The FMC acts in coordination with the Chilean Central Bank (BCCh).

Under the New General Banking Law, minimum capital requiredrequirements have increased in terms of amount and quality. Total Regulatory Capital remains at 8% of risk-weighted assets which includes credit, market and operational risk. Minimum Tier 1 capital increased from 4.5% to 6% of risk-weighted assets, of which up to 1.5% may be maintained by us. Additional Tier 1 (AT1), either in the form of preferred shares or perpetual bonds, both of which may be convertible to common equity. The FMC will now establish the conditions and requirements for the issuance of perpetual bonds and preferred equity. Tier 2 capital is now set at 2% of risk-weighted assets. Additional capital demands are incorporated through a Conservation Buffer of 2.5% of risk-weighted assets, setting a Total Equity Requirement of 10.5% of risk-weighted assets. The BCCh may set an additional Counter Cyclical Buffer of up to 2.5% of risk-weighted assets with agreement from the FMC. Both buffers must be comprised of core capital.

The FMC, with agreement from the BCCh, may impose additional capital requirements for Systemically Important Banks (“SIB”) of between 1-3.5% of risk-weighted assets. Notably, the BCCh may require: (1) the addition of up to 2% to the core capital to total assets ratios; (2) a reduction in the technical reserve requirement trigger from 2.5 times regulatory capital to 1.5 times regulatory capital; and/or (3) a reduction in the interbank loan limit to 20% of regulatory capital of any SIB. While the FMC has not yet established the criteria to assess which banks will be considered SIBs, it is probable that we will be classified an SIB.

The following table sets forth a comparison between the current regulatory capital demands, and those under the New General Banking Law.

Capital requirements: Basel III, current General Banking Law and New General Banking Law
Capital categories Current General Banking Law New General Banking Law
(% over risk weighted assets)
(1) Total Tier 1 Capital (2+3) 4.5 6
(2) Basic Capital 4.5 4.5
(3) Additional Tier 1 Capital (AT1) — 1.5
(4) Tier 2 Capital 3.5 2
(5) Total Regulatory Capital (1+4) 8 8
(6) Conservation Buffer 2% over regulatory capital in order to be classified in Category A solvency. 2.5
(7) Total Equity Requirement (5+6) 8 10.5
(8) Counter Cyclical Buffer — up to 2.5
(9) SIB* Requirement Up to 6% in case of a merger Between 1 - 3.5

* Systemically Important Banks


According to initial estimates of the impact of market risk on regulatory capital, published by the SBIF for informational purposes only, our ratio of regulatory capital to risk-weighted assets, net of loan loss allowance and deductions, including an initial estimate of the adjustments for market risk was 12.2%12.0% as of December 31, 2016. Additionally, for the purposes of reporting to our parent company, we calculate this ratio using a model approved by the European Central Bank standards. In this scenario our core capital ratio is 12.1% and our regulatory capital ratio is 15.5 % as of December 31, 2016.2018. No assurance can be given that the adoption of the Basel III capital requirements will not have a material impact on our capitalization ratio.

The bill also incorporates Pillar II capital requirements with the objective of assuring an adequate management of risk. The FMC, with at least four votes from the Commission, will have the power to impose additional regulatory capital demands of up to 4% of risk-weighted assets, either Tier I or Tier II, if it determines that the previous capital levels and buffers are not enough for a financial institution.

The FMC will be responsible for establishing weightings for risk-weighted assets as a separate regulation based on the implementation of standard models, subject to agreement from the BCCh. The FMC will have until December 31, 2020 to establish the weightings. Until the FMC absorbs the SBIF (which is expected to take place on June 1, 2019) and the new weightings for risk-weighted assets are approved, banks must maintain regulatory capital of at least 8% of risk-weighted assets, net of required loan loss allowance and deductions, and paid-in capital and reserves (“core capital”) of at least 3% of total assets, net of required loan loss allowances. Banco Santander-Chile must maintain a minimum regulatory capital to risk-weighted assets ratio of 11%.

 

We may also be required to raise additional capital in the future in order to maintain our capital adequacy ratios above the minimum required levels. Our ability to raise additional capital may be limited by numerous factors, including: our future financial condition, results of operations and cash flows; any necessary government regulatory approvals; our credit ratings; general market conditions for capital raising activities by commercial banks and other financial institutions; and domestic and international economic, political and other conditions. If we require additional capital in the future, we cannot assure you that we will be able to obtain such capital on favorable terms, in a timely manner or at all. Furthermore, the SBIFFMC may increase the minimum capital adequacy requirements applicable to us. Accordingly, although we currently meet the applicable capital adequacy requirements, we may face difficulties in meeting these requirements in the future. If we fail to meet the capital adequacy requirements, we may be required to take corrective actions. These measures could materially and adversely affect our business reputation, financial condition and results of operations. In addition, if we are unable to raise sufficient capital in a timely manner, the growth of our loan portfolio and other risk-weighted assets may be restricted, and we may face significant challenges in implementing our business strategy. As a result, our prospects, results of operations and financial condition could be materially and adversely affected.

 


The SBIF and the Central Bank published new liquidity standards in 2015 and ratios that must be implemented and calculated by all banks. These will eventually replace the current regulatory limits imposed by the SBIF and the Central Bank described above. These new liquidity standards are in line with those established in Basel III. The most important liquidity ratios that will eventually be adopted by Chilean banks are:

 

·●Liability concentration per institutional and wholesale counterparty. Banks will have to calculate the percentage of their liabilities coming from institutional and wholesale counterparties, including ratios regarding renovation, renewals, restructurings, maturity and product concentration of these counterparties.

 

·●Liquidity coverage ratio (LCR), which measures the percentage of liquid Assets over net cash outflows. The new guidelines also define liquid assets and the formulas for calculating net cash outflows.

 

·●Net Stable Funding Ratio (NSFR) which will measure a bank’s available stable funding relative to its required stable funding. Both concepts are also defined in the new regulations.

 

Beginning on March 30, 2016, banks began reporting these ratios to the Central Bank and the SBIF. The evolution of these indicators will be monitored for a 12 month period and adjustments to the required ratios could be made. The final limits and results should begin to befor the LCR were published in the first halfMay 2018, with minimum LCR of 2017.60% starting from January 1, 2019, gradually increasing by 10% until reaching 100%. The initial limits banks must meet in order to comply with these newthe other liquidity ratios have not been published yet. For this reason, we cannot yet determine the effect that the implementation of these models will have on our business. Such effect could be material and adverse if it materially increases the liquidity we are required to maintain.

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We are subject to regulatory risk, or the risk of not being able to meet all of the applicable regulatory requirements and guidelines.

 

As a financial institution, we are subject to extensive regulation, inspections, examinations, inquiries, audits and other regulatory requirements by Chilean regulatory authorities, which materially affect our businesses. We cannot assure you that we will be able to meet all of the applicable regulatory requirements and guidelines, or that we will not be subject to sanctions, fines, restrictions on our business or other penalties in the future as a result of noncompliance. If sanctions, fines, restrictions on our business or other penalties are imposed on us for failure to comply with applicable requirements, guidelines or regulations, our business, financial condition, results of operations and our reputation and ability to engage in business may be materially and adversely affected.

In their supervisory roles, the regulators seek to maintain the safety and soundness of financial institutions with the aim of strengthening the protection of customers and the financial system. The supervisors’ continuing supervision of financial institutions is conducted through a variety of regulatory tools, including the collection of information by way of prudential returns, reports obtained from skilled persons, visits to firms and regular meetings with management to discuss issues such as performance, risk management and strategy. In general, these regulators have a more outcome-focused regulatory approach that involves more proactive enforcement and more punitive penalties for infringement. As a result, we face increased supervisory scrutiny (resulting in increasing internal compliance costs and supervision fees), and in the event of a breach of our regulatory obligations we are likely to face more stringent regulatory fines.

 

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 of the banking laws and regulations have been recently adopted, the manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Moreover, to the extent these recently adopted regulations are implemented inconsistently in the various jurisdictions in which we operate, it may face higher compliance costs. No assurance can be given generally 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.

 

Modifications to reserve requirements may affect our business.

 

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 require banks to maintain reserves of up to an average of 40.0% for demand deposits and up to 20.0% for time deposits (irrespective, in each case, of the currency in which these deposits are denominated) to implement monetary policy. In addition, to the extent that the aggregate amount of the following types of liabilities exceeds 2.5 times the amount of a bank’s regulatory capital, a bank must maintain a 100% reserve against them: demand deposits, deposits in checking accounts, obligations payable on sight incurred in the ordinary course of business and, in general, all deposits unconditionally payable immediately. The New General Banking Law also states that the FMC, with the approval from the Central Bank, may lower the amount of a bank’s regulatory capital over which a SIB must maintain a 100% reserve, from 2.5 times to 1.5 times. If the Central Bank were to increase reserve requirements, this could lead to lower loan growth and have a negative effect on our business.

 


Our business could be affected if its capital is not managed effectively or if changes limiting our ability to manage our capital position are adopted.

 

Effective management of our capital position is important to our ability to operate our business, to continue to grow organically and to pursue our business strategy. However, in response to the global financial crisis, a number of changes to the regulatory capital framework have been adopted or continue to be considered. As these and other changes are implemented or future changes are considered or adopted that limit our ability to manage our balance sheet and capital resources effectively or to access funding on commercially acceptable terms, we may experience a material adverse effect on our financial condition and regulatory capital position.

 

Changes to the pension fund system may affect the funding mix of the Bank

 

The current pension fund system dates from the 1980’s1980s when pension savingpensions went from being state-funded to private fundsprivately-funded, which requirerequires Chilean employees to set aside 10% of their wages. While the system is widely regarded as a success, the demographics of the Chilean society have changed and there have been some modifications to the system. As of December 31, 2016,2018, the Chilean pension fund management companies (Administradora de Fondos de Pensión, or “AFPs”) had US$6,270U.S.$6,473 million invested in the Bank via equity, deposits and fixed income. ThereIn November 2018, the Chilean government presented a proposal for pension reform to Congress for discussion. The proposed bill includes measures to open the pension fund management industry to new actors, lower entrance barriers to the industry, enhance the powers of the Superintendency of Pensions and introduce the FMC as a supervisory entity, among other reforms. The current proposal includes a reduction of the reserve requirement for AFPs, which typically consist of assets that the AFPs must maintain in order to cover the loss of value of the pension funds if profitability is no assurance thatless than the minimum amount required, from 1% to 0.5% of the value of each of the managed pension funds. Although the bill is currently in its first stage of discussions and widely expected to be approved, we are unable to predict the future there will not be significant reforms that may affect our funding mix which may have anfinal content of the law. The potential adverse effect of the proposed law on our financial condition and results of operations.operations cannot yet be ascertained.

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The legal restrictions on the exposure of Chilean pension funds to different asset classes may affect our access to funding.

 

Chilean regulations impose a series of restrictions on how Chilean pension fund management companies (Administradora de Fondos de Pensión, or “AFPs”) may allocate their assets. In the particular case of financial issuers’ there are three restrictions, each involving different assets and different limits determined by the amount of assets in each fund and the market and book value of the issuer’s equity. As a consequence, limits vary within funds of AFPs and issuers. According to our estimates in December 2016,2018, the AFPs still had the possibility of being able to invest another US$9,338U.S.$11,781 million in the Bank via equity, deposits and fixed income. If the exposure of any AFP to Santander-Chile exceeds the regulatory limits or the regulatory limits are reduced, we would need to seek alternative sources of funding, which could be more expensive and, as a consequence, may have a material adverse effect on our financial condition and results of operations.

 

Our financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of our operations and financial position.

 

The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgments and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to our results and financial position, based upon materiality and significant judgments and estimates, include impairment of loans, valuation of financial instruments, valuation of derivatives, impairment of available-for-sale financial assets, deferred tax assets and liabilities and provision forprovisions -contingent liabilities.

  


If the judgment, estimates and assumptions we use in preparing our consolidated financial statements are subsequently found to be incorrect, there could be a material effect on our results of operations and a corresponding effect on our funding requirements and capital ratios.

 

Changes in accounting standards could impact reported earnings.

 

The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. For example, IFRS 9 will bewas adopted as of January 1, 2018, and will establishestablishing a new impairment model of expected loss and make changes to the classification and measurement requirements for financial assets.assets and liabilities. In addition, the Bank adopted IFRS 16 will be adopted as of January 1, 2019, and will specifyrequiring new standards for recognition, measurement, presentation and disclosure of leases. This led to approximately Ch$154,284 million of assets for the right of use and lease liabilities for the same amount as of the date of adoption of IFRS 16. Changes made to accounting standards can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements. For further information about developments in financial accounting and reporting standards, see Note 1 to our Audited Consolidated Financial Statements.

 

We are subject to review by taxing authorities, and an incorrect interpretation by us of tax laws and regulations may have a material adverse effect on us.

 

The preparation of our tax returns requires the use of estimates and interpretations of complex tax laws and regulations and is subject to review by taxing authorities.

 

We are subject to the income tax laws of Chile and certain foreign countries. These tax laws are complex and subject to different interpretations by the taxpayer and relevant governmental taxing authorities, which are sometimes subject to prolonged evaluation periods until a final resolution is reached. In establishing a provision for income tax expense and filing returns, we must make judgments and interpretations about the application of these inherently complex tax laws.

 

If the judgment, estimates and assumptions we use in preparing our tax returns are subsequently found to be incorrect, there could be a material adverse effect on our results of operations. In some jurisdictions, the interpretations of the taxing authorities are unpredictable and frequently involve litigation, which introduces further uncertainty and risk as to tax expense.

 

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Disclosure controls and procedures over financial reporting may not prevent or detect all errors or acts of fraud.

 

Disclosure controls and procedures, including internal controls, over financial reporting are designed to provide reasonable assurance that information required to be disclosed by the company in reports filed or submitted under the Securities Exchange Act of 1934 is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

These disclosure controls and procedures have inherent limitations, which include the possibility that judgments in decision-making can be faulty and that breakdowns can occur because of errors or mistakes. Additionally, controls can be circumvented by any unauthorized override of the controls. Consequently, our businesses are exposed to risk from potential non-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions, civil claims and serious reputational or financial harm. In recent years, a number of multinational financial institutions have suffered material losses due to the actions of ‘rogue traders’ or other employees. It is not always possible to deter employee misconduct and the precautions we take to prevent and detect this activity may not always be effective. Accordingly, because of the inherent limitations in the control system, misstatements due to error or fraud may occur and not be detected.

 

We engage in transactions with related parties that others may not consider to be on an arm’s-length basis.

 

We and our affiliates have entered into a number of services agreements pursuant to which we render services, such as administrative, accounting, finance, treasury, legal services and others.

 


Chilean law applicable to public companies and financial groups and institutions and our bylawsby-laws provide for several procedures designed to ensure that the transactions entered into with or among our financial subsidiaries and/or affiliates do not deviate from prevailing market conditions for those types of transactions, including the requirement that our board of directors approve such transactions. Furthermore, all significant related party transactions must be approved by the Audit Committee and the Board. These significant transactions are also reported in our annual shareholders meeting. Please see Note 3436 of our Audited Consolidated Financial Statements and “Item 7. Major Shareholders and Related Party Transactions.”

 

We are likely to continue to engage in transactions with our affiliates. Future conflicts of interests between us and any of affiliates, or among our affiliates, may arise, which conflicts are not required to be and may not be resolved in our favor.

 

We may not effectively manage risks associated with the replacement of benchmark indices.

Interest rate, equity, foreign exchange rate and other types of indices which are deemed to be “benchmarks” are the subject of increased regulatory scrutiny. For example, in 2017, the FCA announced that it will no longer persuade or compel banks to submit rates for the calculation of the London interbank offered rate (“LIBOR”) benchmark after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021, and it appears likely that LIBOR will be discontinued or modified by 2021. This and other reforms may cause benchmarks to reform differently than in the past, or to disappear entirely, or have other consequences which cannot be fully anticipated which introduces a number of risks for the business. These risks include (i) legal risks arising from potential changes required to documentation for new and existing transactions; (ii) financial risks arising from any changes in the valuation of financial instruments linked to benchmark rates; (iii) pricing risks arising from how changes to benchmark indices could impact pricing mechanisms on some instruments; (iv) operational risks arising from the potential requirement to adapt IT systems, trade reporting infrastructure and operational processes; and (v) conduct risks arising from the potential impact of communication with customers and engagement during the transition period. The replacement benchmarks, and the timing of and mechanisms for implementation have not yet been confirmed by central banks. Although we currently do not have any bonds maturing after 2021 that use a LIBOR benchmark, it is not currently possible to determine whether, or to what extent, any such changes would affect us. However, the implementation of alternative benchmark rates may have a material adverse effect on our business, results of operations, financial condition and prospects.

Any failure to effectively improve or upgrade our information technology infrastructure and management information systems in a timely manner or any failure to successfully implement new IT regulations could have a material adverse effect on us.

 

Our ability to remain competitive depends in part on our ability to upgrade our information technology on a timely and cost-effective basis. We must continually make significant investments and improvements in our information technology infrastructure in order to remain competitive. We cannot assure you that in the future we will be able to maintain the level of capital expenditures necessary to support the improvement or upgrading of our information technology infrastructure. Any failure to effectively improve or upgrade our information technology infrastructure and management information systems in a timely manner could have a material adverse effect on us.

In addition, several new regulations are defining how to manage cyber risks and technology risks, how to report a data breach, and how the supervisory process should work, among others. These regulations are quite fragmented in terms of definitions, scope and applicability. A failure to successfully implement all or some of these new global and local regulations, that in some cases have severe sanctions regimes, could have a material adverse effect on us.

 

Risks relating to data collection, processing and storage systems and security are inherent in our business.

 

Like other financial institutions, we manage and hold confidential personal information of customers in the conduct of our banking operations, as well as a large number of assets. Accordingly, our business depends on the ability to process a large number of transactions efficiently and accurately, and on our ability to rely on our digital technologies, computer and email services, software and networks, as well as on the secure processing, storage and transmission of confidential sensitive personal data and other information using our computer systems and networks. The proper functioning of financial control, accounting or other data collection and processing systems is critical to our businesses and to our ability to compete effectively. Losses can result from inadequate personnel, inadequate or failed internal control processes and systems, or from external events that interrupt normal business operations. We also face the risk that the design of our controls and procedures prove to be inadequate or are circumvented such that our data and/or client records are incomplete, not recoverable or not securely stored. Although we work with our clients, vendors, service providers, counterparties and other third parties to develop secure data and information processing, storage and transmission capabilities to prevent against information security risk, we routinely manage

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personal, confidential and proprietary information by electronic means, and we may be the target of attempted cyber-attack. If we cannot maintain an effective and secure electronic data and information, management and processing system or we fail to maintain complete physical and electronic records, this could result in regulatory sanctions and serious reputational or financial harm to us.

 


We take protective measures and continuously monitor and develop our systems to protect our technology infrastructure, data and information from misappropriation or corruption, but our systems, software and networks nevertheless may be vulnerable to unauthorized access, misuse, computer viruses or other malicious code and other events that could have a security impact. An interception, misuse or mishandling of personal, confidential or proprietary information sent to or received from a client, vendor, service provider, counterparty or third party could result in legal liability, regulatory action, reputational harm and financial loss. There can be no absolute assurance that we will not suffer material losses from operational risk in the future, including those relating to any security breaches.

 

We have seen in recent years computer systems of companies and organizations being targeted, not only by cyber criminals, but also by activists and rogue states. We have been and continue to be subject to a range of cyber-attacks, such as denial of service, malware and phishing. Cyber-attacks could give rise to the loss of significant amounts of customer data and other sensitive information, as well as significant levels of liquid assets (including cash). In addition, cyber-attacks could disrupt our electronic systems used to service our customers. As attempted attacks continue to evolve in scope and sophistication, we may incur significant costs in order to modify or enhance our protective measures against such attacks, or to investigate or remediate any vulnerability or resulting breach, or in communicating cyber-attacks to our customers. If we fail to effectively manage our cyber security risk, e.g. by failing to update our systems and processes in response to new threats, this could harm our reputation and adversely affect our operating results, financial condition and prospects through the payment of customer compensation, regulatory penalties and fines and/or through the loss of assets. In addition, we may also be impacted by cyber-attacks against national critical infrastructures of the countries where we operate; for example, the telecommunications network. Our information technology systems are dependent on such national critical infrastructure and any cyber-attack against such critical infrastructure could negatively affect our ability to service our customers. As we do not operate such national critical infrastructure, we have limited ability to protect our information technology systems from the adverse effects of such a cyber-attack. For further information see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—2. Non-financial risks—Cyber-security and data security plans.”

 

Although we have procedures and controls to safeguard personal information in our possession, unauthorized disclosures could subject us to legal actions and administrative sanctions as well as damages and reputational harm that could materially and adversely affect our operating results, financial condition and prospects. Further, our business is exposed to risk from potential non-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions and serious reputational or financial harm. It is not always possible to deter or prevent employee misconduct, and the precautions we take to detect and prevent this activity may not always be effective. In addition, we may be required to report events related to information security issues (including any cyber security issues), events where customer information may be compromised, unauthorized access and other security breaches, to the relevant regulatory authorities. Any material disruption or slowdown of our systems could cause information, including data related to customer requests, to be lost or to be delivered to our clients with delays or errors, which could reduce demand for our services and products, could produce customer claims and could materially and adversely affect us.

 

The Chilean Congress is currently discussing modifications to Law 20,009, which defines the scope of responsibility for users and issuers when a client’s cards and/or online payment or transfer user information are lost, stolen or fraudulently used (including through hacking and cloning). Cardholders are obligated to notify the bank through an easily accessible channel when their cards have been lost, stolen, or fraudulently used. Some members of Congress are proposing that for those transactions realized prior to the notice of loss or theft of a credit card, the cardholder must also notify the issuer of all of the unauthorized transactions in the same notice or up to five business days following the original notification. In cases of fraud, the user will not be responsible for the transactions that they did not authorize and which were made prior to the fraud notification within the 30 calendar days following the issuance of said notice. In these cases, some members of Congress are seeking that the issuer be responsible for assuming these costs or must demonstrate that the transaction was in fact authorized by the owner or user of the credit card. The law also considers increasing fines and jail time for those committing theft or fraud with credit cards, which must be legally pursued by the card issuer.


In light of these developments, we are trying to limit the exposure of our clients to credit card fraud through education, insurance coverage, marketing campaigns, daily transfer amount limits, chip technology, improved ATM software, and other technological improvements, but we cannot assure that this law will not increase the financial costs related to cybercrime and credit card fraud.

We rely on third parties and affiliates for important products and services.

 

Third party vendors and certain affiliated companies provide key components of our business infrastructure such as loan and deposit servicing systems, back office and business process support, information technology production and support, internet connections and network access. Relying on these third parties and affiliated companies can be a source of operational and regulatory risk to us, including with respect to security breaches affecting such parties. We are also subject to risk with respect to security breaches affecting the vendors and other parties that interact with these service providers. As our interconnectivity with these third parties and affiliated companies increases, we increasingly face the risk of operational failure with respect to their systems. We may be required to take steps to protect the integrity of our operational systems, thereby increasing our operational costs and potentially decreasing customer satisfaction. In addition, any problems caused by these third parties or affiliated companies, including as a result of them not providing us their services for any reason, or performing their services

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poorly, could adversely affect our ability to deliver products and services to customers and otherwise conduct our business, which could lead to reputational damage and regulatory investigations and intervention. Replacing these third party vendors could also entail significant delays and expense. Further, the operational and regulatory risk we face as a result of these arrangements may be increased to the extent that we restructure such arrangements. Any restructuring could involve significant expense to us and entail significant delivery and execution risk which could have a material adverse effect on our business, operations and financial condition.

 

Damage to our reputation could cause harm to our business prospects.

 

Maintaining a positive reputation is critical to protect our brand, attract and retain customers, investors and employees and conduct business transactions with counterparties. Damage to our reputation can therefore cause significant harm to our business and prospects. Harm to our reputation can arise from numerous sources, including, among others, employee misconduct, including the possibility of fraud perpetrated by our employees, litigation or regulatory enforcement, failure to deliver minimum standards of service and quality, compliance failures, unethical behavior, and the activities of customers and counterparties. Further, negative publicity regarding us may result in harm to our prospects.

 

Actions by the financial services industry generally or by certain members of, or individuals in, the industry can also affect our reputation. For example, the role played by financial services firms in the financial crisis and the seeming shift toward increasing regulatory supervision and enforcement has caused public perception of us and others in the financial services industry to decline.

 

We could suffer significant reputational harm if we fail to identify and manage potential conflicts of interest properly. The failure, or perceived failure, to adequately address conflicts of interest could affect the willingness of clients to deal with us, or give rise to litigation or enforcement actions against us. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause material harm to us.

 

We may be the subject of misinformation and misrepresentations deliberately propagated to harm our reputation or for other deceitful purposes, or by profiteering short sellers seeking to gain an illegal market advantage by spreading false information about us. There can be no assurance that we will effectively neutralize and contain a false information that may be propagated regarding the business, which could have an adverse effect on our operating results, financial condition and prospects.


We rely on recruiting, retaining and developing appropriate senior management and skilled personnel.

 

Our continued success depends in part on the continued service of key members of our senior executive team and other key employees. The ability to continue to attract, train, motivate and retain highly qualified and talented professionals is a key element of our strategy. The successful implementation of our strategy and culture depends on the availability of skilled and appropriate management, both at our head office and at each of our business units. If we or one of our business units or other functions fails to staff its operations appropriately or loses one or more of its key senior executives or other key employees and fails to replace them in a satisfactory and timely manner, our business, financial condition and results of operations, including control and operational risks, may be adversely affected.

 

In addition, the financial industry has and may continue to experience more stringent regulation of employee compensation, which could have an adverse effect on our ability to hire or retain the most qualified employees. If we fail or are unable to attract and appropriately train, motivate and retain qualified professionals, our business may also be adversely affected.

 

We may not be able to detect or prevent money laundering and other financial crime activities fully or on a timely basis, which could expose us to additional liability and could have a material adverse effect on us.

 

We are required to comply with applicable anti-money laundering (“AML”), anti-terrorism, anti-bribery and corruption, sanctions and other laws and regulations applicable to us. These laws and regulations require us, among other things, to conduct full customer due diligence (including sanctions and politically-exposed person screening), keep our customer, account and transaction information up to date and have implemented effective financial crime policies and procedures detailing what is required from those responsible. We are also required to conduct AML training for our employees and to report suspicious transactions and activity to appropriate law enforcement following full investigation by our AML team.

 

Financial crime has become the subject of enhanced regulatory scrutiny and supervision by regulators globally. AML, anti-bribery and corruption and sanctions laws and regulations are increasingly complex and detaileddetailed. Compliance with these laws and have become the subject of enhanced regulatory supervision, requiring improvedregulations requires automated systems, sophisticated monitoring and skilled compliance personnel.

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We have developed policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and other financial crime related activities. However, emerging technologies, such as cryptocurrencies and blockchain, could limit our ability to track the movement of funds. Our ability to comply with the legal requirements depends on our ability to improve detection and reporting capabilities and reduce variation in control processes and oversight accountability. These require implementation and embedding within our business effective controls and monitoring, which in turn requires on-going changes to systems and operational activities. Financial crime is continually evolving and, as noted 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. Even known 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. In addition, we rely heavily 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. Where we outsource any of our customer due diligence, customer screening or anti financial crime operations, we remain responsible and accountable for full compliance and any breaches. If we are unable to apply the necessary scrutiny and oversight of third parties to whom we outsource certain tasks and processes, there remains a risk of regulatory breach.

 

If we are unable to fully comply with applicable laws, regulations and expectations, our regulators and relevant law enforcement agencies have the ability and authority to impose significant fines and other penalties on us, including requiring a complete review of our business systems, day-to-day supervision by external consultants and ultimately the revocation of our banking license.

 

The reputational damage to our business and global brand would 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.

 


In addition, while we review our relevant counterparties’ internal policies and procedures with respect to such matters, we, to a large degree, rely upon our relevant counterparties to maintain and properly apply their own appropriate compliance procedures and internal policies. Such measures, procedures and internal policies may not be completely effective in preventing third parties from using our (and our relevant counterparties’) services as a conduit for illicit purposes (including illegal cash operations) without our (and our relevant counterparties’) knowledge. If we are associated with, or even accused of being associateassociated with, breaches of AML, anti-terrorism or sanctions requirements, our reputation could suffer and/or we could become subject to fines, sanctions and/or legal enforcement (including being added to any “black lists” that would prohibit certain parties from engaging in transactions with us), any one of which could have a material adverse effect on our operating results, financial condition and prospects.

 

Any such risks could have a material adverse effect on our operating results, financial condition and prospects.

 

We are exposed to risk of loss from legal and regulatory proceedings.

 

We face risk of loss from legal and regulatory proceedings, including tax proceedings, that could subject us to monetary judgments, regulatory enforcement actions, fines and penalties. The current regulatory and tax enforcement environment in the jurisdictions in which we operate reflects an increased supervisory focus on enforcement, combined with uncertainty about the evolution of the regulatory regime, and may lead to material operational and compliance costs.

 

We are from time to time subject to certain regulatory investigations and civil and tax claims and party to certain legal proceedings incidental to the normal course of our business, including in connection with conflicts of interest, lending activities, relationships with our employees and other commercial or tax matters. In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in the early stages of investigation, discovery, we cannot state with confidence what the eventual outcome of these pending matters will be or what the eventual loss, fines or penalties related to each pending matter may be. The amount of our reserves in respect of these matters is substantially less than the total amount of the claims asserted against us and in light of the uncertainties involved in such claims and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves currently accrued by us. As a result, the outcome of a particular matter may be material to our operating results for a particular period.

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Ch$923 million.

 

We are subject to market, operational and other related risks associated with our derivative transactions that could have a material adverse effect on us.

 

We enter into derivative transactions for trading purposes as well as for hedging purposes. We are subject to market, credit and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder, including providing sufficient collateral).

 

Market practices and documentation for derivative transactions in Chile may differ from those in other countries. For example, documentation may not incorporate terms and conditions of derivatives transactions as commonly understood in other countries. In addition, the execution and performance of these transactions depend on our ability to maintain adequate control and administration systems. Moreover, our ability to adequately monitor, analyze and report derivative transactions continues to depend, largely, on our information technology systems. These factors further increase the risks associated with these transactions and could have a material adverse effect on us.

 

We are subject to counterparty risk in our banking business.

 

We are exposed to counterparty risk in addition to credit risks associated with lending activities. Counterparty risk may arise from, for example, investing in securities of third parties, entering into derivative contracts under which counterparties have obligations to make payments to us or executing securities, futures or currency or commodity trades from proprietary trading activities that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, clearing houses or other financial intermediaries.

 

We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional clients. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties.

 


Our loan and investment portfolios are subject to risk of prepayment, which could have a material adverse effect on us.

 

Our fixed rate loan and investment portfolios are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a declining interest rate environment, prepayment activity increases, which reduces the weighted average lives of our earning assets and could have a material adverse effect on us. We would also be required to amortize net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income. Prepayment risk also has a significant adverse impact on credit card and collateralized mortgage loans, since prepayments could shorten the weighted average life of these assets, which may result in a mismatch in our funding obligations and reinvestment at lower yields. Prepayment risk is inherent to our commercial activity and an increase in prepayments or a reduction in prepayment fees could have a material adverse effect on us. The current administration is presently analyzing an initiative to reduce or limit prepayment fees and the Bank does not yet have an estimate of the potential impact of such initiatives. We cannot assure you that this change or any future regulatory changes related to prepayment fees will not have a material impact on our business.

 

CurrentA significant deterioration in economic conditions may make it more difficult for us to continue funding our business on favorable terms with institutional investors.

 

Large denominations of funding from time deposits, interbank loans or commercial paper from institutional investors may, under some circumstances, be a less stable source of funding than savings and bonds, such as during periods of significant changes in market interest rates for these types of deposit products and any resulting increased competition for such funds. As of December 31, 20162018, short-term funding from institutional investors as defined by our Asset and Liability Committee totaled US$ 3.7U.S.$2,747 billion or 6.7%4.9% of total liabilities and equity. Although our results of operations and financial position have not suffered a significant impact as a consequence of the credit market instability in the U.S.,Significant future market instability in the U.S. or in Europeanglobal markets, specifically the Spanish market,Eurozone and the U.S., may negatively affect our ability to continue funding our business or maintain our current levels of funding without incurring higher funding costs or having to liquidate certain assets.

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If we are unable to manage the growth of our operations, this could have an adverse impact on our profitability.

 

We allocate management and planning resources to develop strategic plans for organic growth, and to identify possible acquisitions and disposals and areas for restructuring our businesses. From time to time, we evaluate acquisition and partnership opportunities that we believe offer additional value to our shareholders and are consistent with our business strategy. However, we may not be able to identify suitable acquisition or partnership candidates, and our ability to benefit from any such acquisitions and partnerships will depend in part on our successful integration of those businesses. Any such integration entails significant risks such as unforeseen difficulties in integrating operations and systems and unexpected liabilities or contingencies relating to the acquired businesses, including legal claims. We can give no assurances that our expectations with regard to integration and synergies will materialize. We also cannot provide assurance that we will, in all cases, be able to manage our growth effectively or deliver our strategic growth objectives. Challenges that may result from our strategic growth decisions include our ability to:

 

·●manage efficiently the operations and employees of expanding businesses;

 

·●maintain or grow our existing customer base;

 

·●assess the value, strengths and weaknesses of investment or acquisition candidates, including local regulation that can reduce or eliminate expected synergies;

 

·●finance strategic investments or acquisitions;

 

·●align our current information technology systems adequately with those of an enlarged group;

 


·●apply our risk management policy effectively to an enlarged group; and

 

·●manage a growing number of entities without over-committing management or losing key personnel.

 

Any failure to manage growth effectively could have a material adverse effect on our operating results, financial condition and prospects.

 

In addition, any acquisition or venture could result in the loss of key employees and inconsistencies in standards, controls, procedures and policies.

 

Moreover, the success of the acquisition or venture will at least in part be subject to a number of political, economic and other factors that are beyond our control. Any of these factors, individually or collectively, could have a material adverse effect on us.

 

Risks Relating to Chile

 

Our growth, asset quality and profitability may be adversely affected by macroeconomic and political conditions in Chile.

 

A substantial number of our loans are to borrowers doing business in Chile. Chile’s economy has experienced significant volatility in recent decades, characterized, in some cases, by slow or regressive growth, declining investment and hyperinflation. This volatility resulted in fluctuations in the levels of deposits and in the relative economic strength of various segments of the economies to which we lend. The Chilean economy may not continue to grow at similar rates as in the past or future developments may negatively affect Chile’s overall levels of economic activity.

 

Negative and fluctuating economic conditions, such as slowing or negative growth and a changing interest rate and inflationary environment, impact our profitability by causing lending margins to decrease and credit quality to decline and leading to decreased demand for higher margin products and services. Negative and fluctuating economic conditions in Chile could also result in government defaults on public debt. This could affect us in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default in public debt could cause to the banking system as a whole, particularly since commercial banks’ exposure to government debt is high in Chile.

 

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Our revenues are also subject to risk of loss from unfavorable political and diplomatic developments, social instability, and changes in governmental policies, including expropriation, nationalization, international ownership legislation, interest-rate caps and tax policies.

 

The recent fall and subsequentAny future fluctuation in oil prices may give rise to volatility in the global financial markets and further economic instability in oil-dependent regions, such as Chile. In addition, the ability of borrowers in or exposed to the oil sector has been and may be further adversely affected by such price fluctuations.

 

Our growth, asset quality and profitability may be adversely affected by volatile macroeconomic and political conditions in Chile.

Any material change to United States trade policy with respect to Chile could have a material adverse effect on the economy, which could in turn materially harm our financial condition and results of operations.

 

Portions of our loan portfolio are subject to risks relating to force majeure events and any such event could materially adversely affect our operating results.

 

Chile lies on the Nazca tectonic plate, making it one of the world’s most seismically active regions. Our financial and operating performance may be adversely affected by force majeure events, such as natural disasters, particularly in locations where a significant portion of our loan portfolio is composed of real estate loans. Natural disasters such as earthquakes and floods may cause widespread damage which could impair the asset quality of our loan portfolio and could have an adverse impact on the economy of the affected region.

 


Changes in taxes, including the corporate tax rate, in Chile may have an adverse effect on us and our clients.

 

The Chilean Government enacted in 2014 and again in 20152016 a reform to the tax and other assessment regimes to which we are subject in order to finance greater expenditure in education. The most important changes approved were:relevant change was the rise in the corporate tax rate to 27% by 2018 and the introduction of two corporate taxation regimes (Sistema Parcialmente Integrado(SIP or Semi-Integrated Regime) and theSistema de Renta Atribuida(Attributed Income Regime). However, a corporation such as Banco Santander-Chile with a majority of shareholders that are incorporated entities is obliged to adhere to the Semi-Integrated Regime. The statutory tax rate rose to 27% in 2018, with personal and withholding taxes imposed on a cash basis (when dividends are distributed), therefore retaining some benefits for shareholders of companies that reinvest profits.

 

1.A corporation such as Banco Santander Chile with a majority of shareholders that are incorporated entities is obliged to adhere to thesistema integrado parcial (SIP or partially integrated tax system). The statutory tax rate rose to 25.5% in 2016 and will rise to 27% in 2017 and onward, with personal taxes paid on a dividend basis, therefore retaining some benefits for shareholders of companies that reinvest profits.

Furthermore, on August 23, 2018, the President of Chile sent to the National Congress Bill No. 107-366 containing the Tax Modernization Project. Among its changes, this bill proposes a single, fully integrated tax regime with a Corporate Income Tax (“CIT”) rate of 27% and under which CIT paid would be fully creditable against tax imposed on the shareholder. If this bill becomes effective, the Attributed Income Regime (Sistema de Renta Atribuida) and the Semi-Integrated Regime (Sistema Parcialmente Integrado) introduced by the previous tax reform would be repealed. This bill is still under consideration before the Chilean National Congress and, thus, the proposed reforms are not currently in force.

2.The Taxable Profits Fund (FUT), a mechanism that gives shareholders tax exemptions on reinvested profits, will be eliminated in fiscal 2018.

3.Decree-Law 600, which gives foreign investors certain tax and other guarantees, will be replaced by a new law, yet to be designed.

4.The maximum personal income tax rate will be reduced from 40% to 35%, starting in 2018.

5.An increase in stamp tax from 0.45% to 0.8% in 2016.

6.Lowering of VAT exemption for construction of houses up to 2,000 UF to 225 UF per dwelling.

7.Charge VAT tax on real estate transactions beginning in 2016. VAT tax is 19% in Chile.

8.Extension of certain tax benefits and simplified accounting for companies with annual sales lower than 50,000 UF.

9.Withholding tax on dividends paid to ADR holders remains unchanged at 35% with the statutory corporate tax rate paid by the company still available as credit to the withholding tax.

 

In general, these reforms may have an adverse effect on the growth rate of mortgage loans and could slow down the rate of economic growth if tax receipts are not spent efficiently or for their intended purposes. We cannot predict at this time if these reforms will have a material impact on our business or clients or if further tax reforms will be implemented in the future. Banco Santander Chile’s effective corporate tax rate shouldcould rise in the future, which may have an adverse impact on our results of operations. Please see “Item 10—Additional information—E. Taxation” for more information regarding the impacts of this tax reform on ADR holders.

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Developments in other countries may affect us, including the prices for our securities.

 

The prices of securities issued by Chilean companies, including banks, are influenced to varying degrees by economic and market considerations in other countries. We cannot assure you that future developments in or affecting the Chilean economy, including consequences of economic difficulties in other markets, will not materially and adversely affect our business, financial condition or results of operations.

 

We are exposed to risks related to the weakness and volatility of the economic and political situation in Asia, the United States, Europe (including Spain, where Santander Spain, our controlling shareholder, is based), Brazil, Argentina and other nations. Although economic conditions in Europe and the United States may differ significantly from economic conditions in Chile, investors’ reactions to developments in these other countries may have an adverse effect on the market value of securities of Chilean issuers. In particular, investor perceptions of the risks associated with our securities may be affected by perception of risk conditions in Spain.

 

If these, or other nations’ economic conditions deteriorate, the economy in Chile, as both a neighboring country and a trading partner, could also be affected and could experience slower growth than in recent years, with possible adverse impact on our borrowers and counterparties. If this were to occur, we would potentially need to increase our allowances for loan losses, thus affecting our financial results, our results of operations and the price of our securities. As of December 31, 2016,2018, approximately 5.9%2.6% of our assets were held abroad. There can be no assurance that the ongoing effects of thea global financial crisis will not negatively impact growth, consumption, unemployment, investment and the price of exports in Chile. Crises and political uncertainties in other Latin American countries could also have an adverse effect on Chile, the price of our securities or our business.

 

Chile has considerable economic ties with China, the United States and Europe. In 2016,2018, approximately 24.1%32.2% of Chile’s exports went to China, mainly copper. China’s economy has grown at a strong pace in recent times, but a slowdown in economic activity in China may affect Chile’s GDP and export growth as well as the price of copper, which is Chile’s main export. Chile exported approximately 17.8%14.6% of total exports to the United States and 18.7 %14.6% to Europe in 2016.2018.

 

Chile is alsowas recently involved in an international litigation with Bolivia regarding maritime borders. We cannot assure you that crises and political uncertainty in other Latin American countries will not have an adverse effect on Chile, the price of our securities or our business.

 


Fluctuations in the rate of inflation may affect our results of operations.

 

High levels of inflation in Chile could adversely affect the Chilean economy and have an adverse effect on our business, financial condition and results of operations. Extended periods of deflation could also have an adverse effect on our business, financial condition and results of operations. In 2009, Chile experienced deflation of 1.4% as the global economy contracted. In 2016,2018, CPI inflation was 2.7%2.6% compared to 4.4%2.3% in 2015.2017.

 

Our assets and liabilities are denominated in Chilean pesos, UF and foreign currencies. The UF is revalued in monthly cycles. On each day in the period beginning on the tenth day of any given month through the ninth day of the succeeding month, the nominal peso value of the UF is indexed up (or down in the event of deflation) in order to reflect a proportionate amount of the change in the Chilean Consumer Price Index during the prior calendar month. For more information regarding the UF, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Impact of Inflation.” Although we benefit from inflation in Chile due to the current structure of our assets and liabilities (i.e., a significant portion of our loans are indexed to the inflation rate, but there are no corresponding features in deposits, or other funding sources that would increase the size of our funding base), there can be no assurance that our business, financial condition and result of operations in the future will not be adversely affected by changing levels of inflation, including from extended periods of inflation that adversely affect economic growth or periods of deflation.

 

Any change in the methodology of how the CPI index or the UF is calculated could also adversely affect our business, financial condition and results of operations.

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Currency fluctuations could adversely affect our financial condition and results of operations and the value of our securities.

 

Any future changes in the value of the Chilean peso against the U.S. dollar will affect the U.S. dollar value of our securities. The Chilean peso has been subject to large devaluations and appreciations in the past and could be subject to significant fluctuations in the future. Our results of operations may be affected by fluctuations in the exchange rates between the peso and the dollar despite our policy and Chilean regulations relating to the general avoidance of material exchange rate exposure. In order to avoid material exchange rate exposure, we enter into forward exchange transactions. The following table shows the value of the Chilean peso relative to the U.S. dollar as reported by the Central Bank at year end for the last five years and the devaluation or appreciation of the peso relative to the U.S. dollar in each of those years.

 

Year 

Exchange rate (Ch$) at year end 

Devaluation (Appreciation) (%) 

2012478.60(8.2)
2013523.769.4
2014607.3816.0
2015707.3416.5
2016667.29(5.7)
2017 (through March 22, 2017)657.83(1.4)
Year Exchange rate (Ch$) at year end Devaluation (Appreciation) (%) 
2015  707.34  16.5 
2016  667.29  (5.7)
2017  615.22  (7.8)
2018  695.69  13.1 
2019 (through March 19, 2019)  667.21  (4.0)

Source: Central Bank.

 

We may decide to change our policy regarding exchange rate exposure. Regulations that limit such exposures may also be amended or eliminated. Greater exchange rate risk will increase our exposure to the devaluation of the peso, and any such devaluation may impair our capacity to service foreign currency obligations and may, therefore, materially and adversely affect our financial condition and results of operations. Notwithstanding the existence of general policies and regulations that limit material exchange rate exposures, the economic policies of the Chilean government and any future fluctuations of the peso against the dollar could affect our financial condition and results of operations.

 

We are subject to substantial regulation and regulatory and governmental oversight which could adversely affect our business, operations and financial condition.

 

As a financial institution, we are subject to extensive regulation, which materially affects our businesses. TheTherefore, the statutes, regulations and policies to which we are subject may be changed at any time. In addition, the interpretation and the application by regulators of the laws and regulations to which we are subject may also change from time to time. In the wake of the global financial crisis of 2008, the financial services industry continues to experience significant financial regulatory reform in jurisdictions outside of Chile that directly or indirectly affect our business, including Spain, the UK, the European Union, the United States, Latin America and other jurisdictions. Changes to current legislation and their implementation through regulation (including additional capital, leverage, funding, liquidity and tax requirements), policies (including fiscal and monetary policies established by central banks and financial regulators, and changes to global trade policies), and other legal and regulatory actions may impose additional regulatory burden on Santander Group, including Santander-Chile, in these jurisdictions. The manner in which these laws and related regulations are applied to the operations of financial institutions is still evolving. Moreover, to the extent these recently adopted regulations are implemented inconsistently in the various jurisdictions in which we operate we may face higher compliance costs.

 


Any legislative or regulatory actions and any required changes to our business operations resulting from such legislation and regulations, as well as any deficiencies in our compliance with such legislation and regulation, could result in significant loss of revenue, limit our ability to pursue business opportunities in which we might otherwise consider engaging and provide certain products and services, affect the value of assets that we hold, require us to increase our prices and therefore reduce demand for our products, impose additional compliance and other costs on us or otherwise adversely affect our businesses. In particular, legislative or regulatory actions resulting in enhanced prudential standards, in particular with respect to capital and liquidity, could impose a significant regulatory burden on the Bank or on its bank subsidiaries and could limit the bank subsidiaries’ ability to distribute capital and liquidity to the Bank, thereby negatively impacting the Bank. Future liquidity standards could require the Bank to maintain a greater proportion of its assets in highly-liquid but lower-yielding financial instruments, which would

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negatively affect its net interest margin. Moreover, the Bank'sBank’s regulatory authorities, as part of their supervisory function, periodically review the Bank'sBank’s allowance for loan losses. Such regulators may require the Bank to increase its allowance for loan losses or to recognize further losses. Any such additional provisions for loan losses, as required by these regulatory agencies, whose views may differ from those of the Bank'sBank’s management, could have an adverse effect on the Bank’s earnings and financial condition. Accordingly, there can be no assurance that future changes in regulations or in their interpretation or application will not adversely affect us.

 

The wide range of regulations, actions and proposals which most significantly affect the Bank, or which could most significantly affect the Bank in the future, relate to capital requirements, funding and liquidity and regulatory reforms in Chile, and are discussed in further detail below. These and other regulatory reforms adopted or proposed in the wake of the financial crisis have increased and may continue to materially increase our operating costs and negatively impact our business model. Furthermore, regulatory authorities have substantial discretion in how to regulate banks, and this discretion, and the means available to the regulators, have been increasing during recent years. Regulation may be imposed on an ad hoc basis by governments and regulators in response to a crisis. In addition, the volume, granularity, frequency and scale of regulatory and other reporting requirements necessitate a clear data strategy to enable consistent data aggregation, reporting and management. Inadequate management information systems or processes, including those relating to risk data aggregation and risk reporting, could lead to a failure to meet regulatory reporting requirements or other internal or external information demands and we may face supervisory measures as a result.

 

The main regulations and regulatory and governmental oversight that can adversely impact us include but are not limited to the following (see more details on “Item 4. Information on the Company—B. Business Overview—Regulation and Supervision”):

 

We are subject to regulation by the SBIF and by the Central Bank with regard to certain matters, including reserve requirements, interest rates, foreign exchange mismatches and market risks. Chilean laws, regulations, policies and interpretations of laws relating to the banking sector and financial institutions are continually evolving and changing. Any new reforms could result in increased competition in the industry and thus may have a material adverse effect on our financial condition and results of operations.

 

Pursuant to the General Banking Law, all Chilean banks may, subject to the approval of the SBIF,FMC, engage in certain businesses other than commercial banking depending on the risk associated with such business and their financial strength. Such additional businesses include securities brokerage, mutual fund management, securitization, insurance brokerage, leasing, factoring, financial advisory, custody and transportation of securities, loan collection and financial services. The General Banking Law also applies to the Chilean banking system a modified version of the capital adequacy guidelines issued by the Basel Committee on Banking Regulation and Supervisory Practices and limits the discretion of the SBIFFMC to deny new banking licenses. There can be no assurance that regulators will not in the future impose more restrictive limitations on the activities of banks, including us. Any such change could have a material adverse effect on our financial condition or results of operations.

 


Historically, Chilean banks have not paid interest on amounts deposited in checking accounts. We have begun to pay interest on some checking accounts under certain conditions. If competition or other factors lead us to pay higher interest rates on checking accounts, to relax the conditions under which we pay interest or to increase the number of checking accounts on which we pay interest, any such change could have a material adverse effect on our financial condition or results of operations.

 

On November 20, 2013, the Chilean Congress approved new legislation to reduce the maximum rates that can be charged on loans. This new legislation is aimed at loans of less than UF 200UF50 (U.S.$7,241)1,975) and between UF50 and UF200 (U.S.$7,901) and with a term of more than 90 days, and thus includes consumer loans in installments, lines of credit and credit card lines. Previously, the maximum interest rate for loans of less than UF 200UF200 and with a term of more than 90 days was calculated as the average rate of all transactions undertaken within the banking industry over the previous month of loans of less than UF 200UF200 and with a term of more than 90 days, multiplied by a factor of 1.5. The average and maximum rates are published daily by the SBIF. By year-end 2016 the maximum rate was 36.64%, close to the level the authorities are seeking for loans of this size.

On December 13, 2013, the SBIF published the new maximum rates for loans between UF 50 (US$1,810) and UF 200 (US$7,241). The objective was to lower the maximum rate to a level closer to the average interest rate for loans between UF 200 (US$7,241)UF200 (U.S.$7,901) to UF 5,000 (US$181,047)UF5,000 (U.S.$197,531) plus 14%, unless the flow of new loans in the

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industry decreases by 10%-20%, in which case the reduction will be partially or completely suspended until the next period. The average and maximum rates are published daily by the SBIF. By year-end 20162018, the maximum rate was 29.64%, close to the level the authorities are seeking for loans of this size.equal or lower than UF50 (U.S.$1,975) was 35.58%. The maximum rate for loans between UF50 (U.S.$1,975) and UF200 (U.S.$7,901) was 28.58%.

 

In March 2012, a bill aimed at giving additional enforcement powers toJanuary 2019, the SERNAC (Chile’s Consumer Protection Agency) regarding financial services became effective and created the SERNAC Financiero, a specific consumer protection agency for the financial industry. The SERNAC Financiero has powers to supervise and regulate Bank products and services. The creation of the SERNAC Financiero has also resulted in additional scrutiny regarding prices and contracts for financial products and services, making it more difficult to raise prices and increasing competition among bank and non-bank competitors. The government is currently discussing with the Chilean Congress a bill to again reform the SERNAC Financiero and its powers. No assurance can be given that these changes will not have a material impact on our fee income.

The SBIF and the Ministry of Finance have drafted a newNew General Banking Law that is expected to be submitted towas passed by the Chilean Congress in 2017.government. Among other things, the New General Banking Law provides new banking law is expected to include clearer guidelines for the adoption ofminimum capital requirements in line with Basel III regulations, in Chile and new regulations regarding the SBIF’s corporate governance. Although we currently have agovernance and its absorption by the FMC, FMC and new rules regarding bank liquidation. The rules governing the functioning of Banks and the regulatory capital ratiooversight of 13.4% as of December 31, 2016 and a core capital ratio of 10.5%, this change could require usbanks will pass from the SBIF to inject additional capital to our business in the future. According to initial estimatesFMC under the rules of the impactNew General Banking Law. The absorption of market risk on regulatory capital, published for informational purposes onlythe SBIF by the SBIF, our ratio of regulatory capitalFMC is expected to risk-weighted assets, net of loan loss allowance and deductions, including an initial estimate of the adjustments for market risk was 12.2% as of December 31, 2016. Additionally, for the purposes of reporting to our parent company, we calculate this ratio using a model approved by the European Central Bank standards. In this scenario our core capital ratio is 12.1% and our regulatory capital ratio is 15.5% as of December 31, 2016. No assurance can be given that these changes will not have a material impacttake place on our capitalization ratio.June 1, 2019.

 

A change in labor laws in Chile or a worsening of labor relations in the Bank could impact our business.

 

As of December 31, 20162018, on a consolidated basis, we had 11,35411,305 employees. We have traditionally enjoyed good relations with our employees and their unions. Of the total headcount of which 72.2%us and our subsidiaries, 8,487 or 75.1% were unionized.unionized as of December 31, 2018. In March 2014,February 2018, a new collective bargaining agreement was signed with the main unions ahead of schedule, which became effective on JanuarySeptember 1, 2014,2018 and which will expireexpires on DecemberAugust 31, 2018.2021, though it may also be renegotiated ahead of schedule with the consent of management and the union. We generally apply the terms of our collective bargaining agreement to unionized and non-unionized employees. We have traditionally had good relations with our employees and their unions, but we cannot assure you that in the future, a strengthening of cross-industry labor movements will not materially and adversely affect our business, financial condition or results of operations.

 

Congress passed a new labor law in 2016 that becomesbecame effective April 1, 2017. The main points included in this law are:

 

·●Legalizes industry-wide unions.

●Expands the scope of collective bargaining. Currently some groups of workers are excluded from the collective bargaining process.

 

·●Gives unions sole collective bargaining rights. Non-union groups can no longer negotiate a collective bargaining agreement.

●Expands workers ability to switch unions and gives workers the same rights under a collective bargaining agreement if they affiliate themselves post-negotiations.

 

·●ExpandExpands the right to greater information of unions including the wages of each worker included in a collective bargaining agreement.

 

·●Simplifies the standard collective bargaining process.

 

·●Collective bargaining agreements must last maximum three years instead of four.

 


·●EliminateEliminates the ability of the employer to replace workers on strike and establishes minimum service guidelines that workers must respect.

 

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·●Establishes the current collective bargaining agreement as the bargaining floor for future collective bargaining agreements.

 

·●Amplifies the matters that can be negotiated in collective bargaining.

 

·●GreaterIncreases the hours for training of union representatives.

 

·●StrengthenStrengthens the participation of women in unions.

 

The Bank currently has a high unionization level and good labor relations. At this time, we are unable to estimate the impact these new regulations will have on labor relations and costs. The current project may also suffer additional modification will being discussedChilean Congress is currently considering new labor and pension law reforms, which were designed to flexibilize the labor market and to increase employers’ contribution to pension savings. Such new legislation could have an adverse effect on our business, results of operation or financial condition in Congress.the future.

 

These and any additional legislative or regulatory actions in Chile, Spain, the European Union, the United States or other countries, and any required changes to our business operations resulting from such legislation and regulations, could result in reduced capital availability, significant loss of revenue, limit our ability to continue organic growth (including increased lending), pursue business opportunities in which we might otherwise consider engaging and provide certain products and services, affect the value of assets that we hold, require us to increase our prices and therefore reduce demand for our products, impose additional costs on us or otherwise adversely affect our businesses. Accordingly, we cannot provide assurance that any such new legislation or regulations would not have an adverse effect on our business, results of operations or financial condition in the future.

 

Our corporate disclosure may differ from disclosure regularly published by issuers of securities in other countries, including the United States.

 

Issuers of securities in Chile are required to make public disclosures that are different from, and that may be reported under presentations that are not consistent with, disclosures required in other countries, including the United States. In particular, as a Chilean regulated financial institution, we are required to submit to the SBIF on a monthly basis unaudited consolidated balance sheets and income statements, excluding any note disclosure, prepared in accordance with Chilean Bank GAAP as issued by the SBIF. This disclosure differs in a number of significant respects from generally accepted accounting principles in the United States and information generally available in the United States with respect to U.S. financial institutions.institutions or IFRS. In addition, as a foreign private issuer, we are not subject to the same disclosure requirements in the United States as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue quarterly reports, the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules under Section 16 of the Exchange Act. Accordingly, the information about us available to you will not be the same as the information available to shareholders of a U.S. company and may be reported in a manner that you are not familiar with.

 

Chile imposes controls on foreign investment and repatriation of investments that may affect your investment in, and earnings from, our ADSs.

 

Equity investments in Chile by persons who are not Chilean residents have generally been subject to various exchange control regulations, which restrict the repatriation of the investments and earnings therefrom. In April 2001, the Central Bank eliminated the regulations that affected foreign investors, except that investors are still required to provide the Central Bank with information relating to equity investments and conduct such operations within Chile’s Formal Exchange Market. The ADSs are subject to a contract, dated May 17, 1994, among the Depositary, us and the Central Bank (the “Foreign Investment Contract”) that remains in full force and effect. The ADSs continue to be governed by the provisions of the Foreign Investment Contract subject to the regulations in existence prior to April 2001. The Foreign Investment Contract grants the Depositary and the holders of the ADSs access to the Formal Exchange Market, which permits the Depositary to remit dividends it receives from us to the holders of the ADSs. The Foreign Investment Contract also permits ADS holders to repatriate the proceeds from the sale of shares of our common stock withdrawn from the ADR facility, or that have been received free of payment as a consequence of spin offs, mergers, capital increases, wind ups, share dividends or preemptive rights transfers, enabling them to acquire the foreign currency necessary to repatriate earnings from such investments. Pursuant to Chilean law, the Foreign Investment Contract cannot be amended unilaterally by the Central Bank, and there are judicial precedents (although not binding with respect to future judicial decisions) indicating that contracts of this type may not be abrogated by future legislative changes or resolutions of the Advisory Council of the Central Bank. Holders of shares of our common stock, except for shares of our common stock withdrawn from the ADS facility or

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received in the manner described above, are not entitled to the benefits of the Foreign Investment Contract, may not have access to the Formal Exchange Market, and may have restrictions on their ability to repatriate investments in shares of our common stock and earnings therefrom.

 


Holders of ADSs are entitled to receive dividends on the underlying shares to the same extent as the holders of shares. Dividends received by holders of ADSs will be paid net of foreign currency exchange fees and expenses of the Depositary and will be subject to Chilean withholding tax, currently imposed at a rate of 35.0% (subject to credits in certain cases). If for any reason, including changes in Chilean law, the Depositary were unable to convert Chilean pesos to U.S. dollars, investors would receive dividends and other distributions, if any, in Chilean pesos.

 

We cannot assure you that additional Chilean restrictions applicable to holders of our ADSs, the disposition of the shares underlying them or the repatriation of the proceeds from such disposition or the payment of dividends will not be imposed in the future, nor can we advise you as to the duration or impact of such restrictions if imposed.

 

Investors may find it difficult to enforce civil liabilities against us or our directors, officers and controlling persons.

 

We are a Chilean corporation. None of our directors are residents of the United States and most of our executive officers reside outside of the United States. In addition, a substantial portion of our assets and the assets of our directors and executive officers are located outside the United States. Although we have appointed an agent for service of process in any action against us in the United States with respect to our ADSs, none of our directors, officers or controlling persons has consented to service of process in the United States or to the jurisdiction of any United States court. As a result, it may be difficult for investors to effect service of process within the United States on such persons.

 

It may also be difficult for ADS holders to enforce in the United States or in Chilean courts money judgments obtained in United States courts against us or our directors and executive officers based on civil liability provisions of the U.S. federal securities laws. If a U.S. court grants a final money judgment in an action based on the civil liability provisions of the federal securities laws of the United States, enforceability of this money judgment in Chile will be subject to the obtaining of the relevant “exequatur” (i.e., recognition and enforcement of the foreign judgment) according to Chilean civil procedure law currently in force, and consequently, subject to the satisfaction of certain factors. The most important of these factors are the existence of reciprocity, the absence of a conflicting judgment by a Chilean court relating to the same parties and arising from the same facts and circumstances and the Chilean courts’ determination that the U.S. courts had jurisdiction, that process was appropriately served on the defendant and that enforcement would not violate Chilean public policy. Failure to satisfy any of such requirements may result in non-enforcement of your rights.

 

Risks Relating to Our Controlling Shareholder and our ADSs

 

Our controlling shareholder has a great deal of influence over our business and its interests could conflict with yours.

 

Santander Spain, our controlling shareholder, controls Santander-Chile through its holdings in Teatinos Siglo XXI Inversiones S.A. and Santander Chile Holding S.A., which are controlled subsidiaries. Santander Spain has control over 67.18% of our shares and actual participation, excluding non-controlling shareholders that participate in Santander Chile Holding, S.A. of 67.06%67.12%.

 

Due to its share ownership, our controlling shareholder has the ability to control us and our subsidiaries, including the ability to:

 

·●elect the majority of the directors and exercise control over our company and subsidiaries;

 

·●cause the appointment of our principal officers;

 

·●declare the payment of any dividends;

 


·●agree to sell or otherwise transfer its controlling stake in us; and

 

·●determine the outcome of substantially all actions requiring shareholder approval, including amendments of our bylaws,by-laws, transactions with related parties, corporate reorganizations, acquisitions and disposals of assets and issuance of additional equity securities, if any.

 

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In December 2012, primarily in response to the requirements of the European Banking Authority, the Bank of Spain and regulators in various jurisdictions, Santander Spain adopted a corporate governance framework (Marco de Gobierno Interno del Grupo Santander). The purpose of the framework is to organize and standardize the corporate governance practices of Santander Spain and its most significant subsidiaries, including us. (OurOur Board of Directors approved the adoption of this corporate governance framework in July 2013,) subject to certain overarching principles, such as the precedence of applicable laws and regulations over the framework to the extent they are in conflict. See “Item 16G. Corporate Governance.” Our adoption of this framework may increase Santander Spain’s control over us.

 

We operate as a stand-alone subsidiary within the Santander Group. Our controlling shareholder has no liability for our banking operations, except for the amount of its holdings of our capital stock. The interests of Santander Spain may differ from the interests of our other shareholders, and the concentration of control in Santander Spain may differ from the interests of our other shareholders, and the concentration of control in Santander Spain will limit other shareholders’ ability to influence corporate matters. As a result, we may take actions that our other shareholders do not view as beneficial.

 

Our status as a controlled company and a foreign private issuer exempts us from certain of the corporate governance standards of the New York Stock Exchange (“NYSE”), limiting the protections afforded to investors.

 

We are a “controlled company” and a “foreign private issuer” within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a controlled company is exempt from certain NYSE corporate governance requirements. In addition, a foreign private issuer may elect to comply with the practice of its home country and not to comply with certain NYSE corporate governance requirements, including the requirements that (1) a majority of the board of directors consist of independent directors, (2) a nominating and corporate governance committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, (3) a compensation committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities and (4) an annual performance evaluation of the nominating and corporate governance and compensation committees be undertaken. Although we have similar practices, they do not entirely conform to the NYSE requirements for U.S. issuers; therefore we currently use these exemptions and intend to continue using them. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all NYSE corporate governance requirements.

 

There may be a lack of liquidity and market for our shares and ADSs.

 

Our ADSs are listed and traded on the NYSE.NYSE (under the ticker “BSAC”). Our common stock is listed and traded on the Santiago Stock Exchange (under the Chile Electronic Stock Exchange and the Valparaiso Stock Exchange,ticker “BSANTANDER”), which we refer to collectively as the Chilean Stock Exchanges,Exchange, although the trading market for the common stock is small by international standards. At December 31, 2016,2018, we had 188,446,126,794 shares of common stock outstanding. The Chilean securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. According to Article 14 of the Ley de Mercado de Valores, Ley No. 18,045, or the Chilean Securities Market Law, the Superintendencia de Valores y Seguros, or the Superintendency of Securities and Insurance,FMC may suspend the offer, quotation or trading of shares of any company listed on one or more Chilean Stock Exchangesstock exchanges for up to 30 days if, in its opinion, such suspension is necessary to protect investors or is justified for reasons of public interest. Such suspension may be extended for up to 120 days. If, at the expiration of the extension, the circumstances giving rise to the original suspension have not changed, the Superintendency of Securities and InsuranceFMC will then cancel the relevant listing in the registry of securities. In addition, the Santiago Stock Exchange may inquire as to any movement in the price of any securities in excess of 10% and suspend trading in such securities for a day if it deems necessary.

 

Although our common stock is traded on the Chilean Stock Exchanges,Exchange, there can be no assurance that a liquid trading market for our common stock will continue to exist. Approximately 33.0% of our outstanding common stock is held by the public (i.e., shareholders other than Santander Spain and its affiliates), including our shares that are represented by ADSs trading on the NYSE. A limited trading market in general and our concentrated ownership in particular may impair the ability of an ADS holder to sell in the Chilean market shares of common stock obtained upon withdrawal of such shares from the ADR facility in the amount and at the price and time such holder desires, and could increase the volatility of the price of the ADSs.

 

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You may be unable to exercise preemptive rights.

 

TheLey Sobre Sociedades Anónimas, Ley No. 18,046 and theReglamento de Sociedades Anónimas, which we refer to collectively as the Chilean Companies Law, and applicable regulations require that whenever we issue new common stock for cash, we grant preemptive rights to all of our shareholders (including holders of ADSs), giving them the right to purchase a sufficient number of shares to maintain their existing ownership percentage. Such an offering would not be possible in the United States unless a registration statement under the U.S. Securities Act of 1933 (“Securities Act”), as amended, were effective with respect to such rights and common stock or an exemption from the registration requirements thereunder were available.

 

Since we are not obligated to make a registration statement available with respect to such rights and the common stock, you may not be able to exercise your preemptive rights in the United States. If a registration statement is not filed or an applicable exemption is not available under U.S. securities law, 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.

 

As a holder of ADSs you will have different shareholders’ rights than in the United States and certain other jurisdictions.

 

Our corporate affairs are governed by our estatutos, or by-laws, and the laws of Chile, which may differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or in certain other jurisdictions outside Chile. Under Chilean corporate law, you may have fewer and less well-defined rights to protect your interests than under the laws of other jurisdictions outside Chile. For example, under legislation applicable to Chilean banks, our shareholders would not be entitled to appraisal rights in the event of a merger or other business combination undertaken by us.

 

Although Chilean corporate law imposes restrictions on insider trading and price manipulation, the form of these regulations and the manner of their enforcement may differ from that in the U.S. securities markets or markets in certain other jurisdictions. In addition, in Chile, self-dealing and the preservation of shareholder interests may be regulated differently, which could potentially disadvantage you as a holder of the shares underlying ADSs.

 

Holders of ADSs may find it difficult to exercise voting rights at our shareholders’ meetings.

 

Holders of ADSs will not be our direct shareholders and will be unable to enforce directly the rights of shareholders under our by-laws and the laws of Chile. Holders of ADSs may exercise voting rights with respect to the common stock represented by ADSs only in accordance with the deposit agreement governing the ADSs. Holders of ADSs will face practical limitations in exercising their voting rights because of the additional steps involved in our communications with ADS holders. Holders of our common stock will be able to exercise their voting rights by attending a shareholders’ meeting in person or voting by proxy. By contrast, holders of ADSs will receive notice of a shareholders’ meeting by mail from the Depositary following our notice to the Depositary requesting the Depository to do so. To exercise their voting rights, holders of ADSs must instruct the Depositary on a timely basis on how they wish to vote. This voting process necessarily will take longer for holders of ADSs than for holders of our common stock. If the Depositary fails to receive timely voting instructions for all or part of the ADSs, the Depositary will assume that the holders of those ADSs are instructing it to give a discretionary proxy to a person designated by us to vote their ADSs, except in limited circumstances.

 

Holders of ADSs also may not receive the voting materials in time to instruct the Depositary to vote the common stock underlying their ADSs. In addition, the Depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADSs or for the manner of carrying out those voting instructions. Accordingly, holders of ADSs may not be able to exercise voting rights, and they will have little, if any, recourse if the common stocks underlying their ADSs are not voted as requested.

 

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ADS holders may be subject to additional risks related to holding ADSs rather than shares.

 

Because ADS holders do not hold their shares directly, they are subject to the following additional risks, among others:

 

·●as an ADS holder, you may not be able to exercise the same shareholder rights as a direct holder of ordinary shares;

 

·●we and the Depositary may amend or terminate the deposit agreement without the ADS holders’ consent in a manner that could prejudice ADS holders or that could affect the ability of ADS holders to transfer ADSs; and

 

·●the Depositary may take or be required to take actions under the Deposit Agreement that may have adverse consequences for some ADS holders in their particular circumstances.

 

ITEM 4. INFORMATION ON THE COMPANY

 

A.History and Development of the Company

A. History and Development of the Company

 

Overview

 

We are the largest bank in Chilethe Chilean market in terms of total assets and loans. As of December 31, 2016,2018, we had total assets of Ch$37,030,02539,132,512 million (U.S.$55,60156,083 million), outstanding loans at amortized cost, net of allowances for loan losses of Ch$26,147,154 29,331,001 million (U.S.$39,26042,036 million), total deposits of Ch$20,691,02421,809,236 million (U.S.$31,068 31,256 million) and equity of Ch$2,938,1993,245,459 million (U.S.$4,4124,652 million). As of December 31, 2016,2018, we employed 11,35411,305 people. We have a leading presence in all the major business segments in Chile, and the largesta large distribution network with national coverage spanning across all the country, including the only privately owned bank with a branch in Easter Island.country. We offer unique transaction capabilities to clients through our 423380 branches and 1,295910 ATMs. Our headquarters are located in Santiago and we operate in every major region of Chile.

 

We provide a broad range of commercial and retail banking services to our customers, including Chilean peso and foreign currency denominated loans to finance a variety of commercial transactions, trade, foreign currency forward contracts and credit lines and a variety of retail banking services, including mortgage financing. We seek to offer our customers a wide range of products while providing high levels of service. In addition to our traditional banking operations, we offer a variety of financial services, including financial leasing, financial advisory services, mutual fund management, securities brokerage, insurance brokerage and investment management.

 

The legal predecessor of Santander-Chile was Banco Santiago (“Santiago”). Old Santander-Chile was established as a subsidiary of Santander Spain in 1978. On August 1, 2002, Santiago and Old Santander Chile merged, whereby the latter ceased to exist and Santander-Chile (formerly known as Santiago) being the surviving entity.

 

Our principal executive offices are located at Bandera 140, 20th floor, Santiago, Chile. Our telephone number is +562-320-2000 and our website is www.santander.cl. None of the information contained on our website is incorporated by reference into, or forms part of, this Annual Report. Our agent for service of process in the United States is CT Corporation, locatedPuglisi & Associates, 850 Library Ave., Suite 204, Newark, DE  19711. The SEC maintains a website on the Internet at 111 Eighth Avenue, 13th Floor, New York, New York 10011.http://www.sec.gov that contains reports and information statements and other information about us. The reports (including this annual report) and information statements and other information about us can be downloaded from the SEC’s websitewww.sec.gov website or our investor relations websitewww.santandercl.gcs-web.com. None of the information contained on our website, or any website referred to in this Annual Report, is incorporated by reference into, or forms part of, this Annual Report.

 

Relationship with Santander Spain

 

We believe that our relationship with our controlling shareholder, Santander Spain, offers us a significant competitive advantage over our peer Chilean banks. Santander Spain, our parent company, is one of the largest financial groups in Brazil and the rest of Latin America, in terms of total assets measured on a regional basis. It is the largest financial group in Spain and is a major player elsewhere in Europe, including the United Kingdom, Poland and Portugal, where it is the third-largest banking group. Through Santander Consumer, it also operates a leading consumer finance franchise in the United States, as well as in Germany, Italy, Spain, and several other European countries.

 

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Our relationship with Santander Spain provides us with access to the group’s client base, while its multinational focus allows us to offer international solutions to our clients’ financial needs. We also have the benefit of selectively borrowing from Santander Spain’s product offerings in other countries, as well as of its know-how in systems management. We believe that our relationship with Santander Spain will also enhance our ability to manage credit and market risks by adopting policies and knowledge developed by Santander Spain. In addition, our internal auditing function has been strengthened as a result of the addition of an internal auditing department that concurrently reports directly to our Audit Committee and the audit committee of Santander Spain. We believe that this structure leads to improved monitoring and control of our exposure to operational risks.

 

Santander Spain’s support of Santander-Chile includes the assignment of managerial personnel to key supervisory areas of Santander-Chile, such as risks, auditing, accounting and financial control. Santander-Chile does not pay any management or other fees to Santander Spain in connection with these support services.

 

B.Business Overview

B. Business Overview

 

We have 423380 total branches, 274266 of which are operated under the Santander brand name, with the remaining branches under certain specialty brand names, including 39 under theSantander Banefe brand name, 5346 under the Select brand name, 87 specialized branches for the Middle Market and 4921 as auxiliary and payment centers. During 2018, we also opened 20 Santander Workcafés, reaching a total of 40 Workcafés across all regions of Chile. We provide a full range of financial services to corporate and individual customers. We divide our clients into the following groups: (i) Retail banking, (ii) Middle-market, (iii) Global Corporate Investment Banking and (iv) Corporate Activities (“Other”).

 

The Bank has the reportable segments noted below (see “Segmentation Criteria” for further information):

 

Retail Banking

 

Consists of individuals and small to middle-sizedmedium-sized entities (SMEs) with annual sales less than Ch$2,0001,200 million (U.S.$3.01.7 million). This segment gives customers a variety of services, including consumer loans, credit cards, auto loans, commercial loans, foreign exchange, mortgage loans, debit cards, checking accounts, savings products, mutual funds, stock brokerage, and insurance brokerage. Additionally, the SME clients are offered government-guaranteed loans, leasing and factoring.

 

Middle-market

 

This segment serves companies and large corporations with annual sales exceeding Ch$2,0001,200 million (U.S.$3.01.7 million). It also serves institutions such as universities, government entities, local and regional governments and companies engaged in the real estate industry who carry out projects to sell properties to third parties and annual sales exceeding Ch$800 million (U.S.$1.21.1 million) with no upper limit. The companies within this segment have access to many products including commercial loans, leasing, factoring, foreign trade, credit cards, mortgage loans, checking accounts, transactional services, treasury services, financial consulting, savings products, mutual funds, and insurance brokerage. Also, companies in the real estate industry are offered specialized services to finance projects, chiefly residential, with the aim of expanding sales of mortgage loans.

 

Global Corporate Investment Banking

 

This segment consists of foreign and domestic multinational companies with sales over Ch$10,000 million (U.S.$15.014.3 million). The companies within this segment have access to many products including commercial loans, leasing, factoring, foreign trade, credit cards, mortgage loans, checking accounts, transactional services, treasury services, financial consulting, investments, savings products, mutual funds and insurance brokerage.

 

This segment also consists of a Treasury Division which provides sophisticated financial products, mainly to companies in the Middle-market segment and Global Corporate Investment Banking. These include products such as short-term financing and fund raising, brokerage services, derivatives, securitization and other tailor-made products. The Treasury Division may act as broker to transactions and also manages the Bank’s investmenttrading fixed income portfolio.

 

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Corporate Activities (“Other”)

 

This segment mainly includes our Financial Management Division, which develops global management functions, including managing inflation rate risk, foreign currency gaps, interest rate risk and liquidity risk. Liquidity risk is managed mainly through wholesale deposits, debt issuances and the Bank’s available-for-sale portfolio. This segment also manages capital allocation by unit. These activities usually result in a negative contribution to income.

 

In addition, this segment encompasses all the intra-segment income and all the activities not assigned to a given segment or product with customers.

The segments’ accounting policies are those described in the summary of accounting policies. The Bank earns most of its income in the form of interest income, fee and commission income and income from financial operations. To evaluate a segment’s financial performance and make decisions regarding the resources to be assigned to segments, the Chief Operating Decision Maker (CODM) bases his or her assessment on the segment'ssegment’s interest income, fee and commission income, and expenses.

 

The tables below show the Bank’s results by reporting segment for the year ended December 31, 2016,2018, in addition to the corresponding balances of loans and accounts receivable from customers:

 

  As of December 31, 2016
 

Loans and accounts receivable from customers

(1)

Net interest
income		Net fee and commission
income

Financial transactions, net

(2)

Provision for loan losses

Support expenses

(3)

Segment`s
net contribution
 Ch$mn
        
Retail Banking18,604,936931,105196,84521,141(323,888)(529,909)295,294
Middle-market6,396,376244,96030,85119,577(26,748)(83,412)185,228
Global Corporate Banking2,121,51395,10525,07755,9277,579(53,935)129,753
Other83,60610,1961,65143,713974(19,649)36,885
Total27,206,4311,281,366254,424140,358(342,083)(686,905)647,160
        
Other operating income    6,427
Other operating expenses and impairment    (69,136)
Income from investments in associates and other companies    3,012
Income tax expense    (109,031)
Net income for the year    478,432
         

    For the year ended December 31, 2018
  

Loans and accounts receivable at amortized

(1)

 Net interest income Net fee and commission income 

 

Financial transactions, net

(2)

 Provision for loan losses 

Support expenses

(3)

 Segment`s
net contribution
  (in millions of Ch$)
               
Retail Banking  20,786,637   949,764   220,532   19,694   (287,739)  (553,157)  349,094 
Middle-market  7,690,380   272,912   36,746   16,848   (26,314)  (92,377)  207,815 
Corporate Investment Banking  1,613,088   96,722   35,064   57,340   2,339   (64,913)  126,552 
Other  123,309   94,970   (1,457)  11,200   (5.694)  (11,486)  87,533 
Total  30,213,414   1,414,368   290,885   105,082   (317,408)  (721,933)  770,994 
                             
Other operating income                          23,129 
Other operating expenses and impairment                          (32,381)
Income from investments in associates and other companies                          5,095 
Income tax expense                          (167,144)
Net income for the year                          599,693 

(1) Corresponds to loans and accounts receivable from customers,at amortized cost under IFRS 9, without deducting their allowances for loan losses.

 

(2) Corresponds to the sum of the net income from financial operations and the foreign exchange profit or loss.

 

(3) Corresponds to the sum of personnel salaries and expenses, administrative expenses, depreciation and amortization.

 

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Operations through Subsidiaries

 

Today, the General Banking Law permits us to directly provide the leasing and financial advisory services that we could formerly offer only through our subsidiaries, to offer investment advisory services outside of Chile and to undertake activities that we could not formerly offer directly or through subsidiaries, such as factoring, securitization, foreign investment funds, custody and transport of securities and insurance brokerage services. For the twelve–month period ended December 31, 2016,2018, our subsidiaries collectively accounted for 0.6% of our total consolidated assets.

 

    Percent ownership share As of December 31,
    2016 2015 2014
Name of the Subsidiary Main activity Direct Indirect Total Direct Indirect Total Direct Indirect Total
     %   %   %   %   %   %   %   %   % 
Santander Corredora de Seguros Limitada Insurance brokerage  99.75   0.01   99.76   99.75   0.01   99.76   99.75   0.01   99.76 
Santander Corredores de Bolsa Limitada(*) Financial instruments brokerage  50.59   0.41   51.00   50.59   0.41   51.00   50.59   0.41   51.00 
Santander Agente de Valores Limitada Securities brokerage  99.03   —   99.03   99.03   —   99.03   99.03   —   99.03 
Santander S.A. Sociedad Securitizadora Purchase of credits and issuance of debt instruments  99.64   —   99.64   99.64   —   99.64   99.64   —   99.64 
Santander Servicios de Recaudación y Pagos Limitada(**) Support business, making and receiving payments  —   —   —   —   —   —   99.90   0.1   100.00 

 

    Percent ownership share as of December 31,
    2018 2017 2016
Name of the Subsidiary Main activity Direct Indirect Total Direct Indirect Total Direct Indirect Total
     %   %   %   %   %   %   %   %   % 
Santander Corredora de Seguros Limitada Insurance brokerage  99.75   0.01   99.76   99.75   0.01   99.76   99.75   0.01   99.76 
Santander Corredores de Bolsa Limitada Financial instruments brokerage  50.59   0.41   51.00   50.59   0.41   51.00   50.59   0.41   51.00 
Santander Agente de Valores Limitada(*) Securities brokerage  99.03   —   99.03   99.03   —   99.03   99.03   —   99.03 
Santander S.A. Sociedad Securitizadora Purchase of credits and issuance of debt instruments  99.64   —   99.64   99.64   —   99.64   99.64   —   

99.64 

 

 
(*)On June 19, 2015, Santander Corredores de Bolsa Limitada, our stock brokerage company changed its corporate structure to that of a limited liability company.

(*) On July 25, 2018, this company ceased conducting foreign currency purchase and sale operations, which are now carried out directly by the Bank.

(**)As of May 1, 2014, this entity was absorbed by the Bank pursuant to authorization obtained from the SBIF on March 25, 2014.

 

The following companies have been consolidated based on the determination that they are controlled by the Bank, in accordance with IFRS 10 Consolidated Financial Statements:

 

●Santander Gestión de Recaudación y Cobranza Limitada (collection services)

- Santander Gestión de Recaudación y Cobranza Limitada (collection services)

●Bansa Santander S.A. (management of repossessed assets and leasing of properties)

 

-In September 2017, Bansa Santander S.A. (managementcelebrated a legal cession of repossessed assets and leasingrights, which generated an income of properties)Ch$20,663 million before tax (Ch$15,197 million net of taxes).

 

During 2015, Multinegocios S.A. (managementThe Bank also has significant influence over the following entities:

      Percentage of  ownership share
      As of December 31,
    Place of 2018  2017  2016 
Associates Main activity Incorporation
and operation		 %  %  % 
Redbanc S.A. ATM services Santiago, Chile  33.43   33.43   33.43 
Transbank S.A. (1) Debit and credit card services Santiago, Chile  25.00   25.00   25.00 
Centro de Compensación Automatizado Electronic fund transfer and compensation services Santiago, Chile  33.33   33.33   33.33 
Sociedad Interbancaria de Depósito de Valores S.A. Delivery of securities on public offer Santiago, Chile  29.29   29.29   29.29 
Cámara Compensación de Alto Valor S.A. Payments clearing Santiago, Chile  15.00   15.00   14.93 
Administrador Financiero del Transantiago S.A. Administration of boarding passes to public transportation Santiago, Chile  20.00   20.00   20.00 
Sociedad Nexus S.A. Credit card processor Santiago, Chile  12.90   12.90   12.90 
Servicios de Infraestructura de Mercado OTC S.A. Administration of the infrastructure for the financial market of derivative instruments Santiago, Chile  12.48   12.48   12.07 

(1) The Bank has given a mandate to a third party to exercise the Bank’s rights as a shareholder in Transbank.

Significant influence is defined here as the power to participate in the financial and operating policy decisions of sales force), Servicios Administrativos y Financieros Limitada (managementthe investee without exercising control, whether singularly or jointly, over such policies. An investment in an associate is accounted for using the equity method from the date on which the investee becomes an associate.

As of sales force) and Multiservicios de Negocios Limitada (call center) have ceased rendering sales services toDecember 18, 2018, the Bank andannounced the Bank no longer controls their relevant activities. Therefore asdecision to sell its investment in Transbank S.A. The expected date of June 30, 2015, these entities have been excluded from our consolidated results. Ascompletion of August 1, 2014, Servicios de Cobranza Fiscalex Limitada was absorbed by Santander Gestión de Recaudación y Cobranza Limitada.the sale is still to be determined.

 

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Competition

 

Overview

 

The Chilean financial services market consists of a variety of largely distinct sectors. The most important sector, commercial banking, includes a number of privately-owned banks and one public-sector bank, Banco del Estado de Chile (which operates within the same legal and regulatory framework as the private sector banks). The private-sector banks include local banks and a number of foreign-owned banks operating in Chile. The Chilean banking system is comprised of 2219 banks, including one public-sector bank. The foursix largest banks accounted for 69.1%87.5% of all outstanding loans by Chilean financial institutions as of December 31, 20162018 (excluding assets held abroad by Chilean banks). In July 2018, Scotiabank Chile acquired BBVA Chile, becoming the third largest bank in terms of loans in the Chilean market.

 

The Chilean banking system has experienced increased competition in recent years, largely due to consolidation in the industry and new legislation. We also face competition from non-bank and non-finance competitors, principally department stores, credit unions andcajas de compensación (private, non-profitable corporations whose aim is to administer social welfare benefits, including payroll loans, to their members) with respect to some of our credit products, such as credit cards, consumer loans and insurance brokerage. In addition, we face competition from non-bank finance competitors, such as leasing, factoring and automobile finance companies, with respect to credit products, and mutual funds, pension funds and insurance companies, with respect to savings products. Currently, banks continue to be the main suppliers of leasing, factoring and mutual funds, and the insurance sales business has grown rapidly.

 

All the competition data in the following sections is based on Chilean Bank GAAP.

 

The following tables set out certain statistics comparing our market position to that of our peer group, defined as the five largest banks in Chile in terms of total loans as of December 31, 20162018 (excluding assets held by Chilean banks abroad).

 

 

As of December 31, 2016,
unless otherwise noted 

 

Market Share 

Rank 

Commercial loans17.3%2
Consumer loans23.4%1
Residential mortgage loans21.6%1
Total loans19.4%1
Deposits18.8%1
Credit card issued15.5%1
Checking accounts (1)21.8%1
Branches19.3%1

  As of December 31, 2018,
unless otherwise noted		 
  Market Share  Rank 
Commercial loans  16.9%  2 
Consumer loans  19.6%  1 
Residential mortgage loans  21.1%  1 
Total loans  18.6%  1 
Deposits  17.9%  2 
Credit card issued(1)  15.6%  1 
Checking accounts(1)  21.3%  1 
Branches  18.1%  3 

 

Source: SBIF

 

(1)As of November 2016,2018, according to the latest publically available information

 

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Loans

 

As of December 31, 2016,2018, our loan portfolio was the largest among Chilean banks. Our loan portfolio, including interbank loans, represented 19.4%18.6% of the market for loans in the Chilean financial system as of such date. The following table sets forth our and our peer group’s market shares in terms of loans (excluding assets held by Chilean banks abroad).

 

  As of December 31, 2016
(Chilean Bank GAAP)
Loans Ch$ million U.S.$ million Market
Share
Santander-Chile  27,206,431   40,850   19.4%
Banco de Chile  25,858,639   38,827   18.4%
Banco de Crédito e Inversiones  18,183,165   27,302   13.0%
Banco del Estado de Chile  20,208,686   30,343   14.4%
BBVA, Chile  9,271,674   13,921   6.6%
Itaú Corpbanca  15,503,610   23,279   11.1%
Others  51,232,466   76,926   36.5%
Chilean financial system  140,258,239   210,598   100.0%

  As of December 31, 2018
(Chilean Bank GAAP)		 
Loans Ch$ million  U.S.$ million  Market
Share		 
Santander-Chile  30,282,023   43,399   18.6%
Banco de Chile  28,308,887   40,571   17.4%
Scotiabank Chile  22,826,129   32,713   14.0%
Banco del Estado de Chile  22,667,427   32,486   13.9%
Banco de Crédito e Inversiones  22,200,629   31,817   13.6%
Itaú Corpbanca  16,273,212   23,322   10.0%
Others  20,510,612   29,395   12.6%
Chilean financial system  163,068,919   233,703   100.0%

 

 

Source: SBIFSBIF.

 

Deposits

 

We had a 18.8%17.9% market share in deposits, ranking firstsecond among banks in Chile as of December 31, 2016.2018. Deposit market share is based on total time and demand deposits as of the respective dates. The following table sets forth our and our peer group’s market shares in terms of deposits (excluding assets held by Chilean banks abroad).

 

  As of December 31, 2016
(Chilean Bank GAAP)
Deposits Ch$ million U.S.$ million Market Share
Santander-Chile  20,691,024   31,068   18.8%
Banco de Chile  18,874,049   28,339   17.2%
Banco de Crédito e Inversiones  13,492,879   20,260   12.3%
Banco del Estado de Chile  19,744,842   29,647   18.0%
BBVA, Chile  6,876,369   10,325   6.3%
Itaú Corpbanca  10,648,447   15,989   9.7%
Others  19,573,689   29,390   17.8%
Chilean financial system  109,901,300   165,017   100.0%

  As of December 31, 2018
(Chilean Bank GAAP)		 
Deposits Ch$ million  U.S.$ million  Market Share 
Banco del Estado de Chile  22,713,927   32,553   18.7%
Santander-Chile  21,809,236   31,256   17.9%
Banco de Chile  20,240,662   29,008   16.6%
Banco de Crédito e Inversiones  15,612,197   22,375   12.8%
Scotiabank Chile  14,927,861   21,394   12.3%
Itaú Corpbanca  10,151,012   14,548   8.3%
Others  16,287,206   23,342   13.4%
Chilean financial system  121,742,101   174,476   100.0%

  

 

Source: SBIF.

 

Total equity

 

With Ch$2,898,0473,458,363 million (U.S.$4,3514,956 million) in equity in Chilean Bank GAAP as of December 31, 2016,2018, we were the secondfourth largest commercial bank in Chile in terms of shareholders’ equity. The following table sets forth our and our peer group’s shareholders’ equity.

 

 As of December 31, 2016
(Chilean Bank GAAP)		 As of December 31, 2018
(Chilean Bank GAAP)		 
Total Equity Ch$ million U.S.$ million Market Share Ch$ million  U.S.$ million  Market Share 
Itaú Corpbanca  3,547,612   5,084   17.5%
Banco de Crédito e Inversiones  3,458,363   4,956   17.1%
Banco de Chile  3,304,153   4,735   16.3%
Santander-Chile  2,898,047   4,351   16.3%  3,285,709   4,709   16.2%
Banco de Chile  2,887,411   4,335   16.2%
Banco de Crédito e Inversiones  2,518,677   3,782   14.1%
Scotiabank Chile  2,109,953   3,024   10.4%
Banco del Estado de Chile  1,572,861   2,362   8.8%  1,713,584   2,456   8.5%
BBVA, Chile  829,494   1,245   4.7%
Itaú Corpbanca  3,404,296   5,112   19.1%
Others  3,692,173   5,544   20.7%  2,809,411   4,026   13.9%
Chilean financial system  17,802,959   26,731   100.0%  20,228,785   28,991   100.0%
Chilean financial system  3,547,612   5,084   17.5%

 

 

Source: SBIF.

 

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Efficiency

 

As of December 31, 2016,2018, we were the most efficient bank in our peer group. The following table sets forth our and our peer group’s efficiency ratio (defined as operating expenses as a percentage of operating revenue, which is the aggregate of net interest income, fees and income from services (net), net gains from mark-to-market and trading, exchange differences (net) and other operating income (net)) in each case under Chilean Bank GAAP.

 

Efficiency ratio as defined by the SBIF

As of
December 31, 20162018
(Chilean Bank GAAP)

Santander-Chile44.4%41.1%
Banco de Chile45.2%44.8%
Scotiabank Chile53.5%
Banco de Crédito e Inversiones53.8%54.4%
Banco del Estado de Chile61.3%
BBVA, Chile61.5%59.4%
Itaú Corpbanca71.2%58.7%
Chilean financial system53.9%50.9%

 

 

Source: SBIF.

 

Net income for the period attributable to equity holders

 

In 2016,2018, we were the second largest bank in Chile in terms of net income attributable to shareholders of Ch$472,351591,902 million (U.S.$709848 million) measured under Chilean Bank GAAP. The following table sets forth our and our peer group’s net income.

 

 As of December 31, 2016
(Chilean Bank GAAP)		 As of December 31, 2018
(Chilean Bank GAAP)		 
Net income attributable to equity holders Ch$ million U.S.$ million Market Share Ch$ million  U.S.$ million  Market Share 
Banco de Chile  594,872   853   25.3%
Santander-Chile  472,351   709   24.3%  591,902   848   25.2%
Banco de Chile  552,249   829   28.4%
Banco de Crédito e Inversiones  340,121   511   17.5%  395,794   567   16.9%
Banco del Estado de Chile  147,090   221   7.6%
BBVA, Chile  80,440   121   4.1%
Itaú Corpbanca  2,059   3   0.1%  172,047   247   7.3%
Chile Banco del Estado de Chile  165,951   238   7.1%
Scotiabank Chile  108,120   155   4.6%
Others  349,001   524   18.0%  318,538   457   13.6%
Chilean financial system  1,943,311   2,918   100.0%  2,347,224   3,365   100.0%

 

 

Source: SBIF.

 

Return on equity

 

As of December 31, 2016,2018, we were the second most profitable bank in our peer group (as measured by return on period-end equity under Chilean Bank GAAP) and the third most capitalized bank as measured by the Chilean BIS ratio. The following table sets forth our and our peer group’s return on average equity and BIS ratio.

 

 Return on period-end equity as of December 31, 2016
(Chilean Bank GAAP)		 BIS Ratio as of December 31, 2016
(Chilean Bank GAAP)		 Return on period-end equity as of December 31, 2018
(Chilean Bank GAAP)		  BIS Ratio as of December 31, 2018
(Chilean Bank GAAP)		 
Santander-Chile  16.4%  13.4%  18.1%  13.2%
Banco de Chile  19.1%  13.9%  18.0%  13.9%
Banco de Crédito e Inversiones  13.5%  13.4%  11.4%  12.8%
Banco del Estado de Chile  10.2%  11.3%  10.5%  11.1%
BBVA, Chile  9.7%  12.3%
Itaú Corpbanca  (0.1)%  14.0%  5.0%  14.6%
Chilean Financial System  11.0%  13.8%
Scotiabank Chile  6.0%  11.4%
Chilean financial system  11.5%  13.3%

 

 

Source: SBIF.

 

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Asset Quality

 

As of December 31, 2016,2018, we had the second-highest non-performing loan to loan ratio in our peer group. The following table sets forth our and our peer group’s non-performing loan ratio as defined by the SBIF as of December 31, 2016.2018.

 

 

Non-performing loans / total loans(1)
as of December 31, 20162018
(Chilean Bank GAAP)

Santander-Chile2.07%2.1%
Banco de Chile1.12%1.1%
Banco de Crédito e Inversiones1.42%1.4%
Banco del Estado de Chile3.34%
BBVA, Chile1.30%3.5%
Itaú Corpbanca1.66%2.1%
Scotiabank Chile1.7%
Chilean financial system1.85%2.9%

  

 

Source: SBIF.

 

(1)Excluding interbank loans.

 

Regulation and Supervision

 

General

 

In Chile, only banks may maintain checking accounts for their customers, conduct foreign trade operations, and, together with non-banking financial institutions, accept time deposits. The principal authorities that regulate financial institutions in Chile are the SBIF, which is expected to be absorbed by the FMC on June 1, 2019, and the Central Bank. Chilean banks are primarily subject to the General Banking Law, and secondarily subject, to the extent not inconsistent with this statute, the provisions of the Chilean Companies Law governing public corporations, except for certain provisions which are expressly excluded.

 

The modern Chilean banking system dates from 1925 and has been characterized by periods of substantial regulation and state 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 General Banking Law. That law was amended most recently in 2001 grantedto grant additional powers to banks, including general underwriting powers for new issues of certain debt and equity securities and the power to create subsidiaries to engage in activities related to banking, such as brokerage, investment advisory and mutual fund services, administration of investment funds, factoring, securitization products and financial leasing services. The most recent amendment to the General Banking Law was introduced by law 21,130, which modernizes banking legislation.

 

The Central Bank

 

The Central Bank is an autonomous legal entity created by the Chilean Constitution. It is subject to the Chilean Constitution and its ownley orgánica constitucional, or organic constitutional law. To the extent not inconsistent with the Chilean Constitution or the Central Bank’s organic constitutional law, the Central Bank is also subject to private sector laws (but in no event is it subject to the laws applicable to the public sector). It is directed and administered by a Board of Directors composed of five members designated by the President of Chile, subject to the approval of the Chilean Senate.

 

The legal purpose of the Central Bank is to maintain the stability of the Chilean peso 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, establishing regulations and guidelines regarding finance companies, foreign exchange (including the Formal Exchange Market) and banks’ deposit-taking activities.

 

The SBIF

 

Banks are supervised and controlled by the SBIF, an independent Chilean governmental agency. The SBIF authorizes the creation of new banks and has broad powers to interpret and enforce legal and regulatory requirements applicable to banks and financial companies. Furthermore, in cases of noncompliance with such legal and regulatory requirements, the SBIF has the ability to impose sanctions. In extreme cases, it can appoint, with the

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prior approval of the Board of Directors of the Central Bank, a provisional administrator to manage a bank. It must also approve any amendment to a bank’s by-laws or any increase in its capital.

 


The SBIF examines all banks from time to time, generally at least once a year. Banks are also required to submit their financial statements monthly to the SBIF, and a bank’s financial statements are published at least four times a year in a newspaper with countrywide coverage. In addition, banks are required to provide extensive information regarding their operations at various periodic intervals to the SBIF. A bank’s annual financial statements and the opinion of its independent auditors must also be submitted to the SBIF.

 

Any person wishing to acquire, directly or indirectly, 10.0% or more of the share capital of a bank must obtain the prior approval of the SBIF. Absent such approval, the acquirer of shares so acquired will not have the right to vote. The SBIF may only refuse to grant its approval, based on specific grounds set forth in the General Banking Law.

 

According to Article 35bis of the New General Banking Law, the prior authorization of the SBIFregulator is required for:

 

·●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 existing control of a bank by a controlling shareholder of that bank.

 

Such prior authorization is required solely when the acquiring bank or the resulting group of banks would own a significant market share in loans, defined by the SBIF to be more than 15.0% of all loans in the Chilean banking system. The intended purchase, merger or expansion may be denied by the SBIF; or, ifregulator with an accompanying resolution recording the acquiring bank or resulting group would ownspecific reasons for denial and with agreement of a market share in loans determined to be more than 20.0% of all loans in the Chilean banking system, the purchase, merger or expansion may be conditioned on one or moremajority of the following:

·that the bank or banks maintain regulatory capital higher than 8.0% and up to 14.0% of their risk-weighted assets;

·that the technical reserve established in Article 65 of the General Banking Law be applicable when deposits exceed one and a half times the resulting bank’s paid-in capital and reserves; or

·that the margin for interbank loans be reduced to 20.0% of the resulting bank’s regulatory capital.

If the acquiring bank or resulting group would own a market share in loans determined by the SBIF to be more than 15.0% but less than 20.0%, the authorization will be conditioned on the bank or banks maintaining a regulatory capital not lower than 10.0%Board of their risks-weighted assets for the period specified by the SBIF, which may not be less than one year. The calculationDirectors of the risk-weighted assets is based on a five-category risk classification system applied to a bank’s assets that is based on the Basel Committee recommendations.Central Bank.

 

Pursuant to the regulations of the SBIF, the following ownership disclosures are required:

 

·●a bank is required to inform the SBIF of the identity of any person owning, directly or indirectly, 5.0% or more of such banks’ shares;

 

·●holders of ADSs must disclose to the Depositary the identity of beneficial owners of ADSs registered under such holders’ names;

 

·●the Depositary is required to notify the bank as to the identity of beneficial owners of ADSs which such Depositary has registered and the bank, in turn, is required to notify the SBIF as to the identity of the beneficial owners of the ADSs representing 5.0% or more of such banks’ shares; and

 

·●bank shareholders who individually hold 10.0% or more of a bank’s capital stock and who are controlling shareholders must periodically inform the SBIF of their financial condition.

 

Pursuant to Law 21,130 which modernizes banking legislation, the SBIF is scheduled to merge with the FMC on June 1, 2019. Thereafter, the position of the “Superintendent” will be eliminated and replaced by a council comprised of four commissioners and one president.

Financial Market Commission

In 2017, Law 21,000 created theComisión para el Mercado Financiero or Financial Market Commission (FMC). This law became a Law of the Republic in January 2018. The FMC is now the sole supervisor for the Chilean financial system overseeing insurance companies, companies with publicly traded securities, credit unions, credit card and prepaid card issuers, and eventually banks. It is the responsibility of this commission to ensure the proper functioning, development and stability of the financial market, facilitating the participation of market agents and defending public faith in the financial markets. To do so, it must maintain a general and systemic vision of the market, considering the interests of investors and policyholders. Likewise, it shall be responsible for ensuring that the persons or entities audited, from their initiation until the end of their liquidation, comply with the laws, regulations, statutes and other provisions that govern them.


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TableThe Commission is in charge of Contents
a Council, which is composed of five members, who are appointed and are subject to the following rules:

●A Commissioner appointed by the President of Chile, of recognized professional or academic prestige in matters related to the financial system, which will have the character of President of the Commission.

●Four commissioners appointed by the President of Chile, from among persons of recognized professional or academic prestige in matters related to the financial system, by supreme decree issued through the Ministry of Finance, after ratification of the Senate by the four sevenths of its members in exercise, in session specially convened for that purpose.  

The Council’s responsibilities include regulation, sanctioning and the definition of general supervision policies. In addition, there will be a prosecutor in charge of investigations and the Chairman will be responsible for supervision. The FMC will act in coordination with the Chilean Central Bank (BCCh).

The date of entry into operation of the Commission for the Financial Market was December 14, 2017. The Superintendency of Securities and Insurance was eliminated on January 15, 2018 and all functions of this Superintendency were absorbed by the FMC.

In January 2019, Law 21,130, which modernizes the banking legislation contained in the General Banking Law and amends Law 21,000 (among others), was published in the Official Gazette. The law intends to modernize Chilean banking regulation in order to comply with Basel III practices and provisions. The law provides for stronger banking capital and reserves requirements in accordance with Basel III guidelines. The law also modernizes the corporate governance function of the FMC and, importantly, transfers the SBIF functions to the domain of the FMC. The FMC now has the faculty to determine the risk weighting of assets through a standardized model to be approved by the FMC or banks can implement their own methodology, subject to approval by the FMC. The law also imposes limitations on dividend distributions and puts in place intervention mechanisms in the event of insolvency.

 

Limitations on Types of Activities

 

Chilean banks can only conduct those activities allowed by the General Banking Law: making loans, accepting deposits and, subject to 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, equity investments, securities, mutual fund management, investment fund management, financial advisory and leasing activities. Subject to specific limitations and the prior approval of the SBIF and the Central Bank, Chilean banks may own majority or non-controlling interests in foreign banks.

 

Since June 1, 2002, Chilean banks are allowed to offer a new checking account product that pays interest. The SBIF also stated that these accounts may be subject to minimum balance limits and different interest rates depending on average balances held in the account and that banks may also charge fees for the use of this new product. For banks with a solvency score of less than A, the Central Bank has also imposed additional caps to the interest rate that can be paid.

 

On June 5, 2007, pursuant to Law 20.190, new regulations became effective authorizing banks to enter into transactions involving a wider range of derivatives, such as futures, options, swaps, forwards and other derivative instruments or contracts subject to specific limitations established by the Central Bank of Chile. Previously, banks were able to enter into transactions involving derivatives, but subject to more restrictive guidelines.

 

Deposit Insurance

 

The Chilean government guarantees up to 90.0% of the principal amount of certain time and demand deposits and savings accounts held by natural persons with a maximum value of UF120UF400 per person (Ch$3,161,75811,026,316 or U.S.$4,74715,802 as of December 31, 2016)2018) per calendar year in the entire financial system.

 


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). For purposes of calculating the reserve obligation, banks are authorized to deduct daily from their foreign currency denominated liabilities, the balance in foreign currency of certain loans and financial investments held outside of Chile, the most relevant of which include:

 

·●cash clearance account, which should be deducted from demand deposit for calculating reserve requirement;

 

·●certain payment orders issued by pension providers; and

 

·●the amount set aside for “technical reserve” (as described below), which can be deducted from reserve requirement.

 

The Central Bank has statutory authority to require banks to maintain reserves of up to an average of 40.0% for demand deposits and up to 20.0% for time deposits (irrespective, in each case, of the currency in which they are denominated) to implement monetary policy. In addition, to the extent that the aggregate amount of the following types of liabilities exceeds 2.5 times the amount of a bank’s regulatory capital, a bank must maintain a 100.0% “technical reserve” against them: demand deposits, deposits in checking accounts, or obligations payable on sight incurred in the ordinary course of business, and in general all deposits unconditionally payable immediately but excluding interbank demand deposits.

 

Minimum Capital

 

Under the General Banking Law, a bank is required to have a minimum of UF800,000 (approximately Ch$21,07822,053 million or U.S.$31.6 million as of December 31, 2016)2018) of paid-in capital and reserves, calculated in accordance with Chilean Bank GAAP, regulatory capital of at least 8.0% of its risk weighted assets, net of required allowances, and paid in capital and reserves of at least 3.0% of its total assets, net of required allowances, as calculated in accordance with Chilean Bank GAAP.

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Table Under the New General Banking Law, total regulatory capital remains at 8% of Contents
risk-weighted assets which includes credit, market and operational risk, while Minimum Tier 1 capital increases from 4.5% to 6% of risk-weighted assets.

 

Regulatory capital is defined as the aggregate of:

 

·●a bank’s paid-in capital and reserves, excluding capital attributable to subsidiaries and foreign branches orcapital básico;

 

·●its subordinated bonds, valued at their placement price (but decreasing by 20.0% for each year during the period commencing six years prior to maturity), for an amount up to 50.0% of its core capital; and

 

·●its voluntary allowances for loan losses for an amount of up to 1.25% of risk weighted-assets.

 

Capital Adequacy Requirements

 

According to the General Banking Law, each bank should have regulatory capital of at least 8.0% of its risk-weighted assets, net of required allowances. The calculation of risk weighted assets is based on a five-category risk classification system for bank assets that is based on the Basel Committee recommendations. The SBIF is expected to implement in 2017Under the Basel III capital standards in Chile, which will includes the implementation of capital limits with market risk and operational risk-weighted assets. These changes must be approved by the Chilean Congress, as it involves a modification to theNew General Banking Law.

Banks should also havecapital básico, or core capital, of at least 3.0% of their total assets, net of allowances. Core capital is defined to include shareholders’ equity.

WithinLaw, following the scopeguidelines of Basel III, minimum capital requirements have increased in Chile, further changesterms of amount and quality. Total Regulatory Capital remains at 8% of risk-weighted assets which includes credit, market and operational risk. Minimum Tier 1 capital increases from 4.5% to 6% of risk-weighted assets, of which up to 1.5% may be Additional Tier 1 (“AT1”) either in regulationthe form of preferred shares or perpetual bonds, both of which may occur. See “Item 3. Key Information—D. Risk Factors—Risks Relatingbe convertible to Chile—Wecommon equity. The FMC will now establish the conditions and requirements for the issuance of perpetual bonds and preferred equity. Tier 2 capital is now set at 2% of risk-weighted assets. Additional capital demands are subjectincorporated through a Conservation Buffer of 2.5% of risk-weighted assets, setting a Total Equity Requirement of 10.5% of risk-weighted assets. Furthermore, the BCCh may set an additional Counter Cyclical Buffer of up to substantial regulation and regulatory and governmental oversight2.5% of risk-weighted assets with the agreement of the FMC. Both buffers must be comprised of core capital. The FMC, with agreement from the BCCh, may also impose additional capital requirements for Systemically Important Banks (“SIB”) of between 1-3.5% of risk-weighted assets. The FMC will establish a criteria to assess which could adversely affect our business, operations and financial condition.”banks are considered SIBs. It is probable that we will be classified an SIB.

 


Lending Limits

 

Under the General Banking Law, Chilean banks are subject to certain lending limits, including the following material limits:

 

·●A bank may not extend to any entity or individual (or any one group of related entities), except for another financial institution, directly or indirectly, unsecured credit in an amount that exceeds 10.0% of the bank’s regulatory capital, or in an amount that exceeds 30.0% of its regulatory capital if the excess over 10.0% is secured by certain assets with a value equal to or higher than such excess. These limits were raised from 5.0% and 25.0%, respectively, in 2007 by theReformas al Mercado de Capitales II (also known as MK2). In the case of financing infrastructure projects built by government concession, the 10.0% ceiling for unsecured credits is raised to 15.0% if secured by a pledge over the concession, or if granted by two or more banks or finance companies which have executed a credit agreement with the builder or holder of the concession;

 

·●a bank may not extend loans to another financial institution subject to the General Banking Law in an aggregate amount exceeding 30.0% of its regulatory capital;

 

·●a bank may not directly or indirectly grant a loan whose purpose 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; and

 

·●a bank may not grant loans to related parties (including holders of more than 1.0% of its shares) on more favorable terms than those generally offered to non-related parties. Loans granted to related parties are subject to the limitations described in the first bullet point above. In addition, the aggregate amount of loans to related parties may not exceed a bank’s regulatory capital.

 

In addition, the General Banking Law limits the aggregate amount of loans that a bank may grant to its employees to 1.5% of its regulatory capital, and provides that no individual employee may receive loans in excess of 10.0% of this 1.5% limit. Notwithstanding these limitations, a bank may grant to each of its employees a single residential mortgage loan for personal use during such employee’s term of employment.

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Allowance for Loan Losses

 

Chilean banks are required to provide to the SBIF detailed information regarding their loan portfolio on a monthly basis. The SBIF examines and evaluates each financial institution’s credit management process, including its compliance with the loan classification guidelines. Banks are classified into four categories: 1, 2, 3 and 4. Each bank’s category depends on the models and methods used by the bank to classify its loan portfolio, as determined by the SBIF. Category 1 banks are those banks whose methods and models are satisfactory to the SBIF. Category 1 banks will be entitled to continue using the same methods and models they currently have in place. A bank classified as a category 2 bank will have to maintain the minimum levels of reserves established by the SBIF while its Board of Directors will be made aware of the problems detected by the SBIF and required to take steps to correct them. Banks classified as categories 3 and 4 will have to maintain the minimum levels of reserves established by the SBIF until they are authorized by the SBIF to do otherwise. Santander-Chile is categorized as a “Category 1” bank.

 

Differences between IFRS and Chilean Bank GAAP

 

As stated above, Chilean Bank GAAP, as prescribed by the Compendium of Accounting Standards (the “Compendium”), differs in certain respects from IFRS. The main differences that should be considered by an investor are the following:

 

Suspension of Income Recognition on Accrual Basis

 

In accordance with the Compendium, 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 does9 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 ECL provision). Off-balance interests are recorded as interest income only if the Bank receives the related payments. This difference does not materially impact our Audited Consolidated Financial Statements.

 


Charge-offs and Accounts Receivable

 

The Compendium requires companies to establish deadlines for the charge-off of loans and accounts receivable. IFRS does not require any such deadline for charge-offs. A charge-off due to impairment would be recorded, if and only if, all efforts at collection of the loan or account receivable had been exhausted. Accordingly, this difference does not materially impact our Audited Consolidated Financial Statements.

 

Assets Received inIn Lieu of Payment

 

The Compendium requires that the initial value of assets received in lieu of payment be the value agreed upon with a debtor as a result of the loan settlement or the value awarded in an auction, as applicable. These assets are required to be written off one year after their acquisition, if the assets have not been previously disposed of. IFRS requires that assets received in lieu of payment be initially accounted for at fair value. Subsequently, asset valuation depends on the classification provided by the entity for that type of asset. No deadline is established for charging-off an asset. The Bank has adjusted the Audited Consolidated Financial Statements accordingly.

 

Loan loss allowances

 

Prior to the adoption of IFRS 9 on January 1, 2018, the Bank calculated loan loss allowances in accordance with IAS 39. The main difference between Chilean bank GAAP and IFRS 9 and IAS 39 regarding loan loss allowances is that loan loss allowances under Chilean Bank GAAP these are calculated using expected loss models based on specific guidelines set by the SBIF, which are in turn are based on an expected losses approach and under IFRS, we usewhile IAS 39 used an incurred loss approach. According to both Chilean Bank GAAP and IFRS, loan loss allowances are calculated using expected loss models. The models adopted with IFRS 9 used an expected loss approach, however these are not in accordance with specific guidelines under Chilean Bank GAAP given by the SBIF. The SBIF has not yet adopted IFRS 9 and therefore the Bank has adjusted the Audited Consolidated Financial Statements.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. Impairment losses will increase and become more volatile for financial instruments in the scope of the IFRS 9 impairment model. Based on the assessment made the total impact (net of tax) of the adoption of IFRS 9 on the opening balance on the Bank’s equity at 1 January 2018 is Ch$82,454 million (net of tax).

 

Provisions for country risk and for contingent loan risk

 

Under Chilean GAAP, the Bank provisions for country risk to cover the risk taken when holding or committing resources with any foreign country. These allowances are established according to country risk classifications established by the SBIF and therefore are not in accordance with IFRS as issued by the IASB. Our Audited Consolidated Financial Statements have been adjusted accordingly.

 

Also under Chilean GAAP, the Bank has established allowances related to the undrawn available credit lines and contingent loans in accordance with the SBIF. AsPrior to the adoption of IFRS 9, IAS 39 only permitspermitted allowances following its internal models based on incurred debt,debt. With the adoption of IFRS 9, provisions for contingent loans are calculated based on expected credit loss. The Bank has adjusted the Audited Consolidated Financial Statements accordingly.

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These differences do 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. Due to the adjustments made to the consolidated financial statements, we adjust deferred taxes accordingly.

 

Provision for mandatory dividends

 

This provision is made in accordance with the Bank’s internal policy, pursuant to which at least 30% of net income for the period is distributed, except in the case of a contrary resolution adopted at the respective shareholders’ meeting by unanimous vote of the outstanding shares. While the Bank uses the same policy under Chilean GAAP and IFRS, the net income used to calculate the provision is adjusted in accordance with IFRS principles.principles, however for the distribution of dividends, the Bank uses the net income according to Chilean GAAP.

 

Capital Markets

 

Under the General Banking Law, 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 in financial leasing, mutual fund and investment fund administration, investment advisory services and merger and acquisition services. These subsidiaries are regulated by the SBIF and, in some cases, also by the Superintendency of Securities and Insurance,FMC, the regulator of the Chilean securities market, open-stock corporations and insurance companies. The absorption of the SBIF by the FMC is expected to take place on June 1, 2019.

 

Legal Provisions Regarding Banking Institutions with Economic Difficulties

 

TheArticle 112 of the New General Banking Law provides that if specified adverse economic circumstances exist at any bank, its Board of Directors must approve a financing plan to correct the situation and present it to the FMC. In its proposal, the bank must state the scheduled time within 30 days fromwhich the date of receiptplan will be completed, which may not exceed 6 months. If one of the relevant financial statements. Ifmeasures contained in the Board of Directorsfinancing plan is unable to do so, it must call a special shareholders’ meeting to increase the capital of the bank by the amount necessary to return the bank to financial stability.stability, the Board of Directors must call a special shareholders’ meeting to the capital increase. If the shareholders reject the capital increase, the FMC may apply one or if itmore of the restrictions stated in Article 116 of the New General Banking Law for a period not exceeding 6 months, which may be renewed once for the same period. These restrictions include limiting the bank’s ability to grant loans to any person or legal entity linked (directly or through third parties) to the property or management of the bank, limiting loan renewals for more than 180 days, limiting security documents governing existing loans, among others.

If the approval of shareholders is not effected within the term andrequired for a different measure included in the manner agreed to at the meeting, or if the SBIF does not approve the Board of Directors’ proposal, the bank will be barred from increasing its loan portfolio beyond that stated in the financial statements presented toplan, the Board of Directors and from making any further investments in any instrument other than in instruments issued bymust call the Central Bank. In such a case, or in the event that a bank is unable to make timely payment in respect of its obligations, or if a bank is under provisional administration of the SBIF, theshareholders’ meeting within 15 days. The General Banking Law provides that the bank may receive a two-yearthree-year term loan from another bank.one or more banking institutions. The terms and conditions of such a loan must be approved by the directors of both banks, as well as by the SBIF,FMC, but need not be submitted to the borrowing bank’sany institution’s shareholders for their approval. In any event, a creditor bank cannot grant interbank loans to an insolvent bank in an amount exceeding 25.0% of the creditor bank’s regulatory capital. The Board of Directors of aIf the bank that is unable to make timely payment of its obligations must present a reorganization planpay the loan to its creditors, in order to capitalize the credits, extend their respective terms, condone debts or take other measures for the paymentarticle 115 of the debts. IfGeneral Banking Law provides that a bank’s unpaid debt may be: (i) capitalized in a merger between the Boardbank and creditor bank, where the creditor bank may establish the terms and conditions of Directors ofthe merger provided such terms and conditions are approved by the FMC; (ii) used to complete a bank submits a reorganization plan to its creditors and such arrangement is approved, all subordinated debt issuedcapital increase agreed by the bank, whether or not matured, willprovided that the shares are issued by a third party; and (iii) to subscribe and pay a capital increase. The shares acquired by the creditor bank must be convertedsold within a period of 180 days, which can be extended by operation of law into common stock in the amount requiredFMC for the ratio of regulatory capital to risk-weighted assets to be not lower than 12.0%. If a bank fails to pay an obligation, it must notify the SBIF, which shall determine if the bank is solvent.further 180 days.

 

Dissolution and Liquidation of Banks

 

The SBIF may establish that a bank should be liquidated for the benefit of its depositors or other creditors when such bank does not have the necessary solvency to continue its operations. In such case, the SBIF must revoke a bank’s authorization to exist and order its mandatory liquidation, subject to agreement by the Central Bank. The SBIF must also revoke a bank’s authorization if the reorganization plan of such bank has been rejected twice. The resolution by the SBIF must state the reason for ordering the liquidation and must name a liquidator, unless the SBIF assumes this responsibility. When a liquidation is declared, all checking accounts and other demand deposits received in the ordinary course of business, are required to be paid by using existing funds of the bank, its deposits with the Central Bank or its investments in instruments that represent its reserves. If these funds are insufficient to

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pay these obligations, the liquidator may seize the rest of the bank’s 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 12, 2019, Law No. 21,130 was published in the Official Gazette of Chile. The law modernizes banking legislation including the General Banking Law by, among other things, transferring the supervisory powers of the SBIF to the FMC, updating the capital and risk management requirements applicable to banking companies in accordance with the Basela III standards, and introducing measures for the early regularization and intervention of banking companies that are at risk of insolvency.

With respect to measures for early regularization, Law No. 21,130 establishes an obligation on banks to inform the FMC if any of the regulatory non-compliance situations listed in Article 112 of the New General Banking Law arise or if it has detected any event indicative of financial instability or deficient administration. Within five days of notifying the FMC, the bank must present a regularization plan approved by its board of directors containing concrete measures that shall remedy the relevant situation and ensure the bank’s normal performance. The bank must comply with the regularization plan within 6 months of the resolution approving it. During the implementation of the plan, the bank must also submit periodic reports on its progress to the FMC, and the FMC may require the implementation of additional measures and/or prohibitions it deems necessary for the plan’s success.

Article 161 of the New General Banking Law provides that directors, managers, administrators and attorneys-in-fact who, without written authorization from the FMC, agree to, perform or cause the execution of any of the acts prohibited under Article 116 of the New General Banking Law shall be sanctioned with ordinary imprisonment for a term within the medium to maximum range. If a bank fails to submit the regularization plan, the plan is rejected by the FMC, the bank fails to comply with any of the measures set out in the plan, the bank repeatedly breaches the plan’s terms or is subject to fines, or if any serious event occurs that raises concerns for the bank’s financial stability, the FMC may appoint a delegated inspector, who shall have powers to, among other things, suspend any agreement of the board of directors or act of the attorneys-in-fact of the institution, and/or a provisional administrator, who shall have all the ordinary faculties that the law and the by-laws provide for the board of directors, or whoever acts in its place, and for the general manager.

Other amendments incorporated by Law No. 21,130 include the elimination of creditors’ agreements as a mechanism for regularizing a bank’s financial situation, the incorporation of modifications to financial system capitalization and preventive capitalization, and the incorporation of further requirements for bank directors.

 

Obligations Denominated in Foreign Currencies

 

Santander-Chile must also comply with various regulatory and internal limits regarding exposure to movements in foreign exchange rates (See “Item 11. Quantitative and Qualitative Disclosures About Market Risk”).

 

Loans and Investments in Foreign Securities

 

Under current Chilean banking regulations, banks in Chile may grant loans to foreign individuals and entities and invest in certain securities of foreign issuers. Banks may grant commercial loans and foreign trade loans, and can buy loans granted by banks abroad. Banks in Chile may also invest in debt securities traded in formal secondary markets. Such debt securities must be (1) securities issued or guaranteed by foreign sovereign states or their central banks or other foreign or international financial entities, and (2) bonds issued by foreign companies. If the sum of investment in foreign securities and loans granted outside of Chile surpasses 70.0% of regulatory capital, the amount that exceeds 70.0% is subject to a mandatory reserve of 100.0%.

 

Table 1

 

Rating Agency

Short Term

Long Term

Moody’sP2Baa3
Standard and Poor’sA3BBB-
FitchF2BBB-
Dominion Bond Rating (DBRS)R-2BBB (low)

  


In the event that the sum of: (a) loans granted abroad that are not to subsidiaries of Chilean companies, and that have a rating of BB- or less and do not trade on a foreign stock exchange, and (b) the investments in foreign securities which have a rating that is below that indicated in Table 1 above, but is equal to or exceeds the ratings mentioned in the Table 2 below and exceeds 20.0% (and 30.0% for banks with a BIS ratio equal or exceeding 10% of the regulatory capital of such bank), the excess is subject to a mandatory reserve of 100.0%.

 

Table 2

 

Rating Agency

Short Term

Long Term

Moody’sP2Ba3
Standard and Poor’sA-2BB-
FitchF2BB-
Dominion Bond Rating (DBRS)R-2BB (low)

  

In addition, banks may invest in foreign securities whose ratings are equal or exceeds those mentioned in Table 3 below for an additional amount equal to 70% of their regulatory capital. This limit constitutes an additional margin and is not subject to the 100% mandatory reserve.

 

Additionally, a Chilean bank may invest in foreign securities whose rating is equal to or exceeds those mentioned in Table 3 below in: (i) demand deposits with foreign banks, including overnight deposits in a single entity; and (ii) securities issued or guaranteed by sovereign states or their central banks or securities issued or guaranteed by foreign entities within the Chilean State, though investment will be subject to the limits by issuer up to 30.0% and 50.0%, respectively, of the regulatory capital of the Chilean bank that makes the investment. If these foreign securities do not have a rating, the individual limit will be 10.0% of regulatory capital.

 

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Table 3

 

Rating Agency

Short Term

Long Term

Moody’sP1Aa3
Standard and Poor’sA1+AA-
FitchF1+AA-
DBRSR-1 (high)AA (low)AA(low)

  

Moreover, the sum of all demand deposits with foreign banks, including overnight deposits to related parties, as defined by the Central Bank and the SBIF,FMC cannot surpass 25.0% of a bank’s regulatory capital. This limit excludes foreign branches of Chilean banks or their subsidiaries, but must include amounts deposited by these entities in related parties abroad.

 

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 be complementary to the bank’s business if such companies were incorporated in Chile.

 

“Mortgage Bonds”United States Supervision and Regulation

 

In 2012, the mortgage-covered bond legislation was approvedFinancial Regulatory Reform

Banking statutes and regulations are continually under review by the ChileanUnited States Congress. These bonds, knownIn addition to laws and regulations, the U.S. bank regulatory agencies may issue policy statements, interpretive letters and similar written guidance. Many changes have occurred as “mortgage bonds,”a result of the 2010 Dodd-Frank Act and its implementing regulations, most of which are debt backed bynow in place. More recently, the companyPresident of the United States issued an executive order in 2017 that sells them,sets forth principles for financial regulatory and legislative reform. In May 2018 the United States Congress passed, and President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”), which exempts bank holding companies with less than $100 billion in total consolidated assets from certain enhanced prudential standards, and may exempt bank holding companies with between $100 billion and $250 billion in total consolidated assets from certain enhanced prudential standards in 2019 at the Federal Reserve’s discretion. EGRRCPA made clear that the Federal Reserve retained the right to apply enhanced prudential standards to FBOs with greater than $100 billion in global total consolidated assets, such as well as by a poolSantander Spain, but the Federal Reserve has not yet proposed regulations to implement EGRRCPA for FBOs. While the final form of mortgagesregulations implementing EGRRCPA for FBOs is unclear, it is possible that EGRRCPA and its implementing regulations will leave in the event of insolvency the pool of mortgages are auctioned with the corresponding mortgage bond. Unlike covered bonds, they are not be limitedplace most enhanced prudential standards applicable to banks. These bonds, if bought by banks, are available for immediate liquidity in the Central Bank liquidity windowSantander Spain, and will have other restrictions as to the type of mortgage they will be funding,i.e. mortgage loans with loan-to-values of maximum 80.0%.little direct impact on Santander-Chile.

 


U.S. Banking Regulation—Volcker Rule

 

Section 13 of the U.S. Bank Holding Company Act of 1956, as amended, and its implementing rules (collectively, the “Volcker Rule”) prohibit “banking entities” from engaging in certain forms of proprietary trading or from sponsoring or investing in or entering into certain credit-related transactions with related “covered funds,” in each case subject to certain limited exceptions.The term “covered fund” is defined very broadly to include traditional hedge funds, private equity funds, certain securitization vehicles and other entities that must rely on Section 3(c)(1) or 3(c)(7) of the U.S. Investment Company Act of 1940 for an exemption under that Act, as well as certain similar foreign funds. The Volcker Rule also limits the ability of banking entities and their affiliates to enter into certain transactions with covered funds with which they or their affiliates have certain relationships. Banking entities such as Santander-Chile and Santander Spain were required to bring their activities and investments into compliance with the requirements of the Volcker Rule by the end of the conformance period applicable to each requirement. Santander Spain has assessed how the Volcker Rule affects its businesses and subsidiaries, including Santander-Chile, and has brought its activities into compliance. The Group has adopted processes to establish, maintain, enforce, review and test the compliance program designed to achieve and maintain compliance with the Volcker Rule. The Volcker Rule contains exclusions and certain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations, as well as certain foreign government obligations, and trading solely outside the United States, and also permitpermits certain ownership interests in certain types of funds to be retained. Banking entities such as Santander Spain must bring their activities and investments worldwide into compliance with the requirements of the Volcker Rule by the end of the conformance period applicable to each requirement.

In general, all banking entities were required to conform to the requirements of the Volcker Rule, except for provisions related to certain funds, and to implement a compliance program by July 21, 2015. In December 2014, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) issued an order extending the Volcker Rule’s general conformance period until July 21, 2016 for investments in and relationships with covered funds and certain foreign funds that were in place on or prior to December 31, 2013 (“legacy covered funds”). In July 2016, the Federal Reserve Board granted a final one-year extension of the general conformance period to July 21, 2017 for banking entities to conform ownership interests in and relationships with legacy covered funds. Santander Spain has assessed how the Volcker Rule affects the businesses of Santander Group and Santander Group, including Santander-Chile, generally has brought its activities into compliance, with the exception of certain legacy covered funds activities. Santander Group, including Santander-Chile, has further adopted the necessary measures to bring these legacy covered funds activities into compliance prior to July 21, 2017. Santander Group’sSpain’s non-U.S. banking organizations, such asorganization subsidiaries, including Santander-Chile, are largely able to continue their activities outside the United States in reliance on the “solely outside the U.S.” exemptions underfrom the Volcker Rule. Santander Group, including Santander-Chile, will monitorThose exemptions generally exempt proprietary trading, and sponsoring or investing in covered funds if, among other restrictions, the financial regulatory reform developments inessential actions take place outside the United States includingand any transactions are not with respectU.S. persons.

On July 21, 2017 the five regulatory agencies charged with implementing the Volcker Rule announced the coordination of reviews of the treatment of certain foreign funds that are investment funds organized and offered outside of the United States and that are excluded from the definition of covered fund under the agencies’ implementing regulations. Also in July 2017, the Federal Reserve issued guidelines for banking entities seeking an extension to conform certain “seeding” investments in covered funds to the requirements of the Volcker Rule.

In May 2018, the five regulatory agencies charged with implementing the Volcker Rule released proposed amendments to the current Volcker Rule regulations. The proposal would tailor the Volcker Rule’s compliance requirements to the amount of a firm’s trading activity, revise the definition of a trading account, clarify certain key provisions in the Volcker Rule, and make appropriate adjustments, if necessary,simplify the information that covered entities are required to ensure continuedprovide to regulatory complianceagencies. If adopted, the proposed changes regarding the definition of trading account would likely expand the scope of investing and trading activities subject to the Volcker Rule’s restrictions, although Santander-Chile would still largely rely on the “solely outside the U.S. exemption” to conduct its operations.

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Tabletrading activities. Santander Spain will continue to monitor Volcker Rule-related developments and assess their impact on its operations, including those of Contents
Santander-Chile, as necessary.

 

U.S. Anti-Money Laundering, Anti-Terrorist Financing, and Foreign Corrupt Practices Act Regulations

 

The Bank,Santander-Chile, as a foreign private issuer whose securities are registered under the U.S. Securities Exchange Act of 1934, is subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”). The FCPA generally prohibits such issuers and their directors, officers, employees and agents from using any means or instrumentality of U.S. interstate commerce in furtherance of any offer or payment of money to any foreign official or political party for the purpose of influencing a decision of such person in order to obtain or retain business. It also requires that the issuer maintain books and records and a system of internal accounting controls sufficient to provide reasonable assurance that accountability of assets is maintained and accurate financial statements can be prepared. Penalties, fines and imprisonment of the Bank’sSantander-Chile’s officers and/or directors can be imposed for violations of the FCPA.

 

Furthermore, the BankSantander-Chile is subject to a variety of U.S. anti-money laundering and anti-terrorist financing laws and regulations, such as the Bank Secrecy Act of 1970, as amended, and the USA PATRIOT ACTAct of 2001, as amended, and a violation of such laws and regulations may result in substantial penalties, fines and imprisonment of the Bank’sSantander-Chile’s officers and/or directors.

 


Disclosure pursuant to Section 219 of the Iran Threat Reductionthreat reduction and Syria Human Rights Act

Santander-Chile has no exposure to Iran or Syria. As we are part of Grupo Santander, we must disclose the exposure of other entities of the Group to Iran and Syria.human rights act

 

Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law.

 

As we are part of the Santander Group, we must also disclose the exposure of other entities of the Santander Group to Iran. The following activities are disclosed in response to Section 13(r) with respect to affiliates of Santander U.K. within the Group.Group and its affiliates. During the period covered by this annual report:

 

(a)        Santander U.K.UK holds two savings accounts and one current account for two customers. Both of the customers, who are resident in the U.K. whoUK, are currently designated by the U.S.US under the Specially Designated Global Terrorist (SDGT)(“SDGT”) sanctions program. Revenues and profits generated by Santander U.K.UK on these accounts in the year ended December 31, 20162018 were negligible relative to the overall revenues and profits of Banco Santander S.A.SA.

 

(b)        During the period covered by this annual report, Santander U.K.UK held aone savings account with a balance of £1.24, and one current account with a balance of £1,884.53 for aanother customer resident in the U.K.UK who is currently designated by the U.S.US under the SDGT sanctions program. The savings account wascustomer relationship pre-dates the designations of the customer under these sanctions. The United Nations and European Union removed this customer from their equivalent sanctions lists in 2008. Santander UK determined to put a block on these accounts and the accounts were subsequently closed on July 26, 2016. RevenueJanuary 14, 2019. Revenues and profits generated by Santander U.K.UK on this accountthese accounts in the year ended December 31, 2016 was2018 were negligible relative to the overall revenuesprofits of Banco Santander S.A.SA.

 

(c)        Santander U.K. held a current account for a customer resident in the U.K. who is currently designated by the U.S. under the SDGT sanctions program. The current account was closed on December 22, 2016. Revenue generated by Santander U.K. on this account in the year ended December 31, 2016 was negligible relative to the overall revenues of Banco Santander S.A.

(d)       Santander U.K.UK holds two frozen current accounts for two U.K.UK nationals who are designated by the U.S.US under the SDGT sanctions program. The accounts held by each customer have been frozen since their designation and have remained frozen through the year ended December 31, 2016.2018. The accounts are in arrears (£1,844.73 in debit combined) and are currently being managed by Santander U.K.UK Collections & Recoveries department. Revenues andNo revenues or profits were generated by Santander U.K.UK on these accounts in the year ended December 31, 2016 were negligible relative to the overall revenues and profits of Banco Santander S.A.2018.

 

(e)       In addition, during the year ended December 31, 2016, Santander U.K. had an OFAC match on a power of attorney account. The power of attorney listed on the account is currently designated by the U.S. under the SDGT and the Iranian Financial Sanctions Regulations (IFSR) sanctions program. The power of attorney was removed from the account on July 29, 2016. During the year ended December 31, 2016, revenues and profits generated by Santander U.K. were negligible relative to the overall revenues and profits of Banco Santander S.A.

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(f)       An Iranian national, resident in the U.K., who is currently designated by the U.S. under the Iranian Financial Sanctions Regulations and the Non-Proliferation of Weapons of Mass Destruction (NPWMD) designation, held a mortgage with Santander U.K. that was issued prior to such designation. The mortgage account was redeemed and closed on April 13, 2016. No further drawdown has been made (or would be allowed) under this mortgage although we continued to receive repayment instalments prior to redemption. Revenues generated by Santander U.K. on this account in the year ended December 31, 2016 were negligible relative to the overall revenues of Banco Santander S.A. The same Iranian national also held two investment accounts with Santander ISA Managers Limited. The funds within both accounts were invested in the same portfolio fund. The accounts remained frozen until the investments were closed on May 12, 2016 and bank checks issued to the customer. Revenues generated by Santander U.K. on these accounts in the year ended December 31, 2016 were negligible relative to the overall revenues of Banco Santander S.A.

(g)       In addition, during the year ended December 31, 2016, Santander U.K. held a basic current account for an Iranian national, resident in U.K., previously designated under the OFAC Iran designation. The account was closed in September 2016. Revenues generated by Santander U.K. on this account in the year ended December 31, 2016 were negligible relative to the overall revenues of Banco Santander S.A.

In addition, the Group has an outstanding legacy export credit facility with Bank Mellat. In 2005 Banco Santander S.A. participated in a syndicated credit facility for Bank Mellat of €15.5 million, which matured on July 6, 2015. As of December 31, 2016, the Group was owed €0.1 million not paid at maturity under this credit facility, corresponding to the 5% that was not covered by official export credit agencies.

Banco Santander has not been receiving payments from Bank Mellat under this or other credit facilities in recent years. Banco Santander has been and expects to continue to be repaid any amounts due by official export credit agencies. No funds have been extended by Santander under this facility since it was granted.

(d)       The Group also has certain legacy performance guarantees for the benefit of Bank Sepah and Bank Mellat (stand-by letters of credit to guarantee the obligations – either under tender documents or under contracting agreements – of contractors who participated in public bids in Iran) that were in place prior to April 27, 2007.

 

In the aggregate, all of the transactions described above resulted in gross revenues and net profits in the year ended December 31, 2016,2018, which were negligible relative to the overall revenues and profits of Banco Santander, S.A. The Group has undertaken significant steps to withdraw from the Iranian market such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit taking from Iranian entities and issuing export letters of credit, except for the legacy transactions described above. The Group is not contractually permitted to cancel these arrangements without either (i) paying the guaranteed amount (in the case of the performance guarantees), or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). As such, theTherefore, Santander Group intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws.

 

C.Organizational Structure

C. Organizational Structure

 

Santander Spain controls Santander-Chile through its holdings in Teatinos Siglo XXI Inversiones S.A. and Santander Chile Holding S.A. which are controlled subsidiaries. Santander Spain control over 67.18% of our shares and actual participation when excluding non-controlling interests participating in Santander Chile Holding S.A. of 67.06%67.12%.

 


Shareholder Number of Shares  Percentage 
Santander Chile Holding S.A.  66,822,519,695   35.46 
Teatinos Siglo XXI Inversiones S.A.  59,770,481,573   31.72 

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The chart below sets forth the names and areas of responsibility of our senior managers as of March 2017.

 15, 2019.

 

 (graphic)

D.Property, Plant and Equipment

D. Property, Plant and Equipment

 

We are domiciled in Chile and own our principal executive offices located at Bandera 140, 20th floor, Santiago, Chile. At December 31, 2016,2018, we owned the locations at which 23.5%25.2% of our branches were located. The remaining branches operate at rented locations. We believe that our existing physical facilities are adequate for our needs.

 

Main properties as of December 31, 2016 2018

Number

Central Offices 
Owned4
Rented5
Total9
  
Branches(1) 
Owned984
Rented3195
Total4179
  
Other property(2)Branches 
Owned4996
Rented5284
Total54380
Other property(1)
Owned56
Rented5
Total61

 

 
(1)Some branches are located inside central office buildings and other properties. Including these branches, the total number of branches is 423. Special payment centers are included in Other property.

(2)Consists mainly of parking lots, mini-branches and property owned by our subsidiaries.

(1)       Consists mainly of parking lots, mini-branches and property owned by our subsidiaries.

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

None.

 


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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

Accounting Standards Applied in 20162018

 

Santander-Chile is a Chilean bank and maintains its financial books and records in Chilean pesos and prepares its consolidated financial statements in accordance with IFRS-IASBIFRS as issued by the IASB in order to comply with requirements of the SEC. As required by the General Banking Law, which subjects Chilean banks to the regulatory supervision of the SBIF,FMC, and which mandates that Chilean banks abide by the accounting standards stipulated by the SBIF,FMC, our locally-filed consolidated financial statements have been prepared in accordance with Chilean Bank GAAP as issued by the SBIF.FMC. The accounting principles issued by the SBIFFMC are substantially similar to IFRS but there are some exceptions, as described in Item 4. Therefore, our locally-filed consolidated financial statements have been adjusted according to IFRS as issued by the IASB.

 

Critical Accounting Policies

 

Our consolidated financial statements include various estimates and assumptions, including but not limited to the adequacy of the allowance for loan losses, estimates of the fair value of certain financial instruments and the selection of useful lives of certain assets.

 

We evaluate these estimates and assumptions on an ongoing basis. Management bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances. Actual results in future periods could differ from those estimates and assumptions, and if these differences were significant enough, our reported results of operations would be affected materially. We believe that the following are the most critical judgment areas or involve a higher degree of complexity in the application of the accounting policies that currently affect our financial condition and results of operations.

 

Adoption of IFRS 9 in 2018: Allowance for loan losses

Since January 2018, the Bank has replaced the “incurred loss” model in IAS 39 with the “expected credit loss (ECL)” model of IFRS 9. See “Note 2—Accounting Changes—IFRS 9 Adoption – Transition Disclosure” of our Audited Consolidated Financial Statements.

The new single impairment model applies to all financial assets measured at amortizedcost and fair value through other comprehensive income (“FVOCI”), including loan commitments and contingent loans. The Bank accounted the ECL related to financial assets measured at amortized cost and FVOCI as a loss allowance in the statement of financial position and the carrying amount of these assets is stated net of the loss allowance. The ECL related to contingent loans are accounted as a provision in the statement of financial position. For financial assets that are measured at fair value through other comprehensive income, the loss allowance is recognized in other comprehensive income and does not reduce the carrying amount of the financial asset in the statement of financial position. The new model uses a dual measurement approach, under which the loss allowance is measured as either: (a) 12-month expected credit losses or (b) lifetime expected credit losses

Based on changes in credit quality since initial recognition, IFRS 9 outlines a “three-stage” impairment model as illustrated by the following chart:

 Change in credit quality since initial recognition 
Stage 1Stage 2Stage 3
Initial recognitionSignificant increase in credit risk since initial recognitionCredit impaired assets
12-month expected credit lossesLifetime expected credit lossesLifetime expected credit losses

The Bank, at the end of each reporting period, evaluates whether a financial instrument’s credit risk has increased since initial recognition, and consequently classifies the financial instrument in the relevant stage:

●Stage 1: At initial recognition of a loan or when there has been an improved credit risk following a significant increase or impairment of assets, the Bank recognizes an allowance based on 12 months ECL.


●Stage 2: When a loan has shown a significant increase in credit risk since origination, the Bank records an allowance for the lifetime ECL. Stage 2 loans also include loans where the credit risk has improved following a Stage 3 classification.

●Stage 3: Loans considered credit-impaired. The Bank records an allowance for the lifetime ECL, setting the probability of default at 100%.

The Bank considers reasonable and verifiable information available without undue cost or effort to it that may affect the credit risk on a financial instrument, including forward-looking information to determine whether there is or has been a significant increase in credit risk since initial recognition of a loan. Forward-looking information includes past events that affect future performance, current conditions and forecasts of future economic conditions.

i.Expected credit loss measurement

The expected credit losses is the probability-weighted estimate of credit losses,i.e., the present value of all cash shortfalls. A cash shortfall is the difference between the cash flows that are due to an entity in accordance with the contract and the cash flows that the entity expects to receive. The three main components in measuring expected credit losses are:

●PD: The probability of default is an estimate of the likelihood of default over a given time period. A default may only happen at a certain time over the assessed period, if the facility has not been previously de-recognized and is still in the portfolio.

●LGD: The loss given default is an estimate of the loss arising after a specific default. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, including from the realization of any collateral.

●EAD: The exposure at default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, whether scheduled by contract or otherwise, expected drawdown on committed facilities and accrued interest from missed payments.

For measuring 12-month and lifetime expected credit losses, cash shortfalls are identified as follows:

●12-month expected credit losses: the portion of lifetime expected credit losses that represents the expected credit losses that result from default events on the financial instruments that are possible within the 12 months after the reporting date.

●Lifetime expected credit losses: the expected credit losses that result from all possible default events over the expected life of the financial instrument.

Forward-looking information

The ECL model includes a broad range of forward-looking information as economic inputs, such as:

●GDP growth;

●Unemployment rates;

●Central Bank interest rates; and

●Real estate prices.

ii.Interbank loans

According to the new balance presentation required under IFRS 9, the Bank has grouped interbank loans with loans and accounts receivable since both are measured at amortized cost and are evaluated together for impairment purposes.

iii.Contingent loans

The Bank enters into various irrevocable loan commitments and contingent liabilities. Even though these obligations may not be recognized on the statement of financial position, they contain credit risk and, therefore, form part of the overall risk of the Bank. When the Bank estimates the ECLfor contingent loan commitments and letters of credit, it estimates the expected portion of the loan commitment that will be drawn down over its expected life.


iv.Loans and account receivable measured at fair value through other comprehensive income

When the Bank enters into arrangements with its major customers for project finance and syndicated loans, the amount requested sometimes exceeds the Bank’s limit for single client exposure under credit risk policy, so these operations are approved under the condition that a portion of the loans be sold in the near term. The Bank also has loans that it expects to sell if market conditions are favorable to the Bank. These loans are measured at fair value through other comprehensive income, and are subject to impairment requirements.

The following table reconciles the prior period’s closing impairment allowance measured in accordance with the IAS 39 incurred loss model to the new impairment model under IFRS 9.

  Loans loss
allowance under
IAS 39		  Reclassification  Remeasurement  

Loans loss allowance 

under IFRS 9 

 
  MCh$  MCh$  MCh$  MCh$ 
Loans and receivable (IAS 39)/ Financial assets at amortised cost (IFRS 9) 
Interbank loans  472   (472)  —  — 
Loans and account receivable from customers  790,685   84   97,322   888,091 
Total loans and account receivable at amortised cost  791,157   (388)  97,322   888,091 
Available for sale investment (IAS39)/Financial assets at FVOCI (IFRS 9) 
Loans and account receivable from customer – at FVOCI  —   388   (291)  97 
Total financial assets at FVOCI  —   388   (291)  97
Other credit- related commitments                
Contingent liabilities  8,404   —   (3,767)  4,637 
Loan commitments  —   —   19,124   19,124 
Total contingents  8,404   —   15,357   23,761 
Total provision for loan losses  799,561   —   112,388   911,949 

Allowance for loan losses prior to 2018

 

The Bank records its allowances following its internal models for the recording of incurred debt.losses. These models have been approved by the Board. To establish impairment losses, the Bank carries out an evaluation of outstanding loans and accounts receivable from customers, as detailed below:

 

·●Individual assessment of debtors: when debtors are recorded as individually significant,i.e., when they have significant debt levels or, even for those that do not have these levels, could be classified in a group of financial assets with similar credit risk features and who, due to the size, complexity or level of exposure, require detailed information. See “Item 5. Operating and Financial Review and Prospects—C. Selected Statistical Information—Classification of Loan Portfolio—Classification of Loan Portfolio—Credit Approval: Loans approved on an individual basis” and “Note 1—Summary of Significant Accounting Policies—(p) Provisions for loan losses” of our Audited Consolidated Financial Statements.

 

·●Group assessment of debtors: when there is no evidence of impairment for individually-assessed debtors and debtors with loans grouped collectively—whether or not significant—the Bank groups debtors with similar credit risk credit features and assesses them for impairment. Debtors individually assessed for impairment and for whom a loss due to impairment has been recorded, are not included in the group assessment of impairment. See “Item 5. Operating and Financial Review and Prospects—C. Selected Statistical Information—Classification of Loan Portfolio—Classification of Loan Portfolio—Credit Approval: Loans approved on a group basis” and “Note 1—Summary of Significant Accounting Policies—(p) Provisions for loan losses” of our Audited Consolidated Financial Statements.

 


Valuation of financial instruments

 

Fair value 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 market participants at the measurement date. IFRS 13 provides a hierarchy that separates the inputs and/or valuation technique assumptions used to measure the fair value of financial instruments. The hierarchy reflects the significance of the inputs used in making the measurement.

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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.

 

For financial instruments with no available market prices, fair values are estimated using recent transactions in analogous instruments, and in the absence thereof, the present values or other valuation techniques based on mathematical valuation models sufficiently accepted by the international financial community. In the use of these models, consideration is given to the specific particularities of the asset or liability to be valued, and especially to the different kinds of risks associated with the asset or liability.

 

These techniques are significantly influenced by the assumptions used, including the discount rate, the estimates of future cash flows and prepayment expectations. See “Note 36— 38—Fair valueValue of financial assetsFinancial Assets and liabilities”Liabilities” in our Audited Consolidated Financial StatementsStatements.

 

Derivative activities

 

Derivatives are measured at fair value on the statement of financial position and the net unrealized gain (loss) on derivatives is classified as a separate line item within the income statement. Under IFRS, banks must mark-to-market derivatives. A derivative financial instrument held for trading purposes must be marked to market and the unrealized gain or loss must be recognized in the income statement. Within the fair value of derivatives are included Credit Valuation Adjustment (CVA)(“CVA”) and Debit Valuation Adjustment (DVA)(“DVA”), all with the objective that the fair value of each instrument includes the credit risk of its counterparty and Bank’s own risk. The CVA is a valuation adjustment to OTC derivatives as a result of the risk associated with the credit exposure assumed by each counterparty in each future period. The DVA is a valuation adjustment similar to the CVA but, in this case, it arises as a result of the Bank’s own risk assumed by its counterparties. The following inputs are used to calculate the CVA and DVA:

 

·●Expected exposure: Including for each transaction the mark-to-market (MtM) value plus an add-on for the potential future exposure for each period. Mitigating factors such as collateral and netting agreements are taken into account, as well as a temporary impairment factor for derivatives with interim payments.

 

·●LGD: percentage of final loss assumed in a counterparty credit event/default.

 

·●Probability of default: for cases where there is no market information, proxies based on comparable companies in the same industry and with the same external rating as the counterparty, are used.

 

·●Discount factor curve.

 

Impairment of available-for-sale financial assets prior to 2018

 

Available for sale financial assets are evaluated for impairment throughout the year and at each reporting date in order to assess whether events or changes in circumstances indicate that these assets are impaired, such as an adverse change in business climate or observable market data, indicate that these assets may be impaired. If there is objective evidence of an impairment of an asset, an impairment test is performed by comparing the investments’ recoverable amount, which is the higher of its value in use and fair value less costs to sell, with its carrying amount.

 

The Bank evaluates available-for-saleavailable for sale financial assets with unrealized losses as of the end of each period and concludes if these were impaired. This review consistconsists of evaluating the economic reasons for any declines, the credit ratings of the securities’ issuers, and the Bank’s intention and ability to hold the securities until the unrealized loss is recovered. See “Note 10— Available for sale investments”12— Debt Instruments at Fair Value through Other Comprehensive Income” in our Audited Consolidated Financial Statements.

 


Deferred tax assets and liabilities

 

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

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tax legislation or tax rates are recorded in deferred taxes beginning on the date on which the law is enacted or substantially enacted. See “Note 14—16—Current and deferred taxes”Deferred Taxes” of our Audited Consolidated Financial Statements.

 

Provision forProvisions - contingent liabilities

 

Provisions for liabilities such asrelated to contingencies associated to pending signature of contracts, potential clients and other administrative claims, operational risk arise from financial transactions, and potential property tax associated to leasing contracts and personnel salaries and expenses are quantified using the best available information on the consequencesof uncertain future events that are not wholly within control of the event giving rise to them andBank. These are reviewed and adjusted at the end of each year.reporting date. See “Note 20—22—Provisions and Contingent Provisions” of our Audited Consolidated Financial Statements.

 

A.Operating Results

Adoption of IFRS 16 Leases

IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. Lessor accounting however remains largely unchanged and the distinction between operating and finance leases is retained.

The Bank has established a team that has reviewed the Bank’s lease agreements in light of the new lease accounting guidelines in IFRS 16. The standard mainly affects the accounting of the Bank’s operating leases. To date, the Bank has non-cancellable operating lease commitments and short-term leases, which are recognized in the straight line as lease expenses in the results. For lease commitments that are within the scope of this standard, the Bank will recognize, as of January 1, 2019, right-of-use assets of approximately Ch$154,248 million and lease liabilities for the same amount, since the approach to the transition has been correctly defined simplified in which no corporate information is restated in its place, the cumulative effect of the application of the rule is given as an adjustment to the initial balance of the retained earnings for the years prior to the date of its initial application.

The Bank will adopt IFRS 16 as of January 1, 2019 and apply the simplified transition approach. Therefore, the Bank will not restate the comparative amounts for the year prior to adoption. The right-of-use assets for property leases are measured in the transition as the new rules would have always applied. All other assets for right-of-use are measured in the amount of the liability for the lease on adoption (adjusted for any lease expense paid in advance or accrued).

A. Operating Results

 

Chilean Economy

 

All of our operations and substantially all of our customers are located in Chile. Accordingly, our financial condition and results of operations are substantially dependent upon economic conditions prevailing in Chile. In 2016,2018, the Chilean economy grew approximately 1.6%4.0% compared to 2.1%1.5% in 20152017 and 1.9%1.3% in 2014.2016. In the same period, the Central Bank of Chile reported that internal demand increased 1.1%4.9% compared to an increase of 1.8%3.1% in 20152017 and a decreasean increase of 0.3%1.3% in 2014.2016. The growth of internal demand was led by growth of total consumption, which was up 2.8% while6.3% in investment as business activity increased in the year and a 3.8% growth in the mining sector contracted due to concerns regarding global economic growth, especially growth in China.private consumption.

 

As of December 2016,2018, the unemployment rate was 6.1%7.0% compared to 5.8%6.4% in 20152017 and 6.0%6.1% in 2014.2016. The higher unemployment rate in 2018 was due to a large increase of person seeking to enter the workforce in light of enhanced domestic economic growth. The exchange rate appreciateddepreciated in 20162018 by 5.7%13.1% compared to a depreciation of 16.5% in 2015. As a result of thisan appreciation of the peso,7.8% in 2017. Greater economic activity throughout 2018 resulted in CPI inflation reachedreaching 2.6% in 2018 compared to 2.3% in 2017 and 2.7% in 2016 compared to 4.4% in 2015 and 4.7% in 2014.2016. Given the slower economic growth in 2016 and the lower inflation rate, the Central Bank decided to reduce thereduced its mandatory policy rate to 3.00%2.5% during 2017. In October 2018, the Central Bank increased this rate by 25bps to 2.75% with a further increase in the first quarterJanuary 2019 of 2017. Economic activity25bps to 3.00%. Domestic economic growth is expected to increase by approximately 2.0%3.5% in 2017, but with continued uncertainty regarding global growth, especially2019, driven by a further rise in growth in China, which impacts Chile’s mining sector,investment and internal political issues.a growing world economy.

 


The growth of the Chilean banking sector evolved in line with overall economic developments, with an increase in the volume of loans and deposits. Total loans as of December 31, 20162018 in the Chilean financial system were Ch$140,258,239163,068,919 million (U.S.$211234 billion), excluding loans held by subsidiaries of Chilean banks abroad, grew 5.7%11.5% in 2016.2018. Total customer deposits (defined as time deposits plus checking accounts), excluding loansdeposits held by subsidiaries of Chilean banks abroad grew 3.4%6.7% in 20162018 and totaled Ch$109,901,300121,742,101 million (U.S.$165174 billion) as of December 31, 2016.2018. The non-performing loan (defined as loans with an installment that is at least 90 days past-due) to total loans ratio remained stable at year end for both 20162018 and 2015.2017 at 1.9%.

 

Impact of inflation

 

Our assets and liabilities are denominated in Chilean pesos, Unidades de Fomento (UF) and foreign currencies. The Bank no longer recognizes inflation accounting and has eliminated price-level restatement in line with IFRS, but inflationInflation impacts our results of operations as some loan and deposit products are contracted in UF. The UF is revalued in monthly cycles. Each day in the period beginning on the tenth day of the current month through the ninth day of the succeeding month, the nominal peso value of the UF is indexed up (or down in the event of deflation) in order to reflect a proportionate amount of the change in the Chilean Consumer Price Index during the prior calendar month. One UF equaled Ch$27,565.79 at December 31, 2018, Ch$26,798.14 at December 31, 2017 and Ch$26,347.98 at December 31, 2016, Ch$25,629.09 at December 31, 2015 and Ch$24,627.10 at December 31, 2014.2016. High levels of inflation in Chile could adversely affect the Chilean economy and could have an adverse effect on our business, financial condition and results of operations. Negative inflation rates also negatively impact our results. Inflation measured as the annual variation of the UF was 2.9% in 2018, 1.7% in 2017 and 2.8% in 2016, 4.1% in 2015 and 5.7% in 2014.2016. There can be no assurance that Chilean inflation will not change significantly from the current level. Although we currently benefit from moderate levels of inflation, due to the current structure of our assets and liabilities (i.e., a significant portion of our loans are indexed to the inflation rate, but there are no correspondingsignificantly less features in deposits orand other funding sources that would increase the size of our funding base), there can be no assurance that our business, financial condition and result of operations in the future will not be adversely affected by changing levels of inflation. In summary:

 

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·●UF-denominated assets and liabilities. The effect of any changes in the nominal peso value of our UF-denominated interest earning assets and interest bearinginterest-bearing liabilities is reflected in our results of operations as an increase (or decrease, in the event of deflation) in interest income and expense, respectively. Our net interest income will be positively affected by an inflationary environment to the extent that our average UF-denominated interest earning assets exceed our average UF-denominated interest bearinginterest-bearing liabilities. Our net interest income will be positively affected by deflation in any period in which our average UF-denominated interest bearinginterest-bearing liabilities exceed our average UF-denominated interest earning assets. Our net interest income will be negatively affected in a deflationary environment if our average UF-denominated interest earning assets exceed our average UF-denominated interest bearinginterest-bearing liabilities.

 

·●Inflation and interest rate hedge. A key component of our asset and liability policy is the management of interest rate risk. The Bank’s assets generally have a longer maturity than our liabilities. As the Bank’s mortgage portfolio grows, the maturity gap tends to rise as these loans, which are contracted in UF, have a longer maturity than the average maturity of our funding base. As most of our long term financial instruments and mortgage loans are contracted in UF and most of our deposits are in nominal pesos, the rise in mortgage lending increases the Bank’s exposure to inflation and to interest rate risk. The size of this gap is limited by internal and regulatory guidelines in order to avoid excessive potential losses due to strong shifts in interest rates. In order to keep this duration gap below regulatory limits, the Bank issues long term bonds denominated in UF or interest rate swaps. The financial cost of the bonds and the efficient part of these hedges is recorded as net interest income. In 2016,2017, the loss from the swaps taken in order to hedge mainly for inflation and interest rate risk and included in net interest income totaled Ch$18,799 million compared to a gain of Ch$15,408 million in 2017 and a loss of Ch$42,420 million compared to a loss of Ch$107,867 million in 2015 and of Ch$130,254 million in 2014.2016. The average gap between our interest earnings assets and total liabilities linked to the inflation, including hedging, was Ch$4,534,6654,537,476 million in 2016,2018, Ch$3,507,2504,340,626 million in 20152017 and Ch$4,193,7014,659,534 million in 2014.2016. Therefore, our sensitivity to a 100 basis point shift in UF inflation considering our year end gap would be approximately Ch$45 billion.

 


·●The financial impact of the gap between our interest earning assets and liabilities denominated in UFs including hedges was Ch$126,260 million in the results of the Bank2018, Ch$73,050 million in 2017 and Ch$133,702 million in 2016, Ch$130,666 million in 2015 and Ch$229,946 million in 2014.2016. The 2.3% rise72.8% increase in the results from our UF gap was due to thea higher gap in 2016 compared to 2015, which was partially offset by the lower UF inflation rate in 20162018 compared to 2015.2017, which was managed by a higher UF gap.

 

  As of December 31, % Change % Change
Impact of inflation on net interest income  
  2016   2015   2014   2016 /2015  2015 /2014
   (in millions of Ch$)
Results from UF GAP (1)  133,702   130,666   229,946   2.3%  (43.2%)
Annual  UF inflation  2.8%  4.1%  5.7%        

           
  As of December 31,   % Change   % Change 
Impact of inflation on net interest income  2018   2017   2016   2018/2017  2017/2016
   (in millions of Ch$) 
Results from UF GAP (1)  126,260   73,050   133,702   72.8%  (45.4%)
Annual  UF inflation  2.9%  1.7%  2.8%        

  

 

(1)UF GAP is net interest income from asset and liabilities denominated in UFs and include the results from hedging the size of this gap via interest rate swaps.

 

·●Peso-denominated assets and liabilities. Interest rates prevailing in Chile during any period primarily reflect the inflation rate during the period and the expectations of future inflation. The sensitivity of our peso-denominated interest earning assets and interest bearinginterest-bearing liabilities to changes to such prevailing rates varies. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Interest Rates.” We maintain a substantial amount of non-interest bearingnon-interest-bearing peso-denominated demand deposits. Because such deposits are not sensitive to inflation, any decline in the rate of inflation would adversely affect our net interest margin on inflation indexed assets funded with such deposits, and any increase in the rate of inflation would increase the net interest margin on such assets. The ratio of the average of such demand deposits and average shareholder’s equity to average interest-earning assets was 29.0%30.6%, 29.9%29.8%, and 30.2%29.0% for the years ended December 31, 2016, 2015,2018, 2017, and 2014,2016, respectively.

 

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Interest Rates

 

Interest rates earned and paid on our assets and liabilities reflect, to a certain degree, inflation, expectations regarding inflation, changes in short term interest rates set by the Central Bank and movements in long term real rates. The Central Bank manages short term interest rates based on its objectives of balancing low inflation and economic growth. Because our liabilities are generally re-priced sooner than our assets, changes in the rate of inflation or short termshort-term rates in the economy are reflected in the rates of interest paid by us on our liabilities before such changes are reflected in the rates of interest earned by us on our assets. Therefore, when short term interest rates fall, our net interest margin is positively impacted, but when short term rates increase, our interest margin is negatively affected. At the same time, our net interest margin tends to be adversely affected in the short term by a decrease in inflation rates since generally our UF-denominated assets exceed our UF-denominated liabilities. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Impact of Inflation—Peso-denominated assets and liabilities.” An increase in long term rates has a positive effect on our net interest margin, because our interest earning assets generally have longer terms than our interest bearinginterest-bearing liabilities. In addition, because our peso-denominated liabilities have relatively short re-pricing periods, they are generally more responsive to changes in inflation or short termshort-term rates than our UF-denominated liabilities. As a result, during periods when or expected inflation exceeds the previous period’s inflation, customers often switch funds from UF-denominated deposits to peso-denominated deposits, which generally bear higher interest rates, thereby adversely affecting our net interest margin.

 

Foreign Exchange Fluctuations

 

The Chilean government’s economic policies and any future changes in the value of the Chilean peso against the U.S. dollar could adversely affect our financial condition and results of operations. The Chilean peso has been subject to significant devaluation in the past and may be subject to significant fluctuations in the future. The Central Bank exchange rate depreciated 13.1% in 2018 and appreciated 5.7%7.8% in 2016 and 16.5% in 2015.2017. See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates.” A significant portion of our assets and liabilities are denominated in foreign currencies, principally the U.S. dollar, and we historically have maintained and may continue to maintain material gaps between the balances of such assets and liabilities. Our current strategy is not to maintain a significant difference between the balances of our assets and liabilities in foreign currencies. In 2016, 20152018, 2017 and 2014,2016, the Bank, usually in its spot position, held more liabilities than assets in foreign currencies, mainly the U.S. dollar, as a result of an ample supply of U.S. dollar deposits from companies that receive export revenues, foreign correspondent bank loans and bonds issued abroad. This difference is usually hedged using forwards and cross-currency swaps. Including derivatives, the Bank seeks to run no foreign currency risk in its non-trading balance sheet. Because such assets and liabilities, as well as interest earned or paid on such assets and liabilities, and gains and losses realized upon the sale of such assets, are translated to Chilean pesos in preparing our financial statements, our reported income is affected by changes in the value of the Chilean peso relative to foreign currencies (principally the U.S. dollar). The translation gain or loss over assets and liabilities (excluding derivatives held for trading) isand derivatives accounted under hedge accounting standards are included as foreign exchange transactions in the income statement. The translation and mark-to-market of foreign currency derivatives held for trading is recognized as a gain or loss in the net results from mark-to-market and trading. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk—E. Market Risks—Foreign exchange fluctuations” for more detail on the Bank’s exposure to foreign currency.


The Bank also uses a sensitivity analysis with both internal limits and regulatory limits to seek to manage the potential loss in net interest income resulting from fluctuations of interest rates on U.S. dollar denominated assets and liabilities and a VaR model to limit foreign currency trading risk.

 

We also set an absolute limit on the size of Santander-Chile’s consolidated net foreign currency trading position. As of December 31, 2016,2018, the net difference between assets and liabilities in foreign currency was a net asset position of U.S.105.4U.S.$ 8.2 million. The average gap, be it a net asset or liability position in foreign currency, in 20162018 was U.S.$121.6 21.5 million. Both figures include derivatives used to hedge foreign currency risk. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Volume limits.” The limit on the size of the net foreign currency position is determined by the Asset and Liability Committee and is calculated and monitored by our Market Risk and Control Department.

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Segmentation criteria

 

The accounting policies used to determine the Bank’s income and expenses by reporting segment are the same as those described in the summary of accounting policies in “Note 1—Summary of Significant Accounting Policies” of the Bank’s Consolidated Financial Statements, and are customized to meet the needs of the Bank’s management. The Bank earns most of its income in the form of interest income, fee and commission income and income from financial operations.

 

To evaluate a segment’s financial performance and make decisions regarding the resources to be assigned to segments, the Chief Operating Decision Maker (CODM) bases his or her assessment on the segment'ssegment’s interest income, fee and commission income, and expenses. Due to changes aimed at improving relations with its customers, streamlining processes and saving costs, the Bank simplified its internal structure in 2015. For this reason, the disclosure has been simplified to reflect how the Bank is currently managed. The Bank’s reporting segments have three Chief Operating Decision Makers: (i) Director of Retail banking, (ii) the Director of the Middle-market segment and (iii) the Director of Global corporate banking,Corporate Investment Banking, each of which report to our Chief Executive Officer. All reporting segment information is presented following this structure.

Due to changes aimed at allocating customers to the segment best capable of servicing them and streamlining processes, the Bank modified its internal structure in 2015. This change in composition of the segments resulted in the following:

·commissions paid in “Net fee and commission income “were reassigned among segments to more appropriately reflect the distributions in accordance with the management of each segment;

·the effects of changes in foreign exchange rates of provisions were reallocated to the line item “Other” to more appropriately reflect the effects directly attributable to the respective segments; and

·the improvement of the allocation of interest costs at the time of placement of the loan.

 

Under IFRS 8, the Bank has aggregated operating segments with similar economic characteristics according to the aggregation criteria specified in the standard. A reporting segment consists of clients that are offered differentiated but, considering how their performance is measured, homogenous services based on IFRS 8 aggregation criteria, thus they form part of the same reporting segment. The clients included in each business segment are constantly revised and reclassified if a client no longer meets the criteria for the segment they are in and transferred to a different CODM. Therefore, variations of loan volumes and profit and loss items reflect business trends as well as client migration effects. Overall, this aggregation has no significant impact on the understanding of the nature and effects of the Bank’s business activities and the economic environment. The information relating to 2015 and 2014 has been prepared using the above-mentioned current criteria so that the figures presented are comparable.

 

The Bank’s reportable segments are (i) Retail banking, (ii) Middle-market, (iii) Global Corporate Investment Banking and (iv) Corporate Activities (“Other”).

See “Note 4—Reporting Segments” of our Audited Consolidated Financial Statements for more information.


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Results of Operations for the Years Ended December 31, 2016, 20152018, 2017 and 20142016

 

The following discussion is based upon and should be read in conjunction with the Audited Consolidated Financial Statements. The Audited Consolidated Financial Statements have been prepared in accordance with IFRS as issued by the IASB. The following table sets forth the principal components of our net income for the years ended December 31, 2016, 20152018, 2017 and 2014.2016.

                   
  2018  2018  2017  2016       
CONSOLIDATED INCOME STATEMENT DATA (U.S.$)(1)  (Ch$ million)  % Change
2018/2017		  % Change
2017/2016		 
IFRS:                  
Interest income and expense                        
Interest income  3,216,460   2,244,317   2,058,446   2,137,044   9.0%  (3.7%)
Interest expense  (1,189,448)  (829,949)  (731,755)  (855,678)  13.4%  (14.5%)
Net interest income  2,027,012   1,414,368   1,326,691   1,281,366   6.6%  3.5%
Fees and income from services                        
Fees and commission income  694,312   484,463   455,558   431,184   6.3%  5.7%
Fees and commission expense  (277,428)  (193,578)  (176,495)  (176,760)  9.7%  (0.1%)
Total net fees and commission income  416,884   290,885   279,063   254,424   4.2%  9.7%
Financial transactions, net                        
Net income (expense) from financial operations  76,207   53,174   2,796   (367,034)  1,801.8%  (100.8%)
Net foreign exchange gain  74,392   51,908   126,956   507,392   (59.1%)  (75.0%)
Financial transactions, net  150,599   105,082   129,752   140,358   (19.0%)  (7.6%)
Other operating income  33,148   23,129   62,016   6,427   (62.7%)  864.9%
Net operating profit before provision for loan losses  2,627,643   1,833,464   1,797,522   1,682,575   2.0%  6.8%
Provision for loan losses  (454,896)  (317,408)  (302,255)  (342,083)  5.0%  (11.6%)
Net operating profit  2,172,747   1,516,056   1,495,267   1,340,492   1.4%  11.5%
Operating expenses                        
Personnel salaries and expenses  (569,772)  (397,564)  (396,967)  (395,133)  0.2%  0.5%
Administrative expenses  (351,251)  (245,089)  (230,103)  (226,413)  6.5%  1.6%
Depreciation and amortization  (113,621)  (79,280)  (77,823)  (65,359)  1.9%  19.1%
Impairment of property, plant and equipment  (56)  (39)  (5,644)  (234)  (99.3%)  2312.0%
Other operating expenses  (46,351)  (32,342)  (68,413)  (68,902)  (52.7%)  (0.7%)
Total operating expenses  (1,081,051)  (754,314)  (778,950)  (756,041)  (3.2%)  3.0%
Net Operating income  1,091,696   761,742   716,317   584,451   6.3%  22.6%
Income from investments in associates and other companies  7,302   5,095   3,963   3,012   28.6%  31.6%
Income before tax  1,098,998   766,837   720,280   587,463   6.5%  22.6%
Income tax expense  (239,544)  (167,144)  (145,031)  (109,031)  15.2%  33.0%
Consolidated Net income for the year  859,455   599,693   575,249   478,432   4.2%  20.2%
Net income for the year attributable to:                        
Equity holders of the Bank  853,206   595,333   562,801   476,067   5.8%  18.2%
Non-controlling interests  6,249   4,360   12,448   2,365   (65.0%)  426.3%

 

  2016 2016 2015   2014  % Change % Change
CONSOLIDATED INCOME STATEMENT DATA (ThU.S.$)(1) (Ch$ million)  2016/2015  2015/2014
IFRS:          
Interest income and expense                        
Interest income  3,208,775   2,137,044   2,085,988   2,227,018   2.4%  (6.3%)
Interest expense  (1,284,802)  (855,678)  (830,782)  (909,914)  3.0%  (8.7%)
Net interest income  1,923,973   1,281,366   1,255,206   1,317,104   2.1%  (4.7%)
Fees and income from services                        
Fees and commission income  647,423   431,184   402,900   366,729   7.0%  9.9%
Fees and commission expense  (265,405)  (176,760)  (165,273)  (139,446)  7.0%  18.5%
Total net fees and commission income  382,018   254,424   237,627   227,283   7.1%  4.6%
Financial transactions, net                        
Net income (expense) from financial operations  (551,102)  (367,034)  (457,897)  (159,647)  (19.8%)  186.8%
Net foreign exchange gain (loss)  761,850   507,392   603,396   272,212   (15.9%)  121.7%
Financial transactions, net  210,748   140,358   145,499   112,565   (3.5%)  29.3%
Other operating income  9,650   6,427   6,439   6,545   (0.2%)  (1.6%)
Net operating profit before provision for loan losses  2,526,389   1,682,575   1,644,771   1,663,497   2.3%  (1.1%)
Provision for loan losses  (513,638)  (342,083)  (399,277)  (354,903)  (14.3%)  12.5%
Net operating profit  2,012,751   1,340,492   1,245,494   1,308,594   7.6%  (4.8%)
Operating expenses                        
Personnel salaries and expenses  (593,293)  (395,133)  (387,063)  (338,888)  2.1%  14.2%
Administrative expenses  (339,959)  (226,413)  (220,531)  (205,149)  2.7%  7.5%
Depreciation and amortization  (98,137)  (65,359)  (53,614)  (44,172)  21.9%  21.4%
Impairment of property, plant and equipment  (351)  (234)  (21)  (36,664)  1014.3%  (99.9%)
Other operating expenses  (103,456)  (68,902)  (58,729)  (58,946)  17.3%  (0.4%)
Total operating expenses  (1,135,197)  (756,041)  (719,958)  (683,819)  5.0%  5.3%
Net Operating income  877,554   584,451   525,536   624,775   11.2%  (15.9%)
Income from investments in associates and other companies  4,523   3,012   2,588   2,165   16.4%  19.5%
Income before tax  882,077   587,463   528,124   626,940   11.2%  (15.8%)
Income tax expense  (163,710)  (109,031)  (76,395)  (51,050)  42.7%  49.6%
Consolidated Net income for the year  718,366   478,432   451,729   575,890   5.9%  (21.6%)
Net income for the year attributable to:                        
Equity holders of the Bank  714,815   476,067   448,466   569,910   6.2%  (21.3%)
Non-controlling interests  3,551   2,365   3,263   5,980   (27.5%)  (45.4%)
                         

 

(1)Amounts stated in U.S. dollars at and for the year ended December 31, 20162018 have been translated from Chilean pesos at the exchange rate of Ch$666.00697.76 = U.S.$1.00 as of December 31, 2016.2018. See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates” for more information on exchange rate.

 

Results of operations for the years ended December 31, 20162018 and 20152017. Consolidated net income for the year ended December 31, 20162018, increased 5.9%4.2% to Ch$478,432599,693 million. Our return on annualized average equity was 16.8%18.4% in 20162018 compared to 16.0%19.2% in 2015.2017.

 

In 2016,2018,net operating profit before loan losses was Ch$1,682,5751,833,464 million, an increase of 2.3%2.0% compared to 2015.2017. Ournet interest income increased 2.1% to Ch$1,281,366 million6.6% in 20162018 compared to 2015. Our2017. This was mainly driven by loan growth, especially commercial and mortgage loans. Higher inflation led to higher returns on most mortgage loans and some commercial loans denominated in UF, but these returns were partially offset by a lower yielding loan mix and an increase in the cost of funding as a higher rate paid on UF denominated liabilities. Overall, our net interest margin decreased to 4.32%remained stable at 4.3% in 2016 from 4.40% in 2015. Net interest margins were negatively affected by the lower UF inflation rate in 20162018 compared to 2015.2017.


Net fees and commission income increased 7.1%4.2% to Ch$254,424290,885 million in the twelve-month period ended December 31, 20162018 compared to the same period in 2015.2017. Fees from retail banking increased 6.8% in 2018 compared to 2017. Total retail clients with a checking account increased 6.4% to 953,075. In 2016,2018, the Bank continued to experience positive client base and product usage growth. Thisgrowth that drove fee growth for various products. Fee growth for retail clients has been driven growthby the use of feescards, insurance brokerages, brokerage of asset management products and checking accounts driven by digital innovations, which led to an increase of retail digital clients of 6.2% in Global2018. Fees from the Corporate Banking that rose 64.6% in 2016 as the Bank won an important share of the investmentInvestment banking cash management and advisory services for the large

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projects being developed in Chile. The Middle-market segment increased fees by 8.1% and Retail banking increased 3.4%26.9% in 2016,2018 compared to 2017, mainly due to greater product usage.cash management services, financial advisory and investment banking fees.

 

Total financial transactions, net, which is the sum of net income from financial operations and foreign exchange gain (loss), totaled Ch$140,358105,082 million in the year ended December 31, 2016,2018, a decrease of 3.5%19.0% compared to the same period in 2015.2017. These results include the results of our Treasury Division’s trading business and financial transactions with customers, as well as the results of our non-client treasury operations, mainly the Financial Management Division. Client treasury services totaled Ch$95,188 million, an increase of 16.0% compared to 2017. The results from our client treasury business increased 7.1% in 2016 and totaled Ch$89,786 million. The results from Santander Global Connectproducts and market-making mainly include the results from the sale of derivatives, foreign exchange and fixed income instruments to our client base. In 2016,2018, the results from Santander Global Connectclient treasury products increased 2.3%20.9%. The highhigher market volatility and depreciation of the peso in the second half of 2018 led to a largerhigher demand for hedging from our Corporate and Middle-market clients, driving this income line.clients. The results from market-making with client services increased 19.8%1.9% in 2016,2018, mainly due to higheran improvement in business volumes withof tailor-made treasury services and cash management sold to specific corporate clients. These results may vary year-to-year as some large operations with corporate clients especiallymay not be repeated in our cash management services.subsequent years.

 

ResultsThe results from non-client treasury income decreased 79.3% to a gain of Ch$9,894 million in 20162018 compared to Ch$47,713 million in 2017. These results include the income from sale of loans, including charged-off loans, the results from CVA over our derivative portfolio and the results from our Financial Management Division. In 2018, income from the Bank’s Financial Management Division decreased 18.0% and totaledto Ch$50,572 million.12,441 million from Ch$45,018 million in 2017. This decrease was mainly due to lower results from liability management operations and lower realized gains onfrom the available-for-sale portfolio in 2016.sale of debt instruments at fair value through other comprehensive income.

 

Other operating income decreased by 62.7% in 2018 compared to 2017 and totaled a gain of Ch$6,42723,129 million mainly due to a decrease in the extraordinary income from the sale of repossessed assets by Bansa S.A, which amounted to Ch$2,122 million for 2018 as compared to Ch$20,663 million in 2017. Bansa is a company that is consolidated by the Bank due to control in accordance with IFRS 10. For the purposes of consolidation, this one-time income forms part of the net income attributable to non-controlling interest and has no impact on net income attributable to shareholders or shareholders’ equity. The decrease in other operating income this year ended December 31, 2016, a 0.2% decrease compared to 2015. The main reasons for this decrease was loweroffset by an increase in income received from assets received in lieu of payment, which decreased 32.3%.totaling a gain of Ch$7,106 million, and less reversal of provisions for non-credit contingencies compared to 2017.

 

For the year ended December 31, 2018Provisionsprovisions for loan losses net of recoveries totaled Ch$342,083317,408 million in 2016 and decreased 14.3% comparedaccordance with the adoption of IFRS 9. The changes in accounting policies resulting from the adoption of IFRS 9 were applied retrospectively adjusting the opening balance as of January 1, 2018, applying the transition exemption that allows the Bank not to restate comparative information for prior periods. Therefore, this figure is not entirely comparable to the amount of provisions recorded in 2015. Provisions for loan losses totaled Ch$409,159 million in 2016 compared to Ch$454,462 million in 2015 and decreased 10.0%. Improvements in asset quality and higher loan loss recoveries drove this decreaseprovisions recognized in 2017, which was calculated according to an incurred loss provision model under IAS 39. The bulk of provision expenses in 2018 were due to: (i) provisions for loan losses. Non-performing loans as a percentage of the loan portfolio decreased from 2.6% in 2015 to 2.1% in 2016 and the non-performing loans coverage ratio increased from 118.5% to 140.2%. This environment also led to a decrease in the loans charged-off during 2016 to Ch$11,222 million.

The provision expense for loan loss forindividually analyzed commercial loans, decreased fromwhich mainly corresponds to larger SMEs that are marked for legal action and classified in Stage 3 and (ii) provisions for expected credit losses for consumer loans, which totaled a charge of Ch$197,247186,938 million in 2015 to Ch$137,242 million in 2016. This wasfor the year ended December 31, 2018 mainly due to an improvement in asset quality in commercial loans. The non-performing loan ratio of commercial loans reached 2.3% in 2016 compared to 2.6% in 2015. This improvement in asset quality was due to two factors. First, the NPL ratio among small to middle-sized entities in retail banking decreased from 6.8% in 2015 to 5.8% in 2016. Second, there was an improvement in asset quality among loans evaluated on an individual basis, which resulted in a provision expense of Ch$17,819 million in 2016 compared to an expense of Ch$78,354 million in 2015. This was due to (i) a 2.6% decrease in loan volumes in global corporate banking, (ii) an unusually high provision expense in 2015 for specific corporate clients that were downgraded and (iii) an increase in 2016 in the number of clients that either improved their risk status or paid their loans.

Provisions for mortgage loans decreased by 38.7% from Ch$27,168 million in 2015 compared to Ch$16,646 million in 2016. During 2016, the Bank lowered its exposure to the lower end of the market and lowered the loan-to-value of residential mortgages at origination, which led to an improvement in mortgage loan asset quality and in April 2016 the mortgage loan allowance model was recalibrated resulting in a decrease in mortgage loan allowance of approximately Ch$3,500 million. The non-performing ratio for mortgage loans decreased from 2.1% in 2015 to 1.7% in 2016 and the impaired mortgage loans ratio also improved from 5.1% in 2015 to 4.6% in 2016.

The provision expenseprovisions for consumer loans increased 8.2% during 2016, primarily attributable to growth of 7.1% in the loan portfolio in 2016. During 2016, the Bank lowered its exposure to the lower end of the consumer market and restricted renegotiations for consumer clients presenting payment difficulties, which led to an increase in charge-offs in 2016 and improvements in consumer loan asset quality.Stage 3. This was partially offset by recoveries fromthe release of provisions for expected credit losses for mortgage loans, previously charged-off that increased fromwhich totaled Ch$35,56514,119 million in 2015 to Ch$41,072 million in 2016. The consumer non-performing loans ratio was 2.2% in 2016 compared to 2.7% in 2015 andfor the impaired consumer loan ratio decreased from 8.9% in 2015 to 6.5% in 2016.

Recoveries on loans previously charged-off increased 14.9% in 2016 compared to 2015.year ended December 31, 2018. This was due to higher recoveries from charged-off consumer and residential mortgage loansis mainly due to improved recovery efforts.

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targeting the higher income segments that tend to be less risky.

 

As a result of the factors mentioned above,net operating profit increased 7.6%1.4% in 20162018 compared to 20152017 and totaled Ch$1,340,4921,516,056 million.

 

Operating expenses increased 5.0%in the year ended December 31, 2018 decreased 3.2% compared to 2015.the corresponding period in 2017. The efficiency ratio was 41.1% in 2018, 43.3% in 2017 and 44.9% in 2016 compared to 43.8% in 2015. The increase in 2016 is explained by the digital transformation undertaken by the Bank that involves developing technology capabilities and branch formats in order to achieve greater efficiencies in the long term.2016.


The 2.1%0.2% increase in personnel salaries and expenses was mainly duebelow the CPI inflation of 2.6%, even though all salaries are indexed to inflation pursuant to the collective bargaining agreement. This was despite an increase in personnel compensationheadcount of 2.1% to a total of 11,305 employees. This decrease in expenses is mainly due to all salaries being indexed to inflation. During the year the Bank made changes to the management structure and the total headcount was reduced 3.1% to 11,354 employees in December 2016, in line with the Bank’s strategy of reducing mid-upper level management levels and the sales force.force in previous periods, which lowered variable compensation.

 

Administrative expenses increased 2.7%6.5% in the year ended December 31, 20162018 compared to the corresponding period in 2015,2017, mainly due to IT and communication expenses that increased from Ch$28,420 millionthe continued investment in 2015technology aimed to Ch$37,351 million in 2016 as part of technological innovation to maintain and developtransform the Bank’s digital platform. This also ledplatforms and the branch network. During 2018, we continued to an increase in impairment charges to Ch$234 million in 2016 compared to Ch$21 million in 2015, primarily due to impairments inreduce the ATM network.network, focusing on extending the network within our branches or places with increased security measures. As of December 31, 2018, we had a total of 380 branches and 910 ATMs.

 

Depreciation and amortization expense increased 21.9%1.9% in 20162018 compared to 20152017 and totaled Ch$65,35979,280 million. This expense is in line with the greatercontinued investments in software, hardware and other equipment made bythat the Bank has invested in as it modernizescontinues to modernize its branch network and systems. Impairment charges decreased to Ch$39 million in 2018 compared to Ch$5,644 million in 2017 mainly related to less impairment for obsolete fixed assets and technology that totaled Ch$5,290 million in 2017.

 

Other operating expenses were Ch$68,90232,342 million in 2016,2018, a 17.3% increase52.7% decrease compared to 2015.2017. This was mainly due to a one time severance pay of Ch$10,789 million in April 2016 aslower expenses related to life and general insurance policies for the Bank made changesBank. See “Note 35—Other Operating Income and Expenses” to the management structure in line with the strategy of reducing mid-upper management levels.our Audited Consolidated Financial Statements for more details.

 

Total income tax expense by the Bank in 20162018 totaled Ch$109,031167,144 million, a 42.7%15.2% increase compared to 2015. This rise was mainly due to the higher2017. The Bank paid an effective tax rate paid by the Bank, whichof 21.88% in 2016 reached 18.6%2018 compared to 14.5%20.1% in 2015.2017. The higher effective tax rate was mainly due to the higherfact that the statutory corporate tax rate in Chile, which increased from 22.5%25.5% in 20152017 to 24.0%27.0% in 2016. Also, the lower CPI inflation rate in 2016 compared to 2015 resulted in higher income tax expense since the Bank, for Chilean tax purposes, must re-measure its capital each year for the variation in CPI inflation.

Results of operations for the years ended December 31, 2015 and 2014. Consolidated net income for the year ended December 31, 2015 decreased 21.6% to Ch$451,729 million. Our return on annualized average equity was 16.0% in 2015 compared to 21.4% in 2014.

In 2015,net operating profit before loan losses was Ch$1,644,771 million, a decrease of 1.1% compared to 2014. Our net interest income decreased 4.7% to Ch$1,255,206 million in 2015 compared to 2014. Our net interest margin decreased to 4.40% in 2015 from 4.92% in 2014. Net interest margins were negatively affected by the lower UF inflation rate in 2015 compared to 2014.

Net fees and commission income increased 4.6% to Ch$237,627 million in the twelve-month period ended December 31, 2015 compared to the same period in 2014. In 2015, the Bank continued to experience positive client base and product usage growth. This has driven growth of fees in Retail banking that rose 8.8% in 2015 and the Middle-market segment in which fees increased 5.5% in the period being analyzed. This was partially offset by the 31.8% decrease in fees from Global corporate banking which were negatively affected by the slower economic growth environment that lowered investment banking revenue.

Total financial transactions, net, which is the sum of net income from financial operations and foreign exchange gain (loss), totaled Ch$145,499 million in the year ended December 31, 2015, an increase of 29.3% compared to the same period in 2014. These results include the results of our Treasury Division’s trading business and financial transactions with customers, as well as the results of our non-client treasury operations, mainly the Financial Management Division. The results from our Client treasury business were flat compared to 2014 and totaled Ch$83,845 million. The results from Santander Global Connect and market-making mainly include the results from the sale of derivatives, foreign exchange and fixed income instruments to our client base. In 2015, the results from Santander Global Connect increased 20.2%. The depreciation of the peso and higher market volatility led to a larger demand for hedging from our Corporate and Middle-market clients, driving this income line. The results from market-making with client services decreased 31.0% in 2014, mainly due to lower business volumes of tailor-made treasury services sold to specific corporate clients.

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Results from non-client treasury income in 2015 increased 114.6% and totaled Ch$61,654 million. This higher result was mainly due to larger realized gains from the available-for-sale portfolio. The results from our available-for-sale portfolio increased 241.1% in 2015 compared to 2014 and totaled Ch$23,655 million. This higher gain arose from the decline in long-term interest rates, especially in the first quarter of 2015.

Other operating income totaled a gain of Ch$6,439 million in the year ended December 31, 2015, a 1.6% decrease compared to 2014. The main reasons for this decrease was lower income received from assets received in lieu of payment which decreased 12.7%.

Provisions for loan losses, net of recoveries totaled Ch$399,277 million in 2015 and increased 12.5% compared to the amount of provisions recorded in 2014. Provision for loan losses totaled Ch$454,462 million in 2015 compared to Ch$403,069 million in 2014 and increased 12.8%.

Provisions established for the Bank’s consumer loans increased by 27.8% to Ch$230,811 million in 2015 compared to 2014. This rise was mainly due to the release of consumer provisions of Ch$26,563 million during the second half of 2014 as a result of a re-calibration of the allowances model for consumer loans. Excluding this effect in 2014, consumer loan loss provisions grew 11.4%. This rise was mainly due to: (i) consumer loan growth, which reached 5.9% year over year in 2015 compared to 2014, and (ii) greater charge-offs of consumer loans assessed on a group basis. In light of lower economic growth, the Bank restricted renegotiations of consumer loans for customers presenting payment difficulties and this resulted in higher charge-offs.

Provision expense in commercial lending decreased 3.1% in 2015 compared to 2014. During the second half of 2014, and as a response to the ongoing improvement of the allowances models for loans, the Bank updated its allowances model for commercial loans analyzed on a group basis. This resulted in the recognition of Ch$45,141 million in provisions for our commercial loan book in 2014. Excluding this impact, provisions for commercial loans grew 24.6% in the period being analyzed. This rise was mainly due to higher provisions in Global corporate banking as the Bank downgraded various corporate clients affected by the slower economic environment, but which have not yet entered non-performing status. On the other hand, improvements in asset quality of middle-market and SME customers in the retail banking segment led to an improvement in commercial NPLs and impaired loans. The total NPL ratio in commercial loans decreased from 3.0% in 2014 to 2.6% in 2015 mainly due to improvements in asset quality of the middle-market customers and SMEs in the retail banking segment. The impaired commercial loan ratio reached 7.1% in 2015 compared to 7.2% at year-end 2014 due to improvements in asset quality among SME clients in retail banking.

Provisions for mortgage loans increased 48.1% in 2015 compared to 2014. This rise was mainly due to: (i) mortgage loan growth, which increased 17.8% in the period being analyzed, and (ii) greater charge-offs of mortgage loans. In light of lower economic growth, the Bank has been restricting the renegotiations of mortgage loans for customers presenting payment difficulties and this resulted in higher charge-offs. This is also leading to higher recoveries, which in the case of mortgage loans, increased 27.7% in 2015 compared to 2014. The Bank also focused mortgage loan growth on higher income earners that in general are less risky. As a result of the change in the loan mix and the higher charge-offs, mortgage loan asset quality improved in 2015 compared to 2014. Mortgage loan asset quality improved in 2015 compared to 2014. The non-performing ratio for mortgage loans declined from 2.7% in 2014 to 2.1% in 2015. The impaired mortgage loans ratio also improved from 5.6% in 2014 to 5.1% in 2015.

Additionally, the lower economic growth in 2015 resulted in a rise in charge-off of loans analyzed on an individual basis that totaled Ch$12,955 million in 2015 and rose 19.8% compared to 2014.

Recoveries on loans previously charged-off increased 15.5% in 2015 compared to 2014 (see “Provision for loan losses” in the table above). This was due to higher recoveries of charged-off commercial and residential mortgage loans mainly due to improved recovery efforts, especially in the Middle-market segment. As the Bank has improved the asset quality in consumer lending, the growth rate of recoveries has also diminished.

As a result of the factors mentioned above,net operating profit decreased 4.8% in 2015 compared to 2014 and totaled Ch$1,245,494 million.

Operating expenses increased 5.3% compared to 2014. The efficiency ratio was 43.8% in 2015 compared to 41.1% in 2014. The 14.2% increase in personnel salaries and expenses was mainly due to an increase in personnel compensation, higher severance payments and greater costs related to benefits included in the Bank’s collective bargaining agreement. Severance payments increased 222.4% to Ch$34,051 million. The Bank in 2015 executed a

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program to eliminate high level management positions in order to mitigate cost growth which entailed greater severance payments. In March 2014, a new collective bargaining agreement was signed with the main unions, which became effective on October 1, 2014, and which will expire on December 31, 2018. This resulted in an increase in certain benefits related to the Bank’s health insurance fund and other benefits.

Administrative expenses increased 7.5% in the year ended December 31, 2015 compared to the corresponding period in 2014. The increase in administrative expenses was mainly due to the 14.3% increase in maintenance, repair of property, plant and equipment, which totaled Ch$20,002 million. In 2015, the Bank continued to refurbish branches, open new Santander Select branches, expand the number of Middle-market centers and close Santander Banefe branches and other payment centers.

Impairment charges totaled Ch$21 million in 2015 compared to Ch$36,664 million in 2014. In 2014, the Bank initiated a plan to transform its business and operating model with a better focus on the client. In 2014, the Bank evaluated a number of applications that were in use or in development and tested them for impairment. Following the testing, in accordance with IAS 36, the Bank has recognized an impairment of Ch$36,556 million in 2014 due to the abandonment of unnecessary systems.

Depreciation and amortization expense increased 21.4% in 2015 compared to 2014 and totaled Ch$53,614 million. This rise was mainly due to the increase in depreciation of equipment that reached Ch$18,417 million in 2015 compared to Ch$12,331 million in 2014. This is in line with the greater investments in hardware and other equipment as the Bank modernizes its branch network and systems.

Other operating expenses were Ch$58,729 million in 2015, a 0.4% decrease compared to 2014. In 2015, customer service expenses, which are related to our phone banking service, decreased 60.6% due to cost restructurings. Additionally in 2015, the Bank had less expenses related to adopting chip technology on cards. These lower other operating expenses were offset by greater provisions for assets received in lieu of payment.

Total income tax expense in 2015 totaled Ch$76,395 million a 49.6% increase compared to 2014. This rise was mainly due to the higher effective tax rate paid by the Bank, which in 2015 reached 14.5% compared to 8.1% in 2014. The higher effective tax rate was mainly due to the higher statutory corporate tax rate which increased from 21% in 2014 to 22.5% in 2015. In 2015, the Bank also recognized lower credits from deferred tax assets that totaled Ch$10,600 million in 2015 compared to Ch$39,262 million in 2014. Finally, the lower CPI inflation rate in 2015 compared to 2014 also resulted in higher income tax expense since the Bank, for Chilean tax purposes, must re-value its capital each year for the variation in CPI inflation.

 

Net interest income

 

  Year ended December 31, % Change
  2016 2015 2014 2016/2015 2015/2014
  (in millions of Ch$, except percentages)
Retail banking  931,105   873,026   833,139   6.7%  4.8%
Middle-market  244,960   229,812   200,675   6.6%  14.5%
Total commercial banking  1,176,065   1,102,838   1,033,814   6.6%  6.7%
Global corporate banking  95,105   85,553   71,992   11.2%  18.8%
Total reporting segments  1,271,170   1,188,391   1,105,806   7.0%  7.5%
Other (1)  10,196   66,815   211,298   (84.7%)  (68.4%)
Net interest income  1,281,366   1,255,206   1,317,104   2.1%  (4.7%)
Average interest-earning assets  29,671,311   28,523,005   26,759,696   4.0%  6.6%
Average non-interest-bearing demand deposits  5,753,622   5,719,889   5,386,272   0.6%  6.2%
Net interest margin (2)  4.32%  4.40%  4.92%        
Average shareholders’ equity and average non-interest-bearing demand deposits to total average interest-earning assets  29.0%  29.9%  30.2%        

                
   Year ended December 31,   % Change 
   2018   2017   2016   2018/2017  2017/2016
   (in millions of Ch$, except percentages) 
Retail banking  949,764   970,332   931,105   (2.1%)  4.2%
Middle-market  272,912   264,663   244,960   3.1%  8.0%
Total commercial banking  1,222,676   1,234,995   1,176,065   (1.0%)  5.0%
Corporate Investment banking  96,722   100,808   95,105   (4.1%)  6.0%
Total reporting segments  1,319,398   1,335,803   1,271,170   (1.2%)  5.1%
Other (1)  94,970   (9,112)  10,196   (1142.3%)  (189.4%)
Net interest income  1,414,368   1,326,691   1,281,366   6.6%  3.5%
Average interest-earning assets  32,760,203   30,595,059   29,671,311   7.1%  3.1%
Average non-interest-bearing demand deposits  6,763,546   6,117,644   5,753,622   10.6%  6.3%
Net interest margin (2)  4.32%  4.34%  4.32%        
Average shareholders’ equity and average non-interest-bearing demand deposits to total average interest-earning assets  30.6%  29.8%  29.0%        

 

 

(1)Consists mainly of net interest income from the Financial Management Division and the cost of funding our fixed income trading portfolio.financial assets held for trading. Each segment obtains funding from its clients. Any surplus deposits are transferred to the Financial Management Division, which in turn makes such excess available to other areas that need funding. The Financial Management Division also sells the funds it obtains in the institutional funding market at a transfer price equal to the market price of the funds. This segment also includes intra-segment income and activities not assigned to a given segment or product line.

 

(2)Net interest margin is net interest income divided by average interest-earning assets.

 

For the years ended December 31, 2018 and 2017 our net interest income totaled Ch$1,414,368 million in the year ended December 31, 2018, an increase of 6.6% from Ch$1,326,691 million in 2017 and average interest earning assets increased 7.1% in the same period. During 2018, the loan portfolio grew 9.0% with greater economic activity leading to more loan growth, but mainly in lower yielding commercial and mortgage loans. The nominal yield earned on peso-denominated consumer loans also declined due to a lower rate environment for most of 2018 and continued focus on growing among high income earners that obtain a lower yield, but who also have a lower risk profile. The average nominal interest rate for interest earning assets denominated in pesos decreased from 9.6% in 2017 to 8.6% in 2018. This lower yielding loan mix was compensated by higher UF inflation in 2018. The higher inflation rate in 2018 compared to 2017 caused our average nominal interest rate earned on interest earning assets indexed to the UF to increase from 5.4% in 2017 to 6.2% in 2018.


Average nominal interest rate earned on interest earning assets 2018 2017 2016
Ch$  8.6%  9.6%  9.9%
UF  6.2%  5.4%  6.6%
Foreign currencies  3.4%  2.7%  2.1%
Total  6.9%  6.7%  7.2%

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The average rate paid on our interest bearing liabilities increased to 3.6% in 2018 from 3.3% in 2017. This was mainly due to a higher rate paid on UF denominated liabilities as a result of Contentsthe higher UF inflation in the year, which increased to 5.4% in 2018 compared to 4.4% in 2017. The decrease in the average rate paid on peso denominated liabilities was due to deposit price discipline and the lower average short-term interest rate environment in 2018 compared to 2017.

Average nominal interest rate paid on interest bearing liabilities 2018 2017 2016
Ch$  3.3%  3.6%  4.7%
UF  5.4%  4.4%  5.6%
Foreign currencies  2.2%  1.5%  1.1%
Total  3.6%  3.3%  3.9%

Additionally, in 2018, average non-interest bearing demand deposits increased 10.6% and the ratio of these deposits plus average shareholders’ equity over interest earning assets improved 80 bps to 30.6%.

In summary, the higher inflation coupled with lower peso deposit costs and larger average balance of non-interest bearing demand deposits, offset the lower yielding asset mix, leading to a net interest margin that remained stable at 4.3% in 2018 compared to 2017.

Net interest income from our reporting segments totaled Ch$1,319,398 million and decreased 1.2% compared to 2017. This decrease was mainly due to a lower yield earned by each segment on their non-interest bearing demand deposits in line with lower average interest rates. The changes in net interest income by segment in 2018 as compared to 2017 were as follows:

●Net interest income from Retail banking decreased 2.1%, despite an 8.1% increase in loan volumes mainly as a result of the lower return earned on non-interest earning demand deposits and a lower average nominal interest rate on assets denominated in pesos that decreased from 9.6% in 2017 to 8.6% in 2018 due to the lower yielding loan mix.

●Net interest income from the Middle-market segment increased 3.1% in 2018 due to increasing loan volumes in this segment of 13.5%, which offset the lower yield on loans and the lower return on non-interest bearing demand deposits.

●Net interest income from the Corporate Investment Banking segment decreased 4.1% due to lower yield on loans and the lower return on non-interest bearing demand deposits assigned to this segment.

●Other net interest income consists mainly of net interest income from the Bank’s ALCO, which includes the net interest income from the Bank’s debt instruments recorded at fair value through other comprehensive income, deposits in the Central Bank, the financial cost of supporting our cash position and financial investments held for trading (the interest income from which is recognized as net income from financial operations and not interest income). The result of the Bank’s inflation gap is also included in this line. The net interest income included as “other” increased from a loss of Ch$9,112 million in 2017 to a gain of Ch$94,970 million. This was mainly due to higher inflation in 2018 as the Bank has more assets than liabilities linked to inflation. Other interest income also includes the cost of liquidity which is a net interest expense for the Bank, but which fell in 2018 due to lower short-term average interest rates.


The following table shows our balances of loans and accounts receivable from customers and interbank loans by segment at the dates indicated.

  At December 31,  % Change 
  

2018 (1) 

 2017  2016  2018/2017  2017/2016
  (in millions of Ch$, except percentages) 
Retail banking  20,786,637   19,233,169   18,604,936   8.1%  3.4%
Middle-market  7,690,380   6,775,734   6,396,376   13.5%  5.9%
Corporate Investment banking  1,613,088   1,633,796   2,121,513   (1.3%)  (23.0%)
Other (2)  123,309   83,215   83,606   48.2%  (0.5%)
Total loans  30,213,414   27,725,914   27,206,431   9.0%  1.9%

(1)For December 31, 2018, total loans corresponds to loans at amortized cost in accordance with IFRS 9. Prior periods are presented in accordance with IAS 39.

(2)Includes interbank loans.

As of January 1, 2018 the Bank adopted IFRS 9. The following table shows interest income of financial assets by valuation as of December 31, 2018.

At December 31,
2018
(in millions of Ch$)
Financial assets measured at amortized cost (1)2,122,253
Financial assets measured al FVOCI (2)100,213
Other interest21,851
Interest income not including income from hedge accounting2,243,123

(1) Financial assets measured at amortized cost include loans measured at amortized cost as described above and investments under resale agreements. Theeffective interest method is used in the calculation of the amortized cost of the financial asset and in the allocation and recognition of the interest revenue over the relevant period.

(2) Financial assets measured at fair value through other comprehensive income include the interest income from debt instruments. These mainly consisted of securities and bonds of the Chilean Central Bank that contain contractual terms that give rise on specific dates to cash flows that are solely payments of principal and interest (SPPI), and are measured at FVOCI.

 

For the years ended December 31, 20162017 and 20152016. Our our net interest income totaled Ch$1,281,3661,326,691 million in the year ended December 31, 2016,2017, an increase of 2.1%3.5% from Ch$1,255,2061,281,366 million in 2015.2016. Average interest earning assets increased 4.0%3.1% in the same period, driven mainly by lending in the Retail banking and Middle-market segments. While net interest income from our reporting segments grew 7.0%5.1% during 2016 ,2017 driven by loan growth, a higher yielding loan mix and cheaper funding mix, the total net interest margin in 2016 decreased toremained stable at 4.3% compared to 4.4% in 2015 due to the lower UF inflation in 2016.2017. Because the Bank has more interest earning assets indexed to the UF than interest bearing liabilities, theany decline in inflation adversely affects our net interest margin. The lower inflation rate in 20162017 compared to 20152016 caused our average nominal interest rate earned on interest earning assets indexed to the UF to decrease from 7.6% in 2015 to 6.6% in 2016.2016 to 5.4% in 2017.

 

The average nominal interest rate for interest earning assets denominated in pesos increaseddecreased from 9.6% in 2015 to 9.9% in 2016 whileto 9.6% in 2017 due to the decrease in the Central Bank’s short-term rate during the year which also led to a lower cost of funding with the average nominal rate for interest bearing liabilities denominated in pesos also increaseddecreasing from 4.4% in 2015 to 4.7% in 2016.2016 to 3.6% in 2017.

Average nominal interest rate earned on interest earning assets 2016 2015 2014
Ch$  9.9%  9.6%  10.3%
UF  6.6%  7.6%  9.3%
Foreign currencies  2.1%  1.8%  1.5%
Total  7.2%  7.3%  8.3%

 

The average rate paid on our interest bearing liabilities decreased to 3.3% in 2017 from 3.9% in 2016 from 4.0% in 2015.2016. This was mainly due to a lower rate paid on UF denominated liabilities as a result of the lower UF inflation in the year, which decreased to 4.4% in 2017 compared to 5.6% in 2016 compared to 7.2% in 2015.2016. This partially offset the negative impact of inflation on the interest earning assets. The decrease in the average rate paid on interest bearing liabilities was also due to the effect of the decrease in the short term central bank rates on peso denominated liabilities.

 

Average nominal interest rate paid on interest bearing liabilities 2016 2015 2014
Ch$  4.7%  4.4%  6.0%
UF  5.6%  7.2%  8.4%
Foreign currencies  1.1%  1.3%  0.7%
Total  3.9%  4.0%  4.7%

 

The changes in net interest income by segment in 20162017 as compared to 20152016 were as follows:

 

·●Net interest income from Retail banking increased 6.7%4.2%, mainly as a result of the 9.2%3.4% increase in loan volumes in this segment. The Bank focused growthsegment, lower funding costs and an increase in the high end of this segment in order to focus on margins net of risks, especially considering thataverage yield obtained over consumer loans from 13.9% in 2016 economic growth continued to slow. As a result, the highest growing loan product was residential mortgage loans that have a lower yield compared to other retail loans.14.9% in 2017.

 

·●Net interest income from the Middle-market segment increased 6.6%8.0% in 2016, mainly as a result of stablehigher than the loan growth of 6.5%5.9% in this segment.segment due to improvements in funding costs. Loan growth has been more selective, focusing on the potential return net of risk with a focus on non-lending productscash management which areis positive for margin growth, such as the spread between the rate on deposits and the Central Bank rate.

 

·●The focus for Global corporateCorporate Investment banking was on growth of non-lending products especially cash management which generates a higher return than lending in this segment. This led to an increase in net interest income of 11.2%6.0% in 20162017 despite a 2.6%23.0% decrease in loan volumes.volumes as a result of lower loan demand due to the slower economy and the Bank avoiding growth in low yielding loans.

 

·●Other net interest income consists mainly of net interest income from the Bank’s ALCO, which includes the available-for-sale investment portfolio, deposits in the Central Bank, the financial cost of supporting our cash position and investment portfolio for trading, the interest income from which is recognized as net income from financial operations and not interest income. The result of the Bank’s inflation gap is also included in this line. The net interest income included as “other” decreased from a gain of Ch$66,815 million in 2015 to a gain of Ch$10,196 million in 2016.2016 to a loss of Ch$9,112 million in 2017. This was due to the lower inflation rate in 2016 and lower2017. Because the Bank has more assets than liabilities linked to inflation, when inflation decreases, margins also decrease. Other interest income fromalso includes the Bank’scost of liquidity position as well as the gradual introduction of Basel III liquidity requirements, which led the Bank to take more investments with higher liquidity and shorter maturities that haveis a lower yield.

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The following table shows our balances of loans and accounts receivable from customers and interbank loans by segment at the dates indicated.

  At December 31, % Change
  2016 2015 2014 2016/2015 2015/2014
  (in millions of Ch$, except percentages)
Retail banking  18,604,936   17,034,707   15,191,808   9.2%  12.1%
Middle-market  6,396,376   6,006,282   5,443,983   6.5%  10.3%
Global corporate banking  2,121,513   2,178,643   2,201,913   (2.6%)  (1.1%)
Other (1)  83,606   81,125   54,945   3.1%  47.6%
Total loans  27,206,431   25,300,757   22,892,649   7.5%  10.5%

(1)Includes interbank loans.

For the years ended December 31, 2015 and 2014. Our net interest income totaled Ch$1,255,206 million in the year ended December 31, 2015, a decrease of 4.7% from Ch$1,317,104 million in 2014. Average interest earning assets increased 6.6% in the same period, driven mainly by lending in the Retail banking and Middle-market segments. Net interest margin in 2015 was 4.40% compared to 4.92% in 2014. Net interest margins were negatively affected by the decrease of the average nominal rate we earned on our interest earning assets. This was mainly due to a decrease in the UF inflation rate in 2015 compared to 2014, which in turn lowered the average nominal rate earned on UF denominated interest earning assets. This impact is more relevant than the decrease in funding cost of liabilities linked to the UF since the Bank has more assets than liabilities linked to the UF. We also earned a lower nominal rate on our peso-denominated interest earning assets. This was mainly due to loan growth focused in lower yielding, but less risky loans. This was reflected in the decrease in the average nominal interest rate earned on our peso denominated consumer loans that decreased from 17.2% in 2014 to 14.0% in 2015.

The average rate paid on our interest bearing liabilities decreased from 4.7% in 2014 to 4.0% in 2015. This was mainly due to a lower rate paid on UF denominated liabilities as a result of the lower UF inflation in the year. As a result, the average nominal rate paid on interest bearing liabilities denominated in UF decreased to 7.2% in 2015 compared to 8.4% in 2014. At the same time and despite rising short-term interest rates, the average nominal rate paid on peso denominated interest bearing liabilities also decreased from 6.0% in 2014 to 4.4% in 2015, reflecting positive management of time deposits costs with our clients.

The changes in net interest income by segment in 2015 as compared to 2014 were as follows:

·Net interest income from Retail banking increased 4.8%, mainly as a result of the 12.1% increase in loan volumes in this segment. The Bank focused growth in the high end of this segment in order to focus on margins net of risks, especially considering that in 2015 economic growth slowed. As a result, the highest growing loan product was residential mortgage loans that have a lower yield compared to consumer loans. At the same time, the focus on high income earners also resulted in a reduction of the rate earned on consumer loans.

·Net interest income from the Middle-market segment increased 14.5% in 2015, mainly as a result of the 10.3% increase in loans in this segment. This segment was of significant strategic focus in 2015 as the Bank increased business volumes in this segment both in lending and non-lending services.

·Net interest income from Global corporate banking increased 18.8% in 2015 despite a 1.1% decrease in loan volumes. Loan yields in this segment improved as alternative sources of funds for Chilean corporates, especially from foreign sources, became more expensive. This segment also saw an improvement in cash management services that improved the funding mix.

·Other net interest income consists mainly of net interest income fromexpense for the available-for-sale investment portfolio and deposits in the Central Bank and the financial cost of supporting our cash position and investment portfolio for trading, the interest income from which is recognized as net income from financial operations and not interest income. The result of the Bank’s inflation gap is also included in this line. The net interest income included as “other” totaled a gain of Ch$66,815million in 2015 compared to a gain of Ch$211,298 million in 2014. The gain in 2015 can be explained by the lower UF inflation in 2015 compared to the previous period and the greater UF gap in 2014. The lower variation of the UF gap resulted in Ch$99,280 million less net interest income (See “Item 5A—Impact of Inflation”). Other netBank.

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interest income was also negatively affected by lower net interest income from the Bank’s liquidity position, especially the portion denominated in U.S. dollars. This was mainly due to the low interest rate environment observed globally.

 

Fee and commission income

 

For the years ended December 31, 20162018 and 20152017. Net net fees and commission income increased 7.1%4.2% to Ch$254,424290,885 million in the twelve-month period ended December 31, 20162018 compared to the same period in 2015.2017. The following table sets forth certain components of our income from services (net of fees paid to third parties directly connected to providing those services, principally fees relating to credit card processing and ATM network administration) in the years ended December 31, 2018, 2017 and 2016.

  Year ended December 31,  % Change 
  2018  2017  2016  2018/2017 2017/2016
  (in millions of Ch$) 
Credit, debit and ATM cards  55,109   51,982   52,057   6.0%  (0.1%)
Collections  40,077   44,312   31,376   (9.6%)  41.2%
Insurance brokerage  39,949   36,430   40,882   9.7%  (10.9%)
Letters of credit  33,654   33,882   35,911   (0.7%)  (5.7%)
Checking accounts  33,865   31,901   31,540   6.2%  1.1%
Custody and brokerage services  9,211   9,232   8,358   (0.2%)  10.5%
Lines of credit  6,624   7,413   5,754   (10.6%)  28.8%
Others  72,396   63,911   48,546   13.3%  31.7%
Total fees and commission income, net  290,885   279,063   254,424   4.2%  9.7%

Fees from credit, debit and ATM cards increased 6.0% in 2018. In 2016,2018 we continued to reduce our ATM network, seeking better locations with less security-related expenses, leading to a 28.0% decrease in commissions from debit and ATM cards during the period. This was offset by a 29.0% increase in commissions from credit cards as clients increased the usage of the Bank’s credit cards. Active credit cards totaled 1.6 million as of November 30, 2018 with monetary purchases increasing by 11.8% in the year.

Fees from collections decreased 9.6% in 2018 compared to 2017. This line item includes, among other items, fees collected on behalf of insurance companies for fire and earthquake insurance that are mandatory with mortgage loans. During 2018, a higher level of pre-payment of mortgage loans led to a modification of the estimate of amount of refunds to be paid to clients for insurance premiums already collected.


Insurance brokerage fees increased 9.7% due to higher brokerage of fraud, car and life insurance policies as advances in our digital platforms have enabled clients to search for and purchase these products online.

Fees from letters of credit and other contingent operations decreased 0.7% in 2018. This line corresponds to international and foreign trade financing business with clients. The low growth reflects strong price competition in this product in 2018.

Fees from checking accounts increased 6.2% in 2018 compared to 2017. This was mainly due to a rise in the Bank’s checking account base. The number of retail clients with a checking account increased 6.4% to 953,075. Also, our corporate cash management services continued to boost fee growth in this product.

Brokerage and custody fees decreased 0.2% in 2018 as compared to 2017 due to more volatility in the markets during 2018, dampening the growth we experienced in 2017.

Fees from lines of credit decreased 10.6% due to less cross-selling of this product among checking account holders as clients have preferred other short term financing such as credit cards and installment loans.

The rise in other fee income of 13.3% in 2018 compared to 2017 was mainly due to higher fees from the brokerage of asset management services and fees gained from our Corporate Investment Banking segment. In December 2013, our Asset Management business was sold. The Bank is no longer in the asset management business, but serves as an exclusive broker for Santander Asset Management, the acquirer of our asset management business. In 2018, asset management brokerage fees totaled Ch$45,793 million and increased 5.7% compared to 2017. Other fees from our Corporate Investment banking segment include financial advisory and investment banking.

The following table sets forth, for the periods indicated our fee income broken down by segment for the periods indicated:

  Year ended December 31,  % Change  % Change 
  2018  2017  2016  2018/2017 2017/2016
  (in millions of Ch$)
Retail banking  220,532   206,449   196,845   6.8%  4.9%
Middle-market  36,746   36,280   30,851   1.3%  17.6%
Corporate Investment banking  35,064   27,626   25,077   26.9%  10.2%
Other  (1,457)  8,708   1,651   (116.7%)  427.4%
Total fees and commission income, net  290,885   279,063   254,424   4.2%  9.7%

Fees from Retail banking increased 6.8% in 2018 compared to 2017. Total retail clients with a checking account increased 6.4% to 953,075. In 2018, the Bank continued to experience positive client base and product growth that drove fee growth in various products. Internally, we measure the quantity of products that a client uses and identify them as a loyal customer when they meet certain internal criteria for their segment. For example, loyalsegment (clients with more than four products plus minimum usage and profitability levels). Client loyalty continues to rise in retail banking, especially among high income earners, which was the area we continued to focus on growing. Loyal individual customers use fourin the high-income segment grew 8.3% during 2018. As the economy expanded, we also started opening up more to increasing our middle-income client base through our new Santander Life products. Loyal individual customers in the middle-income segment increased 8.2% during 2018. This has led to high fee growth among retail bank clients, especially cards, insurance brokerage, brokerage of asset management products and have a minimum profitability level and a minimum usage indicator. For SMEs and Middle-market customers, cross-selling is differentiatedchecking accounts. This has also been driven by client size using a point system that depends on the numberdigital innovations leading to an increase of products, usageretail digital clients of products and income net of risk. According to this measurement, the number of loyal high-income clients increased 6.5% and the number of loyal SMEs and middle-market clients increased by 13.8% during 20166.2% in 2018.

 

The following table sets forth certain components1.3% increase in fees from the Middle-market segment was mainly due to the positive expansion of business volumes in this segment from a greater client base. Total clients in this segment increased 3.2% during the year with clients that actively use our incomeproducts increasing 2.7%.

Fees from the Corporate Investment banking segment increased 26.9% in 2018 compared to 2017, mainly due to cash management services, (netfinancial advisory and investment banking fees.

Fees in Other decreased from a gain of Ch$8,708 million in 2017 to an expense of Ch$1,457 million in 2018. In this line item we included the impact of the higher level of pre-payment of mortgage loans which led to a modification of the estimate of amount of refunds of fees paidfor insurance premiums already collected. As this was not assigned to third parties directly connected to providing those services, principally fees relating to credit card processing and ATM network administration)any segment, it is presented in Other.


For the years ended December 31, 2016, 20152017 and 2014.2016. Net fees and commission income increased 9.7% to Ch$279,063 million in the twelve-month period ended December 31, 2017 compared to the same period in 2016.

  Year ended December 31, % Change
  2016 2015 2014 2016/2015 2015/2014
  (in millions of Ch$)
Credit, debit and ATM cards  52,057   46,066   43,161   13.0%  6.7%
Collections  31,376   30,399   35,355   3.2%  (14.0%)
Insurance brokerage  40,882   39,252   34,695   4.2%  13.1%
Letters of credit  35,911   35,276   32,403   1.8%  8.9%
Checking accounts  31,540   30,291   29,031   4.1%  4.3%
Custody and brokerage services  8,358   8,685   8,307   (3.8%)  4.6%
Lines of credit  5,754   6,597   7,015   (12.8%)  (6.0%)
Others  48,546   41,061   37,316   18.2%  10.0%
Total fees and commission income, net  254,424   237,627   227,283   7.1%  4.6%

 

Fees from credit, debit and ATM cards increaseddecreased slightly by 13.0%0.1% in 2016,2017, reflecting the reductions made to the ATM network during the period. This was partially offset by the positive growth of the usage of the Bank’s credit and debit cards. Active credit cards totaled 2,002,998 as of November 2016,1.9 million by year-end 2017 with monetary purchases increasing by 6.8% in the latest market data available, and increased 3.3% compared to the same period in 2015. In the second half of 2015, our contract with Redbank, an ATM services provider, was renegotiated, which led to higher interbank fees charged for ATM usage for the second half of 2015 and the year 2016.year.

 

Fees from collections increased by 3.2%41.2% in 20162017 compared to 20152016 due to a growth in loan volumes, particularly in mortgage loans. This line item includes, among other items, fees collected on behalf of insurance companies for fire and earthquake insurance that are mandatory with mortgage loans.loans for which we negotiated better terms with the insurance providers during the year.

 

Insurance brokerage fees increased 4.2%decreased 10.9% due to higher sales volume from cross-selling of insurance products to customers.more competition and a slower economy.

 

Fees from letters of credit and other contingent operations increased 1.8%decreased 5.7% in 2016. This increase was2017, mainly due to growth of ourless international and foreign trade financing businessesbusiness with clients.clients during the year.

 

Fees from checking accounts increased 4.1%1.1% in 20162017 compared to 2015.2016. This was mainly due to a rise in the Bank’s checking account base. The amountnumber of retail banking clients with a checking account rose 4.3% in 2016, totaling 844,971.increased 5.6% to 896,144. Combined with this an increase in corporate cash management services also boosted fee growth in this product.

 

Brokerage and custody fees decreased 3.8%increased 10.5% in 20162017 as compared to 20152016 due to weakhigher trading volumes in local equity market during 2016.2017.

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Fees from lines of credit decreased 12.8% as there was a switch from clients using credit linesincreased 28.8% due to credit cards and other facilities offered by online banking.greater cross-selling of this product among checking account holders.

 

The rise in other fee income of 18.2%31.7% in 20162017 compared to 20152016 was mainly due to higher fees from the brokerage of asset management services. In December 2013, our Asset Management business was sold. The Bank is no longer in the asset management business, but serves as an exclusive broker for Santander Asset Management, the acquirer of our asset management business. In 2016,2017, asset management brokerage fees totaled Ch$38,24443,331 million and increased 5.7%13.3% compared to 2015.2016. Other fees also include fees from our Global corporateCorporate Investment banking segment. The positive growth of our client loyalty in this segment, led to higherwhich include financial advisory fees in global transactionaland investment banking.

The following table sets forth, for the periods indicated our fee income broken down by segment and sub-segment for the periods indicated:

  Year ended December 31, % Change % Change
  2016 2015 2014 2016/2015 2015/2014
  (in millions of Ch$)
Retail banking  196,845   190,380   175,007   3.4%  8.8%
Middle-market  30,851   28,537   27,055   8.1%  5.5%
Global corporate banking  25,077   15,231   22,338   64.6%  (31.8%)
Other  1,651   3,479   2,883   (52.5%)  20.7%
Total fees and commission income, net  254,424   237,627   227,283   7.1%  4.6%

 

Fees from Retail banking increased 3.4%4.9% in 20162017 compared to 2015. Since mid-2013,2016. Total retail clients with a checking account increased 5.6% to 896,144. In 2017, the Bank has been executing a profound overhaul of its Client Relationship Management (CRM) systems, client service and other changes to its commercial team front-office functions, which has continued to increaseexperience positive client base and product salesgrowth that drove fee growth in various products. Internally, we measure the quantity of products that a client uses and usage.identify them as a loyal customer when they meet certain internal criteria for their segment. Client loyalty continues to rise in retail banking, especially among high income earners, which was the area we focused on growing given the low growth environment. Loyal individual customers (clients with more than 4 products plus minimum usage and profitability levels) in the high-income segment grew 9.5% during 2017. This has led to high fee growth among retail bank clients, especially cards, insurance brokerage, brokerage of asset management products and checking accounts. Total retail clients reached 3.58 million at year-end 2016 and total retail clients with a checking account increased 4.3% to 844,971. Loyal retail clients increased 7.7% to 600,132 by year-end 2016.

 

The 8.1%17.6% increase in fees from the Middle-market segment was mainly due to the positive expansion of business volumes in this segment from greater client loyalty and product usage. Loyal SME and Middle market companies, defined by client size using a point system that depends on the number of products, usage of products and income net of risk, rose 3.9% in 2017. This segment’s client base also grew as SME clients graduated into this segment.

 

Fees from the Global corporateCorporate Investment banking segment increased 64.6%10.2% in 20162017 compared to 2015. In 2016, the Bank won an important share of themainly due to cash management services, financial advisory and investment banking cash management and advisory services for the large projects being developed in Chile.fees.

 

Fees in Other decreased 52.5%increased 427.4% from Ch$3,479 million in 2015 to Ch$1,651 million in 2016 due to distributing more fee and commission income among segments.

For the years ended December 31, 2015 and 2014. Net fees and commission income increased 4.6% to Ch$237,6278,708 million in the twelve-month period ended December 31, 2015 compared to the same period in 2014. In 2015, the Bank continued to experience positive client base and product growth that drove fee growth in various products.

Fees from credit, debit and ATM cards increased by 6.7% in 2015, reflecting the positive growth of the usage of the Bank’s credit and debit cards. Active credit cards totaled 1,936,697 as of October 2015, the latest market data available and increased 3.1% compared to the same period in 2014.

Fees from collections decreased by 14.0% in 2015 compared to 2014. In 2015, we once again auctioned to the lowest bidder the mandatory insurance products that are sold with mortgage loans. This negatively impacted collection fees where this income is recognized.

Insurance brokerage fees increased 13.1% as business volumes recovered in line with a recovery in client and product growth.

Fees from letters of credit and other contingent operations increased 8.9% in 2015. This increase was mainly due to positive performance of our international and foreign trade financing businesses with clients and also due to the depreciation of the peso against the U.S. dollar since this business is mainly transacted in foreign currency.

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Fees from checking accounts increased 4.3% in 2015 compared to 2014. This was mainly2017 due to a rise in the Bank’s checking account base. According to the latest data publishedhigher rebate paid by the SBIF asinsurance company we broker for after a successful renegotiation of December 2015, the Bank’s checking accounts totaled 852,492 compared to 815,182 in 2014 or a growth of 5.5%. Higher checking account balances both in retail banking as well as an increase in corporate cash management services also boosted fee growth in this product.terms and conditions with them.

 

Brokerage and custody fees increased 4.6% in 2015 as compared to 2014. Despite lack luster performance of local equity markets, which hurt brokerage activity, the depreciation of the peso against the dollar positively affected brokerage and custody fees. The Bank also saw an increase in custody services with corporate clients.

Fees from lines of credit decreased 6.0% in 2015 compared to 2014. Lower spending on behalf of individuals resulted in less usage of lines of credit attached to checking accounts. At the same time, as the Bank continued to de-risk its retail loan book, it reduced its exposure of lines of credit among low income earners.

Fees from our asset management business totaled Ch$0 in 2015 and 2014. In December 2013, our Asset Management business was sold. In 2014 and 2015, the Bank continued to broker asset management products for Santander Asset Management. These brokerage fees are included as other income from fees.

The rise in other fee income of 10.0% in 2015 compared to 2014 was mainly due to higher fees from the brokerage of asset management services. As mentioned in the paragraph above, the Bank is no longer in the asset management business, but serves as an exclusive broker for Santander Asset Management, the acquirer of our asset management business. In 2015, asset management brokerage fees totaled Ch$36,182 million and increased 16.8% compared to 2014. The positive growth of our client base among high income earners led to higher brokerage fees of asset management products.

Fees from Retail banking increased 8.8% in 2015 compared to 2014. Since mid-2013, the Bank has been executing a profound overhaul of its Client Relationship Management (CRM) systems, client service and other changes to its commercial team front-office functions, which has continued to increase product sales and usage. This has led to high fee growth among retail bank clients, especially cards, insurance brokerage, brokerage of asset management products and checking accounts. Total retail clients reached 3.38 million at year-end 2015 and increased 1.6%. Total retail clients with a checking account increased 6.4% to 692,359 and loyal retail clients (a new internal measure that considers the amount of products a client has, uses and their profitability) increased 4.8% to 519,889 by year-end 2015.

The 5.5% increase in fees from the Middle-market segment was mainly due to the positive expansion of business volumes in this segment, which led to greater product usage.

Fees from the Global corporate banking segment decreased 31.8% in 2015 compared to 2014. In 2015, this segment saw a reduction in investment banking activities such as bond issuances and financial advisory, mainly due to the slower economic growth.


 

Financial transactions, net

 

The following table sets forth information regarding our income (loss) from financial transactions for the years ended December 31, 2016, 20152018, 2017 and 2014.2016.

 

 Year ended December 31, % Change % Change Year ended December 31,  % Change  % Change 
 2016 2015 2014 2016/2015 2015/2014 2018  2017  2016  2018/2017 2017/2016
 (in millions of Ch$) (in millions of Ch$) 
Net income from financial operations  (367,034)  (457,897)  (159,647)  19.8%  (186.8%)  53,174   2,796   (367,034)  1,801.8%  100.8%
Foreign exchange profit (loss), net  507,392   603,396   272,212   (15.9%)  121.7%
Foreign exchange gain, net  51,908   126,956   507,392   (59.1%)  (75.0%)
Total financial transactions, net  140,358   145,499   112,565   (3.5%)  29.3%  105,082   129,752   140,358   (19.0%)  (7.6%)

 

For the years ended December 31, 20162018 and 20152017.. Total financial transactions, net, which is the sum of net income from financial operations and foreign exchange profit (loss),gain, totaled Ch$140,358105,082 million in the year ended December 31, 2016,2018, a decrease of 3.5%19.0% compared to the same period in 2015.2017. These results include the results of our Treasury Division’s trading business and financial transactions with customers, as well as the results of our Financial Management Division.

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Internal Bank policy does not allow significant foreign currency mismatches and requires that the results included in Total financial transactions, net include not only the market-to-market of our foreign currency spot position, but also the results of the derivatives used to hedge currency risk. The mark-to-market of our spot position is included in the line item Foreign exchange profit (loss), net. This line item also includesgain, net along with the effect of those derivatives accounted for under hedge accounting rules. The derivatives used to hedge foreign currency risk but which are classified as trading are included in the line item Net income from financial operations. For more details regarding our management and exposure to foreign currency risk, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—E. Market Risks—Market risk management— Market risk – local and foreign financial management.”

 

The results from net income (loss) from financial operations totaled a lossgain of Ch$367,03453,174 million in 20162018 compared to a loss of Ch$457,8972,796 million in 2015.2017. As the Bank adopted IFRS 9 on January 1, 2018, its new disclosure requirements were addressed and no comparable information was prepared as provided for by the transitional provisions of IFRS 9.

 

  Year ended December 31, % Change % Change
  2016 2015 2014 2016/2015 2015/2014
  (in millions of Ch$)
Derivatives classified as trading  (395,209)  (503,981)  (224,015)  21.6%  (125.0%)
Trading investments  18,229   21,505   45,952   (15.2%)  (53.2%)
Sale of loans  4,190   863   6,070   385.5%  (85.8%)
Available-for-sale instruments sales  14,598   23,655   6,934   (38.3%)  241.1%
Other results  (8,842)  61   5,412   (14,595.1%)  (98.9%)
Net income (loss) from financial operations  (367,034)  (457,897)  (159,647)  19.8%  186.8%
For the year ended
December 31,
2018

(in millions of Ch$)

Net gains on trading derivatives38,217
Net gains on financial assets at fair value through profit or loss9,393
Net gains on derecognition of financial assets measured at amortized cost8,479
Sale of loans and accounts receivables from customers
     Current portfolio(309)
     Charged-off portfolio709
Repurchase of issued bonds(840)
Other income (expense) from financial operations(2,475)
Total income (expense)53,174

 

The lower lossincome from financial operations in 2016 compared to 2015 was mainly due to:2018 consisted of:

 

(i)Lesser lossesGains of Ch$38,217 million in the sub-item derivatives classified as trading. In 2016, the average yearly exchange rate depreciated 3.5% compared to 14.8% in 2015.net gains on trading derivatives. Movements in foreign currency affect this line item because it includes the valuation adjustments of our derivatives classified as trading. The Bank’s spot foreign currency position includes all assets and liabilities in foreign currency and assets and liabilities in Ch$ linked to U.S.$ that are not derivatives. Internal policy prohibits us from opening a large exposure in foreign currency, but we usually have more liabilities in foreign currency (mainly U.S.$) in our spot position than assets due to our long-term funding in foreign currency and deposits denominated in foreign currencies from Chilean exporters. This net foreign currency liability spot position is hedged using different instruments. We use derivatives classified as trading, mainly forwards and cross-currency swaps, to hedge the net foreign currency spot position between short-term assets and liabilities. Onshort-term liabilities and it includes results from our client foreign currency business, such as the sale of currency derivatives. In 2018, the Bank increased short-term financing in U.S. dollars through deposits and correspondent banking loans. Therefore, on average, the Bank hashad more short-term liabilities in dollars compared to its short-term assets, suchwhich was hedged through a short-term foreign currency asset position classified as U.S. dollars invested in overnight, than short-term deposits in U.S. dollars.trading. The averageCentral Bank exchange rate depreciated 3.5%13.1% in 2016, producing a loss in derivatives classified as trading. This loss was lower than in 2015, since the average depreciation rate was lower in 2016 against 2015.2018, leading to net gains from trading of derivatives.

 

(ii)The 15.2% lower gain of Ch$9,393 million from trading investments was mainly due to the lower UF inflation rate in 2016 compared to 2015.financial assets at fair value through profit or loss. In this line item the mark-to-market and interest income of the trading fixed income portfolio are recognized. In 2016,The Central Bank increased short term rates by 25bps in October 2018 thereby lowering the lower UF inflation decreased interest fromfair value of this portfolio, which is mainly comprised of Central Bank instrumentsinstruments. This was partially offset by UF inflation of 2.9% in 2018, leading to higher interest gained from the portion of this portfolio denominated in UF.

 

(iii)The results from our available-for-sale portfolio decreased 38.3% in 2016 comparedNet gains on the derecognition of financial assets measured at amortized cost related to 2015. The results for 2015 were very high due torealized gains realized when interest rates fell abruptly inon instruments with the first quarterCentral Bank of 2015; this situation was not repeated in 2016.Chile.

 

(iv)In 2018, the Bank repurchased the following bonds for liability management purposes and liquidity management. See “Note 20—Issued Debt Instruments and Other Financial Liabilities—b) Senior Bonds” in the Audited Consolidated Financial Statements.

DateAmount
04-01-2018CLP12,890,000,000
04-01-2018CLP4,600,000,000
22-01-2018UF24,000
05-04-2018UF484,000
06-04-2018UF184,000
23-04-2018UF216,000
24-04-2018UF4,000
25-04-2018UF262,000
10-05-2018UF800,000
07-06-2018USD3,090,000
11-12-2018USD250,000,000

(v)The loss in other results of Ch$8,8422,475 million in 20162018 was due to results from the effectanticipated redemption of depreciation in the average exchange rate on the partial repurchase of senior bondstime deposits during the year. See Note 18 – issued debt instruments and other financial liabilities – b) Senior bonds in the Audited Consolidated Financial Statements.year for liquidity management reasons.

 

The net result from foreign exchange transactions totaled a gain of Ch$507,39251,908 million in 20162018 compared to Ch$603,396126,956 million in 2015.2017.

 

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 Year ended December 31, % Change % Change Year ended December 31,  % Change  % Change 
 2016 2015 2014 2016/2015 2015/2014 2018  2017  2016  2018/2017 2017/2016
 (in millions of Ch$) (in millions of Ch$) 
Net profit or loss from foreign currency exchange differences  116,117   (197,875)  (370,282)  158.7%  46.6%  (212,618)  113,115   116,117   (288.0%)  (2.6%)
Hedge-accounting derivatives  399,875   777,254   621,767   (48.6%)  25.0%  252,275   22,933   399,875   1,000.1%  (94.3%)
Translation gains and losses over assets and liabilities indexed to foreign currencies, net  (8,600)  24,017   20,727   (135.8%)  15.9%  12,251   (9,092)  (8,600)  234.7%  5.7%
Net results from foreign exchange profit (loss)  507,392   603,396   272,212   (15.9%)  121.7%
Net results from foreign exchange gain  51,908   126,956   507,392   (59.1%)  (75.0%)

 

Included in these results is the sub-item Net profit or loss from foreign currency exchange differences which totaled a gain of Ch$116,117 million in 2016 compared to a loss of Ch$197,875 million in 2015. This result includes the mark-to-market of the Bank’s spot position and results from our client foreign currency business, such as currency transactionstransactions. The Central Bank exchange rate depreciated 13.1% in 2018 and market making. The lower rate of average depreciation ofappreciated 7.8% in 2017, which reflects the pesoloss form our net liability spot position in 2016 compared to 20152018. This is offset by the results from hedge-accounting derivatives and the increase in client currency transactions resulted in a higher result in this sub-item compared to 2015.results from derivatives classified as trading.

 

Results from the sub-item hedge-accounting derivative are mainly comprised of the mark-to-market of derivatives that are used to mainly hedge the foreign currency risk of our long-term foreign currency funding. Therefore, we generally have a net foreign currency asset position in our hedge-accounting derivatives. These are mainly cross-currency swaps that are accounted under hedge accounting rules. These derivatives produced a gain of Ch$399,875252,275 million in 2016 attributable2018, significantly higher than 2017 due to the average depreciation of the peso in the year. This gain was lower than in 2015 due to the lower ratesecond half of depreciation in 2016 compared to 2015.2018.


 

Finally, the Bank has some assets and liabilities that are in Chilean pesos, but indexed to foreign currency. This position produced a translation lossgain in 20162018 of Ch$8,60012,251 million. This exposure is also hedged.

 

In order to more easily compare the results from financial transactions, net, we present the following table that separates the results by lines of business for 2016, 20152018, 2017 and 2014.2016.

 

 Year ended December 31, % Change Year ended December 31,  % Change 
 2016 2015 2014 2016/2015 2015/2014 2018  2017  2016  2018/2017 2017/2016
 (in millions of Ch$) (in millions of Ch$)
Santander Global Connect (1)  62,404   60,995   50,740   2.3%  20.2%
Client treasury products  73,912   61,156   62,404   20.9%  (2.0%)
Market-making with clients  27,382   22,850   33,097   19.8%  (31.0%)  21,276   20,883   27,382   1.9%  (23.7%)
Client treasury services  89,786   83,845   83,837   7.1%  —%  95,188   82,039   89,786   16.0%  (8.6%)
Sale of loans and charged-off loans  4,190   863   6,070   3 85.5%  (85.8%)  198   6,040   4,190   (96.7%)  44.2%
Proprietary trading  (94)  (567)  (1,113)  83.5%  49.0%
CVA adjustments  (2,745)  (3,345)  (94)  (17.9%)  3458.3%
Financial Management Division and others (2)(1)  46,475   61,358   23,771   (24.3%)  158.1%  12,441   45,018   46,475   (72.4%)  (3.1%)
Non-client treasury income (loss)  50,572   61,654   28,728   (18.0%)  114.6%  9,894   47,713   50,572   (79.3%)  (5.7%)
Total financial transactions, net  140,358   145,499   112,565   (3.5%)  29.3%  105,082   129,752   140,358   (19.0%)  (7.6%)

 

 

(1)Santander Global Connect is the Bank’s commercial platform for selling treasury products to its clients.

(2)The Financial Management Division manages the structural interest rate risk, the structural position in inflation-indexed assets and liabilities, capital requirements and liquidity levels. The aim of the Financial Management Division is to provide stability and continuity in our net interest income from commercial activities, and to ensure that we comply with internal and regulatory limits regarding liquidity, regulatory capital, reserve requirements and market risk.

 

Client treasury services totaled Ch$89,78695,188 million, a gainan increase of 7.1%19.0% compared to 2015.2017. The results from Santander Global Connectclient treasury products and market-making mainly include the results from the sale of derivatives, foreign exchange and fixed income instruments to our client base. In 2016,2018, the results from Santander Global Connectclient treasury products increased 2.3%20.9%. The higher market volatility and depreciation of the peso and high market volatilityin the second semester of 2018 led to a largerhigher demand for hedging from our Corporate and Middle-market clients, driving this income line.clients. The results from market-making with client services increased 19.8%1.9% in 2015,2018, mainly due to a growthan improvement in business volumes of tailor-made treasury services and cash management sold to specific corporate clients. These results may vary year-to-year as some large operations with corporate clients may not be repeated in subsequent years.

 

The results from non-client treasury income decreased 18.0%to a gain of Ch$9,894 million in 2018 compared to Ch$47,713 million in 2017. These results include the income from sale of loans, including charged-off loans, CVA adjustments and the results from our Financial Management Division.

The results from the sale of loans totaled a gain of Ch$198 million in 2018, decreasing 96.7% from 2017 due to decreased sales of our loan portfolio compared to previous years.

The results from CVAs totaled a loss of Ch$2,745 million. This was mainly due to a loss from CVA adjustments of our derivative portfolio which is included in this line item, since the CVA generated by derivatives taken for hedging and on behalf of clients is not part of client income or part of Financial Management’s profit and loss.

In 2018, income from the Bank’s Financial Management Division decreased to Ch$12,441 million. This department manages the structural interest rate risk, the structural position in inflation-indexed assets and liabilities, capital requirements and liquidity levels. The aim of the Financial Management Division is to provide stability and continuity in our net interest income from commercial activities, and to ensure that we comply with internal and regulatory limits regarding liquidity, regulatory capital, reserve requirements and market risk. This decrease in results was mainly due to lower results from liability management transactions and lower realized gains from our investments in debt instruments at fair value through other comprehensive income. The results from Financial Management Division also include the offset of the foreign currency exposure hedging on provision expenses for loans denominated in U.S. dollars. As the peso depreciated against the dollar, this increased our provision expense for our loans in U.S. dollars and had a corresponding offset gain recognized by financial management in this line.


For the years ended December 31, 2017 and 2016. Total financial transactions, net, which is the sum of net income from financial operations and foreign exchange gain, totaled Ch$129,752 million in the year ended December 31, 2017, a decrease of 7.6% compared to the same period in 2016. These results include the results of our Treasury Division’s trading business and financial transactions with customers, as well as the results of our Financial Management Division.

Internal Bank policy does not allow significant foreign currency mismatches and requires that the results included in Total financial transactions, net include not only the market-to-market of our foreign currency spot position, but also the results of the derivatives used to hedge currency risk. The mark-to-market of our spot position is included in the line item Foreign exchange gain, net along with the effect of those derivatives accounted for under hedge accounting rules. The derivatives used to hedge foreign currency risk but which are classified as trading are included in the line item Net income from financial operations. For more details regarding our management and exposure to foreign currency risk, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—E. Market Risks—Market risk management—Market risk – local and foreign financial management.”

The results from net income (loss) from financial operations totaled a gain of Ch$2,796 million in 2016 compared to a loss of Ch$367,034 million in 2016.

  Year ended December 31,  % Change 
  2017  2016  2017/2016
  (in millions of Ch$)     
Derivatives classified as trading  (18,974)  (395,209)  95.2%
Trading investments  10,008   18,229   (45.1%)
Sale of loans  6,040   4,190   44.2%
Realized gains (losses) Debt instruments at fair value through other comprehensive income / Available-for-sale instruments  8,956   14,598   (38.6%)
Other results  (3,234)  (8,842)  63.4%
Net income (loss) from financial operations  2,796   (367,034)  100.8%

The income from financial operations in 2017 compared to a loss in 2016 was mainly due to:

(i)Lesser losses in the sub-item derivatives classified as trading. In 2017, the average yearly exchange rate appreciated 4.1% compared to a depreciation of 3.5% in 2016 with the appreciation of the peso mainly occurring at year-end 2017. Movements in foreign currency affect this line item because it includes the valuation adjustments of our derivatives classified as trading. We use derivatives classified as trading, mainly forwards and cross-currency swaps, to hedge the net foreign currency spot position between short-term assets and short-term liabilities. On average in 2017, the Bank had more short-term assets, such as U.S. dollars invested in overnight, than short-term deposits in U.S. dollars, so we usually have a short-term foreign currency liability hedge position classified as trading. The average exchange rate appreciated 4.1% in 2017, producing a lower loss in derivatives classified as trading especially at year-end 2017 when the peso appreciated strongly against the U.S. dollar.

(ii)The 45.1% lower gain from trading investments was mainly due to the lower UF inflation rate in 2017 compared to 2016. In this line item the mark-to-market and interest income of the trading fixed income portfolio are recognized. In 2017, the lower UF inflation decreased interest from this portfolio, which is mainly comprised of Central Bank instruments denominated in UF.

(iii)The results from our available-for-sale portfolio decreased 38.6% in 2017 compared to 2016 due to lower realized gains from our available for sale portfolio.


(iv)The loss in other results of Ch$3,234 million in 2017 was due to results from the partial repurchase of senior bonds during the year. See “Note 20– Issued Debt Instruments and Other Financial Liabilities – b) Senior bonds” in the Audited Consolidated Financial Statements.

The net result from foreign exchange transactions totaled a gain of Ch$126,956 million in 2017 compared to Ch$507,392 million in 2016.

Included in these results is the sub-item Net profit or loss from foreign currency exchange differences which totaled a gain of Ch$113,115 million in 2017 compared to Ch$116,117 million in 2016. This result includes the mark-to-market of the Bank’s spot position and results from our client foreign currency business, such as currency transactions and market making. The lower market-making foreign currency transactions and the appreciation of the peso lowered this result.

Results from the sub-item hedge-accounting derivative are mainly comprised of the mark-to-market of derivatives that are used to mainly hedge the foreign currency risk of our long-term foreign currency funding. Therefore, we generally have a net foreign currency position in our hedge-accounting derivatives. These are mainly cross-currency swaps that are accounted under hedge accounting rules. These derivatives produced a gain of Ch$22,933 million in 2017. This gain was lower than in 2016 due to the appreciation of the peso in the fourth quarter of 2017.

Finally, the Bank has some assets and liabilities that are in Chilean pesos, but indexed to foreign currency. This position produced a translation loss in 2017 of Ch$9,092 million. This exposure is also hedged.

Client treasury services totaled Ch$82,039 million, a decrease of 8.6% compared to 2016. The results from client treasury products and market-making mainly include the results from the sale of derivatives, foreign exchange and fixed income instruments to our client base. In 2017, the results from client treasury products decreased 2.0%. The appreciation of the peso and lower market volatility led to lower demand for hedging from our Corporate and Middle-market clients. The results from market-making with client services decreased 23.7% in 2017, mainly due to a decrease in business volumes of tailor-made treasury services and cash management sold to specific corporate clients. These results may vary year-to-year as some large operations with corporate clients may not be repeated in subsequent years.

The results from non-client treasury income decreased 5.7% and totaled a gain of Ch$47,713 million in 2017 compared to Ch$50,572 million in 2016 compared to Ch$61,654 million in 2015.2016. These results include the income from sale of loans, including charged-off loans, proprietary trading and the results from our Financial Management Division.

 

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The results from the sale of loans increased to Ch$4,1906,040 million in 2016.2017. The results from proprietary trading and CVAs totaled a loss of Ch$943,345 million. This was mainly due to a higher loss from CVA adjustments of our derivative portfolio, which totaled Ch$2,821 million. This is included in this line item, since the CVA generated by derivatives taken for hedging and on behalf of clients is not part of client income or part of Financial Management’s profit and loss. Since year-end 2012, the Bank no longer has a proprietary trading area and thesethe results from proprietary trading are from residual positions that are being closed.

 

In 2016,2017, income from the Bank’s Financial Management Division decreased 24.3%3.1% to Ch$46,47545,018 million. This department manages the structural interest rate risk, the structural position in inflation-indexed assets and liabilities, capital requirements and liquidity levels. The aim of the Financial Management Division is to provide stability and continuity in our net interest income from commercial activities, and to ensure that we comply with internal and regulatory limits regarding liquidity, regulatory capital, reserve requirements and market risk. This decrease in results was mainly due to lower realized gains from our available-for-sale portfolio. The results from our available-for-sale portfolio decreased 38.3% in 2016 compared to 2015 and totaled Ch$14,598 million due to the significant decrease in long-term interest rates in the first quarter of 2015. The results from Financial Management Division also include the offset of the foreign currency exposure hedging on provision expenses for loans denominated in U.S. dollars. As the peso appreciated against the dollar, this lowered the provision expense for our loans in U.S. dollars and had a corresponding offset loss recognized by financial management in this line.


Other operating income

  

Year ended December 31, 

  

% Change 

  

% Change 

 
  2018  2017  2016  2018/2017 2017/2016
  (In millions of Ch$) 
Income from assets received in lieu of payment  7,106   3,330   1,663   113.4%  100.2%
Net results from sale of investment in other companies  —   —   —   —%  

— 

%
Operational leases (as lessor)  222   264   519   (15.9%)  (49.1%)
Gain on sale of Bank property, plant and equipment  2,490   23,229   2,017   (89.3%)  1051,7%
Compensation from insurance companies due to damages  144   1,237   1,530   (88.4%)  (19.2%)
Other  13,167   33,956   698   (61.2%)  77.2%
Sub-total other income  16,023   58,686   4,764   (72.7%)  1,131.9%
Total other operating income  23,129   62,016   6,427   (62.7%)  864.9%

 

For the years ended December 31, 20152018 and 20142017. Total financial transactions, net, which is the sum of netother operating income from financial operations and foreign exchange profit (loss), totaled Ch$145,499 milliondecreased by 62.7% in the year ended December 31, 2015, an increase of 29.3%2018 compared to the same period in 2014. These results include the results of our Treasury Division’s trading business and financial transactions with customers, as well as the results of our Financial Management Division.

Net income from financial operations was a loss of Ch$457,897 million in 2015 compared to a loss of Ch$159,647 million in 2014.

The higher loss from financial operations in 2015 compared to 2014 was mainly due to:

(i)Higher losses from derivatives classified as trading. In 2015, the average yearly exchange rate depreciated 14.8%. Movements in foreign currency affect this line item because it includes the valuation adjustments of our derivatives classified as trading. The Bank’s spot position includes all assets and liabilities in foreign currency and assets and liabilities in Ch$ linked to U.S.$ that are not derivatives. Internal policy prohibits us from opening a large exposure in foreign currency, but we usually have more liabilities in foreign currency (mainly U.S.$) than assets in our spot position due to our long-term funding in foreign currency and deposits denominated in foreign currencies from Chilean exporters. This net foreign currency liability spot position is hedged using different instruments. Our long-term foreign currency funding is hedged with cross-currency swaps that are matched and are accounted under hedge accounting rules. Therefore, the liability and the corresponding hedge are recognized in foreign exchange profits, described below and not in this line item. Excluding this part of our funding in foreign currency, we are left with the foreign currency deposits and other short-term foreign currency funding mechanisms, which are smaller than the foreign currency assets, mainly cash. This difference is hedged with derivatives that are accounted as trading derivatives and since the size of our cash position in U.S. dollars (see Note 4a of our Audited Consolidated Financial Statements) increased, the amount of derivatives hedging this position also rose and the loss from derivatives classified as trading rose. For more details, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—E. Market Risks—Market risk management— Market risk – local and foreign financial management.”

(ii)The 53.2% lower gain from trading investments was mainly due to the lower UF inflation rate in 2015 compared to 2014. In this line item the mark-to-market and interest income of the trading fixed income portfolio are recognized. In 2015, the lower UF inflation decreased interest from this portfolio. This explains the 53.2% increase in results from the trading portfolio compared to 2014, which totaled Ch$21,505 million.

(iii)The results from our available-for-sale portfolio increased 241.1% in 2015 compared to 2014. This was mainly due to higher realized gains from our available-for-sale fixed income portfolio, especially in the first quarter of 2015 when long-term interest rates declined sharply.

The net result from foreign exchange transactions totaled a gain of Ch$603,396 million in 2015 compared to Ch$272,212 million in 2014.

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Included in these results is the sub-item Net profit or loss from foreign currency exchange differences which totaled a loss of Ch$197,875 million in 2015. Since the Bank, in its spot position has more liabilities than asset in foreign currency, the depreciation of the peso in 2015 resulted in a net loss in this sub-item.

Included in the net results from foreign exchange profit (loss) are the results from hedge-accounting derivative that are used to hedge the foreign currency risk of our long-term foreign currency funding. These are mainly cross-currency swaps that are accounted under hedge accounting rules. These derivatives produced a gain of Ch$777,254 million in 2015.

Finally, the Bank has assets and liabilities that are in Chilean pesos, but indexed to foreign currency. In this case, we have more asset than liabilities linked to foreign currency and when the peso depreciates this produces a translation gain which in 2015 totaled Ch$24,017 million. This exposure is also hedged.

For more details, see “Item 11. Quantitative and Qualitative Disclosures About Market Risk—E. Market Risks—Market risk management— Market risk – local and foreign financial management.”

Client treasury services totaled Ch$83,845 million and were flat compared to 2014. The results from Santander Global Connect and market-making mainly include the results from the sale of derivatives, foreign exchange and fixed income instruments to our client base. In 2015, the results from Santander Global Connect increased 20.2%. The depreciation of the peso and higher market volatility led to a larger demand for hedging from our Corporate and Middle-market clients, driving this income line. The results from market-making with client services decreased 31.0% in 2014, mainly due to lower business volumes of tailor-made treasury services sold to specific corporate clients. These results may vary year-to-year as some large operations with corporate clients may not be repeated in subsequent years.

The results from non-client treasury income increased 114.6%2017 and totaled a gain of Ch$61,65423,129 million mainly due a decrease in 2015 compared to Ch$28,728 million in 2014. These results include the extraordinary income from sale of loans, including charged-off loans, proprietary trading and the results from our Financial Management Division.

The results from the sale of loans decreased 85.8%repossessed assets by Bansa S.A. Bansa is a company that is consolidated by the Bank due to control in accordance with IFRS 10. For 2018 this amounted to Ch$8632,122 million in 2015. The results from proprietary trading totaled a losswhile for 2017 this concept amounted to Ch$20,663 million. For the purposes of Ch$567 million. The Bank since year-end 2012, no longer has a proprietary trading area and these results are from residual positions that are being closed.

In 2015,consolidation, this one-time income from the Bank’s Financial Management Division increased 158.1% to Ch$61,358 million. This department manages the structural interest rate risk, the structural position in inflation-indexed assets and liabilities, capital requirements and liquidity levels. The aimforms part of the Financial Management Division isnet income attributable to provide stabilitynon-controlling interest and continuity in our net interest income from commercial activities, and to ensure that we comply with internal and regulatory limits regarding liquidity, regulatory capital, reserve requirements and market risk. This higher result was mainly due to larger realized gains from our available-for-sale portfolio. The results from our available-for-sale portfolio increased 241.1% in 2015 compared to 2014 and totaled Ch$23,655 million. This higher gain arose from the decline in long-term interest rates, especially in the first quarter of 2015. The results from Financial Management Division also include the offset of the foreign currencyhas no impact on provision expensesnet income attributable to shareholders or shareholders’ equity. This was offset by an increase in foreign currency. As the peso depreciated against the U.S. dollar, the provision expenses in pesos for dollar denominated loans increased. This exchange rate exposure is hedged and the offsetting gain is recognized here.

Other operating income

  Year ended December 31, % Change % Change
  2016 2015 2014 2016/2015 2015/2014
  (In millions of Ch$)
Income from assets received in lieu of payment  1,663   2,455   2,811   (32.3%)  (12.7%)
Net results from sale of investment in other companies  —   617   —   —%   —% 
Operational leases (as lessor)  519   708   805   (26.7%)  (12.0%)
Gain on sale of Bank property, plant and equipment  2,017   381   687   429.4%  (44.5%)
Compensation from insurance companies due to damages  1,530   435   661   251.7%  (34.2%)
Other  698   1,843   1,581   (62.1%)  16.6%
Sub-total other income  4,764   3,367   3,734   41.5%  (9.8%)
Total other operating income  6,427   6,439   6,545   (0.2%)  (1.6%)

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For the years ended December 31, 2016 and 2015. Total other operating income fell by 0.2% in 2016 compared to 2015 and totaled a gain of Ch$6,427 million mainly due to less income from assets received in lieu of payment, partially offset bytotaling a larger gain from the sale of property as a result of the consolidation of our branch network.Ch$7,106 million. Also during 2016,in 2018 there was a greater gain from the compensation from insurance companies dueless reversal of provisions for non-credit contingencies compared to damages claimed from natural disasters such as earthquakes.2017.

 

For the years ended December 31, 20152017 and 20142016. Total other operating income fell 1.6%increased by 864.9% in 20152017 compared to 20142016 and totaled a gain of Ch$6,439 million. Other operating62,016 million mainly due to (i) an increase in the income was negatively affected by lower gains from incomethe assets received from assets in lieu of payment lowerand the recovery of assets previously charged-off (ii) a reversal of provisions for non-credit contingencies and (iii) an extraordinary income from operational leases and less paymentsthe sale of property for Ch$20,663 million from insurance coverage for earthquake damages.the sale of repossessed assets by Bansa S.A. Bansa is a company that is consolidated by the Bank due to control in accordance with IFRS 10.

 

ProvisionExpected credit loss allowance

For the years ended December 31, 2018(in accordance with IFRS 9 Financial Instruments adopted as of January 1, 2018)

The following table sets forth certain information relating to our provision for expected credit losses for the year ended 2018.

  Stage 1  Stage 2  Stage 3  

Total 

 
(in millions of Ch$) Individual  Collective  Individual  Collective  Individual  Collective   
Commercial loans  79   5,652   (2,891)  (1,533)  (96,131)  (47,959)  (142,782)
Mortgage loans  —   5,583   —   5,161   —   3,375   14,119 
Consumer loans  —   1,861   —   192   —   (191,304)  (189,251)
Contingent loans  (90)  1,214   11   (68)  (225)  (834)  9 
Loans and AR at FVOCI  363   —   68   —   —   —   431 
Debt at FVOCI  —   66   —   —   —   —   66 
Total Expected credit losses allowance  353   14,376   (2,811)  3,752   (96,356)  (236,722)  (317,408)

For the year ended December 31, 2018 provisions for expected credit loss totaled Ch$317,408 million in accordance with the adoption of IFRS 9. The changes in accounting policies resulting from the adoption of IFRS 9 were applied retrospectively adjusting the opening balance as of January 1, 2018, applying the transition exemption that allows not to restate comparative information for prior periods.


Provisions for expected credit losses of our commercial loans totaled Ch$142,782 million for the year ended December 31, 2018. In 2018, commercial loans grew 10% with growth mainly coming from our Middle-market segment in line with the re-activation of investment in the Chilean economy and representing the bulk of growth in Stage 1 loans. The growth of Stage 1 loans was also due to the rise in commercial loans disbursed to high income individuals. The positive evolution of the economy and the focus on less risky loan clients led a reversal of Stage 1 loan loss allowances during the year.

In 2018, the Bank continued to remain selective in the SME (small to medium-sized entities) loan book included in the Commercial banking segment and originated few new assets among this sub-segment. At the same time, as this loan book aged, it represented the bulk of increase and transfers to Stage 2 and Stage 3 loans. Provisions for individually analyzed commercial loans mainly correspond to loans classified in Stage 3 for the year ended December 31, 2018 totaled Ch$96,131 million, this is mainly due to larger SMEs that are marked for legal action.

Provisions for expected credit losses for mortgage loans totaled a release of Ch$14,119 million for the year ended December 31, 2018 despite an increase of 11.6% in the mortgage loan portfolio. This is mainly due to stricter admission requirements and a strategy of targeting the higher income segments that tend to be less risky. This has led to a portfolio with better payment behavior in general.

The provisions for expected credit losses for consumer loans totaled a charge of Ch$189,251 million for the year ended December 31, 2018 mainly due to provisions for consumer loans in Stage 3. Regardless of other factors, if contractual payments are more than 30 days past due, the credit risk is deemed to have increased significantly since initial recognition and consumer loans are written off after 6 months. In 2018, consumer loans grew 7.0% with growth mainly coming from our high income earners and a continued decrease of loans among low income earners.

Recoveries on loans previously charged-off increased 5.9% in 2018 compared to 2017. This was due to higher recoveries from charged-off mortgage loans mainly due to improved recovery efforts. The following table shows recoveries of loans previously charged-off by type of loan.

  Year ended December 31,  % Change  % Change 
  2018  2017  2016  2018/2017 2017/2016
  (in millions of Ch$) 
Recovery of loans previously charged-off                    
Consumer loans  40,180   39,972   41,072   0.5%  (2.7%)
Residential mortgage loans  17,367   10,942   10,041   58.7%  9.0%
Commercial loans  30,934   32,613   27,185   (5.1%)  20.0%
Total recoveries  88,481   83,527   78,298   5.9%  6.7%

In some instances, we will sell a portfolio of charged-off loans to a third party. Gain (loss) on these charged-off loans is recognized as net income from financial transactions as disclosed in “Note 29—Net Income (Expense) from Financial Operations” of our Audited Consolidated Financial Statements. The following table sets forth information about our sale of charged-off loans for the year ended December 31, 2018, 2017 and 2016.

  Year ended December 31,  % Change  % Change 
  2018  2017  2016  2018/2017 2017/2016
  (in millions of Ch$) 
Gains (losses) on sale of loans previously charged-off  709   3,020   2,720   (76.5%)  11.0%


 

The following table sets forth, for the periods indicated, certain information relatingour net provision expense broken down by business segment:

  Year ended December 31,  % Change  % Change 
  2018  2017  2016  2018/2017 2017/2016
  (in millions of Ch$) 
Retail banking  (287,739)  (293,956)  (323,888)  (2.1%)  (9.2%)
Middle-market  (26,314)  (19,235)  (26,748)  36.8%  (28.1%)
Corporate Investment banking  2,339   6,440   7,579   (63.7%)  (15.0%)
Other  (5,694)  4,496   974   (226.6%)  361.6%
Total provisions, net  (317,408)  (302,255)  (342,083)  5.0%  (11.6%)

Net provisions for expected credit losses for the year ended December 31, 2018 are not comparable to net provisions for previous year due to the adoption of IFRS 9 as of January 1, 2018.

We believe that our provisionloan loss allowances are currently adequate for all known and expected credit losses.

For the years ended December 31, 2017 and 2016(in accordance with IAS 39). Provisions for loan losses.losses, net totaled Ch$302,255 million in 2017 and decreased 11.6% compared to the amount of provisions recorded in 2016.

 

  Year ended December 31, % Change % Change
  2016 2015 2014 2016/2015 2015/2014
  (in millions of Ch$)
Provision for loan losses  (409,159)  (454,462)  (403,069)  (10.0%)  12.8%
Charge-off of loans analyzed on an individual basis  (11,222)  (12,955)  (10,811)  (13.4%)  19.8%
Recoveries on loans previously charged-off  78,298   68,140   58,977   14.9%  15.5%
Provision for loan losses, net  (342,083)  (399,277)  (354,903)  (14.3%)  12.5%
Year end loans (1)  27,206,431   25,300,757   22,892,649   7.5%  10.5%
Non-performing loans (2)  564,131   643,468   644,327   (12.3%)  (0.1%)
Impaired loans (3)  1,615,441   1,669,340   1,617,251   (3.2%)  3.2%
Allowance for loan losses (4)  790,605   762,301   684,317   3.7%  11.4%
Impaired loans / Year end loans (5)  5.94%  6.60%  7.06%        
Non-performing loans / Year end loans (2)  2.07%  2.54%  2.81%        
Allowances for loan losses / Total loans  2.91%  3.01%  2.99%        
Coverage ratio non-performing loans (5)  140.15%  118.47%  106.21%        

  Year ended December 31,  % Change 
  2017  2016  2017/2016 
          
Provision for loan losses  (370,083)  (409,159)  (9.6%)
Charge-off of loans analyzed on an individual basis  (15,699)  (11,222)  39.9%
Recoveries on loans previously charged-off  83,527   78,298   6.7%
Provision for loan losses, net  (302,255)  (342,083)  (11.6%)
Year end loans (1)  27,725,914   27,206,431   1.9%
Non-performing loans (2)  633,461   564,131   12.3%
Impaired loans (3)  1,803,173   1,615,441   11.6%
Allowance for loan losses (4)  791,157   790,605   0.1%
Impaired loans / Year end loans (5)  6.50%  5.94%    
Non-performing loans / Year end loans (2)  2.28%  2.07%    
Allowances for loan losses / Total loans  2.85%  2.91%    
Coverage ratio non-performing loans (5)  124.89%  140.15%    
             
(1)Loans and accounts receivable from customers including Ch$162,685 million in 2017 and Ch$272,807 million in 2016 Ch$10,877 million in 2015 and Ch$11,943 million in 2014 in interbank loans.

(2)Non-performing loans include the aggregate unpaid principal and accrued but unpaid interest on all loansof any loan with at least one installment that is at least 90 days past-due.past-due, and do not accrue interest.

(3)ImpairedPrior to January 1, 2018, impaired loans include:include (a) for loans individually evaluated for impairment: (i) the carrying amount of all loans to clients that are rated C1 through C4, D1 and D2 and (ii) the carrying amount of all loans to an individual client with at least one non-performing loan (which is not a residential mortgage loan past due less than 90 days), regardless of category; and (b) for loans collectively evaluated for impairment, the carrying amount of all loans to a client, when at least one loan to that client is not performing or has been renegotiated. See “Note 9—11— Loans and Accounts ReceivablesAccount Receivable from Customers—(a)Customers and Interbank Loans and accounts receivables from customers” in(under IFRS 39)” of the Audited Consolidated Financial Statements. Renegotiated loans, on which payments are not past-due, are not ordinarily classified as non-performing loans, but do not accrue interest.

(4)Allowance for loan losses for loans and accounts receivable from customers, including Ch$472 million in 2017 and Ch$4,135 million in 2016 Ch$1,166 million in 2015 and Ch$1 million in 2014 in allowance for loan losses for interbank loans.

(5)Calculated as allowance for loan losses divided by non-performing loans.

For the years ended December 31, 2016 and 2015. Provisions for loan losses, net of recoveries totaled Ch$342,083 million in 2015 and decreased 14.3% compared to the amount of provisions recorded in 2015.

 

Provision for loan losses, which includes the full amount of provisions recognized as a result of loan growth and change in risk classification as well as the net result of provisions and charge-offs of loans analyzed on a group basis, totaled Ch$370,083 million in 2017 compared to Ch$409,159 million in 2016 compared to Ch$454,462 million in 2015 and decreased 10.0%9.6%. The following table breaks down provision for loans losses by loan product for the years ended December 31, 2016, 20152017 and 2014.2016.

  Year ended December 31,  % Change 
  2017  2016  2017/2016
  (in millions of Ch$)     
Interbank loans  3,663   (2,969)  (223.4%)
Commercial loans  (136,923)  (137,242)  (0.2%)
Mortgage loans  (32,194)  (16,646)  93.4%
Consumer loans  (205,949)  (249,754)  (17.5%)
Contingent loans  1,320   (2,548)  —%
Total(1)  (370,083)  (409,159)  (9.6%)

 

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        % Change
  2016 2015 2014 2016/2015 2015/2014
  (in millions of Ch$)
Interbank loans  (2,969)  (1,165)  494   154.8%  —%
Commercial loans  (137,242)  (197,247)  (203,454)  (30.4%)  (3.1%)
Mortgage loans  (16,646)  (27,168)  (18,346)  (38.7%)  48.1%
Consumer loans  (249,754)  (230,811)  (180,666)  8.2%  27.8%
Contingent loans  (2,548)  1,929   (1,097)  (232.1%)  (275.8%)
Total(1)  (409,159)  (454,462)  (403,069)  (10.0%)  12.8%

 

(1)Includes the full amount of provisions recognized as a result of loan growth and change in risk classification as well as the net result of provisions and charge-offs of loans analyzed on a group basis

 

In general, there was a decrease in the provision expense for commercial loans due to improving asset quality. Non-performing loans as a percentage of the loan portfolio decreased from 2.5% in 2015 to 2.1% in 2016 and the non-performing loans coverage ratio increased from 118.5% to 140.2%. This environment also led to a decrease in the loans charged-off during 2016 to Ch$11,222 million.


 

The provision expense for loan loss for commercial loans decreased from Ch$197,247 million in 2015 to Ch$137,242 million in 2016. This was mainly due2016 to an improvementCh$136,923 million in asset quality in commercial loans.2017. The non-performing loan ratio of commercial loans reached 2.6% in 2017 compared to 2.3% in 2016 compared to 2.6% in 2015. This improvement in asset quality was due to two factors. First,and the NPLimpaired loan ratio among small to middle-sized entities in retail banking decreasedincreased from 6.8% in 2015 to 5.8% in 2016. Second, there was an improvement in asset quality among loans evaluated on an individual basis, which resulted in a provision expense of Ch$17,819 million6.7% in 2016 compared to an expense of Ch$78,354 million7.3% in 2015.2017. This was due to (i) a 2.6%can be explained by the 23.0% decrease in loan volumes in global corporate banking, (ii) an unusually high provision expenseGCB, which have practically no non-performing loans and also the negative effects of a low growth economic environment over commercial loans, especially in 2015the SME portfolio.

At the same time during September 2017, and as part of the normal process of updating the provisioning model for specific corporate clients that were downgradedloans analyzed on a group basis, the Bank calibrated these models, incorporating a greater historical depth, including a recession period, thus strengthening the parameters of probability of default and (iii)loss given default. This calibration resulted in an increase in 2016 in the numberprovisions associated with commercial loans analyzed on group basis of clients that either improved their risk status or paid their loans.Ch$9,040 million.

 

Provisions for mortgage loans decreasedincreased by 38.7% from93.4% to Ch$27,16832,194 million in 20152017 compared to Ch$16,646 million in 2016. During 2016, the Bank lowered its exposure to the lower end of the market and lowered the loan-to-value of residential mortgages at origination, which led to an improvement in mortgage loan asset quality and in April 2016 the mortgage loan allowance model was recalibrated resulting in a decrease in mortgage loan allowance of approximately Ch$3,500 million. The Bank also focused mortgage loan growth on higher income earners with less risk and, as a result, mortgage loans for high income earners grew 10.3% in 2016. The non-performing ratio for mortgage loans decreased from 2.1%increased to 1.8% in 2015 tofrom 1.7% in 2016, andhowever, the impaired mortgage loans ratio also improvedwent up from 5.1% in 2015 to 4.6% in 2016.2016 to 4.4% in 2017.

At the same time during September 2017, and as part of the normal process of updating the provisioning model for loans analyzed on a group basis, the Bank calibrated the provisioning model for mortgage loans, incorporating a greater historical depth, including a recession period, thus strengthening the parameters of probability of default and loss given default. This calibration resulted in an increase in provisions associated with mortgage loans of Ch$8,161 million.

 

The provision expense for consumer loans increased 8.2% during 2016, primarily attributable to growthdecreased 17.5%. During September 2017, and as part of 7.1%the normal process of updating the provisioning model for loans analyzed on a group basis, the Bank recalibrated these models, resulting in a decrease in provisions associated with consumer loans in the loan portfolioamount of Ch$19,499 million. Excluding this, the decrease in 2016. During 2016,provision expense from consumer loans was 9.7%. This reduction was mainly due to the Bank lowered itscontinued process of lowering our exposure to Santander Banefe, the brand aimed at the lower end of the consumer market, and restricted renegotiations for consumer clients presenting payment difficulties, which ledincreasing exposure to an increase in charge-offs in 2016 and improvements in consumer loan asset quality.high-income earners. This was partially offset by recoveries from loans previously charged-off that increased from Ch$35,565 million in 2015 to Ch$41,072 million in 2016.the negative impact of slower economic growth and rising unemployment on consumer asset quality. The consumer non-performing loans ratio was 2.3% in 2017 compared to 2.2% in 2016 compared to 2.7% in 2015 and the2016. The impaired consumer loan ratio decreasedincreased from 8.9% in 2015 to 6.5% in 2016.

Recoveries on loans previously charged-off increased 14.9%2016 to 7.2% in 2016 compared to 2015. This was due to higher recoveries from charged-off consumer and residential mortgage loans mainly due to improved recovery efforts.2017.

 

For a description of the provisions related to our consumer loans, residential mortgage loans and commercial loans analyzed on a group basis, please see “Item 5. Operating and Financial Review and Prospects—C. Selected Statistical Information—Classification of Loan Portfolio—Classification of Loan Portfolio—Loans analyzed on a group basis—Allowances for residential mortgage loans” and “—Loans analyzed on a group basis—Small and mid-sized commercial loans.basis.”

 

Additionally, the provisions for interbank loans increased in 2016 tototaled a reversal of Ch$2,969 million, mainly3,663 million. This was due to the growthdecline in interbank loans in the loan portfolio. In 2016, the Bank granted loans to Chinese banks due to Chilean foreign trade with China. See “Item 5. Operating and Financial Review and Prospects—C. Selected Statistical Information-Classification of Loan Portfolio—Foreign Assets and loans.” The contingent loans in 2016 registered a provision expense of Ch$2,548 million in 2016 compared to a release of Ch$1,929 million in 2015, due to an increase in preapproval of available credit lines.

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The following table shows recoveries of loans previously charged-off by type of loan.

  

Year ended December 31, 

 

% Change 

 

% Change 

  

2016 

 

2015 

 

2014 

 

2016/2015 

 

2015/2014 

  (in millions of Ch$)
Recovery of loans previously charged-off                    
Consumer loans  41,072   35,565   36,908   15.5%  (3.6%)
Residential mortgage loans  10,041   6,543   5,122   53.5%  27.7%
Commercial loans  27,185   26,032   16,947   4.4%  53.6%
Total recoveries  78,298   68,140   58,977   14.9%  15.5%

In some instances, we will sell a portfolio of charged-off loans to a third party. Gain (loss) on these charged-off loans is recognized as net income from financial transactions as disclosed in “Note 27—Profit and Loss from Financial Operations” of our Audited Consolidated Financial Statements. The following table sets forth information about our sale of charged-off loans for the year ended December 31, 2016, 2015 and 2014.

  

Year ended December 31, 

 

% Change 

 

% Change 

  

2016 

 

2015 

 

2014 

 

2016/2015 

 

2015/2014 

  (in millions of Ch$)
Gains (losses) on sale of loans previously charged-off  2,720   (58)  4,809   —%   —% 

The following table sets forth, for the periods indicated, our net provision expense broken down by business segment:

  

Year ended December 31, 

 

% Change 

 

% Change 

  

2016 

 

2015 

 

2014 

 

2016/2015 

 

2015/2014 

  (in millions of Ch$)
Retail banking  (323,888)  (332,657)  (325,621)  (2.6%)  2.2%
Middle-market  (26,748)  (26,147)  (22,034)  2.3%  18.7%
Global corporate banking  7,579   (28,426)  1,924   (126.7%)  —%
Other  974   (12,047)  (9,172)  (108.1%)  31.3%
Total provisions, net  (342,083)  (399,277)  (354,903)  (14.3%)  12.5%

Net provisions expense from retail banking decreased 2.6% in 2016 compared to 2015. This is in line with our strategy of focusing on higher income clients, net of risk for loans for individuals and SMEs, which has led to better asset quality in the loan portfolio.

Net provision expense from the Middle-market segment was stable in 2016, increasing 2.3% compared to 2015 due to an increase of 6.5% in the loan portfolio.

Net provision expense from Global corporate banking totaled a release of provisions of Ch$7,579 million, a 126.7% decrease from 2015 due to the significant increase of provisions in 2015 for specific clients that were downgraded and that in 2016 either improved their risk status or paid their loans.

Total provisions, net included in Others reached a gain of Ch$974 million compared to the loss of Ch$12,047 million. In Other provision expense, we mainly include the impact of the fluctuation of the exchange rate on our provision expense. Of our total loan book, 12.1% is in foreign currency, mainly in U.S. dollars and consisting of short-term foreign trade loans. When the peso depreciates, the amount of provisions set aside for these loans translated to local currency rises. In 2016 the average depreciation of the peso was 3.5%, considerably less than the depreciation in 2015 of 14.8% .This impact has a corresponding hedge recognized in the results from financial transactions and for this reason it is not assigned to any reporting segment.

We believe that our loan loss allowances are currently adequate for all known and estimated incurred losses.

For the years ended December 31, 2015 and 2014. Provisions for loan losses, net of recoveries totaled Ch$399,277 million in 2015 and increased 12.5% compared to the amount of provisions recorded in 2014.

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Provision for loan losses, which includes the full amount of provisions recognized as a result of loan growth and change in risk classification as well as the net result of provisions and charge-offs of loans analyzed on a group basis, totaled Ch$454,462 million in 2015 compared to Ch$403,069 million in 2014 and increased 12.8%.

Provisions established for the Bank’s consumer loans increased by 27.8% to Ch$230,811 million in 2015 compared to 2014. During the second half of 2014, and as a response to the ongoing improvement of the allowances models for loans, the Bank updated its allowances model for consumer loans. The models were calibrated with the aim of improving the prediction of client behavior and maintaining statistical and management standards. Part of these improvements consisted of the advancement of the models’ governance allowing technical and decisional approvals at different points of the approval process, more robust statistical processes and more historical information, allowing stronger parameters of the Probability of Non-Performance (PNP) and the Severity (SEV) involved in the provision calculation. These changes in 2014 resulted in the release of consumer provisions of Ch$26,563 million in 2014. As this is a change in estimation, this improvement was recognized under the "Provisions for loan losses" in the Consolidated Statement of Income for the year in accordance with IAS 8. See “Item 5. Operating and Financial Review and Prospects—C. Selected Statistical Information-Classification of Loan Portfolio— Classification of Loan Portfolio-Loans analyzed on a group basis—Allowances for consumer loans.”

Excluding this effect in 2014, consumer loan loss provisions grew 11.4%. This rise was mainly due to: (i) consumer loan growth, which reached 5.9% year over year in 2015 compared to 2014, and (ii) greater charge-offs of consumer loans assessed on a group basis. In light of lower economic growth, the Bank restricted renegotiations of consumer loans for customers presenting payment difficulties and this resulted in higher charge-offs. As a result of this policy, the consumer non-performing loans ratio reached 2.7% in 2015 compared to 2.5% in 2014 as more clients became non-performing. Overall asset quality trends, measured according to the impaired consumer loan ratio, remained healthy in 2015. The impaired consumer loan ratio decreased from 9.3% in 2014 to 8.9% in 2015 as growth in the consumer loan book was focused on high income earners that are usually less risky.

Provision expense in commercial lending decreased 3.1% in 2015 compared to 2014. During the second half of 2014, and as a response to the ongoing improvement of the allowances models for loans, the Bank updated its allowances model for commercial loans analyzed on a group basis. The models were calibrated with the aim of improving the prediction of client behavior and maintaining statistical and management standards. Part of these improvements consisted of the advancement of the models’ governance allowing technical and decisional approvals at different points of the approval process, more robust techniques of statistical processes and more historical information, allowing stronger parameters of the Probability of Non-Performance (PNP) and the Severity (SEV) involved in the provision calculation. These changes resulted in an increase in commercial provisions of Ch$45,141 million. As this is a change in estimation, this impact was recognized under the "Provisions for loan losses" in the Consolidated Statement of Income for the year in accordance with IAS 8.

Excluding this impact, provisions for commercial loans grew 24.6% in the period being analyzed. This rise was mainly due to higher provisions in Global corporate banking as the Bank downgraded various corporate clients affected by the slower economic environment, but which have not yet entered non-performing status. On the other hand, asset quality in commercial loans in retail banking improved throughout 2015, as the Bank focused growth on less risky commercial retail customers. The NPL ratio in commercial loans decreased from 3.0% in 2014 to 2.6% in 2015 mainly due to improvements in asset quality in retail banking. The impaired commercial loan ratio reached 7.1% in 2015 compared to 7.2% at year-end 2014.

Provisions for mortgage loans increased 48.1% in 2015 compared to 2014. This rise was mainly due to: (i) mortgage loan growth, which increased 17.8% in the period being analyzed, and (ii) greater charge-offs of mortgage loans. In light of lower economic growth, the Bank has been restricting the renegotiations of mortgage loans for customers presenting some payment difficulties and this resulted in higher charge-offs. The Bank also focused mortgage loan growth on higher income earners that in general are less risky. As a result of the change in the loan mix and the higher charge-offs, mortgage loan asset quality improved in 2015 compared to 2014. The non-performing ratio for mortgage loans declined from 2.7% in 2014 to 2.1% in 2015. The impaired mortgage loans ratio also improved from 5.6% in 2014 to 5.1% in 2015.

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For a description of the provisions related to our residential mortgage loans and commercial loans analyzed on a group basis, please see “Item 5. Operating and Financial Review and Prospects—C. Selected Statistical Information—Classification of Loan Portfolio—Classification of Loan Portfolio—Loans analyzed on a group basis—Allowances for residential mortgage loans” and “—Loans analyzed on a group basis—Small and mid-sized commercial loans.”

Additionally, the lower economic growth in 2015 resulted in a rise in charge-off of loans analyzed on an individual basis that totaled Ch$12,955 million in 2015 and rose 19.8% compared to 2014.year.

 

Recoveries on loans previously charged-off increased 15.5%6.7% in 20152017 compared to 2014.2016. This was due to higher recoveries offrom charged-off commercial and residential mortgage loans mainly due to improved recovery efforts, especially in the Middle-market segment. As the Bank has improved the asset quality in consumer lending, the growth rate of recoveries has also diminished.efforts.

 

In some instances, we will sell a portfolio of charged-off loans to a third party. Gain (loss) on these charged-off loans is recognized as net income from financial transactions as disclosed in “Note 27—Profit and Loss29—Net Income (Expense) from Financial Operations” of our Audited Consolidated Financial Statements.

 

Net provisions expense from retail banking increased 2.2%decreased 9.2% in 20152017 compared to 2014. Excluding2016. This is in line with our strategy of focusing on higher income clients, net of risk for loans for individuals which has led to less provisions for loan losses and the netreversal of provision due to the calibration of our consumer provisioning model described above. This was partially offset by the negative impact of Ch$18,578 million as a result of modifications made toslower economic growth and rising unemployment on consumer asset quality and the provisioning models forgreater provision expense recognized in commercial loans assessedanalyzed on a group basis done in 2014, provision expense in retail banking increased 8.3%. This rise was mainly due to: (i) retail loan growth that totaled 12.1% in 2015 compared to 2014, and (ii) greater charge-offs. The Bank, in lightthe recalibration of slower economic growth, restricted renegotiations of retail loans, which resulted in a greater amount of loans being charged-off.the provisioning model.

 

Net provision expense from in the Middle-market segment increased 18.7% compareddecreased by 28.1% in 2017 due to 2014. In 2015, the Bank performed various downgradesimprovement in asset quality, compensated by an increase of specific clients mainly5.9% in the salmon industry.loan portfolio.


 

Net provision expense from Global corporateCorporate Investment banking totaled a lossrelease of provisions of Ch$28,4266,440 million, compareda 15.0% decrease from the release of provisions in 2016 due to net reversal of Ch$1,924 milliona 23.0% decrease in 2014. In 2015,the loan portfolio in this segment as the Bank downgraded specific clientsfocused on non-lending products, such as cash management, that generate a higher return than lending in the non-bank financial sectors and a client in the agro-industrial sector due to company specific weaknesses.this segment.

 

Total provisions, net included in Others reached a gain of Ch$12,0474,496 million compared to the Ch$9,172974 million. In Other provision expense, we mainly include the impact of the fluctuation of the exchange rate on our provision expense. Of our total loan book, 13.3% is in foreign currency, mainly in dollars and consisting of short-term foreign trade loans. When the peso depreciates, as was the case in 2015 and 2014,appreciates, the amount of provisions set aside for these loans translated to local currency rises.decreases. In 2017 the average appreciation of the peso was 4.1%, compared to the depreciation in 2016 of 3.5%, leading to a greater release of provisions. This impact has a corresponding hedge recognized in the results from financial transactions and for this reason it is not assigned to any reporting segment.

 

We believe that our loan loss allowances are currently adequate for all known and estimated incurred losses.

 

Operating expenses

 

The following table sets forth information regarding our operating expenses in the years ended December 31, 2016, 20152018, 2017 and 2014.2016.

 

 Year ended December 31, % Change % Change Year ended December 31,  % Change  % Change 
 2016 2015 2014 2016/2015 2015/2014  2018   2017   2016   2018/2017  2017/2016
 (in millions of Ch$) (in millions of Ch$) 
Personnel salaries and expenses  (395,133)  (387,063)  (338,888)  2.1%  14.2%  (397,564)  (396,967)  (395,133)  0.2%  0.5%
Administrative expenses  (226,413)  (220,531)  (205,149)  2.7%  7.5%  (245,089)  (230,103)  (226,413)  6.5%  1.6%
Depreciation and amortization  (65,359)  (53,614)  (44,172)  21.9%  21.4%  (79,280)  (77,823)  (65,359)  1.9%  19.1%
Impairment  (234)  (21)  (36,664)  1,014.3%  (99.9%)  (39)  (5,644)  (234)  (99.3%)  2312.0%
Other operating expenses  (68,902)  (58,729)  (58,946)  17.3%  (0.4%)  (32,342)  (68,413)  (68,902)  (52.7%)  (0.7%)
Total operating expenses  (756,041)  (719,958)  (683,819)  5.0%  5.3%  (754,314)  (778,950)  (756,041)  (3.2%)  3.0%
Efficiency ratio(1)  44.9%  43.8%  41.1%          41.1%  43.3%  44.9%        

 

 

(1)The efficiency ratio is the ratio of total operating expenses to total operating income. Total operating income consists of net interest income, fee income, financial transactions, net and other operating income.

 

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For the years ended December 31, 20162018 and 20152017. Operating expenses in the year ended December 31, 20162018 decreased 5.0%3.2% compared to the corresponding period in 2015.2017. The efficiency ratio was 41.1% in 2018, 43.3% in 2017 and 44.9% in 2016, 43.8% in 2015 and 41.1% in 2014.2016.

 

The 2.1%0.2% increase in personnel salaries and expenses was mainly due to an increase in personnel compensation and greater costs related to benefits included inbelow the Bank’s collective bargaining agreement. In 2016, CPI inflation was 2.7% andof 2.6%, even though all salaries are indexed to inflation pursuant to the collective bargaining agreement. This was offset by the 3.1% reductiondespite an increase in headcount of 2.1% to 11,354 employeesa total of 11,305 employees. This decrease in December 2016, in line withexpenses is mainly due to the Bank’s strategy of reducing mid-upper level management levels and the sales force.force during 2017, which lowered variable compensation.

 

Administrative expenses increased 2.7%6.5% in the year ended December 31, 20162018 compared to the corresponding period in 2015,2017, mainly due to IT and communication expenses that increased from Ch$28,420 millionthe continued investment in 2015 to Ch$37,351 million in 2016 as part of technological innovation to maintain and developtechnology transforming the Bank’s digital platform, which will allowplatforms and the Bank to consolidate the branchesbranch network and createtherefore creating efficiencies in the long term.

In 2016,2018, the Bank begancontinued to transform the branch network, adopting two main formats (i) a multi-segment approach with smaller branches that are multi-segment with dedicated spaces for the different business segments (Select, SME Advance, Banefe, etc.) and: (ii)roll-out our efficient Work Café spaces that are high tech / high touch branches with no human tellers or back offices.offices, reaching a total of 40 by the end of the year. We also launched a new branch style for Select/Private banking with a team of investment experts on site to give personalized advice to our higher income clients. We also started to pilot our WorkCafé 2.0 for smaller branches and incorporating artificial intelligence into interactions with clients. During 2018 we continued to reduce the ATM network, focusing on extending the network within our branches or places with increased security measures. By the end of 2018 we had a total of 380 branches and 910 ATMs. In 2018, we also increased our cyber security expenditures which totaled Ch$ 11,055 million in 2018.

 

 Year ended December 31, % Change Year ended December 31,  % Change 
 2016 2015 2016/2015 2018  2017  2018/2017
Traditional branches  274   276   (0.7%)  287   307   (6.5%)
Middle-market centers  8   8   —%  7   7   —%
Santander Select  53   53   —%  46   51   (9.8%)
Banefe and other payment centers  88   134   (34.4%)
Workcafés  40   20   100.0%
Total branches  434   471   (7.9%)  380   385   (1.3%)
Total ATMs  910   926   (1.7%)

 

(1)As of December 31, 2017 all Banefe branches were closed down.


Depreciation and amortization expense increased 21.9%1.9% in 20162018 compared to 20152017 and totaled Ch$65,35979,280 million. This expense is in line with thecontinued greater investments in software, hardware and other equipment that the Bank has madeinvested in as it modernizescontinued to innovate in its branch network and systems. This has also ledImpairment charges decreased to an increase in impairment charges to Ch$23439 million in 20162018 compared to Ch$215,664 million in 20152017 mainly related to our ATM network.less impairment associated to ATMs. In 2017, impairment expenses were higher due greater impairments for obsolescence of fixed assets and technology projects of Ch$5,290 million.

 

Other operating expenses were Ch$68,90232,342 million in 2016,2018, a 17.3% increase52.7% decrease compared to 2015. In April 2016, the Bank made changes to the management structure in line with the strategy of reducing mid-upper management levels, incurring a one-off expense of Ch$10,789 million2017. This was mainly due to severance payments ..lower operational charge-offs. See “Note 33—35—Other operating incomeOperating Income and expenses”Expenses” to our Audited Consolidated Financial Statements for more detail on Other operating expenses.

 

The following table sets forth, for the periods indicated, our personnel salaries, administrative and depreciation and amortization expenses broken down by business segment. These amounts exclude impairment and other operating expenses.

 

 Year ended December 31, % Change % Change Year ended December 31,  % Change  % Change 
 2016 2015 2014 2016/2015 2015/2014 2018  2017  2016  2018/2017 2017/2016
 (in millions of Ch$) (in millions of Ch$) 
Retail banking  (529,909)  (533,086)  (479,954)  (0.6%)  11.1%  (553,157)  (534,970)  (529,909)  3.4%  1.0%
Middle-market  (83,412)  (77,261)  (66,321)  8.0%  16.5%  (92,377)  (91,882)  (83,412)  0.5%  10.2%
Global corporate banking  (53,935)  (49,533)  (44,195)  8.9%  12.1%
Corporate Investment banking  (64,913)  (62,685)  (53,935)  3.6%  16.2%
Other  (19,649)  (1,328)  2,261   1379.6%  —%  (11,486)  (15,356)  (19,649)  (25.2%)  (21.8%)
Total personnel, administrative expenses, depreciation and amortization (1)  (686,905)  (661,208)  (588,209)  3.9%  12.4%  (721,933)  (704,893)  (686,905)  2.4% 

 

 

2.6%

 

 

(1)Excludes impairment and other operating expenses.

 

By business segment, the 3.9%2.4% increase in costs excluding impairment and other operating expenses in 20162018 compared to the corresponding period in 20152017 was mainly due toa rise in cost in the 0.6% decrease in costs incurred in retail banking. In 2016, retail banking costs decreased mainly as a result of lower headcount partially offset by greater expenses related to the investment in better digital banking services.Retail and Corporate Investment Banking. Costs in the Middle-market segment grew 8.0%0.5% in 2018 compared to 2017 due to higher spending in IT and 3.6% in the Corporate Investment Banking segment mainly due to transactional banking and cash management services that are intense in data processing.

Retail segment costs grew 3.4% in 2018 compared to 2017 due to higher spending in transforming branches to our new WorkCafé format, and investments in information technology for greater digital banking services.

For the years ended December 31, 2017 and 2016. Operating expenses in the year ended December 31, 2017 increased 3.0% compared to the corresponding period in 2016. The efficiency ratio was 43.3% in 2017, 44.9% in 2016 and 43.8% in 2015.

The 0.5% increase in personnel salaries and expenses was below the CPI inflation of 2.3%, even though all salaries are indexed to inflation pursuant to the collective bargaining agreement. This was mainly due to the 2.5% reduction in headcount to 11,068 employees in December 2017, in line with the Bank’s strategy of reducing mid-upper level management levels and the sales force.

Administrative expenses increased 1.6% in the year ended December 31, 2017 compared to the corresponding period in 2016, mainly due to IT investments to develop the Bank’s digital platform, which is allowing the Bank to consolidate the branches and create efficiencies in the long term. In 2016, the Bank began to transform the branch network, adopting two main formats (i) a multi-segment approach with smaller branches that are multi-segment with dedicated spaces for the different business segments (Select, SME Advance, Banefe, etc.) and (ii) our WorkCafé spaces that are high tech / high touch branches with no human tellers or back offices. This was also accompanied by the closure of less efficient branches, especially in the Santander Banefe network, which were completely eliminated by year-end 2017. This has led to a 11.3% decrease in the number of branches in the period. The Bank has also been reducing the ATM network from 1,295 to 926. This reduction has mainly been for ATMs outside of branches and is leading to less expenses for security and the transportation of cash by 17.7%.

 

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Depreciation and amortization expense increased 19.1% in 2017 compared to 2016 and totaled Ch$77,823 million. This expense is in line with the greater investments in software, hardware and other equipment that the Bank has invested in as it modernizes its branch network and systems. This has also led to an increase in impairment charges to Ch$5,644 million in 2017 compared to Ch$234 million in 2016 mainly related to obsolete fixed asset in remodeled branches.

Other operating expenses were Ch$68,413 million in 2017, a 0.7% decrease compared to 20152016. This was mainly due to lower operational charge-offs. See “Note 35—Other Operating Income and 8.9%Expenses” to our Audited Consolidated Financial Statements for more detail on Other operating expenses.

By business segment, the 2.6% increase in costs excluding impairment and other operating expenses in 2017 compared to the corresponding period in 2016 was mainly due a rise in cost in the Global corporateMiddle-market and GCB. Costs in the Middle-market segment grew 10.2% in 2017 compared to 2016 and 16.2% in the Corporate Investment banking segment in line with business growth in this segment, especially in transactional banking and cash management services that are intense in data processing.

 

For the years ended December 31, 2015 and 2014. Operating expenses in the year ended December 31, 2015 increased 5.3% compared to the corresponding period in 2014. The efficiency ratio was 43.8% in 2015, 41.1% in 2014 and 40.2% in 2013.

The 14.2% increase in personnel salaries and expenses was mainlyIn Retail banking costs grew 1.0% due to an increase in personnel compensation, higher severance paymentslower average headcount and greater costs related to benefits included insaving from the Bank’s collective bargaining agreement. The 9.5% increase in personnel compensation, which totaled Ch$233,707 million in 2015, was mainly due to: (i) growth in total headcountclosure of 2.1% to 11,723 people, (ii) the impact of the Bank’s meritocracy policies and (iii) the impact of CPI inflation on wages. In 2015, CPI inflation was 4.4% and all salaries are indexed to inflation per collective bargaining agreement. Severance payments increased 222.4% to Ch$34,051 million. The Bank in 2015 executed a program to eliminate high level management positions in order to mitigate cost growth which entailed greater severance payments. In March 2014, a new collective bargaining agreement was signed with the main unions, which became effective on October 1, 2014, and which will expire on December 31, 2018. This resulted in an increase in certain benefits related to the Bank’s health insurance fund and other benefits.

Administrative expenses increased 7.5% in the year ended December 31, 2015 compared to the corresponding period in 2014. The increase in administrative expenses was mainly due to the 14.3% increase in maintenance, repair of property, plant and equipment, which totaled Ch$20,002 million. In 2015, the Bank continued to refurbish branches, open new Santander Select branches, expand the number of Middle-market centers and close Santander Banefe branches and other payment centers.

The Bank’s total Outsourced service expenses increased 21.8% in 2015 compared to 2014 and totaled Ch$39,286 million. The Bank outsources various functions especially data processing and IT services. These increasedATMs as a result of the depreciation of the peso against the Euro, since several of the firms that provide the Bank with IT services are in Spain. Imbedded in the Bank results from financial transactions, net is an offsetting result, since this exposure to foreign currency is hedged. Finally the Bank marketing expenses rose 12.6% to Ch$18,483 millionwell as the Bank promoted more intensively various new products and was a sponsor for the Copa America tournament held in Chile in 2015.

Impairment charges totaled Ch$21 million in 2015 compared to Ch$36,664 million in 2014. In 2014, the Bank initiated a plan to transform its business and operating model with a better focus on the client. In 2014, the Bank evaluated a number of applications that were in use or in development and tested them for impairment. Following the testing, in accordance with IAS 36, the Bank has recognized an impairment of Ch$36,556 million in 2014 due to the abandonment of unnecessary systems.

Depreciation and amortization expense increased 21.4% in 2015 compared to 2014 and totaled Ch$53,614 million. This rise was mainly due to the increase in depreciation of equipment that reached Ch$18,417 million in 2015 compared to Ch$12,331 million in 2014. This is in line with the greater investments in hardware and other equipment as the Bank modernizes its branch network and systems.

Other operating expenses were Ch$58,729 million in 2015, a 0.4% decrease compared to 2014. In 2015, customer service expenses, which are related to our phone banking service, decreased 60.6% due to cost restructurings. Additionally in 2015, the Bank had less expenses related to adopting chip technology on cards. These lower other operating expenses were offsetefficiencies produced by greater provisions for assets received in lieu of payment. See “Note 33—Other operating income and expenses” to our Audited Consolidated Financial Statements for more detail on Other operating expenses.

By business segment, the 12.4% increase in costs excluding impairment and other operating expenses in 2015 compared to the corresponding period in 2014 was mainly due to the 11.1% increase in costs incurred in retail banking. In 2015, the Bank continued with its strategy of shifting its strategic focus away from retail clients attended in the Santander Banefe branch network and more towards high income earners and small and mid-sized enterprises. This implied additional costs mainly in our distribution network and technology. Costs in the Middle-market segment grew 16.5% in 2015 compared to 2014 as this segment was a growth priority during the year, increasing in terms of size of balance sheet and headcount. Finally, costs in Global corporatedigital banking rose 12.1% in line with business growth in this segment, especially in transactional banking and cash management services that are intense

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in data processing. All segments costs were also affected by the depreciation of the peso against the euro in 2015, which has a negative impact on IT costs denominated in that currency.services.

 

Income tax

 

 Year ended December 31, % Change % Change Year ended December 31,  % Change  % Change 
 2016 2015 2014 2016/2015 2015/2014 2018  2017  2016  2018/2017 2017/2016
 (in millions of Ch$) (in millions of Ch$) 
Net income before tax  587,463   528,124   626,940   11.2%  (15.8%)  766,837   720,280   587,463   6.5%  22.6%
Income tax expense  (109,031)  (76,395)  (51,050)  42.7%  49.6%  (167,144)  (145,031)  (109,031)  15.2%  33.0%
Effective tax rate(1)  18.6%  14.5%  8.1%          21.8%  20.1%  18.6%        

 

 

(1)The effective tax rate is the income tax expense divided by net income before tax.

 

For the years ended December 31, 20162018 and 20152017. Total income tax expense by the Bank in 20162018 totaled Ch$109,031167,144 million, a 42.7%15.2% increase compared to 2015.2017. The Bank paid an effective tax rate of 18.6%21.8% in 20162018 compared to 14.5%20.1% in 2015.2017. The higher effective tax rate was mainly due to:

 

(i)the statutory corporate tax rate increased from 22.5% in 2015 to 24.0% in 2016. In 2017, the statutory corporate tax rate will rise to 25.5% in 2017 andto 27.0% in 2018; and

 

(ii)income tax expenses includes non-cash income of Ch$86 million in 2016 from the re-adjustments made to the Bank’s deferred tax asset base following passage of the new tax law compared to an income of Ch$10,600 million in 2015. This gain arises from the difference between the Bank’s accounting and tax books regarding how provisions and charge-offs are recognized. When the statutory rates were modified, the Bank’s net deferred tax assets increased as the future tax rates used to calculate this asset were gradually increased from 20.0% to 27.0%;

(iii)the lowerhigher CPI inflation rate in 20162018 compared to 2015 also resulted in lower losses2017, leading to a greater loss associated to the price level restatement for the revaluation of capital for inflation.tax purposes. The Bank, in its Chilean tax book, accounting, must re-measure its capital each year for the variation in CPI inflation. See “Note 14—16—Current and Deferred Taxes” of the Audited Consolidated Financial Statements for more detail on income tax expense.

 

For the years ended December 31, 20152017 and 20142016. Total income tax expense by the Bank in 20152017 totaled Ch$76,395145,031 million, a 49.6%33.0% increase compared to 2014.2016. The Bank paid an effective tax rate of 14.5%20.1% in 20152017 compared to 8.1%18.6% in 2014.2016. The higher effective tax rate was mainly due to:

 

(i)the statutory corporate tax rate increased from 21.0%24.0% in 20142016 to 22.5%25.5% in 2015. In 2016, the2017. The statutory corporate tax rate rose to 24.0% in 2016 and will rise to 25.5% in 2017 and 27.0% in 2018; and

 

(ii)income tax expenses in included non-cash income of Ch$10,600 million in 2015 from the re-adjustments made to the Bank’s deferred tax asset base following passage of the new tax law compared to Ch$39,262 million in 2014. The Bank has more deferred tax assets than liabilities. This gain arises from the difference between the Bank’s accounting and tax books regarding how provisions and charge-offs are recognized. When the statutory rates were modified, the Bank’s net deferred tax assets increased as the future tax rates used to calculate this asset were gradually increased from 20.0% to 27.0%;

(iii)the lower CPI inflation rate in 20152017 compared to 20142016 also resulted in lower permanent differences sincelosses for the price level restatement for tax purposes. The Bank, forin its Chilean tax purposes,book, must re-valuere-measure its capital each year for the variation in CPI inflation. See “Note 14—16—Current and Deferred Taxes” of the Audited Consolidated Financial Statements for more detail on income tax expense.

 


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B.Liquidity and Capital Resources

B. Liquidity and Capital Resources

 

Sources of Liquidity

 

Santander-Chile’s liquidity depends upon its (i) capital, (ii) reserves and (iii) financial investments, including investments in government securities. To cover any liquidity shortfalls and to augment its liquidity position, Santander-Chile has established lines of credit with foreign and domestic banks and also has access to Central Bank borrowings.

 

The following table sets forth our contractual obligations and commercial commitments by time remaining to maturity. As of the date of the filing of this Annual Report, the Bank does not have significant purchase obligations. As of December 31, 2016,2018, the scheduled maturities of our contractual obligations and of other commercial commitments, including accrued interest, were as follows:

 

DemandUp to 1 monthBetween 1 and 3 monthsBetween 3 and 12 monthsSubtotal up to 1 yearBetween 1 and 3 yearsBetween 3 and 5 yearsMore than 5 yearsSubtotal after 1 yearTotal Demand Up to 1
month		 Between
1 and 3
months		 Between
3 and 12
months		 Subtotal
up to 1
year		 Between
1 and 3
years		 Between
3 and 5
years		 More
than 5
years		 Subtotal
after 1
year		 Total 
As of December 31, 2016(in millions of Ch$)
As of December 31, 2018 (in millions of Ch$) 
Obligations under repurchase agreements

—

212,437

—

212,437 

—

—

—

212,437 

 — 48,545 — —  48,545  — — — —  48,545 
Checking accounts, time deposits and other time liabilities (1)

7,949,315

6,105,767

4,193,906

2,537,299

 20,786,287

118,101

13,913

61,196

193,210

20,979,497 

 9,027,434 5,248,418 4,108,556 3,326,199  21,710,607  191,547 6,137 63,988  261,672 21,972,279 
Financial derivatives contracts— 92,335 122,565 263,893 478,793494,539346,948 971,8811,813,368 2,292,161 — 131,378 120,361 349,551  601,290  495,789 471,185 949,464  1,916,438 2,517,728 
Interbank borrowings 4,557 373,423 115,769 1,154,063 1,647,812 233,542 35,014— 268,556 1,916,368 39,378 16,310 404,575 1,188,692  1,648,955  139,671 — —  139,671 1,788,626 
Issue debt instruments — 43,141 185,425 922,705 1,151,2711,168,1171,444,593 3,562,3916,175,101 7,326,372 — 71,465 39,267 745,830  856,562  2,431,849 1,549,743 3,277,079  7,258,671 8,115,233 
Other financial liabilities (2) 153,049 1,461 1,1612,817 158,488 58,641 7,766 15,121 81,528240,016 179,681 934 2,412 22,844  205,871  9,261 92 176  9,529 215,400 
Subtotal8,106,921 6,828,564 4,618,826 4,880,777 24,435,088 2,072,940 1,848,234 4,610,589 8,531,763 32,966,851  9,246,493 5,517,050 4,675,171 5,633,116 25,071,830 3,268,117 2,027,157 4,290,707 9,585,981 34,657,811 
Contractual interest payments (3) 2,273 56,121 170,861 537,941 767,1961,762,884—987,3702,750,254 3,517,450 4,918  82,292  158,760  812,920  1,058,890  1,156,262  1,110,918  1,537,385  3,804,565  4,863,455 
Total8,109,1946,884,6854,789,6875,418,71825,202,2843,835,8241,848,2345,597,959 11,282,01736,484,301 9,251,411  5,599,342  4,833,931  6,446,036  26,130,720  4,424,379  3,138,075  5,828,092  13,390,546  39,521,266 

 

 

(1)Includes demand deposits and other demand liabilities, cash items in process of being cleared and time deposits and other time liabilities.

 

(2)Mainly includes amounts owed to credit card processors and to the Chilean Production Development Corporation (Corporación de Fomento de la Producción de Chile), the state development agency.

 

(3)The table above includes future cash interest payments. For variable rate obligations, we assume the same rate as the last rate known. Various of the payment obligations in the table above are variable debt instruments, since they are denominated in UF, for which we have estimated a long-term inflation rate equal to 3%, which is at the center of the Central Bank’s long-term inflation target. No exclusions requiring further explanation have been made in this table.

 

Operational Leases

 

Certain bank premises and equipment are leased under various operating leases. Future minimum rental commitments as of December 31, 20162018 under non-cancelable leases are as follows:

 

 

As of
December 31, 2016 

2018
 (in millions of Ch$)
Due within 1 year26,45525,702
Due after 1 year but within 2 years24,90324,692
Due after 2 years but within 3 years20,58222,439
Due after 3 years but within 4 years17,32119,574
Due after 4 years but within 5 years14,56917,250
Due after 5 years53,69463,945
Total157,524173,602

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Other Commercial Commitments

 

As of December 31, 2016,2018, the scheduled maturities of other commercial commitments, including accrued interest, were as follows:

 

Other Commercial Commitments Up to 1 month Between 1 and 3 months Between 3 and 12 months Between 1 and 5 years More than 5 years Total
  (in millions of Ch$)
Guarantees  79,457   175,437   739,170   592,017   151,435   1,737,516 
Confirmed foreign letters of credit  12,247   8,125   8,505   28,809   —   57,686 
Letters of credit issued  36,662   82,342   39,768   27   —   158,799 
Pledges and other commercial commitments  9,916   11,591   39,811   63,731   —   125,049 
Total other commercial commitments  138,282   277,495   827,254   684,584   151,435   2,079,050 

Other Commercial Commitments Up to 1
month		  Between
1 and 3
months		  Between 3
and 12
months		  Between 1
and 5
years		  More than 5 years  Total 
(in millions of Ch$)
Performance guarantee  663,642   188,147   905,554   163,506   33,356   1,954,205 
Foreign letters of credit confirmed  3,842   9,128   33,177   10,891   —   57,038 
Letters of credit issued  12,469   110,970   54,015   45,937   29   223,420 
Personal guarantees  22,128   63,230   41,637   6,628   —   133,623 
Total other commercial commitments  702,081   371,475   1,034,383   226,962   33,385   2,368,286 

 

Risk-Weighted Assets and Regulatory Capital

 

We currently have regulatory capital in excess of the minimum requirement under the current Chilean regulations. According to the General Banking Law, a bank is required to have regulatory capital of at least 8.0% of its risk-weighted assets, net of required loan loss allowances, and paid-in capital and reserves (i.e., core capital) of at least 3.0% of its total assets, net of required loan loss allowances. For these purposes, the regulatory capital of a bank is the sum of: (1) the bank’s core capital; (2) subordinated bonds issued by the bank valued at their placement price for an amount up to 50.0% of its core capital, provided that the value of the bonds is required to be decreased by 20.0% for each year that elapses during the period commencing six years prior to their maturity; and (3) its voluntary allowances for loan losses, for an amount of up to 1.25% of its risk-weighted assets. Santander-Chile does not have goodwill, but if it did, this value would be required to be deducted from regulatory capital. When calculating risk weighted assets, we also include off-balance sheet contingent loans. The merger of Old Santander Chile and Santiago on August 1, 2002 required a special regulatory pre-approval of the SBIF (predecessor of the FMC), which was granted on May 16, 2002. The resolution granting this pre-approval imposed a regulatory capital to risk weighted assets ratio of 12.0% for the merged bank. This requirement was reduced to 11.0% by the SBIF effective January 1, 2005. For purposes of weighing the risk of a bank’s assets, the General Banking Law considers five different categories of assets, based on the nature of the issuer, the availability of funds, and the nature of the assets and the existence of collateral securing such assets.

 

The following table sets forth our consolidated and risk-weighted assets and regulatory capital as of December 31, 20162018 and 20152017 as required by the SBIF.Chilean regulation.

 

 

Consolidated assets as of 

 

Risk-weighted assets(1) 

 Consolidated assets as of  

Risk-weighted assets(1)

 
 

December 31, 2016 

 

December 31, 2015 

 

December 31, 2016 

 

December 31, 2015 

 December 31,
2018		  December 31,
2017		  December 31,
2018		  December 31,
2017		 
 (Ch$ million) (Ch$ million)             
Asset Balance (Net of allowances)                        
Cash and deposits in bank  2,279,389   2,064,806   —   —   2,065,441   1,452,922   —   — 
Unsettled transactions  495,283   724,521   80,623   80,447   353,757   668,145   105,421   300,302 
Trading investments  396,987   324,271   24,709   57,796   77,041   485,736   10,704   25,031 
Investments under resale agreements  6,736   2,463   6,736   493   —   —   —   — 
Financial derivative contracts(2)  1,285,157   1,425,450   943,727   1,158,218 
Financial derivative contracts(2)  1,226,892   1,014,070   868,578   718,426 
Interbank loans  272,635   10,861   80,200   1,505   15,065   162,599   15,064   162,598 
Loans and accounts receivables from customers  26,113,485   24,535,201   22,655,553   21,480,044   29,470,370   26,747,542   25,403,426   23,102,177 
Available-for-sale investments  3,388,906   2,044,411   263,016   222,784   2,394,323   2,574,546   172,859   147,894 
Investments in other companies  23,780   20,309   23,780   20,309   32,293   27,585   32,293   27,585 
Intangibles assets  58,085   51,137   58,085   51,137   66,923   63,219   66,923   63,219 
Property, plant and equipment  257,379   240,659   257,379   240,659   253,586   242,547   253,586   242,547 
Current taxes  —   —   —   —   —   —   —   — 
Deferred taxes  372,699   331,714   37,270   33,171   382,934   385,608   38,293   38,561 
Other assets  840,499   1,097,826   585,739   603,503   984,988   755,184   983,299   722,617 
Off-balance sheet assets                                
Contingent loans  3,922,023   4,516,319   2,221,018   2,507,530   4,624,073   4,133,897   2,649,730   2,360,877 
Total  39,713,043   37,389,948   27,237,835   26,457,596   41,947,686   38,713,600   30,600,176   27,911,834 


         Ratio 
   December 31,
2018		  December 31,
2017		  December 31,
2018		  December 31,
2017		 
   (Ch$ million)   %   % 
Core capital(3)   3,239,546   3,066,180   7.72   7.92 
Regulatory capital(4)   4,101,664   3,881,252   13.40   13.91 

 

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      Ratio
  December 31, 2016 December 31, 2015 December 31, 2016 December 31, 2015
     (Ch$ million)   %   % 
 Core capital(3)   2,868,706   2,734,699   7.22   7.31 
 Regulatory capital(4)   3,657,707   3,538,216   13.43   13.37 

 

(1)As required by local regulations.

(2)Derivatives are shown as required by Chapter 12-1 RAN of Chilean Bank GAAP guidelines

(3)As a percentage of total assets.

(4)As a percentage of risk weighted assets (BIS ratio).

 

Under the New General Banking Law, minimum capital requirements have increased in terms of amount and quality. Total Regulatory Capital remains at 8% of risk-weighted assets which includes credit, market and operational risk. Minimum Tier 1 capital increased from 4.5% to 6% of risk-weighted assets, of which up to 1.5% may be Additional Tier 1 (AT1), either in the form of preferred shares or perpetual bonds, both of which may be convertible to common equity. The FMC will now establish the conditions and requirements for the issuance of perpetual bonds and preferred equity. Tier 2 capital is now set at 2% of risk-weighted assets. Additional capital demands are incorporated through a Conservation Buffer of 2.5% of risk-weighted assets, setting a Total Equity Requirement of 10.5% of risk-weighted assets. The BCCh may set an additional Counter Cyclical Buffer of up to 2.5% of risk-weighted assets with agreement from the FMC. Both buffers must be comprised of core capital.

The FMC, with agreement from the BCCh, may impose additional capital requirements for Systemically Important Banks (“SIB”) of between 1-3.5% of risk-weighted assets. Notably, the BCCh may require: (1) the addition of up to 2% to the core capital to total assets ratios; (2) a reduction in the technical reserve requirement trigger from 2.5 times regulatory capital to 1.5 times regulatory capital; and/or (3) a reduction in the interbank loan limit to 20% of regulatory capital of any SIB. While the FMC has not yet established the criteria to assess which banks will be considered SIBs, it is probable that we will be classified an SIB.

Financial Investments

As of January 1, 2018 the Bank adopted IFRS 9 as follows:

On initial recognition, financial assets and financial liabilities are measured at the transaction price, i.e. the fair value of the consideration given or received (IFRS 13). In the case of financial instruments not at fair value through profit or loss, transaction costs are directly attributable to the acquisition or issue of the financial asset or financial liability. After initial recognition, an entity shall measure a financial liability at amortized cost and an entity shall measure a financial asset at:

(a)Amortized cost

Financial assets that are held in a business model to collect the contractual cash flows and contain contractual terms that give rise on specific dates to cash flows that are SPPI, are measured at amortized cost.

The effective interest method is used in the calculation of the amortized cost of a financial asset or a financial liability and in the allocation and recognition of the interest revenue or interest expense in profit or loss over the relevant period. The effective interest rate (“EIR”) is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the amortized cost of a financial liability.

(b)Fair value through other comprehensive income (FVOCI)

Financial assets that are debt instruments held in a business model that is achieved by both collecting contractual cash flow and selling, and that contain contractual terms that give rise on specific dates to cash flows that are SPPI, are measured at FVOCI. They are subsequently remeasured at fair value and changes therein (except for those relating to impairment, interest income and foreign currency exchange gains and losses) are recognized in other comprehensive income, until the assets are sold. Upon disposal, the cumulative gain and losses in OCI are recognized in the income statement.


(c)Fair value through profit or loss (FVTPL)

Financial assets that do not contain contractual terms that give rise on specified dates to cash flows that are SPPI, or if the financial assets, or if the financial asset is not held in a business model that is either (i) a business model to collect the contractual cash flows or (ii) a business model that is achieved by both collecting contractual cash flows and selling.

Financial assets held for trading are recognized at fair value through profit or loss, likewise derivatives contracts for trading purposes.

(d)Equity instruments

For certain equity instruments, the Bank may make an irrevocable election to present subsequent changes in the fair value of the instrument in other comprehensive income, except for dividend income which is recognized in profit or loss. Gains or losses on derecognition of these equity instruments are not transferred to profit or loss.

Prior to January 1, 2018 the Bank classified financial instruments in accordance with IAS 39 as follows:

 

Financial assets are classified into the following specified categories: financial assets trading investments at fair value through profit or loss (FVTPL), “held‘held to maturity”maturity investments’, ‘available for sale investments “available-for-sale investments” (AFS) financial assets’ and “loans‘loans and accounts receivable from customers.”customers’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assetsthe asset within the time frame established by regulation or convention in the marketplace.

 

Effective interest method

 

The effective interest method is a method of calculating the amortized cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.

 

Income is recognized on an effective interest basis for debt instruments other than those financial assets classified as at fair value through profit or loss.

 

Financial assets at FVTPL — Trading investments

 

Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at fair value through profit or loss.

 

A financial asset is classified as held for trading if:

 

·●it has been acquired principally for the purpose of selling it in the near term; or

 

·●on initial recognition it is part of a portfolio of identified financial instruments that the Bank manages together and has a recent actual pattern of short-term profit-taking; or

 

·●it is a derivative that is not designated and effective as a hedging instrument.

 

A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if:

 

·●such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or

 


·●the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Bank'sBank’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or

 

·●it forms part of a contract containing one or more embedded derivatives, and IAS 39 permits the entire combined contract to be designated as at FVTPL.

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Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the ‘net income (expense) from financial operations'operations’ line itemitem.

 

Held to maturity investments

 

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Bank has the positive intent and ability to hold to maturity. Subsequent to initial recognition, held-to-maturity investments are measured at amortized cost using the effective interest method less any impairment.

 

Available-for-sale investments (AFS investments)

 

AFS investments are non-derivatives that are either designated as AFS or are not classified as (a) loans and accounts receivable from customers, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss (trading investments).

 

Financial instruments held by the Bank that are traded in an active market are classified as AFS and are stated at fair value at the end of each reporting period. The Bank also has investments in financial instruments that are not traded in an active market but that are also classified as AFS investments and stated at fair value at the end of each reporting period (because the directors consider that fair value can be reliably measured). Changes in the carrying amount of AFS monetary financial assets relating to changes in foreign currency rates, interest income calculated using the effective interest method and dividends on AFS equity investments are recognized in profit or loss. Other changes in the carrying amount of available-for-sale investments are recognized in other comprehensive income and accumulated under the heading of Valuation Adjustment. When the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation reserve is reclassified to profit or loss.

 

Dividends on AFS equity instruments are recognized in profit or loss when the Bank'sBank’s right to receive the dividends is established.

 

The fair value of AFS monetary financial assets denominated in a foreign currency is determined in that foreign currency and translated asconverted to Chilean pesos using the described in f) above.market rate. The foreign exchange gains and losses that are recognized in profit or loss are determined based on the amortized cost of the monetary asset.

 

AFS equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and derivatives that are linked to and must be settled by delivery of such unquoted equity investments are measured at cost less any identified impairment losses at the end of each reporting period.

 

Detail regarding the financial investments discussed above is presented below.

 

a) Financial Assets Held For Trading / Trading Investments

 

   As of December 31,  
   2016   2015   2014 
   (in millions of Ch$)  
Central Bank and Government Securities            
Chilean Central Bank bonds  158,686   159,767   270,004 
Chilean Central Bank notes  —   —   — 
Other Chilean Central Bank and government securities  237,325   123,468   461,340 
Subtotal  396,011   283,235   731,344 
Other Chilean Securities            
Time deposits in Chilean financial institutions  —   —   — 
Mortgage bonds of Chilean financial institutions  —   —   — 
Chilean financial institutions bonds  —   —   — 
Chilean corporate bonds  976   37,630   36,339 
Other Chilean securities  —   —   — 
Subtotal  976   37,630   36,339 
Foreign securities            
Foreign Financial Securities  —   —   — 
Other foreign financial instruments  —   —   — 
Subtotal  —   —   — 
Investments in mutual funds  —   —   — 
Funds managed by related entities  —   3,406   7,132 
Subtotal  —   3,406   7,132 
             
Total  396,987   324,271   774,815 

  As of December 31, 
  2018  2017  2016 
  (in millions of Ch$) 
Central Bank and Government Securities            
Chilean Central Bank bonds  22,947   272,272   158,686 
Other Chilean Central Bank and government securities  48,211   209,370   237,325 
Subtotal  71,158   481,642   396,011 
Other Chilean Securities            
Chilean corporate bonds  —   —   976 
Subtotal  —   —   976 
Foreign securities            
Other foreign financial instruments  5,883   —   — 
Subtotal  5,883   —   — 
Investments in mutual funds  —   4,094   — 
Subtotal  —   4,094   — 
             
Total  77,041   485,736   396,987 

 

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b) Debt instruments at fair value through other comprehensive income (FVOCI) - under IFRS 9

 

b) Available-for-saleAs of December 31, 2018, the debt instruments at fair value through other comprehensive income (FVOCI) in accordance with IFRS 9 is as follows:

 

  As of December 31,
  2016 2015 2014
  (in millions of Ch$)
Central Bank and Government Securities      
Chilean Central Bank bonds  468,386   687,292   381,117 
Chilean Central Bank notes  1,222,283   —   384 
Other Chilean Central Bank and government securities  52,805   145,603   353,419 
Subtotal  1,743.474   832,895   734,920 
Other Chilean Securities            
Time deposits in Chilean financial institutions  893,000   712,859   590,382 
Mortgage bonds of Chilean financial institutions  25,488   29,025   31,693 
Chilean financial institution bonds  —   —   — 
Chilean corporate bonds  —   —   — 
Other Chilean securities  —   —   — 
Subtotal  918,488   741,884   622,075 
Foreign Financial Securities            
Central Bank and Government Foreign Securities  387,146   —   — 
Other Foreign financial securities  339,798   469,632   294,603 
Subtotal  726,944   469,632   294,603 
Total  3,388,906   2,044,411   1,651,598 
As of December 31,
2018
MCh$
Chilean central bank and government securities
Chilean central bank bonds657,096
Chilean central bank notes56,719
Other Chilean central bank and government securities1,207,221
Subtotal1,921,036
of which sold under repurchase agreement16,109
Other Chilean securities
Time deposits in Chilean financial institutions2,693
Mortgage finance bonds of Chilean financial institutions19,227
Other instruments issued in the country2,907
Subtotal24,827
of which sold under repurchase agreement32,436
Foreign financial securities
Foreign Central Banks and Government securities280,622
Other foreign financial securities167,838
Subtotal448,460
of which sold under repurchase agreement—
Total2,394,323

Available-for-sale Instruments – under IAS 39

For periods prior to January 1, 2018, the Bank valued available for sale instruments in accordance with IAS 39.

  As of December 31, 
  2017  2016 
  (in millions of
Ch$)		    
Central Bank and Government Securities        
Chilean Central Bank bonds  816,331   468,386 
Chilean Central Bank notes  330,952   1,222,283 
Other Chilean Central Bank and government securities  1,115,518   52,805 
Subtotal  2,262,801   1,743,474 


  As of December 31, 
  2017  2016 
  (in millions of
Ch$)		     
Other Chilean Securities        
Time deposits in Chilean financial institutions  2,361   893,000 
Mortgage bonds of Chilean financial institutions  22,312   25,488 
Chilean financial institution bonds  —   — 
Chilean corporate bonds  —   — 
Other Chilean securities  3,000   — 
Subtotal  27,673   918,488 
Foreign Financial Securities        
Central Bank and Government Foreign Securities  132,822   387,146 
Other Foreign financial securities  151,250   339,798 
Subtotal  284,072   726,944 
Total  2,574,546   3,388,906 

  

c) Held-to-maturity

 

No financial investments were classified as held-to-maturity as of December 31, 2016, 20152017 and 2014.2016.

Analysis of investments

 

The following table sets forth an analysis of our investments as of December 31, 20162018 by remaining maturity and the weighted average nominal rates of such investments.

 

As of December 31, 2018 Within
one year		 Weighted
average
Nominal
Rate		 After one
year but
within
five years		 Weighted average
Nominal
Rate		 After five
years but
within ten
years		  Weighted average
Nominal
Rate		 After ten years Weighted
average
Nominal
Rate		 Total Weighted average Nominal
Rate		 
 Within one year After one year but within five years  Weighted average Nominal Rate  After five years but within ten years Weighted average Nominal Rate After ten years After ten years Weighted average Nominal Rate Total Weighted average Nominal Rate (in millions of Ch$, except rates) 
 (in millions of Ch$, except rates)
Trading                    
Financial Assets Held For Trading / Trading Investments                      
Central Bank and Government Securities                                          
Central Bank bonds  44,461   1.7   93,313   0.3   20,880   0.4   32   1.5   158,686   0.7   673 0.3 22,242 0.3 — — 32 0.2 22,947 0.3 
Central Bank notes  —   —   —   —   —   —   —   —   —   —   — — — — — — — — — — 
Central Bank and government securities  140,079   1.1   88,453   2.6   8,739   0.3   54   2.8   237,325   1.6   12,033 0.2 14,169 0.2 891 0.2 21,118 0.4 48,211 0.3 
Subtotal  184,540       181,766       29,619       86       396,011       12,706     36,410     891     21,150     71,158    
Other Chilean Securities                                                              
Time deposits in Chilean financial institutions  —   —   —   —   —   —   —   —   —   —   — — — — — — — — — — 
Mortgage bonds of Chilean financial institutions  —   —   —   —   —   —   —   —   —   —   — — — — — — — — — — 
Chilean financial institutions bonds  —   —   —   —   —   —   —   —   —   —   — — — — — — — — — — 
Chilean corporate bonds  —   —   420   2.4   556   1.5   —   —   976   1.9   — — — — — — — — — — 
Other Chilean securities  —   —   —   —   —   —   —   —   —   —   — — — — — — — — — — 
Subtotal  —       420       556       —       976       —   —   —   —   —   
Foreign Financial Securities                      
Other foreign financial instruments  — — — — 5,883 0.5 — — 5,883 0.5 
Subtotal  —     —     5,883     —     5,883    
Investment in mutual funds                                                              
Mutual funds administered by related parties  —   —   —   —   —   —   —   —   —   —   — — — — — — — — — — 
Subtotal  —   —   —   —   —   —   —   —   —   —   —   —   —   —   —   
Total  184,540       182,186       30,175       86       396,987       12,706     36,410     6,774     21,150     77,041    
                                        

 

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As of December 31, 2018 Within one year  Weighted average Nominal Rate  After one year but within five years  Weighted average Nominal Rate  After five years but within ten years  Weighted average Nominal Rate  After ten years  Weighted average Nominal Rate  Total  Weighted average Nominal Rate 
 Within one year Weighted average Nominal Rate After one year but within five years Weighted average Nominal Rate After five years but within ten years Weighted average Nominal Rate After ten years Weighted average Nominal Rate Total Weighted average Nominal Rate (in millions of Ch$, except rates) 
 (in millions of Ch$, except rates)
Available-for-sale                    
Debt instruments at FVOCI                                        
Central Bank and Government Securities                                                                                
Central Bank bonds  11,046   1.3   373,786   4.2   83,555   4.2   —   —   468,386   4.1   —   —   657,096   2.3   —   —   —   —   657,096   2.3 
Central Bank notes  1,222,283   —   —   —   —   —   —   —   1,222,283   —   56,719   0.3   —   —   —   —   —   —   56,719   0.3 
Central Bank and government securities  13,707   1.2   686   4.1   38,412   4.4   —   —   52,805   3.5   —   —   622,294   2.9   365,424   4.1   219,503   4.0   1,207,221   3.5 
Subtotal  1,247,036       374,472       121,966       —       1,743,474       56,719       1,279,390       365,424       219,503       1,921,036     
Other Chilean Securities                                                                                
Time deposits in Chilean financial institutions  893,000   0.4   0   —   —   —   —   —   893,000   0.4   2,693   —   —   —   —   —   —   —   2,693   3.3 
Mortgage bonds of Chilean financial institutions  47   3.9   1,287   3.7   12,083   3.8   12,071   3.5   25,488   3.7   40   3.9   2,711   4.0   13,377   3.5   3,100   3.9   19,227   3.7 
Chilean financial institutions bonds  —   —   —   —   —   —   —   —   —   —   —   —   —   —   —   —   —   —   —   — 
Chilean corporate bonds  —   —   —   —   —   —   —   —   —   —   —   —   —   —   —   —   —   —   —   — 
Other Chilean securities  —   —   —   —   —   —   —   —   —   —   —   —   —   —   —   —   2,907   —   2,907   — 
Subtotal  893,047       1,287       12,083       12,071       918,488       2,733       2,711       13,377       6,007       24,827     
Other financial securities                                                                                
Central Bank and Government Foreign Securities  6,658   0.7   —   —   380,488   1.5   —   —   387,146   1.5   —   —   103,310   —   177,312   —   —   —   280,622   — 
Other Foreign financial securities  —   —   42,081   2.3   297,717   3.1   —   —   339,798   3.0   —   —   —   2.8   167,838   3.1   —   —   167,838   3.1 
Subtotal  6,658       42,081       678,205       —       726,944       —       103,310       345,150       —       448,460     
Total  2,146,742       417,840       812,255       12,071       3,388,906       59,452       1,385,411       723,951       225,510       2,394,323     

 

Working Capital

 

As a bank, we satisfy our working capital needs through general funding, the majority of which derives from deposits and other borrowings from the public. (See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Deposits and Other Borrowings”). In our opinion, our working capital is sufficient for our present needs.

 

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Liquidity Management

 

Liquidity management seeks to ensure that, even under adverse conditions, we have access to the funds necessary to cover client needs, maturing liabilities and capital requirements. Liquidity risk arises in the general funding for our financing, trading and investment activities. It includes the risk of unexpected increases in the cost of funding the portfolio of assets at appropriate maturities and rates, the risk of being unable to liquidate a position in a timely manner at a reasonable price and the risk that we will be required to repay liabilities earlier than anticipated.

 

The following table sets forth the balance of our liquidity portfolio managed by our Financial Management Division in the manner in which it is presented to the Asset and Liability Committee (ALCO) and the Board. The ALCO has determined that our liquidity portfolio must be comprised of cash plus assets that can be readily convertible into cash either through the Central Bank window, overnight deposits or instruments or the local secondary market. The management of the Bank’s liquidity portfolio is performed by the Financial Management Division under rules determined by the ALCO.ALCO and based on classifications by the SBIF and the Bank’s management.

 

  December 31, 2016 December 31, 2015
  Ch$ million
Balance as of:    
Financial investments for trading  396,987   324,271 
Available-for-sale investments  3,388,906   2,044,411 
Encumbered assets (net) (1)  (205,703)  (77,647)
Net cash (2)  16,259   (315,415)
Net interbank deposits (3)  1,335,017   1,683,208 
Total liquidity portfolio  4,931,466   3,658,829 

  December 31, 2018  December 31, 2017 
  Ch$ million 
Balance as of:        
Trading Investments  77,041   485,736 
Available-for-sale investments  2,394,323   2,574,546 
Encumbered assets (net)(1)  (48,843)  (268,330)
Net cash(2)  149,321   (37,628)
Net interbank deposits(3)  967,095   768,595 
Total liquidity portfolio  3,538,937   3,522,919 

 
(1)Assets encumbered through repurchase agreements are deducted from the liquidity portfolio

 

(2)Total cash minus reserve requirement of the Central Bank

 

(3)Includes overnight deposits in the Central Bank, domestic banks and foreign banks

 

  December 31, 2016 December 31, 2015
  Ch$ million
Average balance as of:    
Financial investments for trading  277,775   405,352 
Available-for-sale investments  2,455,220   1,902,050 
Encumbered assets (net) (1)  (90,460)  (74,664)
Net cash (2)  (202,771)  (244,186)
Net interbank deposits (3)  1,263,768   1,197,325 
Total liquidity portfolio  3,703,533   3,185,876 


  December 31, 2018  December 31, 2017 
  Ch$ million 
Average balance as of:        
Financial investments for trading  259,654   457,546 
Available-for-sale investments  2,690,184   2,562,753 
Encumbered assets (net)(1)  (134,408)  (254,563)
Net cash(2)  109,757   (49,425)
Net interbank deposits(3)  613,259   1,025,280 
Total liquidity portfolio  3,538,446   3,741,591 
 
(1)Assets encumbered through repurchase agreements are deducted from the liquidity portfolio

 

(2)Total cash minus reserve requirement of the Central Bank

 

(3)Includes overnight deposits in the Central Bank, domestic banks and foreign banks

 

Our general policy is to maintain liquidity adequate to ensure our ability to honor withdrawals of deposits, make repayments of other liabilities at maturity, extend loans and meet our own working capital needs. Our minimum amount of liquidity is determined by the statutory reserve requirements of the Central Bank. Deposits are subject to a statutory reserve requirement of 9.0% for demand deposits and 3.6% for Chilean peso-, UF- and foreign currency denominated time deposits with a term of less than a year. See “Item 4. Information on the Company—B. Business Overview—Competition—Regulation and Supervision.” The Central Bank has statutory authority to increase these percentages to up to 40.0% for demand deposits and up to 20.0% for time deposits. In addition, a 100.0% special reserve (reserva técnica) applies to demand deposits, deposits in checking accounts, other demand deposits received or obligations payable on sight and incurred in the ordinary course of business, other than deposits unconditionally payable immediately. This special reserve requirement applies to the amount by which the total of such deposits exceeds 2.5 times the amount of a bank’s regulatory capital. Interbank loans are deemed to have a maturity of more than 30 days, even if payable within the following 10 days.

 

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The Central Bank also requires us to comply with the following liquidity limits:

 

·●The sum of the liabilities with a maturity of less than 30 days may not exceed the sum of the assets with a maturity of less than 30 days by an amount greater than our Shareholders’ equity. This limit must be calculated in local currency and foreign currencies together as one gap. At December 31, 20162018 the percentage of (i) our liabilities with a maturity of less than 30 days in excess of our assets with a maturity of less than 30 days to (ii) our capital and reserves was 15.0%25.0%, thus resulting in our compliance.

 

·●The sum of the liabilities in foreign currency with a maturity of less than 30 days may not exceed the sum of the assets in foreign currency with a maturity of less than 30 days by more than an amount greater than our Shareholders’ equity. At December 31, 20162018 the percentage of (i) our liabilities with a maturity of less than 30 days in foreign currency in excess of our assets in foreign currency with a maturity of less than 30 days to (ii) our capital and reserves was 0%0.0%, as the Bank had more foreign currency assets than liabilities for the calculation of this limit.

 


·●The sum of the liabilities with a maturity of less than 90 days may not exceed the sum of the assets with a maturity of less than 90 days by more than 2 times our Shareholders’ equity. This limit must be calculated in local currency and foreign currencies together as one gap. At December 31, 2016the2018 the percentage of (i) our liabilities with a maturity of less than 90 days in excess of our assets with a maturity of less than 90 days to (ii) our capital and reserves was 37.0%39.4%, thus resulting in our compliance.

 

We have set other liquidity limits and ratios that minimize liquidity risk. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”

 

Cash Flow

 

The tables below set forth our main sources of cash. The subsidiaries are not an important source of cash flow for us and therefore have no impact on our ability to meet our cash obligations. No legal or economic restrictions exist on the ability of subsidiaries to transfer funds to us in the form of loans or cash dividends as long as these subsidiaries abide by the regulations of theLey General de Bancos and theLey de Sociedad Anónimas regarding loans to related parties and minimum dividend payments. See our Consolidated Statements of Cash Flows in our Audited Consolidated Financial Statements for a detailed breakdown of the Bank’s cash flow.

 

  Year ended December 31,
  2016 2015 2014
  Millions of Ch$
Net cash provided by (used in) operating activities  736,154   687,796   282,423 
  Year ended December 31, 
  2018  2017  2016 
  Millions of Ch$ 
Net cash (used in) provided by operating activities  1,022,522   (416,357)  736,154 

 

Our operating activities generated cash of Ch$736,1541,022,522 million in 2016. The consumption of cash2018, mainly due to the expansion of our loans book and financial investments was offset by the cash provided from our funding activities, especially the issuance of bonds. Senior bonds provided cash of Ch$3,537,855 million in 2016 compared to Ch$878,389 million in 2015, partially offset by an increase in redemptionsliquidity at the end of 2018 particularly from time deposits. This was compensated by strong loan growth during the year. The higher amount of fees and interest received also boosted cash from operating activities.

 

Our operating activities generatedused cash of Ch$687,796416,357 million in 2015. The consumption of cash due to2017. As loan growth and interest paid was more than offset by growth of deposits and interest and fee income received. Cash flow provided by total deposits was Ch$2,513,690 millionslower in 2015 compared to Ch$1,466,272 million in 2014. Our operating activities generated cash of Ch$282,423 million in 2014. The consumption of cash due to loan growth and the expansion of2017, we effectively managed our financial investments was more than offset by growth ofliabilities, decreasing our time deposits and other liabilities, but atobligations with banks as well as partially repaying senior bonds, achieving a slower pace than in 2015.better cost of funding for the Bank.

 

 

Year ended December 31, 

 

2016 

2015 

2014 

 Millions of Ch$
Net cash (used in) provided by investment activities(90,200)(92,865)(92,666)
     

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  Year ended December 31, 
  2018  2017  2016 
  Millions of Ch$ 
Net cash (used in) provided by investment activities  (91,595)  (73,458)  (90,200)
             

In 2016,2018, the Bank’s investment activities consumed cash in an amount of Ch$90,200 million. This was mainly91,595 million due to purchases of property, plant and equipment and the acquisition of shares in connection with investments in affiliates. For more information please see Note 1 b) of our Audited Consolidated Financial Statements.fixed assets.

 

In 2015,2017, the Bank’s investment activities consumed cash in an amount of Ch$92,865 million. This was mainly73,458 million due to the purchases of property, plant and equipment and the acquisition of intangibles. In 2014, the Bank’s investment activities consumed cash in an amount of Ch$92,666 million. This was also mainly due to the purchases of property, plantfixed assets and equipment and the acquisition of intangibles.intangibles such as software.

 

  Year ended December 31,
  2016 2015 2014
  Millions of Ch$
Net cash used in financing activities  (336,659)  (330,199)  (265,156)
  Year ended December 31, 
  2018  2017  2016 
  Millions of Ch$ 
Net cash used in financing activities  (423,611)  (330,645)  (336,659)

 

In 2016, 20152018, 2017 and 2014,2016, the net cash used in financing activities can be explained by the Bank’s annual dividend payment each year.

 

Deposits and Other Borrowings

 

The following table sets forth our average balance of liabilities for the years ended December 31, 2016, 20152018, 2017, and 2014,2016, in each case together with the related average nominal interest rates paid thereon.

 

 2016 2015 2014 2018  2017  2016 
 Average Balance % of Total Average Liabilities Average Nominal Rate Average Balance % of Total Average Liabilities Average Nominal Rate Average Balance % of Total Average Liabilities Average Nominal Rate Average Balance  % of Total Average Liabilities  Average Nominal Rate  Average Balance  % of Total Average Liabilities  Average Nominal Rate  Average Balance  % of Total Average Liabilities  Average Nominal Rate 
 (in millions of Ch$, except percentages) (in millions of Ch$, except percentages) 
Interest-bearing liabilities                                                      
Savings accounts  116,339   0.3%  2.5%  114,330   0.3%  3.4%  108,185   0.3%  5.0%  117,885   0.3%  2.7%  117,305   0.3%  1.6%  116,339   0.3%  2.5%
Time deposits  13,620,848   38.6%  3.3%  12,685,504   36.7%  3.2%  11,952,994   36.5%  3.4%  13,154,916   35.3%  2.8%  13,146,520   37.0%  2.9%  13,620,848   38.6%  3.3%
Central Bank borrowings  871   —   3.4%  4,891   —   1.0%  6,906   —   0.2%  4   0.0%  6.0%  6   0.0%  2.2%  871   —   3.4%
Repurchase agreements  121,875   0.3%  2.4%  228,050   0.7%  3.1%  413,263   1.3%  2.0%  291,913   0.8%  2.3%  294,368   0.8%  2.3%  121,875   0.3%  2.4%
Mortgage finance bonds  52,414   0.1%  8.1%  63,061   0.2%  10.2%  81,805   0.2%  11.9%  28,685   0.1%  8.0%  38,714   0.1%  7.0%  52,414   0.1%  8.1%
Other interest bearing liabilities  7,856,201   22.3%  5.0%  7,500,408   21.7%  5.5%  6,865,084   21.0%  6.9%  9,401,475   25.3%  4.8%  8,632,128   24.4%  4.0%  7,856,201   22.3%  5.0%
Subtotal interest-bearing liabilities  21,768,547   61.8%  3.7%  20,596,244   59.6%  4.0%  19,428,237   59.4%  4.6%  22,994,878   61.8%  3.6%  22,229,041   62.6%  3.3%  21,768,548   61.6%  3.7%
                                                                        
Non-interest bearing liabilities                                                                        
Non-interest bearing deposits  5,753,622   16.3%      5,719,889   16.6%      5,386,272   16.5%      6,763,546   18.2%      6,117,644   17.2%      5,753,622   16.3%    
Derivatives  2,724,994   7.7%      2,958,942   8.6%      2,719,386   8.3%      2,020,857   5.4%      2,175,063   6.1%      2,724,994   7.8%    
Other non-interest bearing liabilities  2,156,015   6.1%      2,454,037   7.1%      2,501,651   7.6%      2,170,906   5.8%      1,997,799   5.6%      2,156,015   6.1%    
Shareholders’ equity  2,840,843   8.1%      2,816,116   8.2%      2,689,037   8.2%      3,263,155   8.8%      3,001,680   8.5%      2,840,843   8.2%    
Subtotal non-interest bearing liabilities  13,475,473   38.2%      13,948,984   40.4%      13,296,346   40.6%      14,218,464   38.2%      13,292,186   37.4%      13,475,474   38.4%    
Total liabilities  35,244,021   100.0%      34,545,228   100.0%      32,724,583   100.0%      37,213,342   100.0%      35,521,227   100.0%      35,244,022   100.0%    

 

Our most important source of funding is our deposits. Average time deposits plus non-interest bearing demand deposits represented 54.9%53.5% of our average total liabilities and shareholders’ equity in 2016.2018. Our current funding strategy is to continue to utilize all sources of funding in accordance with their costs, their availability and our general asset and liability management strategy. Special emphasis is being placed on lengthening the maturities of funding with institutional clients, diversifying our bond holder base and broadening our core deposit funding. We believe that broadening our deposit base by increasing the number of account holders has created a more stable funding source.

 

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Composition of Deposits

 

The following table sets forth the composition of our deposits and similar commitments at December 31, 2018, 2017, 2016, 2015 2014, 2013 and 2012.2014.

 

 2016 2015 2014 2013 2012 2018  2017  2016  2015  2014 
 (in millions of Ch$) (in millions of Ch$) 
Demand deposits and other demand obligations                              
Current accounts  6,144,688   5,875,992   5,131,130   4,403,526   4,006,143   6,794,132   6,272,656   6,144,688   5,875,992   5,131,130 
Other deposits and demand accounts  564,966   577,077   554,785   569,395   455,315   709,711   590,221   564,966   577,077   554,785 
Other demand obligations  829,661   903,052   794,582   647,842   508,561   1,237,574   905,289   829,661   903,052   794,582 
Subtotals  7,539,315   7,356,121   6,480,497   5,620,763   4,970,019   8,741,417   7,768,166   7,539,315   7,356,121   6,480,497 
Time deposits and other time deposits                                        
Time deposits  13,031,319   12,065,697   10,303,167   9,567,855   9,008,902   12,944,846   11,792,466   13,031,319   12,065,697   10,303,167 
Time saving accounts  116,451   113,562   107,599   104,143   101,702   118,587   116,179   116,451   113,562   107,599 
Other time deposits  3,939   3,508   3,174   3,274   1,609   4,386   5,300   3,939   3,508   3,174 
Subtotals  13,151,709   12,182,767   10,413,940   9,675,272   9,112,213   13,067,819   11,913,945   13,151,709   12,182,767   10,413,940 
Total deposits and other commitments  20,691,024   19,538,888   16,894,437   15,296,035   14,082,232   21,809,236   19,682,111   20,691,024   19,538,888   16,894,437 

 


Maturity of Interest Bearing Deposits

 

The following table sets forth information regarding the currency and maturity of our interest bearing deposits as of December 31, 2016,2018, expressed in percentages of our total deposits in each currency category. UF-denominated deposits are similar to peso-denominated deposits in all respects, except that the principal is readjusted periodically based on variations in the Chilean consumer price index.

 

 Ch$ UF Foreign Currencies Total Ch$  UF  Foreign Currencies  Total 
Demand deposits  0.02%  0.13%  0.01%  0.03%  0.02%  0.16%  0.01%  0.03%
Savings accounts  0.02%  7.78%  —%  0.89%  0.02%  8.46%  0.00%  0.91%
Time deposits:                                
Maturing within 3 months  79.54%  49.92%  95.04%  78.26%  74.47%  33.50%  90.55%  71.47%
Maturing after 3 but within 6 months  12.60%  12.70%  4.28%  11.52%  18.50%  28.66%  7.68%  18.68%
Maturing after 6 but within 12 months  6.83%  23.31%  0.44%  7.84%  6.55%  13.97%  1.38%  6.90%
Maturing after 12 months  0.99%  6.16%  0.23%  1.47%  0.45%  15.24%  0.39%  2.00%
Total time deposits  99.97%  92.09%  99.99%  99.08%  99.96%  91.37%  99.99%  99.06%
Total deposits  100.00%  100.00%  100.00%  100.00%  100.00%  100.00%  100.00%  100.00%

 

The following table sets forth information regarding the maturity of our outstanding time deposits in excess of U.S.$100,000 as of December 31, 2016.2018.

 

 Ch$ UF Foreign Currencies Total Ch$  UF  Foreign Currencies  Total 
 (in millions of Ch$) (in millions of Ch$) 
Time deposits:                        
Maturing within 3 months  7,910,465   736,896   1,644,819   10,292,180   7,903,478   461,744   974,233   9,339,455 
Maturing after 3 but within 6 months  1,253,336   187,509   74,088   1,514,933   1,963,659   395,139   82,634   2,441,432 
Maturing after 6 but within 12 months  679,209   344,110   7,550   1,030,869   694,858   192,629   14,799   902,286 
Maturing after 12 months  98,497   90,890   3,950   193,337   47,379   210,079   4,214   261,672 
Total time deposits  9,941,507   1,359,405   1,730,407   13,031,319   10,609,374   1,259,591   1,075,880   12,944,845 

 

Short-term Borrowings

 

The principal categories of our short-term borrowings are repurchase agreements and interbank borrowings. The table below presents the amounts outstanding at each year-end indicated and the weighted-average nominal interest rate for each such year by type of short-term borrowing.

 

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 2016 2015 2014 2018  2017  2016 
 Balance Weighted-Average Nominal Interest Rate Balance Weighted-Average Nominal Interest Rate Balance Weighted-Average Nominal Interest Rate Balance  Weighted-Average Nominal Interest Rate  Balance  Weighted-Average Nominal Interest Rate  Balance  Weighted-Average Nominal Interest Rate 
 (in millions of Ch$, except percentages) (in millions of Ch$, except percentages) 
Obligations arising from repurchase agreements  212,437   2.3%  143,689   0.3%  392,126   0.2%  48,545   2.5%  268,061   2.5%  212,437   2.3%
Obligations with the Central Bank  7   0.5%  4   0.5%  94   0.5%  —   —   5   3.0%  7   0.5%
Loans from domestic financial institutions  365,436   0.0%  —   —   66,006   0.2%  —   —   480   —   365,436   — 
Foreign obligations  1,647,805   1.4%  868,593   0.4%  717,416   0.2%  1,648,955   2.5%  1,477,318   1.6%  525,521   1.4%
Total short-term borrowings  2,225,685   1.2%  1,012,286   0.7%  1,175,642   0.2%  1,697,500   2.5%  1,745,864   1.8%  1,103,401   1.2%

 

The following table shows the average balance and the average nominal rate for each short-term borrowing category for the years indicated.

 

 2016 2015 2014 2018  2017  2016 
 Average Balance Average Nominal Interest Rate Average Balance Average Nominal Interest Rate Average Balance Average Nominal Interest Rate Average Balance  Average Nominal Interest Rate  Average Balance  Average Nominal Interest Rate  Average Balance  Average Nominal Interest Rate 
 (in millions of Ch$, except percentages) (in millions of Ch$, except percentages) 
Obligations arising from repurchase agreements  121,875   2.4%  228,050   3.1%  413,263   2.0%  291,913   2.3%  294,368   2.3%  121,875   2.4%
Obligations with the Central Bank  871   3.4%  4,891   1.0%  6,906   0.2%  4   6.0%  6   2.2%  871   3.4%
Loans from domestic financial institutions  114,882   4.2%  88,296   0.6%  100,513   4.9%  80   —   413   —   114,882   4.2%
Foreign obligations  1,435,395   1.1%  1,038,686   0.8%  1,508,559   1.3%  1,462,975   2.3%  1,465,653   1.7%  1,435,395   1.1%
Total short-term borrowings  1,680,300   1.4%  1,359,923   1.1%  2,029,241   1.6%  1,754,972   2.3%  1,760,440   1.8%  1,673,023   1.4%

 


The following table presents the maximum month-end balances of our principal sources of short-term borrowings during the years indicated.

 

 Maximum 2016 Month-End Balance Maximum 2015 Month-End Balance Maximum 2014 Month-End Balance Maximum 2018 Month-End Balance  Maximum 2017 Month-End Balance  Maximum 2016 Month-End Balance 
 (in millions of Ch$) (in millions of Ch$) 
Obligations arising from repurchase agreements  212,437   388,735   392,126   345,927   526,826   212,437 
Obligations with the Central Bank  22   85   205   5   6   22 
Loans from domestic financial institutions  365,436   205,069   206,530   164,606   200,000   365,436 
Foreign obligations  1,787,746   1,387,403   1,809,514   1,918,519   1,778,183   1,787,746 
Total short-term borrowings  2,365,641   1,981,292   2,408,375   2,429,057   2,505,015   2,365,641 

 

Total Borrowings

 

 As of December 31, 2016 As of December 31, 2018 
 Long-term Short-term   Total Long-term  Short-term  Total 
 (in millions of Ch$) (in millions of Ch$) 
Central Bank credit lines for renegotiations of loans (a)  —   7   7  — — — 
Obligations under repurchase agreements  —   212,437   212,437   —   48,545   48,545 
Mortgage finance bonds (b)  35,015   11,236   46,251   18,660   6,830   25,490 
Senior bonds (c)  5,280,561   1,135,713   6,416,274   6,353,967   844,898   7,198,865 
Mortgage bonds(d)  99,864   4,318   104,182   90,088   4,833   94,921 
Subordinated bonds(e)  759,661   4   759,665   795,956   1   795,957 
Borrowings from domestic financial institutions  —   356,436   356,436   —   —   — 
Foreign borrowings(f)  1,025,404   525,521   1,550,925   139,671   1,648,955   1,788,626 
Other obligations(g)  81,528   158,488   240,016   9,529   205,871   215,400 
Total borrowings  7,282,033   2,404,160   9,686,193   7,407,871   2,759,933   10,167,804 
            
 

As of December 31, 2017

 
 

Long-term

  

Short-term

  

Total

 
 (in millions of Ch$) 
Central Bank credit lines for renegotiations of loans (a)  —   5   5 
Obligations under repurchase agreements  —   268,061   268,061 
Mortgage finance bonds (b)  25,788   8,691   34,479 
Senior bonds (c)  5,849,594   337,166   6,186,760 
Mortgage bonds(d)  94,681   4,541   99,222 
Subordinated bonds(e)  773,189   3   773,192 
Borrowings from domestic financial institutions  —   480   480 
Foreign borrowings(f)  220,554   1,477,318   1,697,872 
Other obligations(g)  29,205   212,825   242,030 
Total borrowings  6,993,011   2,309,090   9,302,101 
            
 

As of December 31, 2016

 
 

Long-term

  

Short-term

  

Total

 
 (in millions of Ch$) 
Central Bank credit lines for renegotiations of loans (a)  —   7   7 
Obligations under repurchase agreements  —   212,437   212,437 
Mortgage finance bonds (b)  35,015   11,236   46,251 
Senior bonds (c)  5,280,561   1,135,713   6,416,274 
Mortgage bonds(d)  99,864   4,318   104,182 
Subordinated bonds(e)  759,661   4   759,665 
Borrowings from domestic financial institutions  —   356,436   356,436 
Foreign borrowings(f)  1,025,404   525,521   1,550,925 
Other obligations(g)  81,528   158,488   240,016 
Total borrowings  7,282,033   2,404,160   9,686,193 

 

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  As of December 31, 2015
  Long-term Short-term
  (in millions of Ch$)
Central Bank credit lines for renegotiations of loans (a)  —   4   4 
Obligations under repurchase agreements  —   143,689   143,689 
Mortgage finance bonds (b)  57,314   5,544   62,858 
Senior bonds (c)  4,245,624   796,012   5,041,636 
Mortgage bonds(d)  103,519   4,063   107,582 
Subordinated bonds(e)  738,436   6,583   745,019 
Borrowings from domestic financial institutions  —   —   — 
Foreign borrowings(f)  438,977   868,593   1,307,570 
Other obligations(g)  84,355   136,172   220,527 
Total borrowings  5,668,225   1,960,660   7,628,885 

  As of December 31, 2014
  Long-term Short-term
  (in millions of Ch$)
Central Bank credit lines for renegotiations of loans (a)  —   94   94 
Obligations under repurchase agreements  —   392,126   392,126 
Mortgage finance bonds (b)  74,948   6,561   81,509 
Senior bonds (c)  3,701,885   1,166,602   4,868,487 
Mortgage bonds(d)  105,422   3,778   109,200 
Subordinated bonds(e)  715,465   10,451   725,916 
Borrowings from domestic financial institutions  —   66,006   66,006 
Foreign borrowings(f)  448,085   717,416   1,165,501 
Other obligations(g)  84,576   120,549   205,125 
Total borrowings  5,130,381   2,483,583   7,613,964 
             

(a) Credit lines for renegotiations of loans

 

Central Bank borrowings include credit lines for the renegotiations of loans and other Central Bank borrowings. The maturities of the outstanding amounts due are as follows:

 

  As of December 31, 2016 As of December 31, 2015
  (in millions of Ch$)
Due within 1 year  7   4 
Total  7   4 
As of December 31, 2018As of December 31, 2017
(in millions of Ch$)
Due within 1 year—5
Total—5

 

(b)   Mortgage finance bonds

 

These bonds are used to finance mortgage loans. Their principal amounts are amortized on a quarterly basis. The range of maturities of these bonds is between five and twenty years. Loans are indexed to UF and pay a yearly interest rate.

 

  As of December 31, 20162018
  (in millions of Ch$) 
Due within 1 year  11,2366,830 
Due after 1 year but within 2 years  8,6735,946 
Due after 2 years but within 3 years  6,9285,034 
Due after 3 years but within 4 years  6,2463,997 
Due after 4 years but within 5 years  5,2782,480 
Due after 5 years  7,8901,203 
Total mortgage finance bonds  46,25125,490 

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(c)       Senior bonds

 

The following table sets forth, at the dates indicated, our issued senior bonds. The bonds are denominated principally in UFs or U.S. dollars, and are principally used to fund assets with similar durations.

 

 

As of December 31, 

 

2016 

2015 

2014 

 (in millions of Ch$)
Senior Bonds in UF3,588,3732,179,6431,797,438
Senior Bonds in U.S.$909,3541,625,1502,191,347
Senior Bonds in CHF568,549535,448443,186
Senior Bonds in Ch$1,037,515475,075236,025
Senior Bonds in CNY60,890——
Current bonds in AUD179,42662,06662,472
Santander bonds in JPY72,167164,254138,019
Total senior bonds6,416,2745,041,6364,868,487
     

  As of December 31, 
  2018  2017  2016 
  (in millions of Ch$) 
Senior Bonds in UF  4,095,741   3,542,006   3,588,373 
Senior Bonds in U.S.$  1,094,267   1,045,465   909,354 
Senior Bonds in CHF  386,979   268,281   568,549 
Senior Bonds in Ch$  1,291,900   1,135,527   1,037,515 
Current bonds in AUD  24,954   14,534   60,890 
Santander bonds in JPY  191,598   126,059   179,426 
Senior bonds in EUR  113,426   54,888   72,167 
Total senior bonds  7,198,865   6,186,760   6,416,274 
             

The maturities of these bonds are as follows:

 

  As of December 31, 20162018
  (in millions of Ch$) 
Due within 1 year  1,135,713844,898 
Due after 1 year but within 2 years  321,5091,331,255 
Due after 2 years but within 3 years  816,9191,073,847 
Due after 3 years but within 4 years  663,2891,104,547 
Due after 4 years but within 5 years  754,768421,918 
Due after 5 years  2,724,0762,422,400 
Total bonds  6,416,2747,198,865 

 


In 2016,2018, the Bank issued bonds for UF62,000,000; CLP590,000,000,000; CHF125,000,000; JPY3,000,000,000; USD215,000,000UF 23,000,000; CLP 225,000,000,000; USD 70,000,000, EUR 66,000,000, AUD 20,000,000, CHF 115,000,000 and EUR104,000,000JPY 7,000,000,000 detailed as follows:

 

SeriesCurrencyAmountTermIssuance rateSeries approval dateSeries maximum amountMaturity date
R1UF15,000,0005.52.50%01-09-201515,000,00001-03-2021
R2UF10,000,0007.52.60%01-09-201510,000,00001-03-2023
R3UF10,000,00010.53.00%01-09-201510,000,00001-03-2026
R5UF7,000,0007.02.55%01-12-20157,000,00001-12-2022
R6UF7,000,0009.02.65%01-12-20157,000,00001-12-2024
P9UF3,000,00010.52.60%01-03-20155,000,00001-09-2025
T2UF5,000,0004.52.25%01-02-20165,000,00001-08-2020
T5UF5,000,0006.02.40%01-02-20165,000,00001-02-2022
TotalUF62,000,000     
R4CLP100,000,000,0005.55.50%01-09-2015100,000,000,00001-03-2021
P4CLP50,000,000,0005.04.80%01-03-2015150,000,000,00001-03-2020
SDCLP140,000,000,0005.05.50%01-06-2014200,000,000,00001-06-2019
SCCLP200,000,000,00010.05.95%01-06-2014200,000,000,00001-06-2024
P3CLP50,000,000,0007.05.50%01-01-2015  50,000,000,00001-01-2022
P1CLP50,000,000,00010.05.80%01-01-2015  50,000,000,00001-01-2025
TotalCLP590,000,000,000     
JPYJPY3,000,000,0005.00.115%22-06-20163,000,000,00029-06-2021
TotalJPY3,000,000,000     
DNUSD10,000,0005.0Libor-USD 3M+1.05%02-06-2016  10,000,00009-06-2021
DNUSD10,000,0005.0Libor-USD 3M+1.22%08-06-2016  10,000,00017-06-2021
DNUSD10,000,0005.0Libor-USD 3M+1.20%01-08-2016  10,000,00016-08-2021
DNUSD185,000,0005.0Libor-USD 3M+1.20%10-11-2016185,000,00028-11-2021
TotalUSD215,000,000     
EUREUR54,000,00012.01.307%05-08-2016  54,000,00017-08-2028
EUREUR20,000,0008.00.80%04-08-2016  20,000,00019-08-2024
EUREUR30,000,0003.00.25%09-12-2016  30,000,00020-12-2019
TotalEUR104,000,000     
CHFCHF  125,000,0008.5 0.35%14-11-2016 125,000,00030-05-2025
TotalCHF125,000,000     

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SeriesCurrencyAmountTermIssuance rateSeries approval dateSeries maximum amountMaturity date
T1UF4,000,00022.20%01-02-20167,000,00001-02-2020
T4UF4,000,00032.35%01-02-2016  8,000,00001-08-2021
T11UF5,000,00072.65%01-02-20165,000,00001-02-2025
T12UF5,000,00072.70%01-02-20165,000,00001-08-2025
T15UF5,000,000113.00%01-02-20165,000,00001-08-2028
TotalUF23,000,000   30,000,000 
P5CLP75,000,000,00045.30%05-03-2015150,000,000,00001-03-2022
U4CLP75,000,000,0003 yr + 4mICP + 1.00%10-01-201775,000,000,00010-01-2022
U3CLP75,000,000,0002 yr +7mICP + 1.00%11-06-201875,000,000,00011-06-2021
TotalCLP225,000,000,000   300,000,000,000 
USDUSD50,000,000104.17%10-10-201850,000,00010-10-2028
USDUSD20,000,00020.0369%16-11-201820,000,00016-11-2021
TotalUSD70,000,000   70,000,000 
EUREUR26,000,00071.00%04-05-201826,000,00028-05-2025
EUREUR40,000,000121.78%08-06-201840,000,00015-06-2030
TotalEUR66,000,000   66,000,000 
AUDAUD20,000,00053.56%13-11-201820,000,00013-11.2023
TotalAUD20,000,000   20,000,000 
CHFCHF115,000,0005yr +3m0.441%21-09-2018 115,000,00021-12-2023
TotalCHF115,000,000   115,000,000 
JPYJPY4,000,000,00010yr + 6m0.65%13-07-20184,000,000,00013-01-2029
JPYJPY3,000,000,000556%30-10-20183,000,000,00030-10-2023
TotalJPY7,000,000,000   7,000,000,000 

 

(d)       Mortgage bonds

 

These bonds are used to finance mortgage loans with certain characteristics such as loan-to-value ratios below 80.0% and a debt servicing ratio of the client lower than 20.0%. All outstanding mortgage bonds are UF denominated.

 


The maturities of our mortgage bonds are as follows:

 

 As of December 31, As of December 31, 
 2016 2015 2018  2017 
 Ch$mn Ch$mn (in millions of Ch$) 
         
Due within 1 year  4,318   4,063   4,833   4,541 
Due after 1 year but within 2 years  6,932   6,522   7,758   7,291 
Due after 2 year but within 3 years  7,156   6,733   8,008   7,526 
Due after 3 year but within 4 years  7,386   6,951   8,267   7,769 
Due after 4 year but within 5 years  7,626   7,175   8,534   8,019 
Due after 5 years  70,764   76,138   57,521   64,076 
Total mortgage bonds  104,182   107,582   94,921   99,222 
                

During 2016,2018, the Bank has not placed any mortgage bonds.

 

(e)       Subordinated bonds

 

The following table sets forth, at the dates indicated, the balances of our subordinated bonds. The following table sets forth, at the dates indicated, our issued subordinated bonds. The bonds are denominated principally in UFs or U.S. dollars, and are principally used to fund the Bank’s mortgage portfolio and are considered to be a part of our regulatory capital.

 

  As of December 31,
  2016 2015 2014
  (in millions of Ch$)
Subordinated bonds denominated in U.S.$  —   —   3 
Subordinated bonds linked to the Ch$  4   6   — 
Subordinated bonds linked to the UF  759,661   745,013   725,913 
Total subordinated bonds  759,665   745,019   725,916 

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  As of December 31, 
  2018  2017  2016 
  (in millions of Ch$) 
Subordinated bonds denominated in U.S.$  —   —   — 
Subordinated bonds linked to the Ch$  1   3   4 
Subordinated bonds linked to the UF  795,956   773,189   759,661 
Total subordinated bonds  795,957   773,192   759,665 

 

The maturities of these bonds, which are considered long-term, are as follows.

 

  As of December 31, 20162018
  (in millions of Ch$)
Due within 1 year  41 
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  759,661795,956 
Total subordinated bonds  759,665795,957 

 

During 2016,2018, the Bank did not issue subordinated bonds.

 

(f)       Foreign borrowings

 

These are short-term and long-term borrowings from foreign banks used to fund our foreign trade business. The maturities of these borrowings are as follows.

 

 

As of December 31, 2016 

2018
 (in millions of Ch$)
Due within 1 year525,5211,648,955
Due after 1 year but within 2 years725,315139,671
Due after 2 years but within 3 years186,352—
Due after 3 years but within 4 years80,473—
Due after 5 years33,264—
Total loans from foreign financial institutions1,550,9251,788,626

 


(g)       Other obligations

 

Other obligations are summarized as follows:

 

 

As of December 31, 2016 

2018
 Ch$ millions
Long term obligations 
Due after 1 years but within 2 years33,7779,221
Due after 2 years but within 3 years24,86340
Due after 3 years but within 4 years5,79444
Due after 4 years but within 5 years1,97348
Due after 5 years15,121176
Long-term financial obligations subtotals81,5289,529
Short term obligations: 
Amounts due to credit card operators151,620172,425
Acceptance of letters of credit2,0692,894
Other long-term financial obligations, short-term portion4,79930,552
Short-term financial obligations subtotals158,488205,871
Other financial obligations totals240,016215,400

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Other Off-Balance Sheet Arrangements and Commitments

 

In the normal course of our business, we are party to transactions with off-balance sheet risk. These transactions expose us to credit risk in addition to amounts recognized in the consolidated financial statements. The most important off-balance sheet item is contingent loans. Contingent loans consist of guarantees granted by us in Ch$, UF and foreign currencies (principally U.S.$), unused letters of credit and commitments to extend credit such as overdraft protection and credit card lines of credit. Such commitments are agreements to lend to a customer at a future date, subject to the customer compliance with the contractual terms. Since a substantial portion of these commitments is expected to expire without being drawn upon, the total amount of commitments does not necessarily represent our actual future cash requirements. We use the same credit policies in making commitments to extend credit as we do for granting loans, therefore, in the opinion of our management, our outstanding commitments represent normal credit risk.

 

The following table presents the Bank’s outstanding contingent loans as of December 31, 2016, 20152018, 2017 and 2014:2016:

 

  As of December 31,
  2016 2015 2014
  (in millions of Ch$)
Issued and documented letters of credit  158,800   179,042   205,920 
Confirmed foreign letters of credit  57,686   70,434   75,813 
Documented guarantees  1,752,610   1,684,847   1,481,154 
Other guarantees  125,050   163,955   262,169 
Subtotals  2,094,146   2,098,278   2,025,056 
Lines of credit with immediate availability  7,548,820   6,806,745   5,699,573 
Other irrevocable obligation  260,266   82,328   109,520 
Totals  9,903,232   8,987,351   7,834,149 
  As of December 31, 
  2018  2017  2016 
  (in millions of Ch$) 
Letters of credit issued  223,420   201,699   158,800 
Foreign letters of credit confirmed  57,038   75,499   57,686 
Performance guarantee  1,954,205   1,823,793   1,752,610 
Personal guarantee  133,623   81,577   125,050 
Total contingent liabilities  2,368,286   2,182,568   2,094,146 
Lines of credit with immediate availability  8,997,650   8,135,489   7,548,820 
Other irrevocable obligation  327,297   260,691   260,266 
Total loan commitments  9,324,947   8,396,180   7,809,086 
Totals  11,693,233   10,578,748   9,903,232 

 

Asset and Liability Management

 

Please refer to “Item 11. Quantitative and Qualitative Disclosures about Market Risk” for information regarding our policies with respect to asset and liability management.

 


Capital Expenditures

 

The following table reflects capital expenditures in each of the three years ended December 31, 2016, 20152018, 2017 and 2014:2016:

 

  Year Ended December 31,
  2016 2015 2014
  (in millions of Ch$)
Land and Buildings  26,567   27,781   24,957 
Machinery, Systems and Equipment  30,965   29,282   22,785 
Furniture, Vehicles, Other(1)  4,823   8,048   11,346 
Total  62,355   65,111   59,088 

  Year Ended December 31, 
  2018  2017  2016 
  (in millions of Ch$) 
Land and Buildings  35,369   27,592   26,567 
Machinery, Systems and Equipment  28,438   26,278   30,965 
Furniture, Vehicles, Other(1)  4,522   4,902   4,823 
Total  68,329   58,772   62,355 
 
(1)Includes assets ceded under operating leases.

 

The decreaseincrease in capital expenditures in 2016 was mainly2018 is due acquisition of property in connection with our plans to aextend our WorkCafé branch network. The closure of the Banefe branch network in 2017 resulted in the 2017 reduction in the branch network.capital expenditures.

 

C.Selected Statistical Information

C. Selected Statistical Information

 

The following information is included for analytical purposes and should be read in conjunction with our Audited Consolidated Financial Statements, as well as the discussion in this “Item 5. Item 5. Operating and Financial Review and Prospects.” The UF is linked to, and is adjusted daily to reflect changes in, the previous month’s Chilean consumer price index. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Impact of Inflation.”

 

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Average Balances, Income Earned from 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, have been calculated on the basis of daily balances for us on an unconsolidated basis. Such average balances are presented in Chilean pesos, UFs and in foreign currencies (principally U.S. dollars). Figures from our subsidiaries have been calculated on the basis of monthly balances. The average balances of our subsidiaries, except Santander S.A. Agente de Valores, have not been categorized by currency. As such it is not possible to calculate average balances by currency for such subsidiaries on the basis of daily, weekly or monthly balances.

 

The nominal interest rate has been calculated by dividing the amount of interest and principal changes in the UF index (gain or loss) during the period by the related average balance, both amounts expressed in constant pesos.

 

Foreign exchange gains or losses on foreign currency-denominated assets and liabilities are not included in interest income or expense. When a financial asset becomes credit-impaired and is, therefore, regarded as “Stage 3”, the Bank suspends the interest income recognition in the income statement. Similarly, interest on the available-for-sale investment portfolio does not include trading orand mark-to-market gains or losses on these investments.investments are not included in interest income or expense. Interest is not recognized on non-performing loans. Non-performing loans that are past-due for 90 days or less have been included in each of the various categories of loans, and therefore affect the various averages. Non-performing loans consist of loans as to which either principal or interest is past-due (i.e., non-accrual loans) and restructured loans earning no interest.

 

Included in interbank deposits are checking accounts maintained in the Central Bank and foreign banks. Such assets have a distorting effect on the average interest rate earned on total interest-earning assets because currently balances maintained in Chilean peso amounts do not earn interest, and the only balances held in a foreign currency that earn interest are those maintained in U.S. dollars, but those only earn interest on the amounts that are legally required to be held for liquidity purposes. Additionally, this account includes interest earned by overnight investments. Consequently, the average interest earned on such assets is comparatively low. We maintain these deposits in these accounts to comply with statutory requirements and to facilitate international business, rather than to earn income. See Note 1—Summary of Significant Accounting Policies—(k) Recognizing Income and Expenses of our Audited Consolidated Financial Statements.

 

The following tables show, by currency of denomination, average balances and, where applicable, interest amounts and real rates for our assets and liabilities for the years ended December 31, 2016, 20152018, 2017 and 2014.2016.

 


 For the year ended December 31, For the year ended December 31, 
 2016     2015      2014    2018 2017 2016 
 

Average Balance 

 

Interest Earned 

 

Average Nominal Rate 

 

Average Balance 

 

Interest Earned 

 

Average Nominal Rate 

 

Average Balance 

 

Interest Earned 

 

Average Nominal Rate 

 Average Balance Interest Earned Average Nominal Rate Average Balance Interest Earned Average Nominal Rate Average Balance Interest Earned Average Nominal Rate 
Assets                                 
Interest earning assets                                                                        
Deposits in Central Bank                                                                        
Ch$  341,040   5,396   1.6%      283,376       7,246   2.6%  477,977  8,728 1.8%  451,805   5,930   1.3%  358,445   4,395   1.2%  341,040   5,396   1.6%
UF  —   —   —%       —       —   —%   —  — —%  —   —   —%  —   —   —%  —   —   —%
Foreign currency  —   —   —%       —       —   —%   —  — —%  —   —   —%  —   —   —%  —   —   —%
Total  341,040   5,396   1.6%      283,376       7,246   2.6%  477,977  8,728 1.8%  451,805   5,930   1.3%  358,445   4,395   1.2%  341,040   5,396   1.6%
Financial investments(1)                                                                        
Ch$  1,553,848   78,410   5.0%      1,323,540       29,488   2.2%  1,339,117  40,701 3.0%  1,490,010   64,839   4.4%  1,626,073   91,945   5.7%  1,553,848   78,410   5.0%
UF  108,646   4,727   4.4%      139,394       9,583   6.9%  295,570  38,906 13.2%  826,333   35,573   4.3%  250,729   8,894   3.5%  108,646   4,727   4.4%
Foreign currency  1,106,205   14,452   1.3%      1,054,110       10,784   1.0%  1,368,089  6,047 0.4%  677,343   10,616   1.6%  919,711   13,077   1.4%  1,106,205   14,452   1.3%
Total  2,768,699   97,589   3.5%      2,517,044       49,855   2.0%  3,002,776  85,654 2.8%  2,993,686   111,028   3.7%  2,796,513   113,916   4.1%  2,768,699   97,589   3.5%
Commercial Loans                                                                        
Ch$  5,848,483   532,675   9.1%      5,679,661       502,137   8.8%  5,658,176  474,537 8.4%  6,651,575   461,343   6.9%  6,117,872   468,181   7.7%  5,848,483   532,675   9.1%
UF  4,786,383   329,402   6.9%      4,466,365       352,466   7.9%  4,077,560  381,244 9.3%  5,553,732   357,932   6.4%  5,074,723   284,831   5.6%  4,786,383   329,402   6.9%
Foreign currency  3,254,913   87,735   2.7%      3,388,381       78,552   2.3%  2,874,210  67,140 2.3%  2,852,514   116,991   4.1%  2,937,416   94,914   3.2%  3,254,913   87,735   2.7%
Total  13,889,779   949,812   6.8%      13,534,407       933,155   6.9%  12,609,946  922,921 7.3%  15,057,821   936,266   6.2%  14,130,010   847,926   6.0%  13,889,779   949,812   6.8%
Consumer loans                                                                        
Ch$  3,858,386   542,597   14.1%      3,711,552       520,553   14.0%  3,502,026  600,869 17.2%  4,288,778   585,064   13.6%  4,081,337   616,639   15.1%  3,858,386   542,597   14.1%
UF  21,015   1,821   8.7%      80,848       8,229   10.2%  91,668  11,191 12.2%  19,517   1,470   7.5%  17,475   1,395   8.0%  21,015   1,821   8.7%
Foreign currency  39,458   —   —%       34,370       —   —%   27,606  — —%  55,440   0   0.0%  45,904   —   —%  39,458   —   —%
Total  3,918,859   544,418   13.9%      3,826,770       528,782   13.8%  3,621,300  612,060 16.9%  4,363,735   586,534   13.4%  4,144,716   618,034   14.9%  3,918,859   544,418   13.9%
Mortgage loans                                                                        
Ch$  15,180   964   6.4%      17,291       1,312   7.6%  23,758  4,918 20.7%  6,826   106   1.5%  10,485   139   1.3%  15,180   964   6.4%
UF  8,234,264   535,128   6.5%      7,695,618       564,579   7.3%  6,535,989  591,446 9.0%  9,497,908   597,548   6.3%  8,795,965   469,618   5.3%  8,234,264   535,128   6.5%
Foreign currency  —   —   —%       —       —   —%   —  — —%  —   —   0.0%  —   —   —%  —   —   —%
Total  8,249,444   536,092   6.5%      7,712,909       565,891   7.3%  6,559,747  596,364 9.0%  9,504,734   597,654   6.3%  8,806,450   469,757   5.3%  8,249,444   536,092   6.5%
Interbank loans                                    
Ch$  35,178   897   2.6%  37,188   969   2.6%  8,291   295   3.6%
UF  —   —   —%  —   —   —%  —   —   —%
Foreign currency  —   —   —%  1   —   —%  2   —   —%
Total  35,178   897   2.6%  37,189   969   2.6%  8,293   295   3.6%
Investment Agreements to resell                                    
Ch$  11,564   1,341   11.6%  417   927   222.2%  1,388   1,208   87.0%
UF  380   —   —%  340   13   3.8%  —   302   —%
Foreign currency  —   —   —%  —   —   —%  —   4   —%
Total  11,944   1,341   11.2%  757   940   124.2%  1,388   1,514   87.0%
Threshold (2)                                    
Ch$  83,959   590   0.7%  85,882   321   0.4%  57,859   242   0.4%
UF  4   —   —%  4   —   —%  4   —   —%
Foreign currency  257,337   4,077   1.6%  235,091   2,190   0.9%  435,946   1,762   0.4%
Total  341,300   4,667   1.4%  320,977   2,511   0.8%  493,809   2,004   0.4%
Total interest earning assets                                    
Ch$  13,019,695   1,120,110   8.6%  12,317,700   1,183,515   9.6%  11,684,475   1,161,787   9.9%
UF  15,897,874   992,523   6.2%  14,139,235   764,750   5.4%  13,150,312   871,380   6.6%
Foreign currency  3,842,64   131,684   3.4%  4,138,124   110,181   2.7%  4,836,524   103,953   2.1%
Total  32,760,203   2,244,317   6.9%  30,595,059   2,058,446   6.7%  29,671,311   2,137,120   7.2%
                                    
Non-interest earning assets                                    
Cash                                    
Ch$  622,469           632,208           686,449         
UF  —           —           —         
Foreign currency  122,178           120,832           98,052         
Total  744,647           753,040           784,501         
Allowance for loan losses                                    
Ch$  (844,671)          (841,415)          (833,455)        
UF  —           —           —         
Foreign currency  (41)          (118)          (106)        
Total  (844,712)          (841,533)          (833,561)        
Fixed assets                                    
Ch$  225,115           237,409           220,919         
UF  —           —           —         
Foreign currency  —           —           —         
Total  225,115           237,409           220,919         
Derivatives                                    
Ch$  2,186,596           2,360,426           2,940,584         
UF  —           —           —         
Foreign currency  —           —           —         
Total  2,186,596           2,360,426           2,940,584         

 

101 


Table of Contents
  For the year ended December 31, 
  2018  2017  2016 
  Average Balance  Interest Earned  Average Nominal Rate  Average Balance  Interest Earned  Average Nominal Rate  Average Balance  Interest Earned  Average Nominal Rate 
Financial Investment (Trading)                                    
Ch$  167,090           231,878           177,617         
UF  92,164           260,526           122,113         
Foreign currency  49,520           18,173           32,496         
Total  308,774           510,577           332,226         
Other assets                                    
Ch$  1,345,349           1,276,197           1,246,306         
UF  74,713           77,338           69,335         
Foreign currency  412,657           552,715           812,400         
Total  1,832,719           1,906,250           2,128,041         
Total non-interest earning assets                                    
Ch$  3,701,948           3,896,703           4,438,420         
UF  166,877           337,864           191,448         
Foreign currency  584,314           691,602           942,842         
Total  4,453,139           4,926,169           5,572,710         
Total assets                                    
Ch$  16,721,643   1,120,110       16,214,403   1,183,515       16,122,895   1,161,787     
UF  16,064,751   992,523       14,477,099   764,750       13,341,760   871,380     
Foreign currency  4,426,948   131,684       4,829,725   110,181       5,779,366   103,953     
Total  37,213,342   2,244,317       35,521,227   2,058,446       35,244,021   2,137,120     
                                     
Liabilities And Share-Holders’ Equity                                    
                                     
Interest bearing liabilities                                    
Savings accounts                                    
Ch$  1,830   5   0.3%  1,677   4   0.3%  1,503   4   0.3%
UF  116,055   3,130   2.7%  115,628   1,881   1.6%  114,836   2,949   2.6%
Foreign currency  —   —   —%  —   —   —%  —   —   —%
Total  117,885   3,135   2.7%  117,305   1,885   1.6%  116,339   2,953   2.5%
Time deposits                                    
Ch$  9,792,164   289,990   3.0%  9,506,696   318,803   3.4%  9,545,050   387,566   4.1%
UF  1,133,420   45,401   4.0%  1,141,258   35,196   3.1%  1,299,866   54,320   4.2%
Foreign currency  2,229,332   28,581   1.3%  2,498,566   20,718   0.8%  2,775,932   9,873   0.4%
Total  13,154,916   363,972   2.8%  13,146,520   374,717   2.9%  13,620,848   451,759   3.3%
Central bank borrowings                                    
Ch$  —   114   —%  —   64   —%  858   29   3.4%
UF  4   —   6.0%  6   —   2.2%  14   1   3.9%
Foreign currency  —   —   —%  —   —   —%  —   —   —%
Total  4   114   6.0%  6   64   2.2%  871   29   3.4%
Repurchase Agreements                                    
Ch$  184,458   4,632   2.5%  254,006   5,676   2.2%  108,902   2,812   2.6%
UF  2   —   —%  —   —   —%  —   —   —%
Foreign currency  107,453   2,036   1.9%  40,362   1,076   2.7%  12,973   58   0.4%
Total  291,913   6,668   2.3%  294,368   6,752   2.3%  121,875   2,870   2.4%
Mortgage finance bonds                                    
Ch$  —   —   —%  —   —   —%  —   —   —%
UF  28,685   2,305   8.0%  38,714   2,709   7.0%  52,414   4,258   8.1%
Foreign currency  —   —   —%  —   —   —%  —   —   —%
Total  28,685   2,305   8.0%  38,714   2,709   7.0%  52,414   4,258   8.1%
Other interest bearing liabilities                                    
Ch$  1,305,791   81,616   6.3%  1,198,933   69,592   5.8%  857,325   100,810   11.8%
UF  4,778,773   278,362   5.8%  4,590,260   217,116   4.7%  3,903,076   238,721   6.1%
Foreign currency  3,316,911   93,777   2.8%  2,842,935   58,918   2.1%  3,095,800   54,356   1.8%
Total  9,401,475   453,755   4.8%  8,632,128   345,626   4.0%  7,856,201   393,886   5.0%
Total interest bearing liabilities                                    
Ch$  11,284,243   376,357   3.3%  10,961,312   394,139   3.6%  10,513,637   491,220   4.7%
UF  6,056,939   329,198   5.4%  5,885,866   256,903   4.4%  5,370,205   300,249   5.6%
Foreign currency  5,653,696   124,394   2.2%  5,381,863   80,712   1.5%  5,884,705   64,286   1.1%
Total  22,994,878   829,949   3.6%  22,229,041   731,754   3.3%  21,768,547   855,755   3.9%
                                     
Non-interest bearing liabilities                                    
Non-interest bearing demand deposits                                    
Ch$  6,561,631           5,980,167           5,633,226         
UF  47,091           41,129           39,075         
Foreign currency  154,824           96,348           81,321         
Total  6,763,546           6,117,644           5,753,622         

 

 For the year ended December 31, For the year ended December 31, 
 2016     2015      2014    2018 2017 2016 
 

Average Balance 

 

Interest Earned 

 

Average Nominal Rate 

 

Average Balance 

 

Interest Earned 

 

Average Nominal Rate 

 

Average Balance 

 

Interest Earned 

 

Average Nominal Rate 

 Average Balance Interest Earned Average Nominal Rate Average Balance Interest Earned Average Nominal Rate Average Balance Interest Earned Average Nominal Rate 
Interbank loans                                    
Ch$  8,291   295   3.6%      2,271       364   16.0%  4,356  139 3.2%
UF  —   —   —%       —       —   —%   —  — —%
Foreign currency  2   —   —%       3,327       11   0.3%  1  — —%
Total  8,293   295   3.6%      5,598       375   6.7%  4,357  139 3.2%
Investment Agreements to resell                                    
Ch$  1,388   1,208   87.0%      204       105   51.5%  4,074  793 19.5%
UF  —   302   —%       —       23   —%   —  95 —%
Foreign currency  —   4   —%       —       —   —%   —  — —%
Total  1,388   1,514   87.0%      204       128   51.5%  4,074  888 19.5%
Threshold(1)                                    
Ch$  57,859   242   0.4%      29,895       62   0.2%  31  — —%
UF  4   —   —%       —       —   —%   —  — —%
Foreign currency  435,946   1,762   0.4%      612,802       494   0.1%  479,488  264 0.1%
Total  493,809   2,004   0.4%      642,697       556   0.1%  479,519  264 0.1%
Total interest earning assets                                    
Ch$  11,684,475   1,161,787   9.9%      11,047,790       1,061,267   9.6%  11,009,515  1,130,685 10.3%
UF  13,150,312   871,380   6.6%      12,382,225       934,880   7.6%  11,000,787  1,022,882 9.3%
Foreign currency  4,836,524   103,953   2.1%      5,092,990       89,841   1.8%  4,749,394  73,451 1.5%
Total  29,671,311   2,137,120   7.2%      28,523,005       2,085,988   7.3%  26,759,696  2,227,018 8.3%
                                    
                                    
Non-interest earning assets                                    
Cash                                    
Ch$  686,449               715,484               677,003 
UF  —               —               — 
Foreign currency  98,052               98,936               78,195 
Total  784,501               814,420               755,198 
Allowance for loan losses                                    
Ch$  (833,455)              (805,244)              (722,660)
UF  —               —               — 
Foreign currency  (106)              (15)              — 
Total  (833,561)              (805,259)              (722,660)
Fixed assets                                    
Ch$  220,919               222,083               202,902 
UF  —               —               — 
Foreign currency  —               —               — 
Total  220,919               222,083               202,902 
Derivatives                                                                        
Ch$  2,940,584               3,300,507               2,910,369   2,020,857           2,175,063           2,724,994         
UF  —               —               —   —           —           —         
Foreign currency  —               —               —   —           —           —         
Total  2,940,584               3,300,507               2,910,369   2,020,857           2,175,063           2,724,994         
Financial Investment (Trading)                                    
Other non-interest bearing liabilities                                    
Ch$  177,617               141,784               114,875   946,965           932,082           884,290         
UF  122,113               195,203               600,005   405,225           301,516           339,168         
Foreign currency  32,496               21,828               7   818,716           764,201           932,557         
Total  332,226               358,815               714,887   2,170,906           1,997,799           2,156,015         
Other assets                                    
Shareholders’ equity                                    
Ch$  1,246,306               1,215,289               1,065,307   3,263,155           3,001,686           2,840,846         
UF  69,335               69,534               71,241   —           —           —         
Foreign currency  812,400               846,834               967,643   —           (6)          (4)        
Total  2,128,041               2,131,657               2,104,191   3,263,155           3,001,680           2,840,843         
Total non-interest earning assets                                    
Total non-interest bearing liabilities and shareholders’ equity                                    
Ch$  4,438,420               4,789,903               4,247,703   12,792,608           12,088,998           12,083,356         
UF  191,448               264,737               671,363   452,316           342,645           378,243         
Foreign currency  942,842               967,583               1,045,821   973,540           860,543           1,013,875         
Total  5,572,710               6,022,223               5,964,887   14,218,464           13,292,186           13,475,473         
Total assets                                    
Total Liabilities and Share-Holders’ Equity                                    
Ch$  16,122,895   1,161,787           15,837,693       1,061,266       15,257,218  1,130,685  24,076,851   376,357       23,050,311   394,139       22,596,993   491,220     
UF  13,341,760   871,380           12,646,962       934,881       11,672,150  1,022,882  6,509,255   329,198       6,228,511   256,903       5,748,447   300,249     
Foreign currency  5,779,366   103,953           6,060,573       89,841       5,795,215  73,451  6,627,236   124,394       6,242,406   80,712       6,898,580   64,286     
Total  35,244,021   2,137,120           34,545,228       2,085,988       32,724,583  2,227,018  37,213,342   829,949       35,521,228   731,754       35,244,021   855,755     
Liabilities And Share-Holders’ Equity                                    
Interest bearing liabilities                                    
Savings accounts                                    
Ch$  1,503   4   0.3%  1,413       5       0.4%  1,213  3 0.2%
UF  114,836   2,949   2.6%  112,917       3,937       3.5%  106,972  5,461 5.1%
Foreign currency  —   —   —%   —       —       —%   —  — —%
Total  116,339   2,953   2.5%  114,330       3,942       3.4%  108,185  5,464 5.0%

 

102 

Table of Contents

  For the year ended December 31,
  2016     2015      2014   
  

Average Balance 

 

Interest Earned 

 

Average Nominal Rate 

 

Average Balance 

 

Interest Earned 

 

Average Nominal Rate 

 

Average Balance 

 

Interest Earned 

 

Average Nominal Rate 

Time deposits                                    
Ch$  9,545,050   387,566   4.1%  9,260,339       334,259       3.6%  7,891,805  307,868 3.9%
UF  1,299,866   54,320   4.2%  965,138       63,857       6.6%  1,345,965  93,624 7.0%
Foreign currency  2,775,932   9,873   0.4%  2,460,027       5,303       0.2%  2,715,224  8,443 0.3%
Total  13,620,848   451,759   3.3%  12,685,504       403,419       3.2%  11,952,994  409,935 3.4%
Central bank borrowings                                    
Ch$  858   29   3.4%  4,869       46       1.0%  6,815  5 0.1%
UF  14   1   3.9%  22       2       9.1%  91  9 9.9%
Foreign currency  —   —   —%   —       —       —%   —  — —%
Total  871   29   3.4%  4,891       48       1.0%  6,906  14 0.2%
Repurchase Agreements                                    
Ch$  108,902   2,812   2.6%  220,849       6,954       3.1%  400,673  8,267 2.1%
UF  —   —   —%   —       1       —%   —  — —%
Foreign currency  12,973   58   0.4%  7,201       22       0.3%  12,590  27 0.2%
Total  121,875   2,870   2.4%  228,050       6,977       3.1%  413,263  8,294 2.0%
Mortgage finance bonds                                    
Ch$  —   —   —%   —       —       —%   —  — —%
UF  52,414   4,258   8.1%  63,061       6,420       10.2%  81,805  9,698 11.9%
Foreign currency  —   —   —%   —       —       —%   —  — —%
Total  52,414   4,258   8.1%  63,061      ��6,420       10.2%  81,805  9,698 11.9%
Other interest bearing liabilities                                    
Ch$  857,325   100,810   11.8%  677,014       109,455       16.2%  409,021  203,374 49.7%
UF  3,903,076   238,721   6.1%  3,020,987       227,384       7.5%  2,538,094  234,284 9.2%
Foreign currency  3,095,800   54,356   1.8%  3,802,407       73,137       1.9%  3,917,969  38,851 1.0%
Total  7,856,201   393,886   5.0%  7,500,408       409,976       5.5%  6,865,084  476,509 6.9%
Total interest bearing liabilities                                    
Ch$  10,513,637   491,220   4.7%  10,164,484       450,719       4.4%  8,709,527  519,517 6.0%
UF  5,370,205   300,249   5.6%  4,162,125       301,601       7.2%  4,072,927  343,076 8.4%
Foreign currency  5,884,705   64,286   1.1%  6,269,635       78,462       1.3%  6,645,783  47,321 0.7%
Total  21,768,547   855,755   3.9%  20,596,244       830,782       4.0%  19,428,237  909,914 4.7%
                                     
Non interest bearing liabilities                                    
Non interest bearing demand deposits                                    
Ch$  5,633,226           5,617,012                   5,282,135 
UF  39,075           35,163                   35,333 
Foreign currency  81,321           67,714                   68,804 
Total  5,753,622           5,719,889                   5,386,272 
Derivatives                                    
Ch$  2,724,994           2,958,942                   2,719,386 
UF  —           —                   — 
Foreign currency  —           —                   — 
Total  2,724,994           2,958,942                   2,719,386 
Other non-interest bearing liabilities                                    
Ch$  884,290           896,466                   762,367 
UF  339,168           410,866                   398,108 
Foreign currency  932,557           1,146,705                   1,341,176 
Total  2,156,015           2,454,037                   2,501,651 
Shareholders’ equity                                    
Ch$  2,840,846           2,816,116                   2,689,037 
UF  —           —                   — 
Foreign currency  (4)          —                   — 
Total  2,840,843           2,816,116                   2,689,037 
Total non-interest bearing liabilities and shareholders’ equity                                    
Ch$  12,083,356           12,288,536                   11,452,925 
UF  378,243           446,029                   433,441 
Foreign currency  1,013,875           1,214,419                   1,409,980 
Total  13,475,473           13,948,984                   13,296,346 
Total Liabilities and Share-Holders’ Equity                                    
Ch$  22,596,993   491,220       22,453,020       450,719           20,162,452  519,517
UF  5,748,447   300,249       4,608,154       301,601           4,506,368  343,076
Foreign currency  6,898,580   64,286       7,484,054       78,462           8,055,763  47,321
Total  35,244,021   855,755       34,545,228       830,782           32,724,583  909,914

 

(1)   For the period ending December 31, 2018 this line item includes debt instruments at fair value through other comprehensive income according to IFRS 9. For previous years, this line item consists of available for sale instruments.

(2)   Threshold is the asset generated when we post collateral for a derivative with a counterparty that has negative mark-to-market for us. Some CSDCentral Security Depository agreements permit this collateral to generate interest at the overnight rate and this is the source of interest income associated with this asset.

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Changes in Net Interest Revenue and Interest Expense: Volume and Rate Analysis

 

The following table allocates, by currency of denomination, changes in our net interest revenue and interest expense between changes in the average volume of interest-earning assets and interest-bearing liabilities and changes in their respective nominal interest rates for 20162018 compared to 2015 and 20152017 compared to 2014.2016 and 2017 compared to 2016. Volume and rate variances have been calculated based on movements in average balances over the period and changes in nominal interest rates on average interest-earning assets and average interest-bearing liabilities.

 

 Increase (Decrease) from 2015 to 2016
Due to Changes in		 Increase (Decrease) from 2014 to 2015
Due to Changes in		 Increase (Decrease) from 2017 to 2018
Due to Changes in		  Increase (Decrease) from 2016 to 2017
Due to Changes in		 
 Volume Rate Net Change from 2015 to 2016 Volume Rate Net Change from 2014 to 2015 Volume  Rate  Net Change from 2017 to 2018  Volume  Rate  Net Change from 2016 to 2017 
Assets                         
Interest earning assets                                                
Deposits in Central Bank                                                
Ch$  (413)  (1,437)  (1,850)  (4,199)  2,718   (1,482)  2,602   (1,067)  1,535   (125)  (876)  (1,001)
UF  —   —   —   —   —   —   —   —   —   —   —   — 
Foreign currency  —   —   —   —   —   —   —   —   —   —   —   — 
Subtotal  (413)  (1,437)  (1,850)  (4,199)  2,718   (1,482)  2,602   (1,067)  1,535   (125)  (876)  (1,001)
Financial investments                                                
Ch$  5,103   43,819   48,992   (474)  (10,739)  (11,213)  (5,103)  (22,002)  (27,105)  1,928   11,606   13,534 
UF  (2,230)  (2,626)  (4,856)  (20,539)  (8,784)  (29,323)
Foreign currency  622   3,046   3,668   (1,174)  5,911   4,737 
Subtotal  3,495   44,239   47,734   (22,186)  (13,613)  (35,799)
Commercial loans                        
Ch$  14,002   16,537   30,539   2,031   25,568   27,599 
UF  25,822   (48,887)  (23,065)  36,353   (65,130)  (28,777)
Foreign currency  (2,833)  12,016   9,183   11,412   —   11,412 
Subtotal  36,991   (20,334)  16,657   49,790   (39,562)  (10,234)
Consumer loans                        
Ch$  18,560   3,484   22,044   34,986   (115,302)  (80,316)
UF  (6,093)  (315)  (6,408)  (1,331)  (1,631)  (2,962)
Foreign currency  —   —   —   —   —   — 
Subtotal  12,467   3,169   15,636   33,655   (116,933)  (83,278)
Mortgage loans                        
Ch$  (163)  (185)  (348)  (1,340)  (2,266)  (3,606)
UF  43,613   73,064   (29,451)  105,976   (132,843)  (26,867)
Foreign currency  —   —   —   —   —   — 
Subtotal  43,450   (73,249)  (29,799)  104,637   (135,110)  (30,473)
Interbank loans                        
Ch$  1,024   (1,093)  (69)  (67)  292   225 
UF  —   —   —   —   —   — 
Foreign currency  —   (11)  (11)  —   11   11 
Subtotal  1,024   (1,104)  (80)  (67)  303   236 
Investment under agreement to resell                        
Ch$  610   493   1,103   (753)  65   (688)
UF  —   —   —   —   —   — 
Foreign currency  —   —   —   —   —   — 
Subtotal  610   493   1,103   (753)  65   (688)
Threshold                        
Ch$  59   121   180   —   62   62 
UF  —   —   —   —   —   — 
Foreign currency  (198)  1,466   1,268   230   —   230 
Subtotal  (139)  1,587   1,448   230   62   292 

 


  Increase (Decrease) from 2017 to 2018
Due to Changes in		  Increase (Decrease) from 2016 to 2017
Due to Changes in		 
  Volume  Rate  Net Change from 2017 to 2018  Volume  Rate  Net Change from 2016 to 2017 
UF  14,259   12,420   26,679   37,086   (32,919)  4,167 
Foreign currency  (2,344)  (117)  (2,461)  (1,274)  (101)  (1,375)
Subtotal  6,812   (9,699)  (2,887)  37,740   (21,414)  16,326 
Commercial loans                        
Ch$  9,466   (16,304)  (6,838)  14,979   (79,473)  (64,494)
UF  18,497   54,603   73,101   9,905   (54,476)  (44,571)
Foreign currency  4,021   18,057   22,077   3,908   3,271   7,179 
Subtotal  31,984   56,356   88,340   28,792   (130,678)  (101,886)
Consumer loans                        
Ch$  18,807   (50,380)  (31,574)  27,099   46,942   74,041 
UF  336   (262)  74   (269)  (157)  (426)
Foreign currency  —   —   —   —   —   — 
Subtotal  19,143   (50,642)  (31,500)  26,830  46,785  73,615
Mortgage loans                        
Ch$  (23)  (11)  (33)  (198)  (627)  (825)
UF  24,165   103,766   127,930   16,697   (82,207)  (65,510)
Foreign currency  —   —   —   —   —   — 
Subtotal  24,142   103,755   127,897   16,499   (82,834)  (66,335)
Interbank loans                        
Ch$  (18)  (53)  (71)  (1,391)  2,065   674 
UF  —   —   —   —   —   — 
Foreign currency  —   —   —   —   —   — 
Subtotal  (18)  (53)  (71)  (1,391)  2,065   674 
Investment under agreement to resell                        
Ch$  (25,888)  26,302   414   (961)  680   (281)
UF  1   (14)  (13)  —   (289)  (289)
Foreign currency  —   —   —   (2)  (2)  (4)
Subtotal  (25,887)  26,288   401   (963)  389   (574)
Threshold                        
Ch$  31   238   269   74   5   79 
UF  —   —   —   —   —   — 
Foreign currency  15,592   (13,705)  1,887   397   31   428 
Subtotal  15,623   (13,467)  2,156   471   36   507 
Total interest earnings assets                        
Ch$  (126)  (63,279)  (63,405)  41,405   (19,678)  21,727 
UF  57,259   170,514   227,773   63,419   (170,048)  (106,629)
Foreign currency  17,268   4,235   21,503   3,030   3,198   6,228 
Total  74,401   111,470   185,871   107,854   (186,528)  (78,674)
Liabilities and Shareholders’ Equity                        
Interest bearing liabilities                        
Savings accounts                        
Ch$  1   —   1   —   —   — 
UF  (3)  1,252   1,249   (1)  (1,067)  (1,068)
Foreign currency  —   —   —   —   —   — 
Subtotal  (2)  1,252   1,250   (1)  (1,067)  (1,068)
Time deposits                        
Ch$  2,470   (31,282)  (28,812)  (521)  (68,242)  (68,763)
UF  (61)  10,265   10,204   (2,940)  (16,183)  (19,123)
Foreign currency  5,491   2,372   7,863   7,095   3,750   10,845 
Subtotal  7,900   (18,645)  (10,745)  3,634   (80,675)  (77,041)

 

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  Increase (Decrease) from 2015 to 2016
Due to Changes in		 Increase (Decrease) from 2014 to 2015
Due to Changes in
  Volume Rate Net Change from 2015 to 2016 Volume Rate Net Change from 2014 to 2015
Total interest earnings assets                        
Ch$  38,782   61,739   100,521   30,185   (99,603)  (69,419)
UF  61,112   (124,892)  (63,780)  120,459   (208,388)  (87,929)
Foreign currency  (2,409)  16,517   14,108   10,468   5,922   16,390 
Total  97,485   (46,636)  50,849   161,112   (302,070)  (140,958)
Liabilities and Shareholders’ Equity                        
Interest bearing liabilities                        
Savings accounts                        
Ch$  —   (1)  (1)  —   2   2 
UF  69   (1,057)  (988)  307   (1,831)  (1,524)
Foreign currency  —   —   —   —   —   — 
Subtotal  69   (1,058)  (989)  307   (1,830)  (1,522)
Time deposits                        
Ch$  9,424   43,883   53,307   55,039   (28,648)  26,391 
UF  23,140   (32,677)  (9,537)  (26,002)  (3,766)  (29,768)
Foreign currency  467   4,103   4,570   (745)  (2,395)  (3,140)
Subtotal  33,032   15,308   48,340   28,292   (34,809)  (6,517)
Central bank borrowings                        
Ch$  (35)   18   (17)  (2)  43   41 
UF  (1)  —   (1)  (7)  —   (7)
Foreign currency  —   —   —   —   —   — 
Subtotal  (36)  18  (18)  (9)  43   34 
Repurchase agreements                        
Ch$  3,580   (562)  (4,142)  (3,163)  1,850   (1,313)
UF  —   —   —   —   1   1 
Foreign currency  21   15   36   (15)  10   (5)
Subtotal  (3,560)  (546)  (4,106)  (3,178)  1,861   (1,317)
Mortgage finance bonds                        
Ch$  —   —   —   —   —   — 
UF  (1,074)  (1,088)  (2,162)  (2,214)  (1,064)  (3,278)
Foreign currency  —   —   —   —   —   — 
Subtotal  (1,074)  (1,088)  (2,162)  (2,214)  (1,064)  (3,278)
Other interest bearing liabilities                        
Ch$  29,669   (38,314)  (8,645)  133,636   (227,555)  (93,919)
UF  65,141   (53,804)  11,337   44,230   (51,130)  (6,900)
Foreign currency  (15,262)  (3,519)  (18,781)  (1,198)  35,484   34,286 
Subtotal  79,547   (95,637)  (16,090)  176,668   (243,201)  (66,533)
Total interest bearing liabilities                        
Ch$  35,478   5,024   40,502   185,510   (254,308)  (68,798)
UF  87,275   (88,626)  (1,351)  16,314   (57,790)  (41,476)
Foreign currency  (14,774)  599   (14,175)  (1,958)  33,099   31,141 
Total  107,979   (83,004)  24,975   199,866   (278,999)  (79,133)

  Increase (Decrease) from 2017 to 2018
Due to Changes in		  Increase (Decrease) from 2016 to 2017
Due to Changes in		 
  Volume  Rate  Net Change from 2017 to 2018  Volume  Rate  Net Change from 2016 to 2017 
Central bank borrowings                        
Ch$  50   —   50   35   —   35 
UF  —   —   —   —   —   (1)
Foreign currency  —   —   —   —   —   — 
Subtotal  50   —   50   35   —   35 
Repurchase agreements                        
Ch$  (47)  (997)  (1,044)  488   2,376   2,864 
UF  —   —   —   (1)  —   (1)
Foreign currency  816   144   960   1,724   (706)  1,018 
Subtotal  769   (853)  (84)  2,211   1,670   3,881 
Mortgage finance bonds                        
Ch$  —   —   —   —   —   — 
UF  (1,130)  726   (404)  (966)  (583)  (1,549)
Foreign currency  —   —   —   —   —   — 
Subtotal  (1,130)  726   (404)  (966)  (583)  (1,549)
Other interest bearing liabilities                        
Ch$  4,659   7,366   12,025   22,760   (53,978)  (31,218)
UF  4,868   56,376   61,244   12,059   (33,663)  (21,604)
Foreign currency  115,986   (81,127)  34,859   2,991   1,571   4,562 
Subtotal  125,513   (17,385)  108,128   37,810   (86,070)  (48,260)
Total interest bearing liabilities                        
Ch$  7,133   (24,915)  (17,782)  22,762   (119,843)  (97,081)
UF  3,676   68,619   72,295   8,151   (51,496)  (43,346)
Foreign currency  122,293   (78,611)  43,682   11,811   4,614   16,426 
Total  133,102   (34,907)  98,195   42,724   (166,725)  (124,001)

 

Interest-Earning Assets: Net Interest Margin

 

The following table analyzes, by currency of denomination, the levels of average interest-earning assets and net interest earned by Santander-Chile, and illustrates the comparative net interest margins obtained, for each of the years indicated in the table.

 

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 Year ended December 31, Year ended December 31, 
 2016 2015 2014 2018  2017  2016 
 (in millions of Ch$) (in millions of Ch$) 
Total average interest-earning assets                  
Ch$  11,684,475   11,047,790   11,009,515   13,019,695   12,317,700   11,684,475 
UF  13,150,312   12,382,225   11,000,787   15,897,874   14,139,235   13,150,312 
Foreign currencies  4,836,524   5,092,990   4,749,384   3,842,634   4,138,124   4,836,524 
Total  29,671,311   28,523,005   26,759,696   32,760,203   30,595,059   29,671,311 
Net interest earned (1)                        
Ch$  670,567   610,548   611,168   743,753   789,376   670,567 
UF  571,131   633,279   679,806   663,325   507,847   571,131 
Foreign currencies  39,667   11,379   26,130   7,290   29,469   39,667 
Total  1,281,365   1,255,206   1,317,104   1,414,368   1,326,692   1,281,365 
Net interest margin (2)                        
Ch$  5.74%  5.53%  5.55%  5.7%  6.4%  5.7%
UF  4.34%  5.11%  6.18%  4.2%  3.6%  4.3%
Foreign currencies  0.82%  0.22%  0.55%  0.2%  0.7%  0.8%
Total  4.32%  4.40%  4.92%  4.3%  4.3%  4.3%

 

 
(1)Net interest earned is defined as interest revenue earned less interest expense incurred.

 

(2)Net interest margin is defined as net interest earned divided by total average interest-earning assets.

 


Return on Equity and Assets; Dividend Payout

 

The following table presents certain information and selected financial ratios for Santander-Chile for the years indicated.

 

  Year ended December 31,
Ch$ million 2016 2015 2014
Net income  478,432   451,729   575,910 
Net income attributable to shareholders  476,067   448,466   569,910 
Average total assets  35,244,021   34,545,228   32,724,583 
Average equity  2,840,843   2,816,116   2,689,037 
Net income as a percentage of:            
Average total assets  1.4%  1.3%  1.8%
Average equity  16.8%  16.0%  21.4%
Average equity as a percentage of:            
Average total assets  8.1%  8.2%  8.2%
Cash dividend (1)  330,646   336,659   330,198 
Dividend payout ratio, based on net income attributable to shareholders (1)  69.0%  75.0%  58.0%

  Year ended December 31, 
Ch$ million 2018  2017  2016 
Net income  599,693   575,249   478,432 
Net income attributable to shareholders  595,333   562,801   476,067 
Average total assets  37,213,342   35,521,228   35,244,021 
Average equity  3,263,155   3,001,680   2,840,843 
Net income as a percentage of:            
Average total assets  1.6%  1.6%  1.4%
Average equity  18.4%  19.2%  16.8%
Average equity as a percentage of:            
Average total assets  8.8%  8.5%  8.1%
Cash dividend(1)  357,757   423,611   330,646 
Dividend payout ratio, based on net income attributable to shareholders(1)  60.1%  75.3%  69.0%
 
(1)Cash dividends for each year are declared and approved by shareholders at the annual shareholders’ meeting in the following the year. As of March 15, 2019 the 2018 dividend has been proposed by the Board to the shareholders but not yet approved.

 

Dividends declared at the annual shareholders’ meeting of each year correspond to the Bank’s earnings of the previous year. The following table presents dividends declared and paid by us in nominal terms in the past four years:

 

Year Dividend
Ch$ millions (1)		 Dividend
U.S.$ millions (2)		 Per share Ch$/share (3) Per ADS U.S.$/ADS (4) % over earnings (5) % over earnings (6)
2013   232,780   493.1   1.24   1.05   60   65 
2014   265,156   476.0   1.41   1.01   60   60 
2015   330,198   540.4   1.75   1.15   60   58 
2016   336,659   503.7   1.79   1.07   75   75 
2017(7)  330,646   496.5   1.75   1.05   70   69 

Year paid  Dividend
Ch$ millions (1)		  Dividend
U.S.$ millions (2)		  Per share Ch$/share (3)  Per ADS U.S.$/ADS (4)  % over earnings (5)  % over earnings (6) 
2015   330,198   540.4   1.75   1.15   60   58 
2016   336,659   503.7   1.79   1.07   75   75 
2017   330,646   496.5   1.75   1.05   70   69 
2018   423,611   702.32   2.25   1.49   75   75 

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(1)Millions of nominal pesos.

 

(2)Millions of U.S.$ using the observed exchange rate of the day the dividend was approved at the annual shareholders’ meeting, except for 2017 when the exchange rate used is Ch$666.00.meeting.

 

(3)Calculated on the basis of 188,446 million shares.

 

(4)Dividend in U.S.$ million divided by the number of ADS, which was calculated on the basis of 1,039 shares per ADS for 2012. For 2013, 2014, 2015 and 2016, it is calculatedCalculated on the basis of 400 shares per ADS.

 

(5)Calculated by dividing dividend paid in the year by net income attributable to the equity holders of the Bank for the previous year under Chilean Bank GAAP.

 

(6)Calculated by dividing dividend paid in the year by net income attributable to the equity holders of the Bank for the previous year under IFRS.

 

(7)Dividend proposed by the Board for shareholders’ approval on April 26, 2017.


Loan Portfolio

 

The following table analyzes our loans by product type. Except where otherwise specified, all loan amounts stated below are before deduction for loan loss allowances. Total loans reflect our loan portfolio, including principal amounts of past due loan and substandard loans. Any collateral provided generally consists of a mortgage on real estate, a pledge of marketable securities, a letter of credit or cash. The existence and amount of collateral generally varyvaries from loan to loan.

 

 As of December 31, As of December 31, 
 2016 2015 2014 2013 2012 2018 (1)  2017  2016  2015  2014 
 (in millions of Ch$) (in millions of Ch$) 
Commercial Loans:                              
Commercial loans  9,853,657   8,985,452   8,324,949   7,797,682   7,316,417   11,148,859   9,990,656   9,853,657   8,985,452   8,324,949 
Foreign trade loans  1,829,904   2,152,570   1,786,232   1,840,334   1,270,423   1,752,437   1,574,513   1,829,904   2,152,570   1,786,232 
Checking account debtors  179,468   234,723   266,231   279,657   205,355   215,162   195,696   179,468   234,723   266,231 
Factoring transactions  296,751   275,647   327,841   316,114   322,242   380,983   449,890   296,751   275,647   327,841 
Leasing transactions  1,485,123   1,534,192   1,489,384   1,349,814   1,277,555   1,443,724   1,457,004   1,485,123   1,534,192   1,489,384 
Other loans and accounts receivable  222,562   143,775   135,663   118,651   97,029   244,979   240,883   222,562   143,775   135,663 
Subtotal  13,867,465   13,326,359   12,330,300   11,702,252   10,489,021   15,186,144   13,908,642   13,867,465   13,326,359   12,330,300 
                                        
Mortgage loans:                                        
Mortgage finance bond backed loans  32,579   134,105   116,150   72,297   92,204   17,426   24,060   32,579   134,105   116,150 
Mortgage mutual loans  119,934   44,028   57,356   71,833   46,105   108,536   115,078   119,934   44,028   57,356 
Other mortgage mutual loans  8,466,843   7,634,717   6,458,525   5,481,682   5,133,272   10,025,019   8,957,757   8,466,843   7,634,717   6,458,525 
Subtotal  8,619,356   7,812,850   6,632,031   5,625,812   5,271,581   10,150,981   9,096,895   8,619,356   7,812,850   6,632,031 
                                        
Consumer loans:                                        
Installment consumer loans  2,722,365   2,469,646   2,320,775   2,168,121   1,857,657   3,189,670   2,910,742   2,722,365   2,469,646   2,320,775 
Credit card loans  1,448,118   1,434,609   1,362,587   1,235,881   1,054,473   1,417,152   1,364,980   1,448,118   1,434,609   1,362,587 
Consumer leasing contracts  5,117   5,460   5,270   3,451   3,688   4,157   4,715   5,117   5,460   5,270 
Other consumer loans  271,203   240,956   229,743   199,795   199,659   265,310   277,255   271,203   240,956   229,743 
Subtotal  4,446,803   4,150,671   3,918,375   3,607,248   3,115,477   4,876,289   4,557,692   4,446,803   4,150,671   3,918,375 
                                        
Subtotal Loans to customers  26,933,624   25,289,880   22,880,706   20,935,312   18,876,079   30,213,414   27,563,229   26,933,624   25,289,880   22,880,706 
                                        
Interbank loans(2)  272,807   10,877   11,943   125,449   90,573   —   162,685   272,807   10,877   11,943 
                                        
Total  27,206,431   25,300,757   22,892,649   21,060,761   18,966,652   30,213,414   27,725,914   27,206,431   25,300,757   22,892,649 
(1)Loans as of December 31, 2018 are loans at amortized cost in accordance with IFRS 9. See “Note 9— Loans and Account Receivable at Amortized Cost – under IFRS 9” of our Audited Consolidated Financial Statements.

(2)Interbank loans for December 31, 2018 are included within commercial loans.

 

At December 31, 2018, the Bank had some loans measured at fair value through other comprehensive income according to IFRS 9 as follows:

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  Stage 1  Stage 2  Stage 3  Total 
  Individual  Individual  Individual    
Gross carrying amount at  January 1, 2018  107,998   —   —   107,998 
Transfers to stage 2  (6,697)  6,697   —   — 
Net changes on financial assets  (40,754)  (1,821)  —   (42,575)
Foreign Exchange adjustments  3,198   73   —   3,271 
At December 31, 2018  63,745   4,949   —   68,694 

 

The loan categories are as follows:

 

Commercial loans

 

Commercial loans are long-term and short-term loans, including checking overdraft lines for companies, granted in Chilean pesos, inflation linked, U.S.$ linked or denominated in U.S.$. The interest on these loans is fixed or variable and is used primarily to finance working capital or investments. General commercial loans also include factoring operations.

 

Foreign trade loans are fixed rate, short-term loans made in foreign currencies (principally U.S.$) to finance imports and exports.

 

Checking account debtors mainly include mortgage loans (fixed and variable rate) that are inflation-indexed long-term loans with monthly payments of principal and interest secured by a real property mortgage. These loans can be endorsed to a third party.

 


Factoring transactions mainly include short-term loans to companies with a fixed monthly nominal rate backed by a company invoice.

 

Leasing transactions are agreements for the financial leasing of capital equipment and other property.

 

Other loans and accounts receivable loans include other loans and accounts payable.

 

Mortgage loans

 

Mortgage mutual loans mainly include mortgage loans (fixed and variable rate) that are inflation-indexed long-term loans with monthly payments of principal and interest secured by a real property mortgage. These are financed by issuing mortgage bonds.

 

Mortgage finance bond backed loans are inflation-indexed, fixed or variable rate, long-term loans with monthly payments of principal and interest secured by a real property mortgage that are financed with mortgage finance bonds. At the time of approval, these types of mortgage loans cannot be more than 75.0% of the lower of the purchase price or the appraised value of the mortgaged property or such loan will be classified as a commercial loan. Mortgage bonds are our general obligations, and we are liable for all principal and accrued interest on such bonds. In addition, if the issuer of a mortgage finance bond becomes insolvent, the General Banking Law’s liquidation procedures provide that these types of mortgage loans with their corresponding mortgage bonds shall be auctioned as a unit and the acquirer must continue paying the mortgage finance bonds under the same conditions as the original issuer.

 

Other mortgage mutual loans mainly include mortgage loans (fixed and variable rate) that are inflation-indexed long-term loans with monthly payments of principal and interest secured by a real property mortgage. These are financed by our general borrowings.

 

Consumer loans

 

Installment consumer loans are loans to individuals, granted in Chilean pesos, generally on a fixed rate nominal basis, to finance the purchase of consumer goods or to pay for services.

 

Consumer loans through lines of creditare checking overdraft lines to individuals, granted in Chilean pesos, generally on a fixed rate nominal basis and linked to an individual’s checking account.

 

Credit card loans include credit card balances subject to nominal fixed rate interest charges.

 

Consumer leasing contracts are agreements for the financial leasing of automobiles and other property to individuals.

 

Other loans and accounts receivable from customers include draft lines for individuals.

 

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Non-client loans

 

Interbank loans are fixed rate, short-term loans to financial institutions that operate in Chile.

 

Maturity and Interest Rate Sensitivity of Loans

 

The following table sets forth an analysis by type and time remaining to maturity of our loans at amortized cost as of December 31, 2016.2018.

 

  Due in 1 year or less Due after 1 year through 5 years Due after 5 years Total balance as of December 31, 2016
  (in millions of Ch$)
General commercial loans  4,922,702   3,372,234   2,284,443   10,579,379 
Foreign trade loans  1,649,995   122,712   19,597   1,792,304 
Leasing contracts  322,670   720,315   445,445   1,488,430 
Other outstanding loans  7,352   —   —   7,352 
Subtotal commercial loans  6,902,719   4,215,261   2,749,485   13,867,465 
Residential loans backed by mortgage bonds  9,002   22,248   5,869   37,119 
Other residential mortgage loans  457,192   1,605,301   6,519,744   8,582,237 
Subtotal residential mortgage loans  466,194   1,627,549   6,525,613   8,619,356 
Consumer loans  2,338,603   2,003,601   104,599   4,446,803 
Subtotal  9,707,516   7,846,411   9,379,697   26,933,624 
Interbank loans  272,807   —   —   272,807 
Total loans  9,980,323   7,846,411   9,379,697   27,206,431 
  Due in 1 year or less  Due after 1 year through 5 years  Due after 5 years  Total balance as of December 31, 2018 
  (in millions of Ch$) 
General commercial loans (1)  4,855,960   3,739,606   2,553,293   11,148,859 
Foreign trade loans  1,663,819   79,844   8,774   1,752,437 
Leasing contracts  321,824   725,367   396,533   1,443,724 
Other outstanding loans  759,786   41,617   39,721   841,124 


  Due in 1 year or less  Due after 1 year through 5 years  Due after 5 years  Total balance as of December 31, 2018 
  (in millions of Ch$) 
Subtotal commercial loans  7,601,389   4,586,434   2,998,321   15,186,144 
Residential loans backed by mortgage bonds  5,218   11,652   556   17,426 
Other residential mortgage loans  533,418   1,958,045   7,642,092   10,133,555 
Subtotal residential mortgage loans  538,636   1,969,697   7,642,648   10,150,981 
Consumer loans  2,597,358   2,154,507   124,424   4,876,289 
Total loans at amortized cost  10,737,383   8,710,638   10,765,393   30,213,414 

(1)Interbank loans for December 31, 2018 are included within commercial loans in accordance with disclosures for IFRS 9. See “Note 9— Loans and Account Receivable at Amortized Cost – under IFRS 9” of the Audited Consolidated Financial Statements.

 

The following tables present the total amount of loans due after one year that have fixed and variable interest rates as of December 31, 2016.2018. See also “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Interest Rates.”

 

  As of December 31, 20162018
  (in millions of Ch$)
Variable Rate  
Ch$  659— 
UF  641,7711,569,870 
Foreign currencies  — 
Subtotal  642,4311,569,870 
Fixed Rate    
Ch$  4,310,3944,634,456 
UF  11,434,51412,398,564 
Foreign currencies  838,768873,141 
Subtotal  16,583,67617,906,161 
Total  17,226,10719,476,031 

 

Loans by Economic Activity

 

The following table sets forth, at the dates indicated, an analysis of our client loan portfolio based on the borrower’s principal economic activity and geographic distribution. Loans to individuals for business purposes are allocated to their economic activity.

 

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December 31, 2018, loans by economic activity according to IFRS 9 are listed below:

 

 Total loans at amortized cost  Total  % of 
As of December 31, 2018 Stage 1  Stage 2  Stage 3     Total 
      Ch$ Million      Loans 
Commercial loans                    
Manufacturing  992,786   92,931   54,048   1,139,765   3.8%
Mining  182,342   21,821   4,585   208,748   0.7%
Electricity, gas, and water  384,288   22,365   2,279   408,932   1.4%
Agriculture and livestock  934,199   166,271   100,781   1,201,251   4.0%
Forest  120,371   9,402   14,115   143,888   0.5%
Fishing  238,348   11,104   3,569   253,021   0.8%
Transport  716,493   55,011   37,802   809,306   2.7%
Communications  178,215   30,407   7,222   215,844   0.7%
Construction(*)  723,600   88,691   93,747   906,038   3.0%
Commerce  2,950,517   189,623   199,924   3,340,064   11.1%
Services  1,771,595   81,159   12,915   1,865,669   6.2%
Other  4,120,052   331,471   242,094   4,693,617   15.5%
                     
Subtotal  13,312,806   1,100,255   773,083   15,186,144   50.3%
                     
Mortgage loans  9,258,962   447,496   444,523   10,150,981   33.6%
                     
Consumer loans  4,341,740   249,039   285,510   4,876,289   16.1%
                     
Total loans at amortized cost  26,913,508   1,796,790   1,503,115   30,213,414   100.0%

 

  

Domestic loans (*) as of December 31, 

 

Foreign interbank loans (**) as of December 31, 

  

2016 

 

2015 

 

2014 

 

2013 

 

2012 

 

2016 

 

2015 

 

2014 

 

2013 

 

2012 

  (in millions of Ch$) (in millions of Ch$)
Commercial loans                    
Manufacturing  1,180,886   1,171,830   1,126,268   1,216,914   1,014,777   —   —   —   —   — 
Mining  340,554   510,467   428,847   464,865   292,217   —   —   —   —   — 
Electricity, gas and water  442,936   454,456   567,548   222,110   337,269   —   —   —   —   — 
Agriculture and livestock  1,096,659   1,019,922   871,247   806,092   770,558   —   —   —   —   — 
Forestry  96,806   96,069   98,039   183,716   120,002   —   —   —   —   — 
Fishing  296,592   344,496   256,818   265,917   188,803   —   —   —   —   — 
Transport  787,510   876,329   758,339   721,931   511,407   —   —   —   —   — 
Communications  196,934   160,135   167,004   249,499   179,544   —   —   —   —   — 
Construction  1,792,485   1,462,535   1,365,841   1,337,791   1,130,194   —   —   —   —   — 
Commerce  3,120,400   3,050,663   2,773,410   2,578,979   2,396,428   272,733   10,827   11,899   125,383   90,546 
Services  482,900   483,516   469,141   447,861   400,716   —   —   —   —   — 
Other  4,032,877   3,695,991   3,447,842   3,206,643   3,147,133   —   —   —   —   — 
Subtotals  13,867,539   13,326,409   12,330,344   11,702,318   10,489,048   272,733   10,827   11,899   125,383   90,546 
Mortgage loans  8,619,356   7,812,850   6,632,031   5,625,812   5,271,581   —   —   —   —   — 
Consumer loans  4,446,803   4,150,671   3,918,375   3,607,248   3,115,477   —   —   —   —   — 
Total  26,933,698   25,289,930   22,880,750   20,935,378   18,876,106   272,733   10,827   11,899   125,383   90,546 
                                         
                                         

(*) In 2018, we improved the classification of our construction loans, reassigning loans for real estate investment companies to the Services category.

 


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December 31, 2017, 2016, 2015 and 2014 loans by economic activity is reported according to IAS 39.

 

  

Total loans as of December 31, 

 

% of total loans as of December 31, 

  

2016 

 

2015 

 

2014 

 

2013 

 

2012 

 

2016 

 

2015 

 

2014 

 

2013 

 

2012 

  (in millions of Ch$) (in millions of Ch$)
Commercial loans                    
Manufacturing  1,180,886   1,171,830   1,126,268   1,216,914   1,014,777   4.34%  4.63%  4.92%  5.78%  5.35%
Mining  340,554   510,467   428,847   464,865   292,217   1.25%  2.02%  1.87%  2.21%  1.54%
Electricity, gas and water  442,936   454,456   567,548   222,110   337,269   1.63%  1.80%  2.48%  1.05%  1.78%
Agriculture and livestock  1,096,659   1,019,922   871,247   806,092   770,558   4.03%  4.03%  3.81%  3.83%  4.06%
Forestry  96,806   96,069   98,039   183,716   120,002   0.36%  0.38%  0.43%  0.87%  0.63%
Fishing  296,592   344,496   256,818   265,917   188,803   1.09%  1.36%  1.12%  1.26%  1.00%
Transport  787,510   876,329   758,339   721,931   511,407   2.89%  3.46%  3.31%  3.43%  2.70%
Communications  196,934   160,135   167,004   249,499   179,544   0.72%  0.63%  0.73%  1.18%  0.95%
Construction  1,792,485   1,462,535   1,365,841   1,337,791   1,130,194   6.59%  5.78%  5.97%  6.35%  5.96%
Commerce  3,393,133   3,061,490   2,773,410   2,704,362   2,486,974   12.47%  12.10%  12.17%  12.84%  13.11%
Services  482,900   483,516   469,141   447,861   400,716   1.77%  1.91%  2.05%  2.13%  2.11%
Other  4,032,877   3,695,991   3,447,842   3,206,643   3,147,133   14.84%  14.61%  15.06%  15.23%  16.59%
Subtotals  14,140,272   13,337,236   12,330,344   11,827,701   10,579,594   51.98%  52.71%  53.92%  56.16%  55.78%
Mortgage loans  8,619,356   7,812,850   6,632,031   5,625,812   5,271,581   31.68%  30.88%  28.99%  26.71%  27.79%
Consumer loans  4,446,803   4,150,671   3,918,375   3,607,248   3,115,477   16.34%  16.41%  17.17%  17.13%  16.43%
Total  27,206,431   25,300,757   22,880,750   21,060,761   18,966,652   100.00%  100.00%  100.00%  100.00%  100.00%

  Domestic loans (*) as of December 31,  Foreign interbank loans (**) as of December 31, 
  2017  2016  2015  2014  2017  2016  2015  2014 
  (in millions of Ch$)  (in millions of Ch$) 
Commercial loans                                
Manufacturing  1,218,232   1,180,886   1,171,830   1,126,268   —   —   —   — 
Mining  302,037   340,554   510,467   428,847   —   —   —   — 
Electricity, gas and water  336,048   442,936   454,456   567,548   —   —   —   — 
Agriculture and livestock  1,114,597   1,096,659   1,019,922   871,247   —   —   —   — 
Forestry  98,941   96,806   96,069   98,039   —   —   —   — 
Fishing  215,994   296,592   344,496   256,818   —   —   —   — 
Transport  697,948   787,510   876,329   758,339   —   —   —   — 
Communications  168,744   196,934   160,135   167,004   —   —   —   — 
Construction  1,977,417   1,792,485   1,462,535   1,365,841   —   —   —   — 
Commerce  3,131,870   3,120,400   3,050,663   2,773,410   162,685   272,733   10,827   11,899 
Services  467,747   482,900   483,516   469,141   —   —   —   — 
Other  4,179,067   4,032,877   3,695,991   3,447,842   —   —   —   — 
Subtotals  13,908,642   13,867,539   13,326,409   12,330,344   162,685   272,733   10,827   11,899 
Mortgage loans  9,096,895   8,619,356   7,812,850   6,632,031   —   —   —   — 
Consumer loans  4,557,692   4,446,803   4,150,671   3,918,375   —   —   —   — 
Total  27,563,229   26,933,698   25,289,930   22,880,750   162,685   272,733   10,827   11,899 
                                 
(*)Includes domestic interbank loans for Ch$740 million as of December 31, 2016 (Ch$50 million as of December 31, 2015),2018, see Note 8“Note 9—Loans and Account Receivable at Amortized Cost – under IFRS 9” of the Audited Consolidated Financial Statements.

(**)Includes foreign interbank loans for Ch$272,733162,685 million as of December 31, 2016 (Ch$10,827 million as of December 31, 2015),2018, see Note 8“Note 9—Loans and Account Receivable at Amortized Cost – under IFRS 9” of the Audited Consolidated Financial Statements.

 

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  Total loans as of December 31,  % of total loans as of December 31, 
  2017  2016  2015  2014  2017  2016  2015  2014 
  (in millions of Ch$)          
Commercial loans                                
Manufacturing  1,218,232   1,180,886   1,171,830   1,126,268   4.4%  4.34%  4.63%  4.92%
Mining  302,037   340,554   510,467   428,847   1.1%  1.25%  2.02%  1.87%
Electricity, gas and water  336,048   442,936   454,456   567,548   1.2%  1.63%  1.80%  2.48%
Agriculture and livestock  1,114,597   1,096,659   1,019,922   871,247   4.0%  4.03%  4.03%  3.81%
Forestry  98,941   96,806   96,069   98,039   0.4%  0.36%  0.38%  0.43%
Fishing  215,994   296,592   344,496   256,818   0.8%  1.09%  1.36%  1.12%
Transport  697,948   787,510   876,329   758,339   2.5%  2.89%  3.46%  3.31%
Communications  168,744   196,934   160,135   167,004   0.6%  0.72%  0.63%  0.73%
Construction  1,977,417   1,792,485   1,462,535   1,365,841   7.1%  6.59%  5.78%  5.97%
Commerce  3,294,555   3,393,133   3,061,490   2,773,410   11.9%  12.47%  12.10%  12.17%
Services  467,747   482,900   483,516   469,141   1.7%  1.77%  1.91%  2.05%
Other  4,179,067   4,032,877   3,695,991   3,447,842   15.1%  14.84%  14.61%  15.06%
Subtotals  14,071,327   14,140,272   13,337,236   12,330,344   50.8%  51.98%  52.71%  53.92%
Mortgage loans  9,096,895   8,619,356   7,812,850   6,632,031   32.8%  31.68%  30.88%  28.99%
Consumer loans  4,557,692   4,446,803   4,150,671   3,918,375   16.4%  16.34%  16.41%  17.17%
Total  27,725,914   27,206,431   25,300,757   22,880,750   100.0%  100.00%  100.00%  100.00%
Table of Contents

Foreign Assets and Loans

 

Santander-Chile’s Asset and Liability Committee, or ALCO, is responsible for determining the maximum foreign country exposure the Bank is permitted to have. The ALCO has determined that the total foreign country exposure cannot be greater than 1-time regulatory capital. To determine this, each country is classified using a ranking system from 1 to 6 based on the definition promulgated by the SBIF, in which the main consideration is the international rating of each country. The ALCO has also set a higher limit if the foreign exposure is to related parties. As of December 31, 2016,2018, the Bank’s foreign exposure, including the estimate of counterparty risk in our derivatives portfolio, was U.S.$3,1211,463 million, or 5.9%2.6% of our assets. For more information please see Note 3739 of our Audited Consolidated Financial Statements.

 

Below, there are additional details regarding our exposure to countries in category 2 and 3, the riskiest categories we have exposure to as of December 31, 2016,2018 considering fair value of derivative instruments. In this category China is the largest exposure and is also broke down below. We do not have sovereign exposure to Italy.

 

Country 

Classification(1) 

Derivative Instruments (adjusted to market) 

Deposits 

Loans 

Financial Investments USD Mn 

Total Exposure USD Mn 

  

USD Mn 

USD Mn 

USD Mn 

  
Colombia20.82—0.19—1.01
Italy2—8.77——8.77
China2——348.99—348.99
México2—0.090.32—0.41
Panamá20.69———0.69
Perú22.82———2.82
Uruguay2——0.68—0.68
Other31.32———1.32
Total 5.658.86350.18—364.69

Country  

Classification(1)

  Derivative Instruments (adjusted to market)  Deposits  Loans  Financial Investments  Total Exposure 
      US$ Mn  US$ Mn  US$ Mn  US$ Mn  US$ Mn 
Colombia  2   100.41   0   0.06   —   100.47 
Italy  2   —   6.25   0.46   —   6.71 
Mexico  2   —   0.04   —   —   0.04 
Panama  2   0.56   —   —   —   0.56 
Peru  2   2.26   —   —   —   2.26 
China  2   —   —   3.72   —   3.72 
Turkey  3   —   —   4.94   —   4.94 
Total      103.23   6.29   9.18   —   118.7 
 
(1)Corresponds to country’s classification established in Chapter B-6 of the Compendium of Accounting Standards issued by the SBIF.

 

Our exposure to Grupo Santander is as follows:

 

Counterpart Country Classification Derivative instruments (market adjusted) USD Mn Deposits USD Mn Loans
USD Mn		 Financial Investments USD Mn Total Exposure USD Mn
Banco Santander Spain*  Spain   1   —   280.9   —   —   280.9 

Counterpart Country  Classification  Derivative instruments (market adjusted) USD Mn  Deposits USD Mn  Loans
USD Mn		  Financial Investments USD Mn  Total Exposure USD Mn 
Banco Santander Spain* Spain  1   216.65   332.83   —   —   549.48 
Banco Santander London SA UK  1   25.93   —   —   —   25.93 
Santander UK PLC UK  1   —   0.9   —   —   0.9 
Banco Santander Mexico SA Mexico  2   —   0.04   —   —   0.04 
Total        242.58   333.77   —   —   576.35 
 

*      We have included our exposure to Santander branches in New York and Hong Kong as exposure to Spain.

*We have included our exposure to Santander branches in New York and Hong Kong as exposure to Spain.

 

The total amount of this exposure to derivative instruments must be compensated daily with collateral and, therefore, there is no credit exposure.

 

Furthermore, is additional detail regarding our exposure to the United States, which is the only country with more than 1% of exposure over total assets. Below we detail exposure to assets in the USA as of December 31, 2016, considering fair value of derivative instruments.

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Country 

Classification(1) 

 Derivative Instruments (adjusted to market)
USD Mn		 Deposits
USD Mn		 Loans
USD Mn		 Financial Investments USD Mn Total Exposure USD Mn
 USA   1   211.7   1,487.2   —   581.3   2,280.2 

(1)Corresponds to country’s classification established in Chapter B-6 of the Compendium of Accounting Standards issued by the SBIF.

As of December 31, 2016,2018, we had no applicable sovereign exposure, no unfunded exposure, no credit default protection and no current developments.

 

Classification of Loan Portfolio

Credit Risk Governance

The Risk Division, our credit analysis and risk management group, is largely independent of our Commercial Division. Risk evaluation teams interact regularly with our clients. For larger transactions, risk teams in our headquarters work directly with clients when evaluating credit risks and preparing credit applications. Various credit approval committees, all of which include Risk Division and Commercial Division personnel, must verify that the appropriate qualitative and quantitative parameters are met by each applicant. Each committee’s powers are defined by our Board of Directors.

Santander-Chile’s governance rules establish an Integral Risk Committee. This committee is responsible for revising and following all risks that may affect us, including reputational risk, allowing for an integral risk management. This committee serves as the governing body through which the Board supervises all risk functions. It also evaluates the reasonability of the systems for measurement and control of risks. This Committee includes the Vice Chairman of the Board and five Board members.

The Board has delegated the duty of credit risk management to the Integral Risk Committee, as well as to the Bank’s risk departments, whose roles are summarized below:

·Formulate credit policies by consulting with the business units, meeting requirements of guarantees, credit evaluation, risk rating and submitting reports, documentation and legal procedures in compliance with the regulatory, legal and internal requirements of the Bank.

·Establish the structure to approve and renew credit requests. The Bank structures credit risks by assigning limits to the concentration of credit risk in terms of individual debtor, debtor group, industry segment and country. Approval levels are assigned to the corresponding officials of the business unit (commercial, consumer, SMEs) to be exercised by that level of management. In addition, those limits are continually revised. Teams in charge of risk evaluation at the branch level interact on a regular basis with customers; however, for larger credit requests, the risk team from the head office and the Executive Risk Committee works directly with customers to assess credit risks and prepare risk requests.

·Limit concentrations of exposure to customers or counterparties in geographic areas or industries (for accounts receivable or loans), and by issuer, credit rating and liquidity.

·Develop and maintain the Bank’s credit risk classifications for the purpose of classifying risks according to the degree of exposure to financial loss that is exhibited by the respective financial instruments, with the aim of focusing risk management specifically on the associated risks.

·Revise and evaluate credit risk. Management’s risk divisions are largely independent of the Bank’s commercial division and evaluate all credit risks in excess of the specified limits prior to loan approvals for customers or prior to the acquisition of specific investments. Credit renewal and reviews are subject to similar processes.

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The following diagram illustrates the governance of our credit risk division including the committees with approval power:

 

(1)       Includes various approval committees for the Middle Market and high net worth clients.

Role of Santander Spain’s Global Risk Department: Credit Risk

In matters regarding Credit Risk, Santander Spain’s Global Risk Department has the following role:

·All credit risks greater than U.S.$40 million (U.S.$60 million for financial institutions), after being approved locally, are reviewed by Santander Spain. This additional review ensures that no global exposure limit is being breached.

·In standardized risks, the consumer and mortgage scoring models are developed locally but are reviewed and approved by Santander Spain’s Global Risk Department.

·For each scoring model, a monthly Risk Report is prepared, which is reviewed locally and is also sent to Santander Spain’s Global Risk Department. This report includes the evolution of basic credit risk parameters such as: loan amounts, non-performance, charge-offs and provisions.

·Monthly, the Controller of the Risk Department sends a report to Santander Spain’s Global Risk Department covering all the main indicators regarding credit risk and the evolution of credit risk as compared to the budgeted levels.

Credit Approval: Loans approved on an individual basis

In preparing a credit proposal for a corporate client whose loans are approved on an individual basis, Santander-Chile’s personnel verifies such parameters as debt servicing capacity (typically including projected cash flows), the company’s financial history and projections for the economic sector in which it operates. The Risk Division is closely involved in this process, and prepares the credit application for the client. All proposals contain an analysis of the client’s strengths and weaknesses, a rating and a recommendation. Credit limits are determined not on the basis of outstanding balances of individual clients, but on the direct and indirect credit risk of entire financial groups. For example, a corporation will be evaluated together with its subsidiaries and affiliates.

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Credit Approval: Loans approved on a group basis

The majority of loans to individuals and small and mid-sized companies are approved by the Standardized Risk Area through an automated credit scoring system. This system is decentralized, automated and based on multiple parameters, including demographic and information regarding credit behavior from external sources and the SBIF.

Classification of Loan Portfolio

Credit Risk Governance

The Risk Division, our credit analysis and risk management group, is largely independent of our Commercial Division. Risk evaluation teams interact regularly with our clients. For larger transactions, risk teams in our headquarters work directly with clients when evaluating credit risks and preparing credit applications. Various credit approval committees, all of which include Risk Division and Commercial Division personnel, must verify that the appropriate qualitative and quantitative parameters are met by each applicant. Each committee’s powers are defined by our Board of Directors.

Santander-Chile’s governance rules have established the existence of the Risk Committee. This committee is responsible for revising and following all risks that may affect us, including reputational risk, allowing for an integral risk management. This committee serves as the governing body through which the Board supervises all risk functions. It also evaluates the reasonability of the systems for measurement and control of risks. This Committee includes the Chairman of the Board and five Board members.

The Board has delegated the duty of credit risk management to the Risk Committee, as well as to the Bank’s risk departments, whose roles are summarized below:

●Verify compliance with the strategic objectives of the group, depending on both assumed and potential risk, and alerting management to such risks.

●Propose the primary metrics for risk appetite framework.

●Review the level of compliance with regulatory provisions and recommendations issued by the Local and External Supervisors, ensuring their implementation on the stipulated dates.

●Analyze with a comprehensive vision, the map of recommendations and incidents formulated by the different control instances (SBIF, FMC, DAI and External Audit) in order to identify the main risks involved.

●Review the risk benchmark analysis, and from its results, identify and propose “best practices” or corrective / preventive actions, ensuring their proper implementation.

●Review the adequate management of risks by the management areas, formulating where appropriate, the mitigation actions in accordance with the policies approved by the Board.

●Monitoring, analysis and control of the limits defined in the Risk Framework (basic and complementary metrics) and the key credit risk indicators of each zone, segment or product, identifying possible sources of concern.

●Analyze the relevant aspects of the risk (exogenous variables), which could eventually materialize in possible losses for the business (emerging risks).

●Analyze and propose eventual changes in the policies and procedures used by the Bank for the administration, control and management of risks, when inconsistencies or vulnerabilities are verified.

●Encourage compliance by the Bank with the best corporate governance practices in risk management.

●Pre-review the documents of type 0 and 1 (Frames and Models) that were defined in the Approval Hierarchy model, which must then be approved in the Directory.

●Perform, according to the calendar proposed by the Risk Department or on request, the sectoral analyzes considered relevant.

●Review of risks in terms of Risk Compliance and Reputational Risk

●Any other task that the Board deems necessary.


The following diagram illustrates the governance of our credit risk division including the committees with approval power: 

 

Role of Santander Spain’s Global Risk Department: Credit Risk

In matters regarding Credit Risk, Santander Spain’s Global Risk Department has the following role:

●All credit risks greater than U.S.$40 million (U.S.$60 million for financial institutions), after being approved locally, are reviewed by Santander Spain. This additional review ensures that no global exposure limit is being breached.

●In standardized risks, the consumer and mortgage scoring models are developed locally but are reviewed and approved by Santander Spain’s Global Risk Department.

●For each scoring model, a monthly Risk Report is prepared, which is reviewed locally and is also sent to Santander Spain’s Global Risk Department. This report includes the evolution of basic credit risk parameters such as loan amounts, non-performance, charge-offs and provisions.

●Monthly, the Controller of the Risk Department sends a report to Santander Spain’s Global Risk Department covering all the main indicators regarding credit risk and the evolution of credit risk as compared to the budgeted levels.

Credit Approval: Loans approved on an individual basis

In preparing a credit proposal for a corporate client whose loans are approved on an individual basis, Santander-Chile’s personnel verifies such parameters as debt servicing capacity (typically including projected cash flows), the company’s financial history and projections for the economic sector in which it operates. The Risk Division is closely involved in this process, and prepares the credit application for the client. All proposals contain an analysis of the client’s strengths and weaknesses, a rating and a recommendation. Credit limits are determined not on the basis of outstanding balances of individual clients, but on the direct and indirect credit risk of entire financial groups. For example, a corporation will be evaluated together with its subsidiaries and affiliates.


Credit Approval: Loans approved on a group basis

The majority of loans to individuals and small and mid-sized companies are approved by the Standardized Risk Area through an automated credit scoring system. This system is decentralized, automated and based on multiple parameters, including demographic and information regarding credit behavior from external sources and the FMC.

Classification of Loan Portfolio

 

Loans are divided into: (i) consumer loans (including loans granted to individuals for the purpose of financing the acquisition of consumer goods or payment of services); (ii) residential mortgage loans (including loans granted to individuals for the acquisition, construction or repair of residential real estate, in which the value of the property covers at least 100% of the amount of the loan); and (iii) commercial loans (including all loans other than consumer loans and residential mortgage loans). The models and methods used to classify our loan portfolio and establish credit loss allowances must follow the following guiding principles, which have been approved by our Board of Directors.

 

Impairment assessment (policy applicable from January 1, 2018)

In accordance with the requirements of IFRS 9 the Bank has developed a new credit risk model, applicable from January 1, 2018.

  a.Definition of default and cure

The Bank considers a financial instrument defaulted and therefore Stage 3 for ECL calculations in all cases when the borrower becomes 90 days past due on its contractual payments.

As a part of a qualitative assessment of whether a customer is in default, the Bank also considers a variety of instances that may indicate unlikeliness to pay. Such events include:

●Internal rating of the borrower indicating default or near-default;

●The borrower requesting emergency funding from the Bank;

●The borrower having past due liabilities to public creditors or employees;

●The borrower is deceased;

●A material decrease in the underlying collateral value where the recovery of the loan is expected from the sale of the collateral;

●A material decrease in the borrower’s turnover or the loss of a major customer;

●A covenant breach not waived by the Bank;

●The debtor (or any legal entity within the debtor’s group) filing for bankruptcy application/protection; and/or

●Debtor’s listed debt or equity suspended at the primary exchange because of rumors or facts about financial difficulties.

It is the Bank’s policy to consider a financial instrument as “cured” and therefore re-classified out of Stage 3 when none of the default criteria have been present for at least twelve consecutive months (and 24 months for special vigilance operations). The decision whether to classify an asset as Stage 2 or Stage 1 once cured depends on the updated credit grade at the time of the cure, and whether this indicates there has been a significant increase in credit risk compared to initial recognition.

b.Internal rating and PD estimation

The Bank’s Credit Risk Department operates internal rating models. The models incorporate both qualitative and quantitative information, in addition to borrower-specific information, utilize supplemental external information that could affect the borrower’s behavior. The internal credit grades are assigned based on our internal scoring policy. PDs are then adjusted for IFRS 9 ECL calculations to incorporate forward-looking information and the IFRS 9 Stage classification of the exposure. In relation to the credit quality of the investment portfolio, local regulations specify that banks are able to hold only local and foreign fixed–income securities with certain exceptions. Additionally, Banco Santander-Chile has internal policies to ensure that only securities approved by the Market Risk department, which are listed in an internal document entitled “APS” – Products and underlying Approval, are acquired. The Credit Risk Department sets the exposure limits to the approved securities. The APS is updated on a daily basis.


As of December 31, 2018, 99% our total investment portfolio corresponds to securities issued by the Chilean Central Bank and US treasury notes.

c.Exposure at default

The exposure at default (EAD) represents the gross carrying amount of the financial instruments subject to the impairment calculation, addressing both the client’s ability to increase its exposure while approaching default and potential early repayments too.

To calculate the EAD for a Stage 1 loan, the Bank assesses the possible default events within 12 months for the calculation of the 12mECL. However, if a Stage 1 loan that is expected to default in the 12 months from the balance sheet date and is also expected to cure and subsequently default again, then all linked default events are taken into account. For Stage 2, Stage 3 the exposure at default is considered for events over the lifetime of the instruments.

d.Loss given default

The credit risk assessment is based on a standardized LGD assessment framework that results in a certain LGD rate. These LGD rates take into account the expected EAD in comparison to the amount expected to be recovered or realized from any collateral held.

The Bank segments its retail lending products into smaller homogeneous portfolios (evaluated collective), based on key characteristics that are relevant to the estimation of future cash flows. The applied data is based on historically collected loss data and involves a wider set of transaction characteristics (e.g., product type, wider range of collateral types) as well as borrower characteristics.

Further recent data and forward-looking economic scenarios are used in order to determine the IFRS 9 LGD rate for each group of financial instruments. Under IFRS 9, LGD rates are estimated for the Stage 1, Stage 2, Stage 3 IFRS 9 segment of each asset class. The inputs for these LGD rates are estimated and, where possible, calibrated through back testing against recent recoveries. These are repeated for each economic scenario as appropriate.

e.Significant increase in credit risk (SICR)

The Bank continuously monitors all assets subject to ECLs. In order to determine whether an instrument or a portfolio of instruments is subject to a 12-month ECL or Lifetime ECL, the Bank assesses whether there has been a significant increase in credit risk since initial recognition.

The Bank also applies a secondary qualitative method for triggering a significant increase in credit risk for an asset, such as moving a customer/facility to the watch list (Special vigilance). The Bank may also consider that events explained in letter a) above are a significant increase in credit risk as opposed to a default. Regardless of the change in credit grades, if contractual payments are more than 30 days past due, the credit risk is deemed to have increased significantly since initial recognition.

When estimating ECLs on a collective basis for a group of similar assets, the Bank applies the same principles for assessing whether there has been a significant increase in credit risk since initial recognition.

Quantitative criteria for SICR Stage 2:

The quantitative criteria is used to identify where an exposure has increased in credit risk and it is applied based on whether an increase in the lifetime PD since the recognition date exceeds the threshold set in absolute terms. The following formula is used to determine such threshold:

Threshold = Lifetime PD (at reporting date) – Lifetime PD (at origination)


Collectively assessedIndividually assessed
MortgagesOther loans

Revolving 

(Credit cards) 

Collectively assessed SMEIndividually assessed SMEMiddle marketCorporate and
Investment Banking
45%42%42%42%60%50%Santander Group criteria

There is also a relative threshold of 100% of all portfolios with the exception of the Corporate and Investment Banking Portfolio.

Qualitative criteria for SICR Stage 2:

The qualitative criteria is based on the existence of evidence that leads to an automatic classification of financial instruments in Stage 2 - mainly 30 days overdue and restructured. Thresholds of SICR are calibrated based on the average ECL of exposures that are 30 days overdue or with a level of credit risk considered to be “significant”.

Collectively assessedIndividually assessed
MortgagesOther loans

Revolving

(Credit cards)

Collectively assessed SMEIndividually assessed SMEMiddle marketCorporate and Investment Banking
Irregular portfolio > 30 daysIrregular portfolio > 30 daysIrregular portfolio > 30 daysIrregular portfolio > 30 daysIrregular portfolio > 30 daysIrregular portfolio > 30 daysIrregular portfolio > 30 days
Restructured marked for monitoringRestructured marked for monitoringRestructured marked for monitoringRestructured marked for monitoringRestructured marked for monitoringRestructured marked for monitoringRestructured marked for monitoring
Clients that are considered to be substandard or in incompliance (pre-legal action)Clients that are considered to be substandard or in incompliance (pre-legal action)Clients that are considered to be substandard or in incompliance (pre-legal action)

These thresholds are defined by the Model Committee and the Integral Risk Committee, and are evaluated annually with updates made depending on impacts and definitions of the risk models associated to each portfolio.

f.Grouping financial assets measured on a collective basis

The Bank calculates ECLs either on a collective or an individual basis.

The Bank evaluates on an individual basis commercial loans that are greater than Ch$400 million (US$240,000), while smaller commercial loans, mortgage loans and consumer loans are grouped into homogeneous portfolios, based on a combination of internal and external characteristics.

g.Modified loans

When a loan measured at amortized cost has been renegotiated or modified but not derecognized, the Bank must recognize the resulting gains or losses as the difference between the carrying amount of the original loans, and modified contractual cash flows discounted using the EIR before modification.

If the modification does not result in derecognition, then the subsequent assessment of whether there is a significant increase in credit risk is made comparing the risk at the reporting date based on the modified contractual term and the risk at initial recognition based on the original, unmodified contractual term.


If the modification results in derecognition, then the modified asset is considered to be a new asset. Accordingly, the date of modification is treated as the date of initial recognition for the purposes of the impairment requirements.

h.Collateral and other credit enhancement

The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are in place covering the acceptability and valuation of each type of collateral.

The main types of collateral obtained are, as follows:

●For securities lending and reverse repurchase transactions, cash or securities

●For corporate and small business lending, charges over real estate properties, inventory and trade receivables and, in special circumstances, government guarantees

●For retail lending, mortgages over residential properties

According to the Bank’s policy when an asset (such as real estate) is repossessed it is transferred to assets held for sale at its fair value less cost to sell as a non-financial asset at the repossession date.

Impairment assessment (under IAS 39)

Loans analyzed on an individual basis

 

For loans that are greater than Ch$150400 million (U.S.$225,000)(US$648,455), the Bank uses internal models to assign a risk category level to each borrower and its respective loans. We consider the following risk factors: industry or sector of the borrower, the borrower’s competitive position in its markets, owners or managers of the borrower, the borrower’s financial situation, the borrower’s payment capacity and the borrower’s payment behavior to calculate the estimated incurred loan loss. Through these categories, we differentiate the normal loan portfolio from the impaired one.

 

These are our categories:

 

1.Debtors may be classified in risk categories A1, A2, A3 or B (if(A is applicable if they are current on their payment obligations and show no sign of deterioration in their credit quality).quality and B is different from the A categories by a certain history of late payments.payments). The A categories are distinguished by different PNPs (as defined below).

2.Debtors classified as C1, C2, C3, C4, D1 or D2 include debtors whose loans with us have been charged-offcharged off or administered by our Recovery Unit, or classified asPrecontenciosos (PRECO(PRECO or deteriorated).

 

For loans classified as A1, A2, A3 and B, we assign a specific provision level on an individual basis to each borrower and, therefore, the amount of loan loss allowance is determined on a case by case basis.

 

Estimated Incurred Loan Loss = Loan Loss Allowance

 

The estimated incurred loss is obtained by multiplying all risk factors defined in the following equation:

 

EIL= EXP x PNP x SEV

 

·●EIL = Estimated Incurred Loan Loss. The estimated incurred loan loss is how much could be lost in the event a debtor does not perform the obligations under the loan.

·●EXP = Exposure. This corresponds to the value of commercial loans.

·●PNP = Probability of Non-Performance. This variable, expressed as a percentage, indicates the probability that a debtor will default. This percentage is associated with the internal rating that we give to each debtor, which is determined by analyzing such parameters as debt servicing capacity.

·●SEV = Severity. This is the effective loss rate given default for debtors in the same segment, which is determined statistically based on the historical effective losses for us for each segment.

 

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Every year, models together with PNP and SEV assumptions, are tested by the Bank’s Credit Risk Department, to ensure that they are appropriate at each reporting date so as to make sure any difference between the estimated incurred losses and real losses is reduced.

 

These tests focus on the validation of the sufficiency of the Bank’s allowances, and consist of comparisons between actual write-offs to allowances established by the model, and the coverage of the total allowance to actual write-offs in the most current periods. Individual loan classification and improvements to any customer classification are also presented for approval to our Risk Committee.

 

Our internal policy requires us to update appraisals of the fair value of collateral every 24 months, which policy does not vary by loan product. The appraisal is required to be performed within a shorter period if market conditions in general or conditions in a specific sector or with respect to certain customers indicate that the fair value of the collateral may have changed and any updated fair value of the collateral is factored into our allowance for loan loss calculations. A change in fair value of the collateral may change the risk category or profile of a customer which could result in lower or higher allowance for loan losses.

In accordance with such policy, every year we update appraisals of fair value of collateral before the end of the 24 month period for certain customers and such updated appraisals are considered in the calculation of the allowance for loan losses. The number of updated appraisals performed in 2013 was 113, in 2014 was 98, in 2015 was 43 and in 2016 it was 142 and in 2017 it was 257, and such updated appraisals were performed mainly because of changes in customer conditions (renegotiation deterioration of financial situation increase in credit line).

 

For loans classified in the C and D categories, loan loss allowances are based mainly on the fair value of the collateral, adjusted for an estimate cost to sell, that each of these loans have. Allowance percentage for each category is then based on the fair value of the collateral, or the expected future cash flow from the loan for each individually evaluated non-performing loans. As of December 31, 2016, loans classified in the C and D risk categories had the following associated loan loss allowance levels:

ClassificationAllowance
C12%
C210%
C325%
C440%
D165%
D290%

 

Loans analyzed on a group basis

 

The Bank uses the concept of estimated incurred loss to quantify the allowances levels over loan analyzed on a group basis. Incurred loss is the expected provision expense that will appear one year away from the balance date of the transaction’s credit risk, considering the counterpart risk and the collateral associated to each transaction.

 

Following the Bank’s definition, the Bank uses group evaluation to approach transactions that have similar credit risk features, which indicate the debtor’s payment capacity of the entire debt, capital and interests, pursuant to the contract’s terms. In addition, this allows us to assess a high number of transactions with low individual amounts, whether they belong to individuals or small sized companies. Therefore, debtors and loans with similar features are grouped together and each group has a risk level assigned to it. These models are meant to be used mainly to analyze loans granted to individuals (including consumer loans, credit lines, mortgage loans and commercial loans) and commercial loans to SMEs.

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Allowances are established using these models, taking into account the historical impairment and other known circumstances at the time of evaluation. After this, a historical loss rate is assigned to each portfolio profile constituting each segment. The method for assigning a profile is established based on a statistical building method, establishing a relation through a logistic regression various variables, such as payment behavior in the Bank, payment behavior outside the Bank, various socio-demographic data, among others, and a response variable that determines a client’s risk level, which in this case is 90 days of non-performance. Afterwards, common profiles are established related to a logical order and with differentiate default rates, applying the real historical loss the Bank has had with that portfolio.

 

Our models for loans analyzed on a group basis (consumer loans, residential mortgage loans and small-and-mid-sized commercial loans) are monitored on a monthly basis with respect to predictability and stability, using indices that seek to capture the underlying need to update the models for current loss trends. Therefore, the periods of historical net charge-offs used in the allowance model may be more than a year old as we only update the historical net charge-offs only when our assessment of predictability and stability indicators determine it is necessary.

 

The different risk categories are constructed and updated periodically based on the payment behavior of the client’s profile to which they belong, as well as his or her socio-demographic characteristics. Therefore, when a customer has past due balance or has missed some payments, the outcome is that the customer will move to a different segment with a higher loss rate, therefore capturing current trends for each risk profile.

 

At the same time during September 2017, and as part of the normal process of updating the provisioning model for loans analyzed on a group basis, the Bank re-calibrated these models, incorporating a greater historical depth, including a recession period, thus strengthening the parameters of probability of default and loss given default.


This update did not generate significant differences at the level of the total balance of loan loss allowances for credit risk, although it did imply an increase in the provisions associated with commercial and mortgage loans and a decrease in the provisions associated with consumer loans. These improvements, in accordance with IAS 8, are considered as a change in an estimate and its effect was therefore recorded in the Consolidated Statement of Income for the year. For a description of the impact this re-calibration had on provision expense related to our consumer loans, residential mortgage loans and commercial loans analyzed on a group basis, please see “Item 5. Operating and Financial Review and Prospects— A. Operating Results-Provision for loan losses”

Once the customers have been classified, the loan loss allowance is the product of three factors: Exposure (EXP), Probability of Non-Performance (PNP) and Severity (SEV).

 

EXP = Exposure. This corresponds to the value of commercial loans.

 

PNP = Probability of Non-Performing. This variable, expressed as a percentage, indicates the probability that a debtor will default. This percentage is associated with the internal score that we give to each debtor, which is determined by analyzing such parameters as debt servicing capacity (including, usually, projected cash flows), the company’s financial history, the solvency and capacity of shareholders and management, and projections for the economic sector in which it operates. The internal rating can be different from ratings obtained from external third parties.

 

SEV = Severity. This is the effective loss rate given default for debtors in the same segment, which is determined statistically based on the historical effective losses for us for each segment.

 

PNP and SEV are reviewed and updated every three years. Every year, models together with PNP and SEV assumptions, are tested by the Bank’s Credit Risk Department, to ensure that they are appropriate at each reporting date so as to make sure any difference between the estimated incurred losses and real losses is reduced.

Our models for loans analyzed on a group basis (consumer loans, residential mortgage loans and small-and-mid- sized commercial loans) are monitored on a monthly basis with respect to predictability and stability, using indicators that seek to capture the underlying need to update the models for current loss trends. Therefore, the periods of historical net charge-offs used in the allowance model may be more than a year old as we only update the historical net charge-offs when our assessment of predictability and stability indicators determine it is necessary.

 

Allowances for consumer loans

 

The estimated incurred loss rates for consumer loans correspond to charge-offs net of recoveries. The methodology establishes the period in which the estimated incurred loss for each risk profile emerges. Once the loss has been considered to have been incurred, the estimated incurred loss rates are applied to the corresponding risk profile to obtain the net charge-off level associated with this period. The loss rates applied to each risk profile are based only on the historical net charge-off data for that specific profile within one of the four groups of consumer loans. No other statistical or other information other than net charge-offs is used to determine the loss rates.

 

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During the second half of 2014, and as a response to the ongoing improvement of the allowances models for loans, the Bank updated its allowances model for consumer loans. The model was calibrated with the aim of improving the prediction of client behavior and maintaining statistical and management standards. Part of these improvements consisted of implementing more robust techniques of statistical processes and more historical information, resulting in stronger parameters for the Probability of Non-Performance (PNP) and the Severity (SEV) involved in the provision calculation. These changes resulted in the release of consumer provisions of Ch$26,563 million in 2014. As this is a change in estimation, the impact of this improvement was recognized under the "Provisions for loan losses" in the Consolidated Statement of Income for the year in accordance with IAS 8. The most important improvement was the development of a separate model for our Santander Select customers, which are higher income clients. This is in line with the Bank’s strategy of reducing exposure to the low-end of the consumer market and growing in less risky segments.

The following diagrams set forth the allowances required by our current models for consumer loans:

 

Santander:

 

BankLoan type Allowance Level(1) (Loss rate)
        
ConsumerPerforming New clientsExisting clientsBanefe (3) 
 0.53% -19.75%0.05%-11.92%0.13%-18.67% 
       
Renegotiated consumer loans which were less than 90 days past due at the time of renegotiation (2) 3.66%-30.40%10.19%-43.71% 
       
Renegotiated consumer loans which were more than 90 days past due at the time of renegotiation (2) 41.50%-100%51,11%-100% 
       
Non-performingDays Past DueNew ClientsExisting ClientsPreviously Renegotiated BankPreviously Renegotiated Banefe (3)
90-12031.78%31.78%41.50%51.11%
120-15051.17%51.17%60.15%66.65%
150-18059.98%59.98%68.86%78.50%
>180 Charged-off
            

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Santander (excluding Santander Banefe):

Bank (ex-Banefe)Loan typeAllowance Level(1) (Loss rate)
       
ConsumerPerformingNew clientsExisting clientsSantander Select  
0.33%-19.40%0.08%-15.55%0.04%-7.46%  
      
Renegotiated consumer loans which were less than 90 days past due at the time of renegotiation (2)6.49%-32.09%  
      
Renegotiated consumer loans which were more than 90 days past due at the time of renegotiation (2)44.05%-100%  
      
Non-performingDays Past DueNew ClientsExisting ClientsSelectPreviously Renegotiated
90-12035.93%35.93%35.93%44.05%
120-15044.11%44.11%44.11%50.38%
150-18052.77%52.77%52.77%57.48%
>180Charged-off

 

(1)Percentage of loans outstanding.outstanding

(2)This category relates only to loans which were renegotiated and were less than 90 days past due at the time of renegotiation, migrating from such category as they reached 90 days past due since renegotiation.

Santander Banefe:

Santander BanefeLoan typeAllowance Level(1) (Loss rate)
       
ConsumerPerformingNew clientsExisting clients   
1.17%-27.87%0.16%-16.34%   
      
Renegotiated consumer loans which were less than 90 days past due at the time of renegotiation (2)9.72%-34.37%  
      
Renegotiated consumer loans which were more than 90 days past due at the time of renegotiation (2)45.47%-100%  
      
Non-performing consumerDays Past DueNew ClientsExisting ClientsPreviously Renegotiated 
90-12031.50%31.50%45.47% 
120-15035.78%35.78%51.57% 
150-18042.46%42.46%60.90% 
>180Charged-off 

(1)Percentage of loans outstanding

(2)(3)This category relates only to loans which were renegotiated and were less than 90 days past dueBanefe was the brand aimed at the timelower end of renegotiation, migrating from such category as they reached 90 days past due since renegotiation.the consumer market and for which there are still loans outstanding.

 

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There are two renegotiated categories in our consumer loan portfolio:

 

1.Renegotiated Consumer which were less than 90 days past due at the time of renegotiation. The allowance for loan loss percentages (or loss rates) are assigned based on eight different risk profiles which are determined based on demographic and payment behavior variables.

 

2.Renegotiated Consumer which were more than 90 days past due at the time of renegotiationrenegotiation. The loss rates are assigned based on four different risk profiles which are determined based on the number of days overdue at the time of renegotiation:

 

Profile 1: 180 or more days past due 

Profile 2: between 150 and 180 days past due 

Profile 3: between 120 and 150 days past due 

Profile 4: between 90 and 120 days past due

 

Allowances for residential mortgage loans

Our provision methodology for residential mortgage loans takes into consideration different factors in order to group customers with less the 90 days past due into different risk profiles. First we segregate our clients according to internal categories based on income and restructurings. For each of these categories additional factors are considered in order to develop risk profiles within each risk category, including payment behavior, non-performance less than 90 days, collateral levels, renegotiation history with the Bank, and historical amounts of net charge-offs, among others. The risk categories are such that when a customer’s payment behavior deteriorates, the outcome is that the customer will move to a different risk category with a higher loss rate, therefore capturing the current status of the customer. In April 2016, the risk profiles were recalibrated and separated into four groups based on loans to value, resulting in a decrease in mortgage loan allowance of approximately Ch$3,500 million.

Previously residential mortgage loans with more than 90 days past due balances were assigned an average loss rate of around 12%. With the recalibration in April 2016, mortgage loans with more than 90 days past due balances are assigned a loss rate depending on the loan to value. We determined that 90 days is appropriate, since our historical analysis of customers’ behavior has shown that after 90 days, customers are likely to default on their obligations, and that, over succeeding periods, the loss incurred does not increase given the high fair value of collateral percentage to loan amount required under our credit policies for this type of loan. Also, we note that the Chilean economy’s stability over the last few years has not resulted in other than insignificant fluctuations in collateral fair values on residential mortgage loan properties. When the customer becomes current in its payments, such customer will migrate to a better profile.

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The following table sets forth the required loan loss allowance for residential mortgage loans:

Bank (incl-Banefe)Loan typeAllowance Level(1) (Loss rate)
Residential mortgagePerformingBank (excl Banefe and Select)BanefeSantander Select
0.00%-8.30%0.04%-8.65%0.00%-4.90%
Renegotiated mortgage loans which were less than 90 days past due at the time of renegotiation (2)0.32%-12.06%
Renegotiated mortgage  loans which were more than 90 days past due at the time of renegotiation (2)5.72%-20.81%
Non-performing mortgageLoan to Value
0-605.72%
60-808.31%
80-9011.60%
>9020.81%

(1)Percentage of loans outstanding

(2)This category relates only to loans which were renegotiated and were less than 90 days past due at the time of renegotiation, migrating from such category as they reached 90 days past due since renegotiation.

Small- and mid-sized commercial loans

 

To determine the estimated incurred loss for individuals (natural persons), small- and mid-sized commercial loans collectively evaluated for impairment, we mainly analyze the payment behavior of clients, particularly the payment behavior of clients with payments that are 90 days or more past-due, clients with other weaknesses, such as early non-performance (i.e., payments that are past-due, though by less than 90 days), clients with modified loans and clients with renegotiated loans, as well as success in recovery against these clients. We also consider whether the loan has underlying mortgage collateral.


The risk categories are such that when a customer has a past-due balance or has missed some payments, the outcome is that the customer will move to a different risk category with a higher loss rate, therefore capturing current trends of the customer and, in the aggregate, current trends in the market.

 

During the second half of 2014, and as a response to the ongoing improvement of the allowances models for loans, the Bank updated its allowances model for commercial loans. The model was calibrated with the aim of improving the prediction of client behavior and maintaining statistical and management standards. Part of these improvements consisted of implementing more robust statistical processes and more historical information, resulting in stronger parameters for the Probability of Non-Performance (PNP) and the Severity (SEV) involved in the provision calculation. These changes resulted in an increase in commercial provisions of Ch$45,141 million in 2014. Considering this impact and the reversal of Ch$26,563 million in the consumer loan provisioning model, the net increase of these improvements (Ch$18,578 million) was recognized under the “Provisions for loan losses” in the Consolidated Statement of Income for the year in accordance with IAS 8.

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In order to calculate the estimated incurred loan loss for all commercial loans collectively evaluated for impairment, the Bank sub-divided the portfolio in the following way:

 

Loan typeLoan typeAllowance Level(1) (Loss rate) Loan typeAllowance Level(1) (Loss rate) 
Commercial loans analyzed on a group basisPerformingCommercial loan to individuals w/o mortgage collateralCommercial loan to individuals with mortgage collateralSmall EnterpriseMid-sized  Enterprise  PerformingCommercial loan to individuals w/o mortgage collateralCommercial loan to individuals with mortgage collateralSmall EnterpriseMid-sized Enterprise  
3.72%-46.76%0.02%-7.89%0.20%-21.82%0.11%-16.92  0.87% -15.70%0.03%-3.98%0.21%-14.39%0.14%-7.31  
       
Renegotiated commercial loans which were less than 90 days past due at the time of renegotiation (2)5.22%-19.54%  Renegotiated commercial loans which were less than 90 days past due at the time of renegotiation (2)

loan w/o mortgage collateral 

2.93%-20.65% 

loan with mortgage collateral 

1.17%-8.25% 

       
Renegotiated commercial loans which were more than 90 days past due at the time of renegotiation (2)Days Past Due when renegotiatedCommercial loan to individuals w/o mortgage collateralCommercial loan to individuals with mortgage collateralSmall EnterpriseMid-sized  Enterprise Renegotiated commercial loans which were more than 90 days past due at the time of renegotiation (2)Days Past Due when renegotiatedCommercial loan to individuals w/o mortgage collateralCommercial loan to individuals with mortgage collateralSmall EnterpriseMid-sized Enterprise 
90-17950.76%16.29%30.07%24.32% 90-17941.69%12.15%30.95%18.93% 
180-35951.89%23.90%44.00%37.64% 180-35967.31%23.42%64.47%51.86% 
360-71956.04%31.46%50.27%47.09% 360-71975.69%34.65%70.15%63.12% 
>72057.54%36.69%53.86%52.63% >72083.82%46.25%74.53%72.87% 
       
Non-performing consumerDays Past DueCommercial loan to individuals w/o mortgage collateralCommercial loan to individuals with mortgage collateralSmall EnterpriseMid-sized  EnterprisePreviously renegotiatedNon-performing consumerDays Past DueCommercial loan to individuals w/o mortgage collateralCommercial loan to individuals with mortgage collateralSmall EnterpriseMid-sized EnterprisePreviously renegotiated
90-17950.76%16.29%30.07%24.32%24.32%90-17941.69%12.15%30.95%18.93%18.93%
180-35951.89%23.90%44.00%37.64%37.64%180-35967.31%23.42%64.47%51.86%51.86%
360-71956.04%31.46%50.27%47.09%47.09%360-71975.69%34.65%70.15%63.12%63.12%
>72057.54%36.69%53.86%52.63%52.63%>72083.82%46.25%74.53%72.87%72.87%
               

 

 

(1)Percentage of loans outstanding

 

(2)This category relates only to loans which were renegotiated and were less than 90 days past due at the time of renegotiation, migrating from such category as they reached 90 days past due since renegotiation.

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Allowances for residential mortgage loans

 

The provision methodology for residential mortgage loans takes into consideration different factors in order to group customers with less the 90 days past due into seven different risk profiles. Factors considered are whether the customer is a new customer or has prior history with the Bank. For each of these main categories additional factors are considered in order to develop risk profiles within each risk category, including payment behavior, non-performance less than 90 days, collateral levels, renegotiation history with the Bank, and historical amounts of net charge-offs, among others. The explanation for the initial segregation into three categories, existing, new customer, is as follows: an existing customer is a customer for which there is a broader level of information and history of payment behavior with the Bank, while for a new customer the Bank has no history of payment behavior and only information from the banking system and credit bureaus is available. The risk categories are such that when a customer’s payment behavior deteriorates, the outcome is that the customer will move to a different risk category with a higher loss rate, therefore capturing the current status of the customer.

Previous to 2016, mortgage loans with more than 90 days past due balances are assigned a loss rate of 11.01%. In 2016, mortgage loans more than 90 days past due balances are assigned a loss rate depending on the loan to value. We determined that 90 days is appropriate, since our historical analysis of customer’s behavior has shown that after 90 days, customers are likely to default on their obligations, and that, over succeeding periods, the loss incurred does not increase given the high fair value of collateral percentage to loan amount required under our credit policies for this type of loan. Also, we note that the Chilean economy’s stability over the last few years has not resulted in other than insignificant fluctuations in collateral fair values on residential mortgage loan properties.

The following table sets forth the required loan loss allowance for residential mortgage loans:

BankLoan typeAllowance Level(1) (Loss rate)
Residential mortgagePerformingBank (excl Select)Santander Select
0.00%-5.18%0.00%-3.88%
Renegotiated mortgage loans which were less than 90 days past due at the time of renegotiation (2)0.16%-8.37%
Renegotiated mortgage loans which were more than 90 days past due at the time of renegotiation (2)5.58%-26.25%
Non-performing mortgageLoan to Value
0-605.58%
60-808.48%
80-9011.93%
>9016.25%

1.Percentage of loans outstanding

2.This category relates only to loans which were renegotiated and were less than 90 days past due at the time of renegotiation, migrating from such category as they reached 90 days past due since renegotiation.

Analysis of Santander-Chile’s Loan Classification

The following table shows classifications of our individually assessed loans and related provisions as of December 31, 2018 according to IFRS 9.

Commercial  Stage 1  Stage 2  Stage 3  Total Individually assessed  Percentage  Stage 1  Stage 2  Stage 3  Total ECL Allowance  Percentage 
   (in Ch$ millions)  %  (in Ch$ millions)     % 
A1   29,998           29,998   0.10%  2   —   —   2   0.00%
A2   1,074,789           1,074,789   3.56%  525   —   —   525   0.06%
A3   2,699,684   309       2,699,993   8.94%  2,526   —   —   2,526   0.29%
A4   3,200,608   16,546       3,217,154   10.65%  8,865   323   —   9,188   1.04%
A5   1,755,259   26,141       1,781,400   5.90%  11,296   453   —   11,749   1.33%
A6   935,499   45,671       981,170   3.25%  6,975   2,213   —   9,188   1.04%
B1   —   494,915   187   495,102   1.64%  —   14,107   79   14,186   1.61%
B2   —   81,955   156   82,111   0.27%  —   2,786   66   2,852   0.32%
B3   —   67,089   614   67,703   0.22%  —   3,841   233   4,074   0.46%
B4   —   47,653   45,480   93,133   0.31%  —   2,488   19,688   22,176   2.51%
C1   —   46,383   108,325   154,708   0.51%  —   2,548   48,147   50,695   5.75%
C2   —   15,678   39,246   54,924   0.18%  —   1,261   18,171   19,432   2.20%
C3   —   19,655   26,204   45,859   0.15%  —   733   10,803   11,536   1.31%
C4   —   3,560   32,445   36,005   0.12%  —   246   17,077   17,323   1.96%
C5   —   703   64,762   65,465   0.22%  —   32   40,541   40,573   4.60%
C6   —   1,525   69,510   71,035   0.22%  —   35   43,310   43,345   4.91%
Subtotal   9,695,837   867,783   386,929   10,950,549   36.24%  30,189   31,066   198,115   259,370   29.39%
                                          

  Stage 1  Stage 2  Stage 3  Total Collectively assessed  Percentage  Stage 1  Stage 2  Stage 3  Total ECL Allowance  Percentage 
 (in Ch$ millions)    %  (in Ch$ millions)  %
Commercial  3,616,969   232,472   386,154   4,235,595   14.02%  43,541   24,574   179,317   247,432   28.04%
Mortgage  4,341,740   249,039   285,510   4,876,289   16.14%  70,904   54,372   159,066   284,342   32.22%
Consumer  9,258,962   447,496   444,523   10,150,981   33.60%  9,006   15,102   67,162   91,270   10.34%
Subtotal  17,217,671   929,007   1,116,187   19,262,865   63.76%  123,451   94,048   405,545   623,044   70.61%
Total  26,913,508   1,796,790   1,503,116   30,213,414   100.00%  153,640   125,114   603,660   882,414   100.00%
                                         

 

The following tables provide statistical data regarding the classification of our loans analyzed on an individual basis as of December 31, 2017 and 2016 2015 and 2014.based on IAS 39. 

    
  2017  2016 
Category Individual  Percentage  Allowance  Percentage  Individual  Percentage  Allowance  Percentage 
  Ch$mn  %  Ch$mn  %  Ch$mn  %  Ch$mn  % 
Individualized business                                
A1  1,051,072   3.79   827   0.10   1,599,311   5.88   923   0.12 
A2  5,957,305   21.49   18,514   2.34   6,437,930   23.67   23,757   3.00 
A3  2,176,779   7.85   27,894   3.53   2,030,867   7.47   29,668   3.75 
B  539,074   1.94   32,089   4.06   538,909   1.98   40,545   5.13 
C1  145,033   0.52   2,604   0.33   121,893   0.45   2,176   0.28 
C2  56,871   0.21   5,104   0.65   51,034   0.19   4,555   0.58 
C3  39,825   0.14   8,935   1.13   49,901   0.18   11,136   1.41 
C4  53,261   0.19   19,120   2.42   64,118   0.24   22,894   2.90 
D1  71,896   0.26   41,941   5.30   73,462   0.27   42,625   5.39 
D2  77,048   0.28   62,234   7.87   89,857   0.33   72,192   9.13 
Total  10,168,164   36.67   219,262   27.73   11,057,282   40.66   250,471   31.69 

 

  

As of December 31, 

  

2016 

 

2015 

 

2014 

Category 

 

Individual 

 

Percentage 

 

Allowance 

 

Percentage 

 

Individual 

 

Percentage 

 

Allowance 

 

Percentage 

 

Individual 

 

Percentage 

 

Allowance 

 

Percentage 

  Ch$mn % Ch$mn % Ch$mn % Ch$mn % Ch$mn % Ch$mn %
Individualized business                        
A1  1,599,311   5.88   923   0.12   2,073,792   8.20   1,210   0.17   1,911,035   8.35   998   0.15 
A2  6,437,930   23.67   23,757   3.00   5,898,065   23.32   17,353   2.28   5,564,372   24.30   16,334   2.39 
A3  2,030,867   7.47   29,668   3.75   1,599,234   6.32   25,145   3.30   1,334,042   5.83   19,630   2.87 
B  538,909   1.98   40,545   5.13   504,937   1.99   37,157   4.87   398,611   1.74   29,189   4.27 
C1  121,893   0.45   2,176   0.28   81,767   0.32   1,635   0.21   79,148   0.35   1,583   0.23 
C2  51,034   0.19   4,555   0.58   48,569   0.19   4,857   0.64   66,267   0.29   6,627   0.97 
C3  49,901   0.18   11,136   1.41   37,663   0.15   9,416   1.24   16,742   0.07   4,185   0.61 
C4  64,118   0.24   22,894   2.90   69,952   0.28   27,981   3.67   33,074   0.14   13,229   1.93 
D1  73,462   0.27   42,625   5.39   76,157   0.30   49,503   6.49   59,585   0.26   38,730   5.66 
D2  89,857   0.33   72,192   9.13   92,682   0.36   83,414   10.94   94,832   0.41   85,348   12.47 
Total  11,057,282   40.66   250,471   31.69   10,482,818   41.43   257,671   33.81   9,557,708   41.74   215,853   31.55 

Classification of Loan Portfolio Based on the Borrower’s Payment Performance

Non-performing loans include the aggregate principal and accrued but unpaid interest of any loan with one installment that is at least 90 days past-due, and do not accrue interest.

Impaired loans include: (a) for loans individually evaluated for impairment: (i) the carrying amount of all loans to clients that are rated C1 through C4, D1 and D2 and (ii) the carrying amount of all loans to an individual client with at least one non-performing loan (which is not a residential mortgage loan past due less than 90 days), regardless of category; and (b) for loans collectively evaluated for impairment, the carrying amount of all loans to a client, when at least one loan to that client is not performing or has been renegotiated. See “Note 9—Loans and Accounts Receivables from Customers” of the Audited Consolidated Financial Statements. Renegotiated loans, on which payments are not past-due, are not ordinarily classified as non-performing loans, but do not accrue interest.

Charge-offsWrite-offs

 

As a general rule, charge-offs should be done when all collection efforts have been exhausted. These charge-offs consist of derecognitionde-recognition from the Consolidated Statements of Financial Position of the corresponding loans operations in its entirety, and, therefore, include portions not past-due of a loan in the case of installments loans or leasing operations (no partial charge-offs exists). Subsequent payments obtained from charged-off loans will be recognized in the Consolidated Statement of Income as a recovery of loans previously charged-off. Loan and accounts receivable charge-offs are recorded for overdue, past due, and current installments based on the time periods expired since reaching overdue status, as described below:

 

Type of contract 

Term 

Consumer loans with or without collateral6 months
Other transactions without collateral24 months
Commercial loans with collateral36 months
Mortgage loans48 months
Consumer leasing6 months
Other non-mortgage leasing transactions12 months
Mortgage leasing (household and business)36 months

 

Any payment agreement of an already charged-off loan will not give rise to income-as long as the operation is still in an impaired status-and the effective payments received are accounted for as a recovery from loans previously charged-off. In general, legal collection proceedings are commenced with respect to consumer loans once they are past-due for at least 90 days and, with respect to mortgage loans, once they are past-due for at least 120 days. Legal collection proceedings are always commenced within one year of such loans becoming past-due, unless we determine that the size of the past-due amount does not warrant such proceedings. In addition, the majority of our

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commercial loans are short-term, with single payments at maturity. Past-due loans are required to be covered by individual loan loss reserves equivalent to 100.0% of any unsecured portion thereof.

 

Classification of Loan Portfolio Based on the Borrower’s Payment Performance

Non-performing loans include the aggregate principal and accrued but unpaid interest of any loan with one installment that is at least 90 days past-due, and do not accrue interest.

Impaired loans include all loans classified as Stage 3 according to IFRS 9. Prior to January 1, 2018, impaired loans include: (a) loans individually evaluated for impairment: (i) the carrying amount of all loans to clients that are rated C1 through C4, D1 and D2 and (ii) the carrying amount of all loans to an individual client with at least one non-performing loan (which is not a residential mortgage loan past due less than 90 days), regardless of category; and (b) loans collectively evaluated for impairment, the carrying amount of all loans to a client, when at least one loan to that client is not performing or has been renegotiated. See “Note 9—Loans and Account Receivable at Amortized Cost – under IFRS 9” of the Audited Consolidated Financial Statements. Renegotiated loans, on which payments are not past-due, are not ordinarily classified as non-performing loans, but do not accrue interest.

The following table sets forth all of our non-performing loans and impaired loans as of December 31, 2018, 2017, 2016, 2015 2014, 2013 and 2012.2014.

 

 2016 2015 2014 2013 2012 2018 2017 2016 2015 2014 
 (in millions of Ch$, except percentages)   (in millions of Ch$, except percentages) 
Non-performing loans (1)  564,131   643,468   644,327   613,301   597,767   631,649   633,461   564,131   643,468   644,327 
Impaired loans (2)  1,615,441   1,669,340   1,617,251   1,477,701   1,338,137   1,503,116   1,803,173   1,615,441   1,669,340   1,617,251 
Allowance for loan losses (3)  790,605   762,301   684,317   614,933   550,048   882,414   791,157   790,605   762,301   684,317 
Total loans (4)  27,206,431   25,300,757   22,892,649   21,060,761   18,966,652   30,213,414   27,725,914   27,206,431   25,300,757   22,892,649 
Allowance for loan losses / loans  2.89%  3.01%  2.99%  2.92%  2.90%  2.9%  2.85%  2.89%  3.01%  2.99%
Non-performing loans as a percentage of total loans  2.07%  2.54%  2.81%  2.91%  3.15%  2.1%  2.28%  2.07%  2.54%  2.81%
Loan loss allowance as a percentage of non-performing loans  140.15%  118.47%  106.21%  100.27%  92.02%  139.7%  124.89%  140.15%  118.47%  106.21%

 

 

(1)Non-performing loans include the aggregate principal and accrued but unpaid interest of any loan with one installment that is at least 90 days past-due, and do not accrue interest.

(2)For 2018 Impaired loans include all loans classified as Stage 3 according to IFRS 9. See “Note 9— Loans and Account Receivable at Amortized Cost – under IFRS 9” of the Audited Consolidated Financial Statements. Prior to January 1, 2018, impaired loans include: (a) for loans individually evaluated for impairment (i) the carrying amount of all loans to clients that are rated C1 through C4, D1 and D2 and (ii) the carrying amount of all loans to an individual client with at least one non-performing loan (which is not a residential mortgage loan past due less than 90 days), regardless of category; and (b) for loans collectively evaluated for impairment, the carrying amount of all loans to a client, when at least one loan to that client is not performing or has been renegotiated. Renegotiated loans on which payments are not past-due are not ordinarily classified as non-performing loans, but do not accrue interest.

(3)Includes allowance for interbank loans for periods prior to January 1, 2018 and for December 31, 2018 provisions for loans at amortized cost according to IFRS 9.

(4)Includes interbank loans for periods prior to January 1, 2018 and for December 31, 2018 loans at amortized cost according to IFRS 9.


Analysis of Stage 1, Stage 2 and Stage 3 loans

Commercial loans at amortized cost

In 2018, commercial loans grew 10% or Ch$1,385,736 million with growth mainly coming from our Middle-market segment in line with the re-activation of investment in the Chilean economy and representing the bulk of growth in Stage 1 loans in this product. The growth of Stage 1 loans was also due to the rise in commercial loans disbursed to high income individuals. In 2018, the Bank continued to remain selective in the SME loan book included in the Commercial banking segment and originated few new assets among this sub-segment. On the other hand as this loan book aged, it represented the bulk of increase and transfers to Stage 2 and Stage 3 loans.

Commercial loans Stage 1  Stage 2  Stage 3  Total 
(In millions of Ch$) Individual  Collective  Individual  Collective  Individual  Collective    
Gross carrying amount at January 1, 2018  9,062,153   3,338,916   630,515   208,018   372,744   350,747   13,800,408 
Transfers to stage 2  (225,062)  (53,020)  225,062   53,020   —   —   — 
Transfers to stage 3  (16,654)  (67,886)  —   —   16,654   67,886   — 
Transfers to stage 3  —   —   (59,688)  (40,853)  59,688   40,853   — 
Transfers to stage 1  13,199   52,755   (13,199)  (52,755)  —       — 
Transfers to stage 2  —   —   4,451   36,247   (4,451)  (36,247)  — 
Transfers to stage 1  —   718   —   —   —   (718)  — 
Net changes on financial assets  1,334,933   708,531   138,436   48,323   4,240   70,848   2,305,311 
Write-off  —   —   —   —   (53,921)  (74,430)  (128,351)
Foreign Exchange adjustments  (472,732)  (363,045)  (57,794)  (19,528)  (8,025)  (32,785)  (953,909)
At December 31, 2018  9,695,837   3,616,969   867,783   232,472   386,929   386,154   15,186,144 

Mortgage loans at amortized cost

In 2018, mortgage loans grew 11.6% or Ch$1,054,086 million with growth mainly coming from our high income earners. The focus on this sub-segment and an origination strategy that focused on loan-to-values below 80% in a positive economic environment also explains the improvement of Stage 2 clients that shifted to Stage 1 reducing Stage 2 loans in the year.

Mortgage loans Stage 1  Stage 2  Stage 3  Total 
(In millions of Ch$) Collective  Collective  Collective    
Gross carrying amount at January 1, 2018  8,191,229   469,349   436,317   9,096,895 
Transfers to stage 2  (87,473)  87,473   —   — 
Transfers to stage 3  (64,949)  —   64,949   — 
Transfers to stage 3  —   (54,488)  54,488   — 
Transfers to stage 1  162,432   (162,432)      — 
Transfers to stage 2  —   79,159   (79,159)  — 
Transfers to stage 1  2,612   —   (2,612)  — 
Net changes on financial assets  1,226,259   34,653   10,215   1,271,127 
Write-off  —   —   (31,664)  (31,664)
Foreign Exchange adjustments  (171,148)  (6,218)  (8,011)  (185,377)
At December 31, 2018  9,258,962   447,496   444,523   10,150,981 


Consumer loans at amortized cost

In 2018, consumer loans grew 7.0% or Ch$318,597 million with growth mainly coming from our high income earners and a continued decrease of loans among low income earners. The latter also explains the reduction in Stage 2 and Stage 3 consumer loans as assets repaid or written off in Stage 2 and Stage 3 outpaced the new assets originated or transferred to these stages.

Consumer loans Stage 1  Stage 2  Stage 3  

Total 

 
(In millions of Ch$) Collective  Collective  Collective    
Gross carrying amount at January 1, 2018  3,978,393   257,580   321,719   4,557,692 
Transfers to stage 2  (46,936)  46,936   —   — 
Transfers to stage 3  (33,161)  —   33,161   — 
Transfers to stage 3  —   (19,327)  19,327   — 
Transfers to stage 1  29,777   (29,777)  —   — 
Transfers to stage 2  —   17,988   (17,988)  — 
Transfers to stage 1  37   —   (37)  — 
Net changes on financial assets  766,069   1,063   76,398   843,530 
Write-offs  —   —   (115,933)  (115,933)
Foreign Exchange adjustments  (352,439)  (25,424)  (31,137)  (409,000)
At December 31, 2018  4,341,740   249,039   285,510   4,876,289 

Analysis of Impaired and Non-Performing Loans

The following table analyzes our impaired loans. For 2018 Impaired loans include all loans classified as Stage 3 according to IFRS 9. Prior to January 1, 2018, impaired loans include: (i) all loans to a single client that are evaluated on a group basis, including performing loans, that have a loan classified as non-performing, (ii) all renegotiated consumer loans and (iii) all commercial loans at risk of default. See “Note 9—Loans and Accounts Receivables from Customers—(a) Loans and accounts receivable from customers” in the Audited Consolidated Financial Statements.

  2018 (1)  2017  2016  2015  2014 
   (Ch$ million)                 
Total loans  30,213,414   27,725,914   27,206,431   25,300,757   22,892,649 
Allowance for loan losses  882,414   791,157   790,605   762,301   684,317 
Impaired loans(2)  1,503,116   1,803,173   1,615,441   1,669,340   1,617,251 
Impaired loans as a percentage of total loans  4.97%  6.50%  5.94%  6.60%  7.06%
Amounts non-performing  631,649   633,461   564,131   643,468   644,327 
To the extent secured(3)  323,095   318,218   298,537   283,731   296,899 
To the extent unsecured  308,554   315,243   265,594   359,737   347,428 
Amounts non-performing as a percentage of total loans  2.09%  2.28%  2.07%  2.54%  2.81%
To the extent secured(3)  1.07%  1.15%  1.10%  1.12%  1.30%
To the extent unsecured  1.02%  1.14%  0.98%  1.42%  1.52%
Loans loss allowances as a percentage of:                    
Total loans  2.92%  2.85%  2.91%  3.01%  2.99%
Total amounts non-performing  139.70%  124.89%  140.15%  118.47%  106.21%
Total amounts non-performing-unsecured  285.98%  250.97%  297.67%  211.91%  196.97%

(1)For 2018, loan information corresponds to loans at amortized cost in accordance with IFRS 9. See “Note 9— Loans and Account Receivable at Amortized Cost – under IFRS 9” of the Audited Consolidated Financial Statements.

(2)For 2018 Impaired loans include all loans classified as Stage 3 according to IFRS 9. See “Note 9— Loans and Account Receivable at Amortized Cost – under IFRS 9” of the Audited Consolidated Financial Statements. Prior to January 1, 2018, impaired loans include (a) for loans individually evaluated for impairment: (i) the carrying amount of all loans to clients that are rated C1 through C4, D1 and D2 and (ii) the carrying amount of all loans to an individual client with at least one non-performing loan (which is not a residential mortgage loan past due less than 90 days), regardless of category; and (b) for loans collectively evaluated for impairment, the carrying amount of all loans to a client, when at least one loan to that client is not performing or has been renegotiated. See “Note 9—Loans and Accounts Receivables from Customers” of the Audited Consolidated Financial Statements. Renegotiated loans on which payments are not past-due are not ordinarily classified as non-performing loans, but do not accrue interest.

(3)Includes allowance for interbank loans.

(4)Includes interbank loans.

We suspend the accrual of interest and readjustments on all past-due loans. Interest revenue and expense are recorded on an accrual basis using the effective interest method. However, when a loan is past-due by 90 days or more, when an obligation originated from a refinancing or renegotiation or when the Bank believes that the debtor poses a high risk of default, the interest pertaining to these is not recorded directly in the Consolidated Statement of Income unless it has been actually received. See “Note 1—Summary of Significant Accounting Principles—(h) Valuation of financial assets and liabilities and recognition of fair value changes” and “Note 25—Interest and Adjustments” of the Audited Consolidated Financial Statements. These interest and adjustments balances are generally referred to as “suspended” and are recorded in suspense accounts which are not part of the Consolidated Statements of Financial Position. Instead, they are reported as part of the complementary information thereto. See “Note 25—Interest and Adjustments” of the Audited Consolidated Financial Statements. This interest is recognized as income, when collected, and as a reversal of the related impairment losses.

The Bank ceases accruing interest on the basis of contractual terms on the principal amount of any asset that is classified as an impaired asset. Thereafter, the Bank recognizes as interest income the accretion of the net present value of the written down amount of the loan due to the passage of time based on the original effective interest rate of the loan. On the other hand, any collected interest for any assets classified as impaired are accounted for on a cash basis.

At the period end, the detail of income from suspended interest is as follows:

  Year ended December 31,
  2016 2015 2014 2013 2012
Suspended interest
  Ch$ million                 
Commercial loans  22,089   23,310   24,753   21,645   20,595 
Mortgage loans  5,271   13,268   12,454   8,484   8,844 
Consumer loans  9,559   6,224   6,336   6,753   8,742 
Totals  36,919   42,802   43,543   36,882   38,181 

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Analysis of Impaired and Non-Performing Loans

The following table analyzes our impaired loans. Impaired loans include: (i) all loans to a single client that are evaluated on a group basis, including performing loans, that have a loan classified as non-performing, (ii) all renegotiated consumer loans and (iii) all commercial loans at risk of default. See “Note 9—Loans and Accounts Receivables from Customers—(a) Loans and accounts receivable from customers” in the Audited Consolidated Financial Statements.

  2016 2015 2014 2013 2012
  (Ch$ million)
Total loans  27,206,431   25,300,757   22,892,649   21,060,761   18,966,652 
Allowance for loan losses  790,605   762,301   684,317   614,933   550,048 
Impaired loans(1)  1,615,441   1,669,340   1,617,251   1,477,701   1,338,137 
Impaired loans as a percentage of total loans  5.94%  6.60%  7.06%  7.02%  7.06%
Amounts non-performing  564,131   643,468   644,327   613,301   597,767 
To the extent secured(2)  298,537   283,731   296,899   295,503   306,782 
To the extent unsecured  265,594   359,737   347,428   317,798   290,985 
Amounts non-performing as a percentage of total loans  2.07%  2.54%  2.81%  2.91%  3.15%
To the extent secured(2)  1.10%  1.12%  1.30%  1.40%  1.62%
To the extent unsecured  0.98%  1.42%  1.52%  1.51%  1.53%
Loans loss allowances as a percentage of:                    
Total loans  2.91%  3.01%  2.99%  2.92%  2.90%
Total amounts non-performing  140.15%  118.47%  106.21%  100.27%  92.02%
Total amounts non-performing-unsecured  297.67%  211.91%  196.97%  193.50%  189.03%

(1)Impaired loans include: (a) for loans individually evaluated for impairment: (i) the carrying amount of all loans to clients that are rated C1 through C4, D1 and D2 and (ii) the carrying amount of all loans to an individual client with at least one non-performing loan (which is not a residential mortgage loan past due less than 90 days), regardless of category; and (b) for loans collectively evaluated for impairment, the carrying amount of all loans to a client, when at least one loan to that client is not performing or has been renegotiated. See “Note 9—Loans and Accounts Receivables from Customers” in the Audited Consolidated Financial Statements. Renegotiated loans, on which payments are not past-due, are not ordinarily classified as non-performing loans, but do not accrue interest.

(2)Security generally consists of mortgages on real estate, pledges of marketable securities, letters of credit or cash.

 


A break-down of the loans included in the previous table which have been classified as impaired, including renegotiated loans, is as follows:

 

As of December 31, 2016
Impaired loans Commercial Residential mortgage Consumer Total
  (in millions of Ch$)
Non-performing loans  316,838   147,572   99,721   564,131 
Commercial loans at risk of default (1)  439,707   —   —   439,707 
Other impaired loans consisting mainly of renegotiated loans (2)  172,624   250,116   188,863   611,603 
Total  929,169   397,688   288,584   1,615,441 

 

 

As of December 31, 2015


Impaired loans
  

Commercial

   

Residential mortgage 

   

Consumer 

   

Total 

 
   (in millions of Ch$) 
Non-performing loans  346,868   183,133   113,467   643,468 
Commercial loans at risk of default (1)  486,685   —   —   486,685 
Other impaired loans consisting mainly of renegotiated loans (2)  108,330   213,014   217,843   539,187 
Total  941,883   396,147   331,310   1,669,340 
As of December 31, 2018
Impaired loans at amortized cost Commercial  Residential mortgage  Consumer  Total 
  (in millions of Ch$) 
Total impaired loans at amortized cost  773,083   444,523   285,510   1,503,116 

 

In particular, in 20162018 we renegotiated withcajas de compensación with regard tosaw a decrease in impaired loans (Stage 3) in our commercial portfolio and saw andespite a strong increase in renegotiations with our clients with mortgage loans. However comparedloan volumes during the year. Apart from the adoption of IFRS 9 criteria, this was due to our total mortgage loans, this proportion decreased from 5.1%an improvement in 2015 to 4.6% in 2016. Our consumer loans showed signsmanagement of improvement with less renegotiated loansclient risk and non-performing loans.risk appetite.

As of December 31, 2017
Impaired loans Commercial  Residential mortgage  Consumer  Total 
  (in millions of Ch$) 
Non-performing loans  368,522   161,768   103,171   633,461 
Commercial loans at risk of default (1)  427,890   —   —   427,890 
Other impaired loans consisting mainly of renegotiated loans (2)  217,091   300,776   223,955   741,822 
Total  1,013,503   462,544   327,126   1,803,173 

As of December 31, 2016
Impaired loans Commercial  Residential mortgage  Consumer  Total 
  (in millions of Ch$) 
Non-performing loans  316,838   147,572   99,721   564,131 
Commercial loans at risk of default (1)  439,707   —   —   439,707 
Other impaired loans consisting mainly of renegotiated loans (2)  172,624   250,116   188,863   611,603 
Total  929,169   397,688   288,584   1,615,441 

As of December 31, 2015
Impaired loans Commercial  Residential mortgage  Consumer  Total 
  (in millions of Ch$) 
Non-performing loans  346,868   183,133   113,467   643,468 
Commercial loans at risk of default (1)  486,685   —   —   486,685 
Other impaired loans consisting mainly of renegotiated loans (2)  108,330   213,014   217,843   539,187 
Total  941,883   396,147   331,310   1,669,340 


As of December 31, 2014
Impaired loans Commercial  Residential mortgage  Consumer  Total 
  (in millions of Ch$) 
Non-performing loans  367,791   179,417   97,119   644,327 
Commercial loans at risk of default (1)  420,038   —   —   420,038 
Other impaired loans consisting mainly of renegotiated loans (2)  95,335   191,186   266,365   552,886 
Total  883,164   370,603   363,484   1,617,251 

 

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As of December 31, 2014
Impaired loans Commercial Residential mortgage Consumer Total
  (in millions of Ch$)
Non-performing loans  367,791   179,417   97,119   644,327 
Commercial loans at risk of default (1)  420,038   —   —   420,038 
Other impaired loans consisting mainly of renegotiated loans (2)  95,335   191,186   266,365   552,886 
Total  883,164   370,603   363,484   1,617,251 

As of December 31, 2013
Impaired loans Commercial Residential mortgage Consumer Total
  (in millions of Ch$)
Non-performing loans  364,890   155,688   92,723   613,301 
Commercial loans at risk of default (1)  317,534   —   —   317,534 
Other impaired loans consisting mainly of renegotiated loans (2)  122,464   167,713   256,689   546,866 
Total  804,888   323,401   349,412   1,477,701 
                 
As of December 31, 2012
Impaired loans Commercial Residential mortgage Consumer Total
  (in millions of Ch$)
Non-performing loans  320,461   159,802   117,504   597,767 
Commercial loans at risk of default (1)  298,868   —   —   298,868 
Other impaired loans consisting mainly of renegotiated loans (2)  96,793   69,228   275,481   441,502 
Total  716,122   229,030   392,985   1,338,137 
                 
 

(1)Total loans to a debtor, whose allowance level is determined on an individual basis with a risk of defaulting.

(2)Renegotiated loans for loans whose loan loss allowance is analyzed on a group basis.

 

Renegotiated LoansAs of December 31, 2018 under IFRS 9

Modified loans

When a loan measured at amortized cost has been renegotiated or modified but not derecognized, the Bank must recognize the resulting gains or losses as the difference between the carrying amount of the original loans, and modified contractual cash flows discounted using the EIR before modification. If the modification does not result in derecognition, then the subsequent assessment of whether there is a significant increase in credit risk is made by comparing the risk at the reporting date based on the modified contractual term and the risk at initial recognition based on the original, unmodified contractual term. If the modification results in derecognition, then the modified asset is considered to be a new asset. Accordingly, the date of modification is treated as the date of initial recognition for the purposes of the impairment requirements.

  As of December 31, 2018 
  Stage 1  Stage 2  Stage 3  Total 
  MCh$  MCh$  MCh$  MCh$ 
Gross carrying amount  26.913.508   1.796.790   1.503.116   30.213.414 
Modified loans  —   582.513   815.094   1.397.607 
%      32%  54%  5%
                 
ECL allowance  153.640   125.114   603.660   882.414 
Modified loans  —   44.099   323.802   367.901 
%  —   35%  54%  42%

The following table shows the success rate of renegotiated consumer and residential loans used for management purposes, for the periods indicated. The success rate for consumer loans is defined for each reported period as: (i) the total amount of loans renegotiated in that period minus the amount of such renegotiated loans that are classified as non-performing loans as of December 31, 2017 or 2018, as applicable, minus the amount of such renegotiated loans that have been charged off as of December 31, 2017 or 2018, as applicable, divided by (ii) the total amount of such renegotiated loans. The success rate for residential mortgage loans is defined for each reported period as: (i) the total amount of loans renegotiated in that period minus the amount of such renegotiated loans that are classified as non-performing loans as of December 31, 2017 or 2018, as applicable, divided by (ii) the total amount of such renegotiated loans. A charge-off of a residential mortgage loan is not generally included in measuring the success rate of mortgage renegotiations since the period to charge-off a mortgage loan is 48 months after an installment is past-due.

Period of renegotiation Success rate
Consumer Loans
at December 31, 2018		  Success rate
Residential mortgage loans
at December 31, 2018		 
First Quarter 2017  46.9%  75.3%
Second Quarter 2017  47.6%  79.2%
Third Quarter 2017  52.6%  79.7%
Fourth Quarter 2017  60.4%  82.3%
First Quarter 2018  73.9%  80.7%
Second Quarter 2018  80.8%  85.8%
Third Quarter 2018  94.2%  91.8%
Fourth Quarter 2018  98.4%  93.9%

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For periods prior to January 1, 2018

 

In certain instances, we renegotiate loans that have one or more principal or interest payments past-due. The type of concession we most often afford when renegotiating a loan is a reduction in interest payment or, on rare occasions, forgiveness of principal. We estimate that less than 0.5% of renegotiated loans relate to the forgiveness of principal, and the remaining 99.5% relates to reduction of interest payments. Any amount of principal forgiven is charged off directly to income as of the date the loan is renegotiated, if not already covered by an allowance for loan loss. Renegotiated loans, on which payments are not past-due, are not ordinarily classified as non-performing, but do not accrue interest, and they are considered to be impaired for the life of the loan, both for disclosure purposes and in our determination of our allowances for loan losses, and never moved out of renegotiated status. The effects of the amount of interest to be accrued were not material to “Loans and receivables from customers, net” on our Consolidated Statement of Financial Position.

 

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Modified loans(1) (In millions of Ch$) 

 2017  2016 
Commercial loans collectively evaluated for impairment 111,963   117,002 
Residential mortgage loans 120,109   157,239 
Consumer loans 187,967   214,344 
Total modified loans 420,039   488,585 

 

The following table shows the success rate, for the periods indicated, for renegotiated consumer and residential mortgage loans. The success rate for consumer loans is defined for each reported period as: (i) the total amount of loans renegotiated in that period minus the amount of such renegotiated loans that are classified as non-performing loans as of December 31, 2015 or 2016, as applicable, minus the amount of such renegotiated loans that have been charged off as of December 31, 2015 or 2016, as applicable, divided by (ii) the total amount of such renegotiated loans. The success rate for residential mortgage loans is defined for each reported period as: (i) the total amount of loans renegotiated in that period minus the amount of such renegotiated loans that are classified as non-performing loans as of December 31, 2015 or 2016, as applicable, divided by (ii) the total amount of such renegotiated loans. A charge-off of a residential mortgage loan is not generally included in measuring the success rate of mortgage renegotiations since the period to charge-off a mortgage loan is 48 months after an installment is past-due.

Period of renegotiation 

Success rate
Consumer Loans 

Success rate
Residential mortgage loans 

1Q 201555.3%80.2%
2Q 201557.2%79.3%
3Q 201549.9%82.0%
4Q 201564.8%88.3%
1Q 201671.9%87.3%
2Q 201677.3%91.7%
3Q 201695.8%95.6%
4Q 201699.6%99.6%

From time to time, we modify loans that are not classified as non-performing if a client is confronting a financial difficulty, such as unemployment or another temporary situation. These loans are not classified as renegotiated for disclosure purposes, but are considered as renegotiated for our provisioning models. The following table provides information regarding loans collectively evaluated for impairment that are classified as “modified:”

Modified loans(1) (Ch$mn) 2016 2015 2014
Commercial loans collectively evaluated for impairment  117,002   156,055   169,725 
Residential mortgage loans  157,239   223,645   228,856 
Consumer loans  214,344   178,244   243,441 
Total modified loans  488,585   557,944   642,022 

 

(1)Modified loans include loans collectively evaluated for impairment that were not classified as non-performing in which certain concessions were made to the client. The main type of concession given by the Bank is a reduction of interest, with forgiveness of principal occurring on rare occasions.

 

The modified loans included in the table above represent the full balance of all modified loans regardless of the date of modification. When a loan is marked as modified, we do not remove it from this status until paid in full. Our provisioning models currently consider a modified loan to be renegotiated for the life of the loan. Modified loans are included in the same pool of loans together with renegotiated loans for the life of the loans.

 

Analysis of Loan Loss Allowances

 

As of January 1, 2018, the Bank has adopted IFRS 9. The following table reconciles the prior period’s closing impairment allowance measured in accordance with the IAS 39 incurred loss model to the new expected loss impairment model according to IFRS 9. 

  Loans loss allowance under IAS 39  Reclassification  Remeasurement  

Loans loss allowance 

under IFRS 9 

 
  MCh$  MCh$  MCh$  MCh$ 
Loans and receivable (IAS 39)/ Financial assets at amortised cost (IFRS 9)       
Interbank loans  472   (472)  —   — 
Loans and account receivable from customers  790,685   84  97,322   888,091 
Total loans and account receivable at amortised cost  791,157   (388)  97,322   888,091 


The following tables show for 2018 the movement of provisions for expected credit losses for loans at amortized cost according to IFRS 9:

Commercial loans

  Stage 1  Stage 2  Stage 3    
  

Individual

  

Collective

  

Individual

  

Collective

  

Individual

  

Collective

  TOTAL 
ECL allowance at January 1, 2018  29,797   50,014   28,282   23,041   191,397   160,182   482,713 
Transfers
Transfers to stage 2  (2,719)  (1,525)  8,005   8,169   —   —   11,930 
Transfers to stage 3  (241)  (2,697)  —   —   6,612   29,839   33,513 
Transfers to stage 3  —   —    (5,541)  (6,776)  22,705   17,475   27,863 
Transfers to stage 1  167   553   (411)  (3,402)  —       (3,093)
Transfers to stage 2  —       330   1,854   (1,704)  (6,776)  (6,296)
Transfers to stage 1  —   22   —   —   —   (72)  (50)
Net changes of the exposure and modifications in the credit risk  4,105   3,770   2,740   2,855   1,251   29,253   43,974 
Writte-off  —   —    —       (37,439)  (58,510)  (95,949)
Foreign Exchange adjustments  (920)  (6,696)  (2,339)  (1,167)  15,293   7,926   12,197 
At 31 December 2018  30,189   43,541   31,066   24,574   198,115   179,317   506,802 

Mortgage loans

  Stage 1  Stage 2  Stage 3  Total 
  Collective  Collective  Collective    
ECL allowance at January 1, 2018  14,602   20,227   73,190   108,019 
Transfers                
Transfers to stage 2  (516)  3,846   —   3,330 
Transfers to stage 3  (383)  —   9,060   8,677 
Transfers to stage 3  —   (2,518)  8,056   5,538 
Transfers to stage 1  263   (6,255)  —   (5,992)
Transfers to stage 2  —   2,296   (10,185)  (7,889)
Transfers to stage 1  232   —   (232)  — 
Net changes of the exposure and modifications in the credit risk  1,601   575   (1,784)  392 
Write-off  —   —   (13,548)  (13,548)
Foreign Exchange adjustments  (6,793)  (3,069)  2,605   (7,257)
At December 31, 2018  9,006   15,102   67,162   91,270 

Consumer loans

  Stage 1  Stage 2  Stage 3  Total 
  Collective  Collective  Collective    
ECL allowance at January 1, 2018  72,712   54,557   170,090   297,359 
Transfers                
Transfers to stage 2  (2,117)  14,655   —   12,538 
Transfers to stage 3  (1,431)  —   16,311   14,880 
Transfers to stage 3  —   (3,913)  10,721   6,808 
Transfers to stage 1  1,320   (4,890)  —   (3,570)
Transfers to stage 2  —   2,943   (9,107)  (6,164)
Transfers to stage 1  18   —   (18)  — 
Net changes of the exposure and modifications in the credit risk  3,782   (8,572)  42,194   37,404 
Write-off  —   —   (64,506)  (64,506)
Foreign Exchange adjustments  (3,380)  (408)  (6,619)  (10,407)
At December 31, 2018  70,904   54,372   159,066   284,342 
                 


The following table provides the details of the roll-forwards in 2017, 2016, 2015 2014, 2013 and 20122014 of our allowance for loan losses under IAS 39, including decrease of allowances due to charge-offs, allowances established, allowances released, gross provision expense and opening and closing balance:

 

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  Commercial loans  Mortgage loans  Consumer loans  Interbank loan    
Activity during 2017 Individual  Group  Group  Group     Total 
  (in millions of Ch$)    
Balances as of December 31, 2016  246,336   183,106   57,009   300,019   4,135   790,605 
Allowances established (1)  64,658   148,681   43,621   252,038   307   509,305 
Allowances released (2)  (55,925)  (20,491)  (11,427)  (46,089)  (3,970)  (137,902)
Released allowances by charge-off (3)  (36,279)  (92,223)  (20,137)  (222,212)  —   (370,851)
Balances as of December 31, 2017  218,790   219,073   69,066   283,756   472   791,157 

 

  

Commercial loans 

 

Mortgage loans 

 

Consumer loans 

 

Interbank loan 

  

Activity during 2016 

 

Individual 

 

Group 

 

Group 

 

Group 

   

Total 

 (in millions of Ch$)  
Balances as of December 31, 2015  256,505   174,696   62,427   267,507   1,166   762,301 
Allowances established (1)  61,002   133,855   50,892   280,544   3,052   529,345 
Allowances released (2)  (43,183)  (14,432)  (34,246)  (30,790)  (83)  (122,734)
Released allowances by charge-off (3)  (54,924)  (104,868)  (10,911)  (207,604)  —   (378,307)
Balances as of December 31, 2016  219,400   189,251   68,162   309,657   4,135   790,605 

  Commercial loans  Mortgage loans  Consumer loans  Interbank loan    
Activity during 2016 Individual  Group  Group  Group     Total 
  (in millions of Ch$)    
Balances as of December 31, 2015  256,505   174,696   62,427   267,507   1,166   762,301 
Allowances established (1)  61,002   133,855   50,892   280,544   3,052   529,345 
Allowances released (2)  (43,183)  (14,432)  (34,246)  (30,790)  (83)  (122,734)
Released allowances by charge-off (3)  (27,988)  (111,013)  (22,064)  (217,242)  —   (378,307)
Balances as of December 31, 2016  246,336   183,106   57,009   300,019   4,135   790,605 

 

  Commercial loans  Mortgage loans  Consumer loans  Interbank loan    
Activity during 2015 Individual  Group  Group  Group     Total 
  (in millions of Ch$)    
Balances as of December 31, 2014  215,852   165,697   48,744   254,023   1   684,317 
Allowances established (1)  124,968   136,778   34,373   248,937   1,357   546,413 
Allowances released (2)  (46,614)  (17,885)  (7,205)  (18,126)  (192)  (90,022)
Released allowances by charge-off (3)  (37,701)  (109,894)  (13,485)  (217,327)  —   (378,407)
Balances as of December 31, 2015  256,505   174,696   62,427   267,507   1,166   762,301 

 

  Commercial loans  Mortgage loans  Consumer loans  Interbank loan    
Activity during 2014 Individual  Group  Group  Group     Total 
  (in millions of Ch$)     
Balance as of December 31, 2013  206,377   100,170   43,306   264,585   495   614,933 
Allowances established (1)  52,240   174,244   24,907   218,941   60   470,392 
Allowances released (2)  (15,903)  (7,127)  (6,561)  (38,275)  (554)  (68,420)
Released allowances by charge-off (3)  (26,862)  (101,590)  (12,908)  (191,228)  —   (322,588)
Balances as of December 31, 2014  215,852   165,697   48,744   254,023   1   684,317 

  Commercial loans Mortgage loans Consumer loans Interbank loan  
Activity during 2013 Individual Group Group Group   Total
  (in millions of Ch$)  
Balance as of December 31, 2012  154,702   95,938   35,990   263,259   159   550,048 
Allowances established (1)  92,008   98,715   42,487   258,446   455   492,111 
Allowances released (2)  (22,014)  (11,151)  (9,216)  (35,482)  (119)  (77,982)
Released allowances by charge-off (3)  (18,319)  (83,332)  (25,955)  (221,638)  —   (349,244)
Balances as of December 31, 2013  206,377   100,170   43,306   264,585   495   614,933 

  Commercial loans Mortgage loans Consumer loans Interbank loan  
Activity during 2012 Individual Group Group Group   Total
  (in millions of Ch$  
Balances as of December 31, 2011  112,687   97,115   35,633   243,022   11   488,468 
Allowances established (1)  83,742   83,181   25,314   318,565   548   511,350 
Allowances released (2)  (20,716)  (16,624)  (7,449)  (38,471)  (400)  (83,660)
Charge-off released allowances (3)  (21,011)  (67,734)  (17,508)  (259,857)  —   (366,110)
Balances as of December 31, 2012  154,702   95,938   35,990   263,259   159   550,048 

 

 

(1)Represents gross allowances made in respect of increased risk of loss during the period and loan growth.

 

(2)Represents the gross amount of loan loss allowances released during the year as a consequence of reduction in the level of risk existing in the loan portfolio, including as a result of improvement in the credit risk classification of borrowers and loans paid.

 

(3)Represents the gross amount of loan loss allowances removed due to charge-off.

 

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The following table shows recoveries by type of loan:

 

 Year ended December 31, Year ended December 31, 
 2016 2015 2014 2013 2012 2018 2017 2016 2015 2014 
 (in millions of Ch$) (in millions of Ch$) 
Recovery of loans previously charged-off                     
Consumer loans  41,072   35,565   36,908   36,004   22,015   40,180   39,972   41,072   35,565   36,908 
Residential mortgage loans  10,041   6,543   5,122   4,735   2,305   17,367   10,942   10,041   6,543   5,122 
Commercial loans  27,185   26,032   16,947   14,545   8,695   30,934   32,613   27,185   26,032   16,947 
Total recoveries  78,298   68,140   58,977   55,284   33,015   88,481   83,527   78,298   68,140   58,977 

Allocation of the Loan Loss Allowances

 

The following tables set forth, as of December 31, of each of2018 according to IFRS 9 and for the fiveprevious four years listed below,under IAS 39, the proportions of our required loan loss allowances that were attributable to our commercial, consumer and residential mortgage loans at each such date.

 

  As of December 31, 2018 
  Total ECL Allowance  Allowance amount as a percentage of loans in category  Allowance amount as a percentage of total loans at amortized cost  Allowance amount as a percentage of total allowances for loans at amortized cost 
  Ch$ million 
Commercial loans                
Commercial loans  368,796   3.3%  1.2%  41.8%
Foreign trade loans  39,917   2.3%  0.1%  4.5%
Checking accounts debtors  13,784   6.4%  —   1.6%
Factoring transactions  4,353   1.1%  —   0.5%
Leasing transactions  38,800   2.7%  0.1%  4.4%
Other loans and accounts receivable  41,152   16.8%  0.1%  4.7%
Subtotals  506,802   3.3%  1.7%  57.4%
Residential mortgage loans                
Loans with mortgage finance bonds  177   1.0%  —   — 
Mortgage mutual loans  805   0.7%  —   0.1%
Other mortgage mutual loans  90,288   0.9%  0.3%  10.2%
Subtotals  91,270   0.9%  0.3%  10.3%
Consumer loans                
Installment consumer loans  247,387   7.8%  0.8%  28.0%
Credit card balances  28,788   2.0%  0.1%  3.3%
Consumer leasing contracts  127   3.1%  —   — 
Other consumer loans  8,040   3.0%  —   0.9%
Subtotals  284,342   5.8%  0.9%  32.2%
Totals loans to clients  882,414   2.9%  2.9%  100.0%

 

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  As of December 31, 2017  As of December 31, 2016 
  Total Allowance  Allowance amount as a percentage of loans in category  Allowance amount as a percentage of total loans  Allowance amount as a percentage of total allowances  Total Allowance  Allowance amount as a percentage of loans in category  Allowance amount as a percentage of total loans  Allowance amount as a percentage of total allowances 
  Ch$ million  Ch$ million 
Commercial loans                        
Commercial loans 301,990  3.0% 1.1% 38.2% 308,166  3.1% 1.1% 39.0%
Foreign trade loans 50,470  3.2% 0.2% 6.4% 57,820  3.2% 0.2% 7.3%
Checking accounts debtors 14,466  7.4% 0.1% 1.8% 9,648  5.4% —  1.2%
Factoring transactions 5,995  1.3% —  0.8% 5,407  1.8% —  0.7%
Leasing transactions 30,322  2.1% 0.1% 3.8% 23,139  1.6% 0.1% 2.9%
Other loans and accounts receivable 34,620  14.4% 0.1% 4.4% 25,262  11.4% 0.1% 3.2%
Subtotals 437,863  3.1% 1.6% 55.3% 429,442  3.1% 1.6% 54.3%
Residential mortgage loans                        
Loans with mortgage finance bonds 123  0.5% —  —  16  —  —  — 
Mortgage mutual loans 594  0.5% —  0.1% 190  0.2% —  — 
Other mortgage mutual loans 68,349  0.8% 0.2% 8.6% 56,803  0.7% 0.2% 7.2%
Subtotals 69,066  0.8% 0.2% 8.7% 57,009  0.7% 0.2% 7.2%
Consumer loans                        
Installment consumer loans 240,962  8.3% 0.9% 30.5% 249,545  9.2% 0.9% 31.6%
Credit card balances 33,401  2.4% 0.1% 4.2% 41,063  2.8% 0.2% 5.2%
Consumer leasing contracts 62  1.3% —  —  72  1.4% —  — 
Other consumer loans 9,331  3.4% —  1.2% 9,339  3.4% —  1.2%
Subtotals 283,756  6.2% 1.0% 35.9% 300,019  6.7% 1.1% 37.9%
Totals loans to clients 790,685  2.9% 2.9% 99.9% 786,470  2.9% 2.9% 99.5%
Interbank loans 472  0.3% —  0.1% 4,135  1.5% —  0.5%
Totals 791,157  2.9% 2.9% 100.0% 790,605  2.9% 2.9% 100.0%

 

  

As of December 31, 2016 

 

As of December 31, 2015 

 

As of December 31, 2014 

  

Total Allowance 

 

Allowance amount as a percentage of loans in category 

 

Allowance amount as a percentage of total loans 

 

Allowance amount as a percentage of total allowances 

 

Total Allowance 

 

Allowance amount as a percentage of loans in category 

 

Allowance amount as a percentage of total loans 

 

Allowance amount as a percentage of total allowances 

 

Total Allowance 

 

Allowance amount as a percentage of loans in category 

 

Allowance amount as a percentage of total loans 

 

Allowance amount as a percentage of total allowances 

   Ch$ million  Ch$ million      Ch$ million
Commercial loans                                                
Commercial loans  308,166   3.1%  1.1%  39.0%  305,465   3.4%  1.2%  40.1%  269,185   3.2%  1.2%  39.3%
Foreign trade loans  57,820   3.2%  0.2%  7.3%  67,104   3.1%  0.3%  8.8%  56,800   3.2%  0.2%  8.3%
Checking accounts debtors  9,648   5.4%  —   1.2%  9,869   4.2%  —   1.3%  10,009   3.8%  —   1.4%
Factoring transactions  5,407   1.8%  —   0.7%  5,955   2.2%  —   0.8%  4,868   1.5%  —   0.7%
Leasing transactions  23,139   1.6%  0.1%  2.9%  25,437   1.7%  0.1%  3.3%  23,734   1.6%  0.1%  3.5%
Other loans and accounts receivable  25,262   11.4%  0.1%  3.2%  17,371   12.1%  0.1%  2.3%  16,953   12.5%  0.1%  2.5%
Subtotals  429,442   3.1%  1.6%  54.3%  431,201   3.2%  1.7%  56.6%  381,549   3.1%  1.6%  55.7%
Residential mortgage loans                                                
Loans with mortgage finance bonds  16   —   —   —   336   0.8%  —   —   353   0.6%  —   0.1%
Mortgage mutual loans  190   0.2%  —   —   848   0.6%  —   0.1%  552   0.5%  —   0.1%
Other mortgage mutual loans  56,803   0.7%  0.2%  7.2%  61,243   0.8%  0.2%  8.0%  47,839   0.7%  0.2%  7.0%
Subtotals  57,009   0.7%  0.2%  7.2%  62,427   0.8%  0.2%  8.1%  48,744   0.7%  0.2%  7.2%
Consumer loans                                                
Installment consumer loans  249,545   9.2%  0.9%  31.6%  215,914   8.7%  0.9%  28.3%  201,931   8.7%  0.9%  29.5%
Credit card balances  41,063   2.8%  0.2%  5.2%  43,159   3.0%  0.2%  5.7%  44,050   3.2%  0.2%  6.4%
Consumer leasing contracts  72   1.4%  —   —   79   1.4%  —   —   80   1.5%  —   — 
Other consumer loans  9,339   3.4%  —   1.2%  8,355   3.5%  —   1.1%  7,962   3.5%  —   1.2%
Subtotals  300,019   6.7%  1.1%  37.9%  267,507   6.4%  1.1%  35.1%  254,023   6.5%  1.1%  37.1%
Totals loans to clients  786,470   2.9%  2.9%  99.5%  761,135   3.0%  3.0%  99.8%  648,316   3.11%  2.9%  100.0%
Interbank loans  4,135   1.5%  —   0.5%  1,166   10.7%  —   0.2%  1   —   —   — 
Totals  790,605   2.9%  2.9%  100.0%  762,301   3.0%  3.0%  100.0%  648,317   3.0%  2.9%  100.0%

  As of December 31, 2015  As of December 31, 2014 
  Total
Allowance		  Allowance amount
as a percentage of loans in category		  Allowance amount
as a percentage of total loans		  Allowance amount
as a percentage of total allowances		  Total
Allowance		  Allowance amount
as a percentage of loans in category		  Allowance amount
as a percentage of total loans		  Allowance amount
as a percentage of total allowances		 
  Ch$ million  Ch$ million 
Commercial loans                        
Commercial loans 305,465  3.4% 1.2% 40.1% 269,185  3.2% 1.2% 39.3%
Foreign trade loans 67,104  3.1% 0.3% 8.8% 56,800  3.2% 0.2% 8.3%
Draft loans 9,869  4.2% —  1.3% 10,009  3.8% —  1.4%
Factoring transactions 5,955  2.2% —  0.8% 4,868  1.5% —  0.7%
Leasing transactions 25,437  1.7% 0.1% 3.3% 23,734  1.6% 0.1% 3.5%
Other loans and accounts receivable 17,371  12.1% 0.1% 2.3% 16,953  12.5% 0.1% 2.5%
Subtotals 431,201  3.2% 1.7% 56.6% 381,549  3.1% 1.6% 55.7%
Residential mortgage loans                        
Loans with letters of credit 336  0.8% —  —  353  0.6% —  0.1%
Mortgage mutual loans 848  0.6% —  0.1% 552  0.5% —  0.1%
Other mortgage mutual loans 61,243  0.8% 0.2% 8.0% 47,839  0.7% 0.2% 7.0%
Subtotals 62,427  0.8% 0.2% 8.1% 48,744  0.7% 0.2% 7.2%
Consumer loans                        
Installment consumer loans 215,914  8.7% 0.9% 28.3% 201,931  8.7% 0.9% 29.5%
Credit card balances 43,159  3.0% 0.2% 5.7% 44,050  3.2% 0.2% 6.4%
Consumer leasing contracts 79  1.4% —  —  80  1.5% —  — 
Other consumer loans 8,355  3.5% —  1.1% 7,962  3.5% —  1.2%
Subtotals 267,507  6.4% 1.1% 35.1% 254,023  6.5% 1.1% 37.1%
Totals loans to clients 761,135  3.0% 3.0% 99.8% 648,316  3.11% 2.9% 100.0%
Interbank 1,166  10.7% —  0.2% 1  —  —  — 
Totals 762,301  3.0% 3.0% 100.0% 648,317  3.0% 2.9% 100.0%

 

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As of December 31, 2013 

 

As of December 31, 2012 

  

Total
Allowance 

 

Allowance amount
as a percentage of loans in category 

 

Allowance amount
as a percentage of total loans 

 

Allowance amount
as a percentage of total allowances 

 

Total
Allowance 

 

Allowance amount
as a percentage of loans in category 

 

Allowance amount
as a percentage of total loans 

 

Allowance amount
as a percentage of total allowances 

   Ch$ million               Ch$ million             
Commercial loans                                
Commercial loans  208,619   2.7%  1.0%  33.9%  199,841   2.7%  1.1%  36.3%
Foreign trade loans  53,005   2.9%  0.3%  8.6%  18,535   1.5%  0.1%  3.4%
Draft loans  8,376   3.0%  —   1.3%  3,033   1.5%  —   0.6%
Factoring transactions  5,054   1.6%  —   0.8%  3,683   1.1%  —   0.7%
Leasing transactions  19,177   1.4%  0.1%  3.1%  23,426   1.8%  0.1%  4.3%
Other loans and accounts receivable  12,316   10.4%  0.1%  2.0%  2,122   2.2%  —   0.4%
Subtotals  306,547   2.6%  1.5%  49.7%  250,640   2.4%  1.3%  45.7%
Residential mortgage loans                                
Loans with letters of credit  470   0.7%  —   0.1%  493   0.5%  —   0.1%
Mortgage mutual loans  380   0.5%  —   0.1%  936   2.0%  —   0.2%
Other mortgage mutual loans  42,456   0.8%  0.2%  6.9%  34,561   0.7%  0.2%  6.3%
Subtotals  43,306   0.8%  0.2%  7.1%  35,990   0.7%  0.2%  6.6%
Consumer loans                                
Installment consumer loans  221,723   10.2%  1.1%  36.1%  218,474   11.8%  1.2%  39.7%
Credit card balances  37,300   3.0%  0.2%  6.1%  38,719   3.7%  0.2%  7.0%
Consumer leasing contracts  68   2.0%  —   —   160   4.3%  —   — 
Other consumer loans  5,494   2.7%  —   0.9%  5,906   3.0%  —   1.0%
Subtotals  264,585   7.3%  1.3%  43.1%  263,259   8.5%  1.4%  47.7%
Totals loans to clients  614,438   2.9%  3.0%  99.9%  549,889   2.9%  2.9%  100.0%
Interbank  495   0.4%  —   0.1%  159   0.2%  —   — 
Totals  614,933   2.9%  3.0%  100.0%  550,048   2.9%  2.9%  100.0%

Based on information available regarding our borrowers, we believe that our loan loss allowances are sufficient to cover known potential losses and losses inherent in a loan portfolio of the size and nature of our loan portfolio.

 

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

A.       Directors and Senior Management

 

Directors

 

We are managed by our Board of Directors, which, in accordance with our by-laws, consists of 119 directors and two alternates who are elected at our ordinary shareholders’ meetings. As a result of resignation of the Andreu Plaza López on March 12, 2019, the Board of Directors currently has one vacancy. Except as noted below, the current members of the Board of Directors were elected by the shareholders in the ordinary shareholders’ meeting held on April 26, 2014.2017. Members of the Board of Directors are elected for three-year terms. The term of the current Board members expires in April of 2017.2020. On October 27, 2016, the SBIF authorized a reduction in the number of Board members from 11 to nine. This reduction and the corresponding amendment to Article 14 of the by-laws was approved by the shareholders at an Extraordinary Shareholders’ Meeting held on January 9, 2017 and will enter into force on the date ofwas enforced from the Bank’s next2017 Ordinary Shareholders’ Meeting, which will taketook place on April 26, 2017. The current principal and alternate directors will remain in office until such date.

 

Cumulative voting is permitted for the election of directors. The Board of Directors may appoint replacements to fill any vacancies that occur during periods between elections. If any member of the Board of Directors resigns before his or her term has ended, and no other alternate director is available to take the position at the next annual ordinary shareholders’ meeting a new replacing member will be elected. Our executive officers are appointed by the Board of Directors and hold office at its discretion. Scheduled meetings of the Board of Directors are held monthly. Extraordinary meetings can be held when called in one of three ways: by the Chairman of the Board of Directors, by three directors with the consent of the Chairman of the Board of Directors or by the majority of directors. None of the members of our Board of Directors has a service contract which entitles any Director to any benefits upon termination of employment with Santander-Chile.

 

Our current directors are as follows:

 

DirectorsPositionCommitteesTerm Expires
Vittorio Corbo LioiClaudio Melandri HinojosaPresidentAsset and Liability Committee (President)Apr-17
Human Resources Committee (President)
Market Committee (President)Apr-20
Strategy Committee (President)
Oscar von Chrismar CarvajalIntegral Risk Committee

Market Committee 

Remuneration Committee 

Rodrigo Vergara MontesFirst Vice PresidentMarket CommitteeApr-20
Audit Committee

Asset and Liability Committee (First Vice President)

Apr-17(President) 

Strategy Committee 

Human ResourcesOrlando Poblete IturrateSecond Vice PresidentRemuneration Committee (President)Apr-20
MarketAudit Committee (First Vice President)(President)
Félix de Vicente MingoDirector

Asset and Liability Committee 

Apr-20

Audit Committee 

Strategy Committee 

Management Appointment Committee (President) 

Alfonso Gómez MoralesDirectorIntegral Risk Committee (President)
Strategy CommitteeApr-20
Roberto Méndez Torres

Strategy Committee 

Remuneration Committee 

Market Committee 

Asset and Liability Committee 

Ana DorregoSecond Vice PresidentDirector-Apr-20
Lucía Santa Cruz SutilDirectorStrategy Committee

Analysis and Resolution Committee

Integral Risk Committee (Second Vice President)

Apr-17
Strategy Committee (Vice President)Apr-20
Juan Pedro Santa Maria PerezDirector

Audit Committee 

Analysis and Resolution Committee 

(President)

Apr-17

Integral Risk Committee (First Vice President)

Marco Colodro Hadjes

DirectorAudit Committee (President)Apr-17
Asset and Liability Committee
Market Committee
Mauricio Larraín GarcésDirectorAudit Committee (Vice President and Financial Expert)Apr-17
Human Resources Committee (First Vice President)

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Roberto Zahler MayanzDirectorAsset and Liability Committee (Second Vice President)Apr-17
Integral Risk Committee
Market Committee (Second Vice President)
Lucía Santa Cruz SutilDirectorStrategy CommitteeApr-17
Orlando Poblete IturrateDirectorAudit Committee (Second Vice President)Apr-17
Andreu PlazaDirector—Apr-17
Ana DorregoDirector—Apr-17Apr-20
Blanca Bustamante BravoAlternate DirectorHuman ResourcesIntegral Risk CommitteeApr-17Apr-20
Raimundo Monge Zegers

Strategy Committee 

Management Appointment Committee 

Oscar von Chrismar CarvajalAlternate Director

Integral Risk Committee

Market Committee (President) 

Apr-17Apr-20
Strategy Committee (Secretary)
Asset and Liability Committee

Analysis and Resolution Committee (First Vice President)

Management Appointment Committee 

  


Vittorio Corbo LioiClaudio Melandri Hinojosa became the Executive Chairman on March 1, 2018 and country head of Grupo Santander in Chile. He is also President of Santander Chile Holding S.A. and Vice President of Universia Chile S.A.. He has beenmore than 30 years of experience in the financial industry and was Chief Executive Officer of Santander Chile from January 2010 to March 2018. He started his career in Banco Concepción and joined Grupo Santander in 1990, where he has held various positions of responsibility, including Regional Manager of the branch network, Human Resources Manager and Manager of Commercial Banking. He was also a Vice President at Banco Santander Venezuela for three years in the commercial area of this country. Mr. Melandri has degrees in Business and Accounting and holds a Master of Business Administration from the Universidad Adolfo Ibañez.

Rodrigo Vergara became a director and First Vice President of the Board since April 2014.on July 12, 2018. He was President of the Central Bank of Chile between 2011 and 2016. Mr. Vergara is an associate researcher in Harvard’s Mossavar-Rahmani Center for Business and Government (Kennedy School). He is one of Chile's leading economists. From 2003 to 2007, Mr. Corbo was the President of Chile's Central Bank. Since the end of his tenure there, Mr. Corbo has been a Senior Research Associateprofessor at the CentroInstitute of Economics in Pontificia Universidad Católica de Estudios Públicos (CEP), a local think tank. Mr. Corbo is also member of the boards of Banco Santander Mexico, CCU Chile and an economic consultant and board member for various companies. He graduated with a Business Degree from the Pontificia Universidad Católica de Chile in 1985 and earned a Doctorate Degree in Economics from Harvard University in 1991. Between 1985 and 1995, he worked at the Central Bank of Chile where he was promoted to several large corporationsChief Economist in 1992. He has been an economic consultant for central banks and governments within Latin America, Eastern Europe, Asia and Africa. He has also been an external consultant for the World Bank, the International Monetary Fund, the Inter-American Development Bank and the United Nations. He has served as a Presidential Advisor regarding Work and Equality, Advisor on the Free Trade Agreement between Chile and the US, the National Savings Commission and the National Foundation of Science and Technology Development (Conicyt).

Orlando Poblete Iturrate is the Second Vice President and has served on the Board since April 22, 2014. Since 1991, Mr. Poblete has been a professor at the Universidad de los Andes. Between 1997 and 2004, he was Dean of the Law School at the Universidad de los Andes and since 2014 he has served as Chancellor. He is also a partner at the law firm Orlando Poblete & Company. He is a member of the Counsel of the Arbitration and Mediation of Santiago of the Chamber of Commerce of Santiago. Previously, between 1979 and 1991, he was a professor of Procedural Law at the Universidad de Chile. Mr. Poblete is a lawyer from the University of Chile and has a Masters from the same university. He is also a graduate of the Directive Management of Companies Program (PADE) of ESE Business School of the Universidad de los Andes.


Félix de Vicente Mingo became a director on March 27, 2018. He has a Commercial Engineering degree with honorable mention in Economics from the Universidad de Chile. Between 2013 and 2014, he was Minister of Economy, Development and Tourism. Before this, he was a director of ProChile, the institution of the Ministry of Foreign Affairs that promotes Chilean exports. His first position was in a fruit export company in the O’Higgins region of Chile and then Manager of Administration and Finance of Telemercados Europa, as well as being president and partner of various companies in Chile and abroad.

Alfonso Gómez became a director on March 27, 2018. He servedhas Civil Engineering degree from the Universidad Católica de Chile, a Ph.D. of the Royal College of Art of London. He is the executive president of the Innovation Center UC Anacleto Angelini. He started his career in senior managerial positions at the World BankIndustrial and System Engineering Department of Universidad Católica de Chile. He was founder of various companies, such as Apple Chile, Unlimited and Virtualia, the first social network developed in Washington, DC (1984-1991) andLatin America. He has been a professordirector of economics in Canada,numerous companies and institutions such as National Council of Culture and the USAArts and Chile. Between 1991Fundación País Digital, and 1995, Mr. Corbothe National Council of Innovation. He was an economic advisor toDean of the Bank,Faculty of Engineering and later Dean of the Business School of the Adolfo Ibáñez University.

Juan Pedro Santa María Pérezbecame a director on July 24, 2012 after having served as Corporate Legal Director for Grupo Santander Chile, Legal Counsel for Santander-Chile, Banco O’Higgins and Banco Santiago. He has been President of the Legal Committee of the Asociación de Bancos e Instituciones Financieras de Chile for over 20 years and President Pro-Tempore of the Financial Law Committee of the Federación Latinoamericana de Bancos (FELABAN). He is a member of itsthe Counsel of Arbitrage and Mediation of the Commerce Chamber of Santiago. Mr. Santa María holds a degree in Law from the Pontificia Universidad Católica de Chile.

Lucía Santa Cruz Sutil became a director on August 19, 2003. She is a Member of the Board of Directors between 1995the Universidad Adolfo Ibañez. She is director of Compañía de Seguros Generales y de Vida La Chilena Consolidada (Zurich) and 2003. Between 2011member of the Advisory Board of Nestle Chile. She is a member of the Self-Regulation Committee for Insurance Companies in Chile. Ms. Santa Cruz holds a degree in History from King’s College, London University and 2014, hean M.Phil. in History from Oxford University and holds a Doctor Honoris Causa degree from King’s College.

Ana Dorrego became a director in March 2015. She has been working at the Santander Group since 2005, mainly in the Financial Planning and Corporate Development department, coordinating the Group planning processes and following up on the different Santander Group units and projects. She was director of E-business development director for the Santander Group and previously she was a board membercorporate clients relationship manager and commercial director of Banco Santander SA in Spain. Mr. Corbo is the President of the Asset and Liability Committee, the Market Committee, the Strategy Committee and the Human Resources Committee. Mr. Corbotransactional banking at Bankinter. Ms. Dorrego holds a commercial engineering degree (with highest distinction)in Business Administration from the Universidad Pontificia de ChileComillas ICAI-ICADE, and a Ph.D.Master’s degrees in economicsBusiness Administration from MIT.Deusto University – Bilbao, Spain, and Adolfo Ibañez, Miami/Chile.

 

Blanca Bustamante Bravo became an alternate director on April 28, 2015. She holds a degree in business from Universidad Católica de Chile. Her professional experience includes the role of economic analyst for the Central Bank of Chile, research analyst for Oppenheimer & Co. in New York and research analyst for IM Trust. In 1998, she joined Viña Concha y Toro as Head of Investor Relations, a position held until 2010 the responsibility to present business strategy and achievements of the company to the financial community. In 2001, she also became director of Corporate Communications. Since 2013, she is a director in the Center for Research & Innovation for Concha y Toro.

Oscar von Chrismar Carvajal became Vice President ofjoined the Board on January 1, 2010, after having servedDecember 22, 2009 and is currently an alternate director. Mr. von Chrismar holds an Engineering degree from the Universidad de Santiago de Chile with specialist studies in the US and Europe. He is a director of Sinacofi and the Stock Exchange as the Chief Executive Officer of Santander-Chile since August 2003. Mr. Von Chrismar is First Vice PresidentApril 2012. He joined Banco Santander in 1990 as a Manager of the AssetFinance division. Between 1995 and Liability Committee, the Market Committee and the Integral Risk Committee. He is also a member of the Human Resources Committee and the Strategy Committee. Prior to assuming the Chief Executive officer post,1996 he was the Manager of Global Banking. Prior to the merger, he was the former Chief Executive Officer of Old Santander-Chile since September 1997, after being General Manager of Banco Santander-Peru since September 1995.Santander Peru. In 1997, he became the General Manager of Santander Chile, a position he held until December 2009 when he joined the Board of Directors. Mr. von Chrismar is also a board member of Banco Santander Argentina and Banco Santander Peru. He is also the President of Santander Consumer Chile S.A. Prior to that, Mr. von Chrismar was the manager of the Finance Division of Santander-Chile, a position that he had held since joining Santander-Chile in 1990. Mr. von Chrismar holds an Engineering degree from the Universidad de Santiago de Chile.

Roberto Méndez Torres is Second Vice President of the Board. He is a former member of the Board of Old Santander-Chile, to which he was appointed in 1996. He is Second Vice President of the Integral Risk CommitteePeru and the Strategy Committee. He is a professor of Economics at Universidad Católica de Chile. He has been Advisor to Grupo Santander-Chile since 1989. Mr. Méndez is President and Director of Adimark Chile Gfk and on the Board of the Chilean and German Chamber of Commerce. He is also a Director of Enex S.A. and President of Universia Chile S.A. Mr. Méndez is also a member of the Council of Paz Ciudadana and was a former President of ICARE. He graduated with a degree in Business Administration from Universidad Católica de Chile, and holds an MBA and a Ph.D. from the Graduate School of Business at Stanford University.

Juan Pedro Santa María Pérezbecame a Director on July 24, 2012 after having served as Corporate Legal Director for Grupo Santander Chile and Legal Counsel for Santander-Chile. Mr. Santa María is President of the Analysis and Resolution Committee and First Vice President of the Integral Risk Committee. Mr. Santa María joined Santander-Chile in 2002, after the merger with Banco Santiago. Previous to that he was Legal Counsel for Banco Santiago and Banco O’Higgins. He has also been President of the Legal Committee of the Asociación de

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Bancos e Instituciones Financieras de Chile for over 20 years and President Pro-Tempore of the Financial Law Committee of the Federación Latinoamericana de Bancos (FELABAN). Mr. Santa María holds a degree in Law from the Pontificia Universidad Católica de Chile.

Marco Colodro Hadjes became a Director on April 19, 2005. Mr. Colodro is President of the Audit Committee and is a member of the Asset and Liability Committee and the Market Committee. He is a director of the Board of Telefónica Chile and a former director of Codelco. He is the former chairman of TVN (National Television Network) and the former vice chairman of Banco del Estado de Chile (State Bank of Chile). Prior to that, he was Foreign Trade Director at the Central Bank of Chile. Mr. Colodro holds a degree in Economics from the Universidad de Chile, and has done post-graduate studies at the École Pratique des Hautes Etudes of the University of Paris.

Mauricio Larraín Garcésbecame a Director in April 2014. Previously, he was President of the Board of Santander-Chile for more than two decades. He is Vice President and Financial Expert of the Audit Committee. He is also First Vice President of the Human Resources Committee. He is a member of the board of the Institute for Religious Works (IOR) in the Vatican City State. Mr. Larraín began working at Santander-Chile in 1989. Previously, he was Deputy Superintendent of Banks, Manager of External Debt at the Central Bank of Chile, and Senior Finance Specialist at the World Bank, in Washington D.C. He holds law degrees from the Pontifical Catholic University of Chile and from Harvard University.

Roberto Zahlerbecame a Director in 2002. He is Second Vice President of the Asset and Liability Committee and the Market Committee. He is also a member of the Integral Risk Committee. Currently, he is President of the consultancy firm Zahler & Co. and serves as a consultant for the World Bank, IADB, IMF and BIS. He has been a member of the High Level Consulting Group to the IADB President, of LASFRC (Latin-American Shadow Financial Regulatory Committee) and of the Emerging Market Economies Eminent Persons Group (EMEEPG). He was President of the Board of Siemens-Chile and Director of Air Liquide-Chile and of Banco Santiago. He was also a visiting professor at the IMF’s Research Department. Between 1991 and 1996, he was President of the Central Bank of Chile and Vice President from 1989 to 1991. Prior to that he served as Chief Regional Adviser in Monetary and Financial Policy of the UN Economic Commission for Latin America and the Caribbean and was Lecturer and Researcher at the University of Chile’s School of Economics. Mr. Zahler has provided technical assistance to the central banks and finance ministries of Indonesia, Kosovo and most countries in Latin America. Mr. Zahler holds a degree in Economics from the Universidad de Chile and a Masters in Economics from the University of Chicago.

Lucía Santa Cruz Sutil became a Director on August 19, 2003. Ms. Santa Cruz is a member of the Strategy Committee. Ms. Santa Cruz holds a degree in History from King’s College, London University and an M.Phil. in History from Oxford University and holds a Doctor Honoris Causa degree from King’s College. She is a Member of the Board of the Universidad Adolfo Ibañez. Ms. Santa Cruz is also Second Vice President of Universia Chile S.A. She is Vice President of the Board of Compañía de Seguros Generales y de Vida La Chilena Consolidada,(Zurich) and member of the Advisory Board of Nestle Chile She sits on the board of non-profit cultural organizations and is also a member of the Self-Regulation Committee for Insurance Companies in Chile. She is a Member of the Academy of Social, Political and Moral Sciences of the Institute of Chile.

Orlando Poblete Iturrate became a Director on April 25, 2015. He is the Second Vice President of the Audit Committee. He previously became an Alternate Director on April 22, 2014. Since 1991 Mr. Poblete has been a professor at the Universidad Los Andes. Between 1997 and 2004, he was Dean of the Law School and since 2014 he has been Chancellor of the university. He is also a partner at the law firm Orlando Poblete & Company. He is an arbitrator of the Centro de Arbitraje y Mediación de la Cámara de Comercio de Santiago. Between 2012 and 2014, he was Chairman of Clínica Universidad de los Andes and is currently Member of the Board of the University of the Andes. He has also been a Professor of Law at the University of Chile. Mr. Poblete is a lawyer from the University of Chile and has masters from the same university.

Andreu Plazabecame a Director in March 2016. Mr. Plaza was appointed as senior executive vice president of T&O Division in Santander Group on January 2015. He is Santander’s Chief Technology Officer and a member of the management committee. Mr. Plaza joined the Group in 2012 as the technology and operations director for the retail and business banking segments in Santander UK.  He has been a senior executive vice president and member of the Management Committee of Caixa Catalunya since 1998 and has also been a member of the boards of Servired and Aula Escola Europea.  He has a graduate in Mathematics from the Universitat Autónoma de Barcelona. He also has various Master’s degrees in Finance and Banking from Stanford University, Insead, The Wharton School and ESADE.

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Ana Dorrego became a Director in March 2016. She has been working at the Santander Group in the Financial Planning and Corporate Development department for the last 11 years, coordinating the Group planning processes. In this role, she has also been involved in following up on the different Santander Group units and projects. She is a board member of Santander Securities Services, S.A. She has also participated in acquisition, sales and integration projects during her time with the Group (ABN, SEB, US, Banesto, Spanish Cajas and Banif Portugal among others) and spent two years as e-business development director for the Santander Group.Stock Exchange. Prior to joining the Santander Group shehe was a corporate clients relationship manager and commercial director of transactional banking at Bankinter. Ms. Dorrego holds a degree in Business Administration from the University Pontificia de Comillas ICAI-ICADE, a degree in General Management from IESE and Master’s degrees in Business Administration from Deusto University – Bilbao, Spain, and Adolfo Ibañez, Miami/Chile.

Blanca Bustamante Bravo became an Alternate Director on April 28, 2015. She is also a memberManager of the Human Resources Committee. In 1998, she joined Viña Concha y Toro as Head of Investor Relations with the responsibility to present business strategyFinance Division for Morgan Bank and achievements of the company to the financial community, a position held until 2010. In parallel, in May 2001, she became Assistant Manager of Corporate Communications. In 2011, she became responsible for relations with the community in order to focus the effortsFinance of the company in projects that create value for the community and the environment in which it operates. Since 2013, she is a director in the Center for Research & Innovation for Concha y Toro which focus is to develop technology and knowledge transfer to the industry. She holds a degree in business from Universidad Católica de Chile.

Raimundo Monge Zegers became an Alternate Director on April 29, 2003. Mr. Monge is Corporate Director of Strategic Planning for Grupo Santander-Chile and is CEO of Santander Chile Holding S.A. He is First Vice President of the Analysis and Resolution Committee. He is also currently a member of the Asset and Liability Committee, the Integral Risk Committee and Secretary of the Strategy Committee. He is also President of Santander Inversiones S.A., Santander S.A. Sociedad Securitizadora and Santander Factoring S.A. He is a Director of Teatinos Siglo XXI Inversiones S.A. and Bansa Santander S.A. Mr. Monge has a degree in business from the Universidad Católica de Chile and an MBA from the University of California, Los Angeles.

ING Bank.

 

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Senior Management

 

Our senior managers are as follows:

 

Senior Manager

Position

Date Appointed

Claudio MelandriMiguel MataChief Executive OfficerJan-10
Miguel MataDeputy General ManagerApr-16Mar-18
Matias SanchezSánchezDirector of Retail BankingMar-16
Fred MellerDirector of Global Corporate and Investment BankingJan-11
Jose Manuel ManzanoDirector of Middle-MarketApr-16
Emiliano MuratoreChief Financial OfficerApr-16
Guillermo SabaterFinancial ControllerNov-15
Franco RizzaDirector of RiskFeb-14
Ricardo BartelDirector of Technology and OperationsOct-14Jun-15
María Eugenia de la FuenteDirector of Human ResourcesJun-15
Sergio AvilaDirector of Administration and CostsMar-15
Felipe ContrerasChief Accounting OfficerOct-08
Carlos VolanteManager Clients and Service QualityJan-14
Cristian FlorenceGeneral CounselSep-12
Ricardo MartinezDirector of Internal AuditSep-13

Claudio MelandriMiguel Mata became the Chief Executive Officer of Santander-Chile in January 2010 after being our Retail Banking Manager since February 21, 2008. He started his career at Santander-Chile in 1990 becoming a regional branch manager and manager of Santander-Chile’s branch network. He was also a Vice President at Banco Santander Venezuela from 2005 to 2007. In 2007,March 2018. Previously, he was appointed Corporate Director of Human Resources of Banco Santander-Chile. He is also President of Santander Chile Holding S.A. and First Vice President of Universia Chile S.A. Mr. Melandri has a Business Degree from the Universidad Tecnológica Metropolitana in Chile and holds a Master’s degree in Business Administration from the Universidad Adolfo Ibañez.

Miguel Mata became the Deputy General Manager for Santander-Chile on April 2016. Previously, between 2011 and 2016, he was the Chief Financial Officer for Santander-Chile. Prior to that, he served in several staff positionsamong other diverse roles related to the business strategy.strategy of Santander-Chile. Mr. Mata joined Santander-Chile in 2002 when Santander-Chile merged with Banco Santiago. Previously he wasHe previously served as the Financial Controller of Banco Santiago. Mr. Mata is also a Director of Santander Consumer Chile S.A., Teatinos Siglo XXI Inversiones S.A. and Santander Chile Holding S.A. He has been working in the banking industry since 1990, when he joined Banco O’Higgins, one of the predecessors to Banco Santiago. He is also a Director of Santander Consumer Chile S.A. and was president of Santander Asset Management S.A., as well as a director of Redbanc and Transbank, representing Banco Santander. Mr. Mata holds a degree in Engineering from Universidad Católica de Chile.

 

Matias SanchezSánchez became DirectorManager of Retail Banking in March 2016. He previously was the manager of CorporationsCompanies and Institutions between 2013 and 2016. He joined Banco2016 at Santander Chile. Previously, he worked for 18 years in 1997Banesto, part of Grupo Santander as the joint general director of Commercial Banking, and had different roles there, including agent, Regional Manager, Deputy General Manageras Chief Executive Officer of Gescoban Soluciones S.A.. Mr. Sánchez is an Economist of the Alicante University (Spain), with post-graduate studies in Retail and General Manager in Retail Banking. Mr. Sanchez holds a Master’s degree in Business Administration from the Instituto de Empresa and IESE, both in Spain and various other post graduate degrees.Madrid. He also has a diploma in Leadership from Harvard Business School.

 

Fred Meller became Manager of GlobalSantander Corporate and Investment Banking & Market in January 2011. Prior to that, he was Manager of Market MakingMarkets for Europe and UK for Santander Spain. Previously, he served as Treasurer and was a responsible for Santander-Chile since 2008.the Finance Division of Santander Chile. He was also General Manager of Santander Agente de Valores and Directoris currently a director of Deposito Central de Valores Chile. Mr. MellerChile and is also President of Santander S.A. Corredores de Bolsa. Mr. Meller holds a degree in Business Administrationdegree from Universidad Central de Chile.

 

José Manuel Manzano became DirectorManager of our Middle-market banking segment on April 1, 2016. Prior to that, he was Manager of Personnel, Organization and Cost of Banco Santander Chile since September 2013. Prior to that heHe was Corporate Director of Risk since July 2007, and Corporate Director of Human Resources for Santander-Chile since October 31, 2002. Previously, he served as Manager of Human Resources for Old Santander-Chile since 1999. He was also General Manager of Santander Fund ManagementAdministradora General de Fondos and Managing Director of Bancassurance.Santander AFAP in Uruguay. He is alsocurrently a Directordirector of Teatinos Siglo XXI Inversiones S.A., Santander Chile Holding S.A., Santander Asset Management S.A. and Zurich Santander Factoring S.A. Mr. Manzano holds an MBAa Master of Business Administration and a degree in Business from Universidad Católica de Chile.

 

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Emiliano Muratore became the Chief Financial Officer for Santander-Chile in April 2016. Before becoming Chief Financial Officer,From Buenos Aires, Argentina, he spent eighthas more than 17 years asof experience in the head ofSantander Group. He joined Santander Rio (Argentina) in 1999 and after four years he was moved to the ALM division. Prior to joining Santander Chile in 2006, Mr. Muratore worked at Santander’sGroup headquarters in Madrid for 4 years and, before that, at Santander’s unitas part of the Future Directors Program, where he started his experience in Argentina for 4 years. He is also a Director ofthe finance division. In 2006, he moved to Santander Chile Holding S.A. and Santander Factoring S.A.where, in 2008, he was made Manager of the Financial Division, bearing responsibility for the management of structural financial risks. After eight years, he was promoted to Chief Financial Officer. Mr. Muratore has a degree in business from Universidad Católica Argentina in Buenos Aires and a postgraduate degree in finance from Universidad de San Andrés in Buenos Aires. Currently, he is chairman of the Finance Committee at Chile’s Banking Association.

 


Guillermo Sabaterwas appointedis the Financial Controller of Santander-Chile in November 2015 and has been working for Santander Spain and its affiliates for 23 years. Between 2009 and 2015, he was Executive Vice President of Santander in the US and CFO and Controller of Sovereign Bank and Santander Holdings USA. Before that, he was the financial controller of Banco Santander Chile, between 2006 and 2009. He also served for three years, between 2003-20062003 and 2006, as controller of the Consumer Finance Division in Madrid, Spain. Mr. Sabater also served as an internal auditor during his first ten years at the company,company. He has a degree in Economics and Business Administration from the University College of Financial Studies at the University Complutense de Madrid and a completed thea Program in Executive Development at the Institute of Business and has completed various courses and participation inat institutions such as Babson College and Boston University.

 

Franco Rizzabecame DirectorManager of Risk in February 2014. Previously, he was director of Global Collections & Recoveries in the Madrid headquarters, covering all countries where the Group has commercial banking activities outside Spain. Between 2010 and 2013, he was the Chief Risk Officer of Banco Santander Risk in Uruguay. He joined the Group in 1989 in Argentina, where he held various positions, including Regional Manager, Product Manager and Retail Credit Risk Manager. He is also a Director of Santander Consumer Chile S.A.S.A.. He has completed studies in Business and Risk Management in Argentina and SpainSpain.

 

Ricardo Bartelbecame the DirectorManager of Technology and operationOperation in June 2015 after joining Santander Chile in October 2014. His also Director2014 as Manager of Isban Chile S.A. Prior to working atOperational Services of the Bank hesame division. Mr. Bartel has both a Civil Engineering degree and a Master of Business Administration from Universidad Católica de Chile. He has previously held various management positions at CCU including CFO between 1990in product and 2005. He was also CFOservice companies such as Chief Financial Officer at Madeco, form 2005-2006. Between 2007Logistics and 2008 he was CommercialDistribution Manager and Chief Financial Officer of Viña San Pedro. Following that he was CEOCCU SA. and Chief Executive Officer of Empresas Relsa S.A. and CEO of Laboratorio Mayer between 2011 and 2013. Mr. Bartel has a Civil Engineer degree from Universidad Católica de Chile with an MBA from the same university.Mayer.

 

María Eugenia de la Fuentebecameis the Director of Human Resources in June 2015. Prior to working for the Bank, Ms. de la Fuente held different posts in strategic planning and human resources. From 2010 to 2013, she was Undersecretary to the Chief of Staff of President Piñera. From 2013 to 2015, she was Managing Director of Transparency and Client Services for Corpbanca and Chief Executive Officer of BZD Consultores.Communications. Ms. de la Fuente has a degree in business from the Universidad de Chile and a Master’s degree in tax planning from the Universidad Adolfo Ibañez. She has more than 25 years of experience in strategic planning and human resource management for both private and public companies. From March 2010 to February 2012, she was the Undersecretary to the Chief of Staff for the first government of President Sebastian Piñera. From 2013 to 2015, she was Managing Director of Transparency and Client Services for Corpbanca and Chief Executive Officer of BZD Consultores. She assumed her current role at Santander-Chile in June 2015.

 

Sergio Avilais DirectorManager of Administration and Costs. He has worked at Banco Santander Chile for 19 years in Asset Management, Corporate Finance, Retail banking, Middle-market and Risks. Mr. Avila is also Director of Santander S.A. Sociedad Securitizadora. Mr. Avila has a BSBachelor of Science and MSMaster of Science in Civil Engineering Degree from the Universidad Católica.

 

Felipe Contreraswas named Chief Accounting Officer of Santander-Chile in October 2008. He has worked for 14 years in our Accounting Department, most recently as Manager of the Consolidation and Reporting Departments, overseeing our Chilean, U.S. and Spanish GAAP reporting requirements. He is also General Manager of Gesban Santander Servicios Profesionales Contables Ltda. Mr. Contreras is a Public Accountant from the University of Santiago and is currently a candidate to a Masters in Advanced Finance from the Universidad Adolfo Ibáñez.Santiago.

 

Carlos Volante became manager Customers and Quality of Banco Santander in January 2014. JoinedHe joined the Santander Group in 1990, holding various responsibilities within the organization, including manager of the Branch Network, general manager of the Administrator of Mutual Funds, , Mortgage manager,Manager, Product Manager and Monitoring Commercial Banking. He was also Executive Vice President of Commercial Banking at Banco de Venezuela Grupo Santander. Between 2012 and 2013, he was general manager of the Company Corona Commercial Credit Group. CarlosMr. Volante is an accountant auditor from the University of Talca and attended the DPA and an MBA from the Universidad Adolfo Ibáñez and participates in the PADE program at the Universidad de los Andes.

 

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Cristian Florenceis our General Counsel, a position he has held since September 2012. Prior to that he served as Chief Lawyer at Santander-Chile. Mr. Florence joined Santander-Chile in 2002 when Santander-Chile merged with Banco Santiago. He started working in the banking industry in 1991, when he joined Centrobanco, a predecessor of Banco O’Higgins and Banco Santiago serving at several positions in the law departments. Mr. Florence is also a Director of Administrador Financiero de Transantiago S.A. and Santander Asset Management S.A. Administradora General de Fondos. He has a degree in Law from the Universidad Gabriela Mistral and a Master of Laws (LLM) from the same university.

 

Ricardo Martinezis the Corporate Director of Internal Auditing, a position he has held since September 1, 2013. He has worked for Grupo Santander since 1998 in different position in Internal Audit Division, including the Internal Director of Accounting, Audit Manager of Insurance and Asset Management and head auditor of Financial Risks. Mr. Martinez has a degree in Economic Sciences and Business from the Universidad Complutense of Madrid, and a Master’s in Business from the CIFF of the Universidad de Alcalá de Henares.Henares and post-graduate studies in the Instituto de Empresas and IESE in Spain.

 

B.    Compensation

 

For the year ended December 31, 2016,2018, the aggregate amount of compensation paid by us to all of our directors, executive officers and management members was Ch$37,32828,921 million (U.S.$56.141.4 million). For the year ended December 31, 2016,2018, the aggregate amount of compensation paid by us to all of our directors was Ch$1,269913 million (U.S.$1.91.3 million), in monthly stipends. At our annual shareholder meeting held on April 26, 2016,24, 2018, shareholders were askedagreed to approvemaintain the remunerations approved in the previous shareholders’ meeting in 2017. Therefore it was agreed a monthly stipend per director of UF 230250 (U.S.$9,099)9,877), UF 460500 (U.S.$18,198)19,753) for the Chairman of the Board and UF 345375 (U.S.$13,649)14,815) for the Vice-Chairman of the Board. This amount will be increased by UF 30 per month (U.S.$1,187)1,307) if a Board member is named to one or more committees of the Board. The additional amount will be UF 60 (U.S.$2,374)1,185) for the President of a committee and UF 45 (U.S.$1,780) for the Vice President of a committee. Shareholders were also asked to approve the Audit Committee 2015 remuneration for its members. The remuneration is a 33% additional compensation over the monthly stipend received by a regular board member, or UF 77115 (U.S.$3,046), totaling a monthly stipend4,543) with the President of this committee receiving 230 UF 307 (U.S.$12,145)9,086). This remuneration is in line with the new Chilean corporate governance law. In addition, we pay certain directors professional service fees for the consulting services that they render to us in their fields of expertise. For the year ended December 31, 2016,2018, we did not make any such payments to our directors for consulting fees totaled Ch$703 million (U.S.$1.1 million).directors.

 

Santander-Chile and its affiliates have designed variable-compensation plans for their employees, based on performance targets and objectives, the achievement of which are evaluated and paid on a quarterly and/or annual basis.

 

Share-based compensation (settled in cash)

 

In accordance with IFRS 2, equity instruments settled in cash are allocated to executives of the Bank and its Subsidiaries as a form of compensation for their services. The Bank measures the services received and the cash obligation at fair value at the end of each reporting period and on the settlement date, recognizing any change in fair value in the income statement for the period. For the years ended December 31, 2016, 20152018, 2017, and 2014,2016, share-based compensation amounted to Ch$331146 million, Ch$662,752 million and Ch$310331 million.

 

Pension Plans:

 

The Bank has an additional benefit available to its principal executives, consisting of a pension plan. The purpose of the pension plan is to endow the executives with funds for a better supplementary pension upon their retirement. For this purpose, the Bank will match the voluntary contributions made by the beneficiaries for their future pensions with an equivalent contribution. The executives will be entitled to receive this benefit only when they fulfill the following conditions:

 

a.Aimed at the Bank’s management.

b.The general requisite to apply for this benefit is that the employee must be carrying out his/her duties when turning 60 years old.

c.The Bank will create a pension fund, with life insurance, for each beneficiary in the plan. Periodic contributions into this fund are made by the manager and matched by the Bank.

d.The Bank will be responsible for granting the benefits directly.

 

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If the working relationship between the manager and the respective company ends, before s/he fulfills the abovementioned requirements, s/he will have no rights under this benefit plan. In the event of the executive’s death or total or partial disability, s/he will be entitled to receive this benefit. The Bank will make contributions to this benefit plan on the basis of mixed collective insurance policies whose beneficiary is the Bank. The life insurance company with whom such policies are executed is not an entity linked or related to the Bank or any other Santander Group company. Plan Assets owned by the Bank at the end of 20162018 totaled Ch$6,6126,804 million (Ch$6,9457,919 million in 2015)2017).The amount of the defined benefit plans has been quantified by the Bank, based on the following criteria:

 

Calculation method:

 

Use of the projected unit credit method which considers each working year as generating an additional amount of rights over benefits and values each unit separately. It is calculated based primarily on fund contributions, as well as other factors such as the legal annual pension limit, seniority, age and yearly income for each unit valued individually.

 

Actuarial hypothesis assumptions:

 

Actuarial assumptions with respect to demographic and financial variables are non-biased and mutually compatible with each other. The most significant actuarial hypotheses considered in the calculations were:

 

 Plans  
post-employment		 Plans
post-employment
 2016 2015 Plans
post-employment
2018		 Plans
post-employment
2017
        
Mortality chart  RV-2014/CB-2014   RV-2009  RV-2014 RV-2014
Termination of contract rates  5.0%  5.0% 5.0% 5.0%
Impairment chart  PDT 1985   PDT 1985  PDT 1985 PDT 1985

 

Assets related to the pension fund contributed by the Bank into the Seguros Euroamérica insurance company with respect to defined benefit plans are presented as net of associated commitments. Activity for post-employment benefits is as follows:

 

  As of December 31,
  2016 2015
  Ch$mn
Plan assets  6,612   6,945 
Commitments for defined-benefit plans        
For active personnel  (4,975)  (5,070)
Incurred by inactive personnel  —   — 
Minus:        
Unrealized actuarial (gain) losses  —   — 
Balances at year end  1,637   1,875 

  As of December 31, 
  2018  2017 
  (In millions of Ch$) 
Plan assets  6,804   7,919 
Commitments for defined-benefit plans  —   — 
For active personnel  (5,958)  (6,998)
Incurred by inactive personnel  —   — 
Minus:        
Unrealized actuarial (gain) losses  —   — 
Balances at year end  846   921 

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Year’s cash flow for post-employment benefits is as follows:

 

 For the years ended December 31, For the years ended December 31, 
 2016 2015 2014 2018 2017 2016 
 Ch$mn (In millions of Ch$) 
             
a) Fair value of plan assets                  
Opening balance  6,945   6,495   5,171   7,919   6,612   6,945 
Expected yield of insurance contracts  335   432   446   353   307   335 
Employer contributions  886   18   878   836   1,931   886 
Actuarial (gain) losses  —   —   —   —   —   — 
Premiums paid  —   —   —   (2,304)  —   — 
Benefits paid  (1,554)  —   —       (931)  (1,554)
Fair value of plan assets at year end  6,612   6,945   6,495   6,804   7,919   6,612 
b) Present value of obligations                        
Present value of obligations opening balance  (5,070)  (4,639)  (3,244)
Opening balance  (6,998)  (4,975)  (5,070)
Net incorporation of Group companies  —   —   —       —   — 
Service cost  150   (431)  (1,395)  (1,069)  (2,039)  150 
Interest cost  —   —   —   —   —   — 
Curtailment/settlement effect  —   —   —   —   —   — 
Benefits paid  —   —   —   —   —   — 
Past service cost  —   —   —   —   —   — 
Actuarial (gain) losses  —   —   —   —   —   — 
Other  (55)  —   —   2,109   16   (55)
Present value of obligations at year end  (4,975)  (5,070)  (4,639)  (5,958)  (6,998)  (4,975)
Net balance at year end  1,637   1,875   1,856   846   921   1,637 

 

Plan expected profit:

 

As of December 31, 

 As of December 31,

2016 

2015 

2014 

 2018 2017 2016
Type of expected yield from the plan’s assetsUF + 2.50% annual UF + 2.50% annual UF + 2.50% annual UF + 2.50% annual
Type of yield expected from the reimbursement rightsUF + 2.50% annual UF + 2.50% annual UF + 2.50% annual UF + 2.50% annual

 

Plan associated expenses:

 

  For the years ended December 31,
  2016 2015 2014
  (in millions of Ch$)
       
Current period service expenses  (150)  431   1,395 
Interest cost  —   —   — 
Expected yield from plan’s assets  (335)  (432)  (446)
Expected yield of insurance contracts linked to the Plan:  —   —     
Extraordinary allocations  —   —   — 
Actuarial (gain)/ losses recorded in the period  —   —   — 
Past service cost  —   —   — 
Other  —   —   — 
Total  (485)  (1)  949 

  For the years ended December 31, 
  2018  2017  2016 
  (in millions of Ch$) 
          
Current period service expenses  1,069   2,039   (150)
Interest cost  —   —   — 
Expected yield from plan’s assets  (353)  (307)  (335)
Expected yield of insurance contracts linked to the Plan:  —   —   — 
Extraordinary allocations  —   —   — 
Actuarial (gain)/ losses recorded in the period  —   —   — 
Past service cost  —   —   — 
Other —  —  — 
Total 716  1,732  (485)

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C.    Board Practices

 

Audit Committee

 

Board member

Position in Committee

Marco ColodroPresident
Mauricio Larraín GarcésFirst Vice President and Financial Expert
Orlando PobleteSecond Vice President
Rodrigo VergaraMember
Félix de VicenteMember

 

The Audit Committee (Comité de Directores y Auditoría) is comprised of three members of the Board of Directors. TheDirectors and the Committee Secretary is Juan Pedro Santa María. The Chief Executive Officer, General Counsel, General Auditor and other persons from the Bank can be invited to the meetings if necessary and are present on specific matters. This Committee’s primary responsibility is to support the Board of Directors in the continuous improvement of our system of internal controls, which includes reviewing the work of both the independent registered public accounting firm and the Internal Audit Department. The committee is also responsible for analyzing observations made by regulatory entities of the Chilean financial system about us and for recommending measures to be taken by our management in response. The external auditors are recommended by this committee to our Board of Directors and appointed by our shareholders at the annual shareholders’ meeting.

 

This committee is also responsible for:

 

·●Presenting to the Board of Directors a list of candidates for the selection of an external auditor.auditor to be proposed at the Annual Shareholders’ Meeting.

 

·●Presenting to the Board of Directors a list of candidates for the selection of rating agencies.

 

·●Overseeing and analyzing the results of the external audit and the internal reviews.

 

·●Coordinating the activities of internal auditing with the external auditors’ review.

 

·●Overseeing and coordinating the Bank’s operational risk policies.

 

·●Analyzing the interim and year-end financial statements and reporting the results to the Board of Directors.

 

·●Analyzing the external auditors’ reports and their content, procedures and scope.

 

·●Analyzing the rating agencies’ reports and their content, procedures and scope.

 

·●Obtaining information regarding the effectiveness and reliability of the internal control systems and procedures.

 

·●Analyzing the information systems performance, and its sufficiency, reliability and use in connection with decision-making processes.

 

·●Obtaining information regarding compliance with the company’s policies regarding the due observance of laws, regulations and internal rules to which the company is subject.

 

·●Investigating suspicious and fraudulent activities (including conflicts).

 

·●Analyzing the reports of the inspection visits, instructions and presentations of the SBIF.

 

·●Obtaining information, analyzing and verifying the company’s compliance with the annual audit program prepared by the internal audit department.

 

·●Informing the Board of Directors of accounting changes and their effects.

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Integral Risk Committee

 

Board member 

Position in Committee 

Oscar von ChrismarPresident
Juan Pedro Santa MaríaFirst Vice President
Roberto MéndezSecond Vice President
Raimundo MongeMember
Roberto ZahlerMember

TheIntegral Risk Committee of the Board is responsible for reviewing and monitoring all risks that may affect us, including reputational risk, allowing for an integral risk management. This committee serves as the governing body through which the Board supervises all risk functions and defines risk appetite levels. The committeein general. It also evaluates the adequacyreasonability of ourthe systems for measurement and control of risks. This Committee includes the Vice President of the Board and fivesix Board members. This committee also includes the Chief Executive Officer, the Director of Risk and other senior level executives from the commercial side of our business: The Board members of this committee are:

Board memberPosition in Committee
Alfonso GómezPresident
Claudio MelandriMember
Oscar von ChrismarMember
Lucía Santa CruzMember
Blanca BustamanteMember
Juan Pedro Santa María PérezMember

 

Asset and Liability Committee (ALCO)

 

The ALCO includes the Vice President of the Board and fourthree additional members of the Board, the Deputy Chief Executive Officer, the Chief Financial Officer, the Corporate Financial Controller, the Manager of the Financial Management Division, the Manager of Market Risk, the Manager of the Treasury Division, and other senior members of management. The ALCO meets monthly. All limits reviewed by the ALCO are measured and prepared by the Market Risk Department. The non-Board members of the ALCO meet weekly to review liquidity, funding, capital and market risk related matters.

 

Board member

Position in Committee

Vittorio CorboRodrigo VergaraPresident
Oscar von ChrismarFirst Vice President
Roberto ZahlerSecond Vice President
Marco ColodroMember
Raimundo MongeFélix de Vicente MingoMember
Alfonso GómezMember

 

The main functions of the ALCO are:

 

·●Making the most important decisions, approving the risk appetite and limits regarding our exposure to inflation, risk and exposure, interest rate risk, inflation risk, funding, capital and liquidity levels.

 

·●Review of the evolution of the most relevant local and international markets and monetary policies.

 

AnalysisThe main limits set and Prevention of Money Laundering Committeemonitored by the ALCO (and measured by the Market Risk Department) are:

 

Board member 

Risk

Position in Committee 

Measure
Juan Pedro Santa MaríaInterest ratesPresidentSensitivity Capital
Raimundo MongeFirst Vice PresidentSensitivity NIM
Regulatory limit 30 Days
Regulatory limit 90 Days
Inflation GAP
LiquidityLiquidity coverage ratio
Net stable funding ratio
Stress tests
Structural liquidity limit
Wholesale funding limits
Deposit concentration
Asset encumbrance
CapitalLeverage ratio
Core capital ratio
BIS ratio
ROE - COE
RORAC - COE
Foreign exposuresIntergroup exposure: Derivatives, deposits, loans
Foreign assets: Derivatives, Deposits, Loans

 

This Committee defines and controls the policies regarding anti-money laundering and financing of terrorism in line with Chilean law and Grupo Santander’s governance. In addition to Mr. Santa María and Raimundo Monge, members of senior management from the legal, risk and compliance departments, among others, are also a part of this committee. This committee also interacts with government agencies involved in the analysis and prevention of money laundering and financing of terrorism.

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Market Committee

 

The Market Committee includes the Vice PresidentChairman of the Board, threethe Vice Chairman of the Board, two additional members of the Board, the Chief Executive Officer, the Deputy Chief Executive Officer, the Director of Global Corporate Investment Banking, the Chief Financial Officer, the Manager of the Treasury Division, the Manager of the Financial Management Division, the Manager of Market Risk, the Financial Controller and other senior members of management.

 

Board member

Position in Committee

Vittorio CorboPresident
Oscar von ChrismarVice President
Roberto ZahlerClaudio MelandriSecond Vice PresidentMember
Marco ColodroRodrigo VergaraMember
Alfonso GómezMember

 

The Market Committee is responsible for:

 

·●Establishing a strategy for the Bank’s trading portfolio and risk appetite.investment portfolio.

 

·Net exposure to foreign currency

·●Establishing the Bank’s policies, procedures and limits with respect to its trading portfolio. The Bank’s Market Risk Department measures all risks and limits and reports these to the Market Committee.

 

·●Reviewing the net foreign exchange exposure and limit.

●Reviewing the results of the Bank’s client treasury business

●Reviewing the evolution of the most relevant local and international markets and monetary policies.

 

Strategy Committee

 

Board member

Position in Committee

Vittorio CorboClaudio MelandriPresident
Roberto MéndezRodrigo VergaraVice PresidentMember
Oscar von ChrismarFélix de VicenteMember
Alfonso GómezMember
Lucía Santa CruzMember
Raimundo MongeBlanca BustamanteSecretaryMember
Oscar von ChrismarMember

 

The Strategy Committee is in charge of our strategic planning process and follow-up, as well as the identification of broad business opportunities and threats. The Strategy Committee is comprised of the President of the Board and four additional Board members.

 


Human ResourcesAnalysis and Resolution Committee

 

Board member

Position in Committee

Vittorio CorboJuan Pedro Santa María PérezPresident
Mauricio LarraínOscar von ChrismarVice President
Oscar Von-ChrismarMember
Blanca BustamanteLucía Santa CruzMember

 

The Human ResourcesAnalysis and Resolution Committee defines and controls the compliance of policies, regulations and general and specific objectives regarding the prevention of money laundering and the financing of terrorism, in accordance with local rules and regulations as well as with the Santander Group.

Management Appointment Committee

Board memberPosition in Committee
Félix de VicentePresident
Blanca BustamanteMember
Oscar von ChrismarMember

The Management Appointment Committee is led by the Presidentin charge of the Boardrevision and three additional Board members,application of policies and procedures of roles defined as “Key positions” and also the Chief Executive Officer,review of other positions within the Deputy Chief Executive Officer,organization in general.

Remuneration Committee

Board memberPosition in Committee
Orlando PobletePresident
Alfonso GómezMember
Claudio MelandriMember

The Remuneration Committee reviews the Directordocumentation referring to the evaluation and remuneration of Human Resourcesroles defined as “Key positions” and other senior managers. The Human Resources Committee dictates guidelines on management and general human resources policies, including incentive, selection, promotion and training policies.

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the organization in general.

 

D.    Employees

 

As of December 31, 2016,2018, on a consolidated basis, we had 11,35411,305 employees, 10,86510,715 of whom were bank employees, 8664 of whom were employees of our subsidiaries and 6566526 were employees of entities controlled by the Bank through other considerations. We have traditionally enjoyed good relations with our employees and their unions. Of the total headcount of us and our subsidiaries, 8,1928,487 or 72.2%75.1% were unionized. In May 2014,February 2018, a new collective bargaining agreement was signed with the main unions, which wentwill come into effect on JanuarySeptember 1, 20142018 and which expires on DecemberAugust 31, 2018,2021, though it may be renegotiated ahead of schedule with the consent of management and the union. We generally apply the terms of our collective bargaining agreement to unionized and non-unionized employees. The following chart summarizes the number of employees employed by the bank.

 

Employees

As of
December 31, 2016 

2018
Executives710800
Professionals5,8786,703
Administrative4,7663,802
Total11,35411,305

 

E.     Share Ownership

 

No director or executive officer owns more than 1% of the shares of Santander-Chile. AsSantander-Chile as of December 31, 2016, the following directors and executives held shares in Santander-Chile:

Directors 

Shares 

Mauricio Larraín Garcés568

2018. Santander-Chile currently does not have any arrangements for involving employees in its capital and there is no systematic arrangement for grant of options or shares or securities of Santander-Chile to them. In accordance with IFRS 2, equity instruments settled in cash are allocated to executives of the Bank and its Subsidiaries as a form of compensation for their services. See “Item 6—Directors, Senior Management and Employees—Compensation” for more details.

 


ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A.    Major Shareholders

 

Santander Spain controls Santander-Chile through its holdings in Teatinos Siglo XXI Inversiones S.A. and Santander Chile Holding S.A., which are controlled subsidiaries. Santander Spain has control over 67.18% of our shares and actual participation, excluding non-controlling shareholders that participate in Santander Chile Holding, S.A. of 67.06%67.12%.

 

Shareholder Number of Shares Percentage Number of Shares Percentage
Santander Chile Holding S.A.  66,822,519,695   35.46% 66,822,519,695 35.46%
Teatinos Siglo XXI Inversiones S.A.  59,770,481,573   31.72% 59,770,481,573 31.72%

 

Santander Spain is in a position to cause the election of a majority of the members of Santander-Chile’s Board of Directors, to determine its dividend and other policies and to determine substantially all matters to be decided by a vote of shareholders. Santander Spain holds ordinary shares to which no special voting rights are attached. Each share represents one vote and there are no shareholders with different voting rights.

 

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The number of outstanding shares of Santander-Chile (of which there is only one class, being ordinary shares) at December 31, 2016,2018, was 188,446,126,794 shares, without par value. Santander-Chile’s shares are listed for trading on the Chilean Stock ExchangesExchange and on the NYSE in connection with the registration of ADRs. The market capitalization of Santander-Chile at December 31, 20162018 on the Chilean stock exchangeStock Exchange was Ch$7,021,5039,740,780 million and U.S.$10,30314,086 million on the NYSE. At December 31, 2016,2018, Santander-Chile had 11,59211,431 holders of its ordinary shares registered in Chile, including The Bank of New York Mellon as Depositary (the “Depositary”) of Santander-Chile’s ADS Program. Other than the information disclosed in this section, there are no arrangements to the knowledge of Santander-Chile that can result in a change of control of Santander-Chile. As of December 31, 2016,2018, there were a total of 2528 ADR holders on record. Since some of these ADRs are held by nominees, the number of record holders may not be representative of the number of beneficial holders.

 

B.    Related Party Transactions

 

The Chilean Companies Law requires that our transactions with related parties be on a market basis, that is, on similar terms to those customarily prevailing in the market. We are required to compare the terms of any such transaction to those prevailing in the market at the date the transaction is to be entered into. Directors of companies that violate this provision are liable for losses resulting from such violations.

 

In addition, under the Chilean Companies Law, a company may not enter into a transaction with related parties unless (i) such transaction has received the prior approval of the company’s Board of Directors and (ii) the terms of such transaction are consistent with the terms of transactions of a similar type prevailing in the market. If it is not possible to make this determination, the board may appoint two independent evaluators. The evaluators’ final conclusions must be made available to shareholders and directors for a period of 20 business days, during which shareholders representing 5% or more of the issued voting shares may request the board to call a shareholders’ meeting to resolve the matter, with the agreement of two thirds of the issued voting shares required for approval. For purposes of this regulation, the law considers the amount of a proposed transaction to be material if (1) it exceeds 1% of the company’s net worth (provided that it also exceeds 20,000UF)UF20,000) or (2) it exceeds 20,000 UF.UF20,000.

 

All resolutions approving such transactions must be reported to the company’s shareholders at the annual shareholders’ meeting. Violations of this provision may result in administrative or civil liability to the corporation, the shareholders and/or third parties who suffer losses as a result of such violation.

 

Loans granted to related parties

 

In addition to subsidiaries and associated entities, the Bank’s “related parties” include the “key personnel” of the Bank’s executive staff (members of the Bank’s Board of Directors and the Senior Managers of Santander-Chile and its subsidiaries, together with their close relatives), as well as the entities over which the key personnel could exert significant influence or control.

  

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he The Bank also considers the companies that are part of the Santander Group worldwide as related parties, given that all of them have a common parent,i.e., Santander Spain. The table below shows loans and accounts receivable and contingent loans with related parties. For more information, see “Note 34—36—Transactions with Related Parties” in our Audited Consolidated Financial Statements appearing elsewhere in this Annual Report:

 

 As of December 31, As of December 31, 
 2016 2015 2014 2018 2017 2016 
 Companies of the Group Associated companies Key personnel Other Companies of the Group Associated companies Key personnel Other Companies of the Group Associated companies Key personnel Other 

Companies

of the Group

 

Associated

companies

 

Key

personnel

  Other  

Companies

of the Group

 

Associated

companies

 

Key

personnel

  Other  

Companies

of the Group

 

Associated

companies

 

Key

personnel

  Other 
 Ch$mn Ch$mn Ch$mn Ch$mn Ch$mn Ch$mn Ch$mn Ch$mn Ch$mn Ch$mn Ch$mn Ch$mn MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ 
                                                 
Loans and accounts receivable:                                    
Commercial loans  81,687   533   4,595   7,100   77,388   565   5,841   1,963   51,647   9,614   4,348   8,743  122,289  459  4,299  233  80,076  771  3,947  7,793  81,687  533  4,595  7,100 
Mortgage loans  —   —   18,046   —   —   —   20,559   —   —   —   19,941   —  —  —  18,814  —  —  —  18,796  —  —  —  18,046  — 
Consumer loans  —   —   3,783   —   —   —   2,274   —   —   —   2,798   —  —  —  5,335  —  —  —  4,310  —  —  —  3,783  — 
Loans and accounts receivables  81,687   533   26,424   7,100   77,388   565   28,674   1,963   51,647   9,614   27,087   8,743 
Loans and accounts receivable: 122,289  459  28,448  233  80,076  771  27,053  7,793  81,687  533  26,424  7,100 
                                    
Allowance for loan losses  (209)  (35)  (87)  (34)  (213)  (190)  (62)  (20)  (139)  (10)  (46)  (18) (308) (9) (116) (5) (209) (9) (177) (18) (209) (35) (87) (34)
Net loans  81,478   498   26,337   7,066   77,175   375   28,612   1,943   51,508   9,604   27,041   8,725  121,981  450  28,332  228  79,867  762  26,876  7,775  81,478  498  26,337  7,066 
                                    
Guarantees  434,414   —   23,636   5,486   499,803   —   25,493   1,632   409,339   —   23,896   1,289  442,854  —  22,893  7,171  361,452  —  23,868  7,164  434,141  —  23,636  5,486 
Contingent loans                                                
                                    
Contingent loans:                                    
Personal guarantees  —   —   —   —   —   —   —   —   —   —   —   —  —  —  —  —  —  —  —  —  —  —  —  — 
Letters of credit  27,268   —   —   —   29,275   —   —   —   16,000   —   —   11  5,392  —  2,060  44  19,251  —  —  33  27,268  —  —  — 
Guarantees  437,101   —   —   —   510,309   —   —   2   432,802   —   —   762  445,064  —  3,364  —  377,578  —  —  —  437,101  —  —  — 
Contingent loans  464,369   —   —   —   539,584   —   —   2   448,802   —   —   773 
Contingent loans: 450,456  —  5,424  44  396,829  —  —  33  464,369  —  —  — 
                                    
Allowance for contingent loans  (5)  —   —   —   (11)  —   —   —   (12)  —   —   —  (1) —  (18) —  (4) —  —  1  (5) —  —  — 
                                    
Net contingent loans  464,364   —   —   —   539,573   —   —   2   448,790   —   —   773  450,455  —  5,406  44  396,825  —  —  34  464,364  —  —  — 

  

Loans (a) were made in the ordinary course of business, (b) were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons, and (c) did not involve more than the normal collection risk.

 

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Under the Chilean General Banking Law, Chilean banks are subject to certain lending limits, including the following:

 

·●a bank may not extend to any person or legal entity (or group of related entities), directly or indirectly, unsecured loans in an amount that exceeds 5.0% of the bank’s regulatory capital, or secured loans in an amount that exceeds 25.0% of its regulatory capital. In the case of foreign export trade finance, this 5.0% ceiling is raised to: 10.0% for unsecured financing, 30.0% for secured financing. This ceiling is raised to 15.0% for loans granted to finance public works under the concessions system contemplated in the Decree with Force of Law 164 of 1991, of the Ministry of Public Works, provided that either the loan is secured on the concession, or the loan is granted as part of a loan syndication;

·●a bank may not grant loans bearing more favorable terms than those generally offered by banks in the same community to any entity (or group of related entities) that is directly or indirectly related to its owners or management;

 

·●a bank may not extend loans to another bank in an aggregate amount exceeding 30.0% of its regulatory capital;

 

·●a bank may not directly or indirectly grant a loan, the purpose of which is to allow the borrower to acquire shares in the lending 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, or to certain related parties; and

 

·●a bank may not grant loans to individuals or legal entities involved in the ownership or management of the bank, whether directly or indirectly (including holders of 1.0% or more of its shares), on more favorable terms than those generally offered to non-related parties. Loans may not be extended to senior executives and to companies in which such individuals have a participation of 5.0% or more of the equity or net earnings in such companies. The aggregate amount of loans to related parties may not exceed a bank’s regulatory capital.

 

We are not aware of any loans to any related parties exceeding the above lending limits.

 

The largest related party loan, which matures on July 30, 2018June 13, 2019 and has an annual rate of U.S.$ + 0.0%, by the Bank is to Banco Santander Spain S.A.Alliance & Leicester Commercial Bank Limited (Santander UK PLC), corresponds to a performance bond (boleta de garantía) and had an amount outstanding of U.S.$2875 million, which was guaranteeing a corporate foreign trade loan. As this operation is a contingent loan, the Bank charges a fee which was 0.25%0.10% per quarter.annum.

 

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The table below shows all other assets and liabilities with related parties:

 

  As of December 31,
  2016 2015 2014
  Companies of the Group Associated companies Key personnel Other Companies of the Group Associated companies Key personnel Other Companies of the Group Associated companies Key personnel Other
  (in millions of Ch$)
                         
Assets                        
Cash and deposits in banks  187,701   —   —   —   23,578   —   —   —   193,377   —   —   — 
Trading investments  —   —   —   —   —   —   —   —   —   —   —   — 
Obligations under repurchase agreements  —   —   —   —   —   —   —   —   —   —   —   — 
Financial derivative contracts  742,851   33,433   —   —   771,774   24,773   —   —   995,468   —   —   — 
Available-for-sale investments  —   —   —   —   —   —   —   —   —   —   —   — 
Other assets  4,711   67,454   —   —   3,218   19,101   —   —   2,776   —   —   — 
Liabilities                                                
Deposits and other demand liabilities  6,988   7,141   2,883   630   9,987   8,535   2,454   1,373   5,061   1,168   2,403   4,602 
Obligations under repurchase agreements  56,167   —   —   —   12,006   —   —   —   47,010   —   —   — 
Time deposits and other time liabilities  1,545,771   621   2,365   1,984   1,360,572   234   2,728   898   269,381   2,320   81,079   81,079 
Financial derivative contracts  954,575   54,691   —   —   1,323,996   23,326   —   —   1,395,507   —   —   — 
Issued debt instruments  484,548   —   —   —   398,565   —   —   —   336,323   —   —   — 
Other financial liabilities  8,970   —   —   —   2,409   —   —   —   846   —   —   — 
Other liabilities  446   44,329   —   —   376   19,541   —   —   771   —   —   — 

  

As of December 31,

 
  

2018

  

2017

  

2016

 
  

Companies of the Group

  

Associated companies

  

Key personnel

  

Other

  

Companies of the Group

  

Associated companies

  

Key personnel

  

Other

  

Companies of the Group

  

Associated companies

  

Key personnel

  

Other

 
  (in millions of Ch$) 
Assets                                    
Cash and deposits in banks 189,803  —  —  —  74,949  —  —  —  187,701  —  —  — 
Trading investments —  —  —  —  —  —  —  —  —  —  —  — 
Obligations under repurchase agreements —  —  —  —  —  —  —  —  —  —  —  — 
Financial derivative contracts 748,632  105,358  —  9  545,028  86,011  —  —  742,851  33,433  —  — 
Available-for-sale investments —  —  —  —  —  —  —  —  —  —  —  — 
Other assets 38,960  51,842  —  —  8,480  118,136  —  —  4,711  67,454  —  — 
Liabilities                                    
Deposits and other demand liabilities 27,515  (21,577) 2,493  (480) 24,776  25,805  2,470  221  6,988  7,141  2,883  630 
Obligations under repurchase agreements 6,501  —  329  68  50,945  —  —  —  56,167  —  —  — 
Time deposits and other time liabilities 2,585,337  —  3,189  (838) 785,988  27,968  3,703  3,504  1,545,835  6,219  2,525  2,205 
Financial derivative contracts 770,624  112,523  —  —  418,647  142,750  —  7,190  954,575  54,691  —  — 
Interbank borrowings —  —  —  —  —  —  —  —  6,165  —  —  — 
Issued debt instruments 335,443  —  —  —  482,626  —  —  —  484,548  —  —  — 
Other financial liabilities 6,807  —  —  —  4,919  —  —  —  8,970  —  —  — 
Other liabilities 60,884  89,817  —  —  164,303  58,168  —  —  446  44,329  —  — 

  

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Other transactions with related parties

 

During the years ended December 31, 2016, 2015,2018, 2017 and 2014,2016, the Bank had the following significant income (expenses) from services provided to (by) related parties:

 

 

For the years ended December 31, 

 

For the years ended December 31,

 
 

2016 

 

2015 

 

2014 

 

2018

 

2017

 

2016

 
 

Companies of the Group 

 

Associated Companies 

 

Key personnel 

 

Other 

 

Companies of the Group 

 

Associated companies 

 

Key personnel 

 

Other 

 

Companies of the Group 

 

Associated Companies 

 

Key personnel 

 

Other 

 

Companies of the Group

 

Associated Companies

 

Key personnel

 

Other

 

Companies of the Group

 

Associated companies

 

Key personnel

 

Other

 

Companies of the Group

 

Associated Companies

 

Key personnel

 

Other

 
 (in millions of Ch$) (in millions of Ch$) 
Interest income and inflation-indexation adjustments  (39,279)  40   1,164   115   (10,986)  —   1,664   116   (11,130)  25   1,963   (2,509) (53,256) (156) 1,252  508  (43,892) —  1,051  —  (39,279) 40  1,164  115 
Fee and commission income and expenses  38,167   45   204   20   35,955   77   208   39   30,591   84   230   167  91,178  7,826  305  22  72,273  15,404  224  1  56,952  22,322  204  20 
Net income (expense) from financial operations and net foreign exchange gain (loss) (*)  (343,963)  (48,373)  (88)  2   (321,985)  (16,845)  15   6   (315,918)  —   20   (10,051) (566,677) 65,727  27  (12) 363,108  (48,453) (3) 19  (343,963) (48,373) (88) 2 
Other operating income and expenses  931   (2,239)  —   —   955   (1,027)  —   —   1,158   —   —   —  42  1,388  —  —  21,610  (1,454) —  —  931  (2,239) —  — 
Key personnel compensation and expenses  —   —   (37,328)  —   —   —   (39,323)  —   —   —   (31,361)  —  —  —  (11,761) —  —  —  (43,037) —  —  —  (37,328) — 
Administrative and other expenses  (35,554)  (43,115)  —   —   (30,591)  (41,691)  —   —   (30,342)  (33,961)  —   —  (43,035) (50,764) —  —  (48,246) (47,220) —  —  (35,554) (43,115) —  — 
Total  (379,698)  (93,642)  (36,048)  137   (326,652)  (59,486)  (37,436)  161   (325,641)  (33,852)  (29,148)  (12,393) (571,748) 24,021  (10,177) 518  364,913  (81,723) (41,765) 20  (360,913) (71,365) (36,048) 137 

 

 
(*)Primarily relates to derivative contracts used to financially cover exchange risk of assets and liabilities that cover positions of the Bank and its subsidiaries.

 

Only transactions with related parties equal to or greater than UF 5,000UF5,000 (Ch$132138 million) are included individually in the table above. Transactions with related parties between UF 1,000UF1,000 (Ch$28 million) and up to UF 5,000UF5,000 are included in other transactions with related parties. All transactions were conducted at arm’s length.

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C.Interests of Experts and Counsel

 

Not applicable.

 

ITEM 8. FINANCIAL INFORMATION

 

A.Consolidated Statements and Other Financial Information

A.    Consolidated Statements and Other Financial Information

 

Financial Information

 

See “Item 18. Financial Statements.”

 

Legal Proceedings

 

We are subject to certain claims and are party to certain legal and arbitration proceedings in the normal course of our business, including claims for alleged operational errors. We do not believe that the liabilities related to such claims and proceedings are likely to have, in the aggregate, a material adverse effect on our consolidated financial condition or results of operations. For the year ended December 31, 2016, the Disclosure Committee of Santander-Chile has defined a significant legal proceeding as that implying an estimated incurred loss greater than 0.18% of the average of pre-tax net income in the last three years. As of December 31, 2016, this cut-off totaled Ch$1,027 million (U.S.$1.5 million). As of December 31, 2016, there were no legal proceedings exceeding that amount. There are no material proceedings in which any of our directors, any members of our senior management, or any of our affiliates is either a party adverse to us or our subsidiaries or has a material interest adverse to us or our subsidiaries.

 

Upon the recommendation of our legal advisors, we estimate that our aggregate liability if all legal proceedings were determined adversely to us could result in significant losses not estimated by us. As of the date of the Audited Consolidated Financial Statements, the Bank and its affiliates were subject to certain legal actions in the normal course of their business. As of December 31, 2016,2018, the Bank and its subsidiaries have provisions for these legal actions of Ch$1,194923 million and Ch$480 million, respectively (Ch$1,8031,214 million and Ch$1180 million as of December 31, 2015)2017), which are included in “Provisions” in the Audited Consolidated Statements of Financial Position as provisions for contingencies.

 

Dividends and dividend policy

 

See “Item 3. Key Information—A. Selected Financial Data—Dividends.”

 

B.Significant Changes

B.    Significant Changes

 

None.

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ITEM 9. THE OFFER AND LISTING

 

A.Historical Trading Information

The table below shows, for the periods indicated, the annual, quarterly and monthly high and low closing prices (in nominal Chilean pesos) of the shares of our common stock on the Santiago Stock Exchange and the annual, quarterly and monthly high and low closing prices (in U.S. dollars) as reported by the NYSE.

  Santiago Stock Exchange NYSE
  Common Stock ADS
  High Low High Low
  (Ch$ per share) (U.S.$ per ADS)
Annual Price History        
2012   41.01   31.40   33.96   26.10 
2013   36.23   27.62   30.59   21.38 
2014   37.32   26.81   26.91   19.19 
2015   34.77   29.52   22.61   17.38 
2016   38.05   29.10   23.48   15.98 
Quarterly Price History                 
2015                 
1st Quarter   33.98   29.52   21.71   19.02 
2nd Quarter   34.77   31.71   22.61   20.02 
3rd Quarter   34.51   31.44   21.04   17.88 
4th Quarter   33.96   30.33   20.23   17.38 
2016                 
1st Quarter   33.47   29.10   19.74   15.98 
2nd Quarter   33.89   30.84   20.24   17.99 
3rd Quarter   36.47   31.62   22.51   19.18 
4th Quarter   38.05   34.09   23.48   20.52 
Monthly Price History                 
Oct-16   36.55   34.09   22.85   20.52 
Nov-16   38.05   36.50   23.00   21.66 
Dec-16   38.05   35.45   23.48   21.07 
Jan-17   37.19   35.11   22.21   21.59 
Feb-17   35.76   34.65   22.15   21.36 
Mar-17 (through March 22, 2017)   40.02   36.88   24.11   22.41 
                  
B.Plan of Distribution

 

Not applicable

 

C.B.Nature of Trading Market

 

Nature of Trading Market

 

Shares of our common stock are traded on the Chilean Stock Exchanges.Exchange. Each ADS represents 400 shares of common stock. ADRs have been issued pursuant to the amended and restated deposit agreement dated as of August 4, 2015. As of December 31, 2016, 87,002,3342018, 66,215,000 ADSs were outstanding (equivalent to 34,800,933,671326,486,000,071 shares of common stock or 18.47%14.05% of the total number of issued shares of common stock).

 

D.C.Selling Shareholders

 

Not applicable.

 

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E.D.Dilution

 

Not applicable.

 

F.E.Expenses of the Issue

 

Not applicable.

 

ITEM 10. ADDITIONAL INFORMATION

 

A.Share Capital

A.    Share Capital

 

Not applicable.

 

B.Memorandum and Articles of Association

B.    Memorandum and Articles of Association

 

The legal predecessor of Santander-Chile was Banco Santiago (Santiago)(“Santiago”). Santiago was incorporated by public deed dated September 7, 1977 granted at the Notary Office of Alfredo Astaburuaga Gálvez. Santiago received its permission to incorporate and function as a bank by Resolution No. 118 of the SBIF on October 27, 1977. The Bank’s by-laws were approved by Resolution No. 103 of the SBIF on September 22, 1977. In January 1997, Santiago merged with Banco O’Higgins’O’Higgins, with Santiago as the surviving entity. In 1999, Santiago became a controlled subsidiary of Santander Spain. On January 9, 2017 in an Extraordinary Shareholder Meeting, the shareholders’ approved an amendment of the Bank’s Articles of Incorporation.

 

Our official name is Banco Santander-Chile and Banco Santander and Santander can also be used (formerly:(formerly Banco Santander Santiago, Santander Santiago could also be used, but these names were eliminated in the new Articles of Incorporation).

 

The Bank has a single series of capital stock, which amounts to Ch$891,302,881,691, divided into 188,446,126,794 registered shares with no par value. The capital stock is fully subscribed for, deposited, and paid up. Each share represents one vote and there are no special classes of shares with different rights. Our by-laws do not include any condition that is more significant than required by law to change the right of shareholders.

 

Shareholder rights in a Chilean bank that is also an open stock (public) corporation are governed by (1) the corporation’sestatutos, which effectively serve the purpose of both the articles or certificate of incorporation and the by-laws of a company incorporated in the United States, (2) the General Banking Law and (3) to the extent not inconsistent with the General Banking Law, by the provisions of Chilean Companies Law applicable to open stock corporations, except for certain provisions that are expressly excluded. Article 137 of the Chilean Companies Law provides that all provisions of the Chilean Companies Law take precedence over any contrary provision in a corporation’sestatutos. Both the Chilean Companies Law and ourestatutos 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, notwithstanding the plaintiff’s right to submit the action to the ordinary courts of Chile.proceedings.

 


The Chilean securities markets are principally regulated by the Superintendency of Securities and InsuranceFMC under the Chilean Securities Market Law and the Chilean Companies Law. In the case of banks, compliance with these laws is supervised by the SBIF. These two laws provide for disclosure requirements, restrictions on insider trading and price manipulation and protection of non-controlling investors. The Chilean Securities Market Law sets forth requirements relating to public offerings, stock exchanges and brokers, and outlines disclosure requirements for companies that issue publicly offered securities. The Chilean Companies Law sets forth the rules and requirements for establishing open stock corporations while eliminating government supervision of closed (closely-held) corporations. Open stock (public) corporations are those with 500 or more shareholders, or companies in which 100 or more shareholders own at least 10.0% of the subscribed capital (excluding those whose individual holdings exceed 10.0%), and all other companies that are registered in the Securities Registry of the Superintendency of Securities and Insurance.FMC.

 

Santander-Chile is a bank providing a broad range of commercial and retail banking services, as well as a variety of financial services. Our objects and purposes can be found in Article 4 of our by-laws.

 

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Board of Directors and Managers

 

Currently, the Board of Directors has 11 regular membersconsists of nine directors and two alternate members,alternates, elected by shareholder vote at Ordinary Shareholders’ Meetings. As a result of the resignation of Andreu Plaza López on March 12, 2019, the Board of Directors currently has one vacancy. The directors may be either shareholders or non-shareholders of the Company. There is no age limit for directors. On October 27, 2016, the SBIF authorized a reduction in the number of Board members from 11 to nine. This reduction and the corresponding amendment to Article 14 of the by-laws was approved by the shareholders at an Extraordinary Shareholders’ Meeting held on January 9, 2017 and will enterentered into force onat the date of the Bank’s next Ordinary Shareholders’ Meeting, which will taketook place on April 26, 2017. The current principal and alternate directors will remain in office until such date. The directors may be shareholders or persons who are not members of the company.

 

The directors shall hold office for three years and may be indefinitely re-elected, and their terms of office shall be renewed in their entirety at the conclusion of each term of office. If the Ordinary Shareholders’ Meeting at which periodic elections of directors occur is not held at the stipulated time for any reason, the incumbency of those who have completed their terms shall be understood to be extended until their replacements are appointed, and the Board shall be obligated to summon a Shareholders’ Meeting to make said appointments within thirty days.

 

The directors shall be compensated for their service. The amount of their compensation shall be fixed annually at the Ordinary Shareholders’ Meeting. Such compensation shall be in addition to any salaries, fees, travel expenses, representation expenses, payments due as delegates of the Board, or other stipends in money, kind, or royalties of any class, whether assigned to particular directors at the Ordinary Shareholders’ Meeting or by Board approval, for specific functions or work above and beyond their obligations as directors which have been entrusted to them precisely at the Ordinary Shareholders’ Meeting or by the Board. A detailed and separate record of these special compensations must be made in the Annual Report, indicating the full name of each director who has received them.

 

Without prejudice to other legal disqualifications or conflicts of interest, the following persons cannot serve as directors: (a) a person who has been convicted or is on trial for crimes penalized with a principal or accessory penalty of temporary suspension or permanent disqualification to hold public positions or offices; (b) a debtor subject to a pending insolvency procedure for liquidation, (c) legislators; (d) directors or employees of any other financial institution; (e) employees of the Office of the President of the RepublicChile or employees or officials of the Treasury or of the Services, Fiscal or Semi-Fiscal Institutions, Autonomous Agencies, State-Owned Enterprises, and generally all the Public Services created by law, as well as those of companies, partnerships, or public or private entities to which the State or its companies, partnerships, or centralized or decentralized institutions have contributed the majority capital or a proportion equal thereto, or have a similar representation or participation, provided that the limitation prescribed in this letter (e) shall not apply to persons who hold teaching positions; and (f) Bank employees.

 


In the elections of directors, each shareholder shall have one vote per share held or represented, and may cast all such votes in favor a single candidate or distribute them as deemed convenient; those who receive the largest number of votes in an election shall be proclaimed as elected, until the number of persons to be elected is reached. Elections of principal and alternate directors must be held separately. To proceed to a vote, the Chairman and the Secretary, jointly with the persons who have previously been designated at the Ordinary Shareholders’ Meeting to sign the minutes thereof, must make a documentary record of the votes which are cast through voice vote by the shareholders present, according to the list of attendance. However, any shareholder shall be entitled to vote on a ballot signed by him, stating whether he signs on his own behalf or as a proxy. In any event, to facilitate the casting or speed of a vote, the Chairman of the Bank or the Superintendency, if applicable, may order an alternative procedure or permit either a voice vote or a ballot vote, or any other procedure stipulated as adequate for the purpose. In counting the results, the Chairman shall read out the votes cast aloud so that all the persons present can count the votes themselves and the truthfulness of the result can be verified. The Secretary shall add up the votes and the Chairman shall announce the candidates that receive the largest majorities and proclaim them thereby elected, until the number of persons to be elected is reached. The Secretary shall place the document reflecting the vote count, signed by the persons responsible for taking note of the votes cast, as well as the ballots delivered by the shareholders who did not vote by voice, in an envelope which shall be closed and sealed with the corporate seal, and shall be kept on file at the Bank for at least two years.

 

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Every election to the Board, or every change to the composition of the Board, must be recorded in a public deed executed before a Notary, published in a Santiago newspaper, and reported to the SBIF by sending an authorized copy of the respective public deed. The appointments of the General Manager and Assistant Deputy Manager must likewise be reported and converted into a public deed.

 

Vacancies that arise when a director ceases to be able to perform his or her duties, either because he becomes subject to any conflict of interest, limitation, or legal disqualification or because he is subject to a pending insolvency procedure for liquidation, or due to impossibility of serving, unjustified absence, death, resignation, or for another legal cause, shall be filled in the following manner: (a) vacancies of principal directors by alternate directors; and (b) in case of vacancies of alternate directors because of the application or circumstances not provided for in letter (a) above, or vacancies of principal directors which could not be filled as provided for in this letter because the alternate directors have become principal directors, the appropriate replacements shall be appointed at the first Ordinary Shareholders’ Meetingboard of directors meeting to be held. The directors so designated shall remain in office until the next Ordinary Shareholders’ Meeting, at which the definitive appointments shall be made for the time remaining to complete the replaced directors’ terms.

 

The alternate directors may always take part in a Board meetings and have the right to speak at any such meeting. However, they shall have the right to vote only when they replace a principal director.

 

The Board shall separately elect a Chairman, a First Vice Chairman, and a Second Vice Chairman from among its members at the first meeting held after the Shareholders’ Meeting has appointed it or at its first meeting held after the persons in question have ceased to hold the position for any reason. In case of a tie vote, the person who chairs the meeting shall have the tie-breaking vote.

The Board shall appoint a General Manager who is responsible for the management of the Bank’s business and represents the Bank in all its offices. The General Manager has the right to participate in discussions at Board meetings but may not vote at such meetings. The Board shall also appoint one or more Managers who are responsible for the transactions and business of the Bank at the offices, branch offices, divisions and services placed under their management. The Directors, Managers and other employees of the Bank shall be personally responsible for non-compliance with the Bank’s by-laws and other legal or regulatory provisions arising from the performance of their duties, and liable for such infringements which are effected with their knowledge.

 

The Board meetings shall be held at the company’s domicile unless the directors unanimously resolve to hold a particular session at a different location or all the directors participate in any such meeting held at a different location. The Board shall meet in ordinary session at least once a month, on the days and at the times the Board designates, and additionally, in extraordinary sessions from time to time when summoned by the Chairman at his or her own initiative or at the request of three or more directors, following the Chairman’s determination of the need for a meeting, unless it is requested by an absolute majority of the incumbent directors, in which case the meeting must necessarily be held without the need for a prior determination. Only the topics specifically stated in the notice of meeting may be addressed at extraordinary meetings, unless all the incumbent directors are present and they unanimously agree otherwise. Summonses to extraordinary meetings shall be made in accordance with and in the form prescribed by law.

 


The quorum for Board meetings shall be the absolute majority of the number of directors entitled to vote as prescribed in our by-laws. Resolutions shall be adopted by the absolute majority of the directors present who are entitled to vote. In case of a tie vote, the person who chairs the meeting shall have the tie-breaking vote. Directors who, though not present, are in simultaneous and permanent communication through technological means which have been authorized by the SBIF shall be understood to participate in the meetings.

 

Directors who have an interest in a business dealing, legal act, contract, or operation or transaction not specifically of a banking nature, or as representatives of another person, must inform the other directors thereof. The respective resolutions shall be approved by the Board and must be in accordance with conditions of equity similar to those customarily prevailing in the market;market and they shall be disclosed at the next Ordinary Shareholders’ Meeting by the person who chairs such meeting.

 

A record of the Board’s deliberations and resolutions shall be made in a special minute book to be kept by the Secretary. The minutes must be consecutively numbered, with one numbering sequence assigned to ordinary meetings and another to extraordinary meetings, and they must be signed by the directors who took part in the meeting and the Secretary or the person who performs his or her functions. A director who believes certain minutes contain inaccuracies or omissions is entitled to record his or her reservations prior to signing them. Resolutions may be carried out without the need to approve the minutes at a subsequent meeting. If any of the persons present dies, refuses to sign the minutes, or is prevented from doing so for any reason, a record of said impediment shall be made at the foot thereof.

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The directors shall be personally responsible or liable for all the legal acts they execute in the performance of their functions. A director who wishes to avoid responsibility or liability for any legal act or resolution of the Board must make a record of his or her opposition in the minutes and the Chairman shall be informed thereof at the next Ordinary Shareholders’ Meeting.

 

The Board shall represent the Bank judicially and extra-judicially and for the pursuit of its corporate purpose, which need not be demonstrated to third parties in any manner; it shall be vested with all the authorities and powers of administration that the law or the by-laws do not define as pertaining exclusively to Shareholders’ Meetings, without the need to confer any special power of attorney whatsoever, even for legal acts or contracts for which the laws so require. The foregoing does not impair the Bank’s judicial representation by the General Manager. The Board may delegate part of its powers to the General Manager, to one or more managers, assistant managers, or attorneys of the Bank, to a director, or to a committee of Directors, as well as to other persons for specific purposes.

 

The Board shall designate three Directors from among its members to serve on a committee of Directors which shall be governed by the provisions of articleArticle 50bis of the Corporations Act.Chilean Companies Law.

 

The Chairman/President

 

The Chairman of the Board shall likewise be the president of the company and the chairman of the Shareholders’ Meetings. He shall have the following obligations and authorities, in addition to those prescribed in the pertinent legal and regulatory provisions, in our by-laws, or by the Board: (a) chair the Board and Shareholders’ Meetings; (b) enforce strict compliance with the by-laws, the Board’s resolutions, and the resolutions of the Shareholders’ Meetings; (c) summon the Board meetings; and (d) sign the annual reports and the resolutions and communications of the Board and the Shareholders’ Meetings. In the absence or temporary impediment of the Chairman/President, the First Vice Chairman/First Vice President shall act in his or her stead, and in the latter’s absence, the Second Vice Chairman/Second Vice President shall act, or finally, the person designated by the Board from among its members or the shareholder designated at the Shareholders’ Meeting, as the case may be. Replacement is an internal company procedure that shall not require any formality, and it shall not be necessary to demonstrate its validity to third parties in order to assure the validity of the replacement’s actions; the sole fact of its occurrence suffices to make said actions effective.

 

Meetings and Voting Rights

 

The shareholders shall meet in Ordinary or Extraordinary Shareholders’ Meetings held in Santiago. The resolutions adopted at a validly summoned and convened Shareholders’ Meeting, in conformity with the by-laws, shall be binding on all of the shareholders.

 


The Ordinary Shareholders’ Meetings shall be held annually on the dates determined by the Board within the first four months following the date of the annual balance sheet. There shall be an Extraordinary Shareholders’ Meeting whenever the company’s needs so require. The meetings shall be summoned by the Board at its own initiative or at the request of shareholders representing at least 10% of the issued shares having a legal right to vote. If in this circumstance, the Board, and through it the Chairman, refuses to issue a summons, the Superintendent of Banks and Financial Institutions may be requested to do so.

 

The summons to a Shareholders’ Meeting shall be given through a prominent notice to be published three times on different days in the Santiago newspaper which has been chosen at the Ordinary Shareholders’ Meeting, and in the absence of agreement or in the event of a suspension or disappearance of the designated newspaper’s circulation, in the Official Journal, at the time, in the form, and under the conditions stipulated by the Regulations of the Corporations Act.Chilean Companies Law. Summonses to Extraordinary Shareholders’ Meetings shall state the topics which will be submitted to them. The summons to a meeting shall likewise be announced through a letter sent to the shareholders a minimum of fifteen days in advance of the date set for the meeting, which must contain a reference to the topics to be addressed at it. Failure to send said letter shall not invalidate the summons, without prejudice to legal liabilities. On a date no later than that of the first notice of a summons for an Ordinary Shareholders’ Meeting, each shareholder must be sent a copy of the Bank’s Annual Report and Balance Sheet, including the auditors’ opinion and its respective notes.

 

AQuorum for Shareholders’ Meetings shall convene upon reaching a quorum, which shall be established by the presence of as many shareholders as represent, directly or by proxy, at least an absolute majority of the issued voting shares. If said quorum is not satisfied, a new summons shall be given, for a meeting which must be scheduled to be held in the

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manner prescribed in Article 37 of our by-laws, indicating that it is a second summons and scheduling the new meeting to be held within the forty five days subsequent to the date scheduled for the meeting that was not held due to a lack of quorum. A meeting called by a second summons shall lawfully convene with the number of issued voting shares present or represented thereat.

 

In the absence of a special rule, a Shareholders’ Meeting resolution shall be adopted by an absolute majority of the voting shares present or represented.

 

The Ordinary Shareholders’ Meetings have the following responsibilities: (a) deliberate and resolve on the Annual Report and Balance Sheet which must be submitted by the Board; (b) annually designate an external auditing firm in conformity with the provisions of law to report on the balance sheet and comply with the legal requirements; (c) elect the members of the Board when appropriate pursuant to our by-laws; (d) resolve the distribution of the liquid profits or earnings for each fiscal year, and at the Board’s request, order the distribution of a dividend to the shareholders as of the end of each fiscal year, as prescribed in the by-laws; and (e) in general, deliberate and pass resolutions on any other topic of corporate interest which is not reserved to an Extraordinary Shareholders’ Meeting. The revocation of all the Board members elected by the shareholders and the designation of their replacements may be resolved at an Ordinary or Extraordinary Shareholders’ Meeting, but any individual or collective revocation of one or more Board members would accordingly be invalid.

 

The Extraordinary Shareholders’ Meetings are reserved for certain topics indicated by law or by our by-laws. Resolutions on the topics indicated in the notice of meeting may be adopted at Extraordinary Shareholders’ Meetings.

 

The shareholders may have themselves represented at Meetings by another person, whether a shareholder or not, as is stipulated in the Corporations Act.Chilean Companies Law.

 

A record of the deliberations and resolutions at any Shareholders’ Meeting shall be made in a special minute book to be kept by the Secretary, if any, or in his or her absence by the Bank’s General Manager. The minutes shall be signed by the Chairman or the person who performs his or her functions, by the Secretary and three shareholders elected by the Meeting, or by all the persons present if they number fewer than three. In the event of death, refusal, or impediment to signing the minutes on the part of any of the persons who must do so, a record of the impediment shall be made at the foot thereof. An extract of the minutes shall be made to record what happened at the meeting, and an official copy of the following data shall necessarily be made: the names of the shareholders present and the number of shares owned or represented by each of them (a brief summary of any objections may be omitted if it is attached to the same page or roll of attendance), a list of the proposals submitted for discussion and the results of the votes taken, and the list of the shareholders who voted for or against. Solely by the unanimous consent of the persons present may a record of any event occurring at the meeting that is related to the company’s interests be deleted from the minutes.

 


The persons present at any Shareholders’ Meetings shall sign a roll of attendance on which they shall indicate the number of shares the signatory holds, the number of shares he represents, and the name of the shareholder he represents.

 

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 the bank within the 15-day period before the ordinary annual meeting. In addition to these requirements, we regularly provide, and management currently intends to continue to provide, together with the notice of shareholders’ meeting, a proposal for the final annual dividend.

 

Annual Report, Balance Sheet, and Distribution of Profits

 

A Balance Sheet shall be drawn up as of the thirty firstthirty-first day of December of each year, to be submitted to the Ordinary Shareholders’ Meeting for its consideration, jointly with the Annual Report. The Balance Sheet and Statement of Income shall be published in conformity with the currently applicable legal and regulatory provisions. The approval or rejection of such financial statements is entirely within our shareholders’ discretion. If our shareholders reject our financial statements, our Board of Directors must submit new financial statements not later than 60 days from the date of such rejection. If our shareholders reject our new financial statements, our entire Board of Directors is deemed removed from office and a new Board of Directors is elected at the same meeting. Directors who individually approved such rejected financial statements are disqualified for re-election for the ensuing period.

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The profits attributable to shareholders reflected in the Balance Sheet shall be applied preferentially to absorb prior-year losses. The balance which is earned shall be allocated as may be resolved by the Shareholders’ Meeting, at the Board’s recommendation, to: (a) an increase of the effective capital, the formation of a fund for future capitalizations or dividends, or other special reserve funds; these uses shall receive the amounts the Meeting deems convenient, in conformity with the limits and obligations prescribed by law; and (b) the distribution of dividends to the shareholders in proportion to their shareholdings.

 

Under the Chilean Corporations Law, Chilean companies are generally required to distribute at least 30.0% of their earnings as dividends. No dividends of a bank above the legal minimum can be distributed if doing so would result in the bank exceeding its ratio of risk-weighted assets to regulatory capital or total assets.

 

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 they accrue interest.

 

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. Our ADS holders 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. B.10.B.—Memorandum and Articles of Association—Preemptive Rights and Increases of Share Capital.” A dividend entitlement lapses after 5 years and the funds go to the Chilean Treasury.

 

Liquidation and Appraisal Rights

 

The Bank may be dissolved and liquidated if it is so resolved at an Extraordinary Shareholders’ Meeting, with the favorable vote of at least two thirds of the issued voting shares, and approved by the Superintendent of Banks and Financial Institutions.

 

Once the voluntary dissolution to which the preceding article refers has been resolved, the Shareholders’ Meeting at which it is resolved shall appoint a committee of three shareholders to proceed to the company’s liquidation. The liquidating committee so created shall act with the powers and obligations which the by-laws confer on the Board, and it shall keep the shareholders informed of the liquidation’s progress, shall summon Ordinary Shareholders’ Meetings on the dates scheduled for them, being authorized to likewise summon Extraordinary Shareholders’ Meetings. In all other respects the provisions of the Commercial Code, the applicable provisions of the Corporations Act,Chilean Companies Law, and the corporate regulations which govern the company shall be followed. In accordance with the General Banking Law, our shareholders do not have appraisal rights.

 


Arbitration

 

Any difficulty which may arise between the Bank and any of the shareholders or directors, or between such persons, in connection with the application of the by-laws or the recognition of the existence, nonexistence, validity, nullity, construction, performance or breach, dissolution, liquidation, or any other cause shall be submitted to resolution by two arbitrators at law and in equity, who shall rule without subsequent appeal, one of whom shall be appointed by each party. If they cannot reach agreement, the parties shall appoint a third arbitrator to resolve the discord. If there is no agreement for the third arbitrator’s appointment, the two previously appointed arbitrators shall make the designation. If either party refuses to participate in the appointment of arbitrators or, after they have been appointed, there is no agreement on the ruling and neither the parties nor the arbitrators have designated the third arbitrator to resolve the discord, the designation of said arbitrator, if any, or of the third participant in discord, shall be made by the Ordinary Court of Justice, and the person so designated must necessarily be one who has held or currently holds the position of attorney and member of the Honorable Supreme Court.

 

Capitalization

 

Under Chilean law, the shareholders of a company, acting at an extraordinary shareholders’ meeting, have the power to authorize an increase in such 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, provided that the shareholders may, by

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amending the by-laws, also grant the right to receive dividends or distributions of capital. The investor becomes eligible to receive dividends and returns 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 and/or returns of capital with respect to such shares unless the company’s by-laws 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 the stock exchange and collect the difference, if any, between the subscription price and the auction proceeds. However, until such shares are sold at auction, the subscriber continues to exercise all the rights of a shareholder (except the right to receive dividends and return of capital).

 

Article 22 of the Chilean Corporations Law states that the purchaser of shares of a company implicitly accepts its by-laws and any agreements adopted at shareholders’ meetings.

 

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.

 

Ownership Restrictions

 

Under Article 12 of the Chilean Securities Market Law and the regulations of the SBIF, shareholders of open stock corporations are required to report the following to the Superintendency of Securities and InsuranceFMC and the Chilean Stock Exchanges:stock exchanges:

 

·●any direct or indirect acquisition or sale of shares that results in the holder’s acquiring or disposing, directly or indirectly, 10.0% 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 10.0% 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.

 

In addition, majority shareholders must include in their report whether their purpose is to acquire control of the company or if they are making a financial investment. A beneficial owner of ADSs representing 10.0% or more of our share capital will be subject to these reporting requirements under Chilean law.

 


Under Article 54 of the Chilean Securities Market Law and the regulations of the Superintendency of Securities and Insurance,FMC, 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 acquisition 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 (i.e., when information and documents concerning the target are delivered to the potential acquirer) through a filing with the Superintendency of Securities and Insurance,FMC, the stock exchanges and the 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 and the price and 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 Superintendency of Securities and Insurance,FMC, and to the Chilean stock exchanges on which the securities are listed.

 

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.

 

The provisions of the aforementioned articles do not apply whenever the acquisition is being made through a tender or exchange offer.

 

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Title XXV of the Chilean Securities Market Law on tender offers and the regulations of the Superintendency of Securities and Insurance (now the FMC) 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; and

 

·●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 75.0% or more of the consolidated net worth of the parent company.

 

In addition, Article 69bis199 of the CompaniesChilean Securities Market Law requires that 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 non-controlling shareholders in a tender offer.

 

Article 200 of the Chilean Securities Market Law prohibits any shareholder that has taken control of a publicly traded company to acquire, 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 3.0% 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, 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 25.0% 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 or group of persons;

 

·●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 5.0% of the share capital (either directly or pursuant to a joint action agreement); or

 


·●in cases where the Superintendency of Securities and Insurance (now the FMC) has ruled otherwise, based on the distribution or atomization of the overall shareholding.

 

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 Superintendency of Securities and InsuranceFMC 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

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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;

 

·●all the entities that the Superintendency of Securities and InsuranceFMC declares to be part of the business group due to one or more of the following reasons:

 

·●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;

 

·●the company has a significant level of indebtedness and the business group has a material participation as a lender or guarantor;

 

·●any member of a group of controlling entities of a company mentioned in the first two bullets above and there are grounds to include it in the business group; or

 

·●the company is controlled by a member of a group of controlling entities and there are grounds to include it in the business group.

 

Article 36 of the General Banking Law states that as a matter of public policy, no person or company may acquire, directly or indirectly, more than 10.0% of the shares of a bank without the prior authorization of the SBIF,FMC, which may not be unreasonably withheld. The prohibition would also apply 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 SBIFFMC considers a number of factors enumerated in Article 28 of the General Banking Law, including, among others (i) the financial stability of the purchasing party and (ii) the legitimacy of the purchasing party.

 

According to Article 35bis of the General Banking Law, the prior authorization of the SBIFFMC is required for:

 

·●the merger of two or more banks;

 


·●the acquisition of all or a substantial portion of a banks’ 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 existing control of a bank by a controlling shareholder of that bank.

 

This priorThe FMC may deny its authorization with an accompanying resolution recording the specific reasons for denying the authorization and with the agreement of a majority of the Board of Directors of the Central Bank, provided there is only required when the acquiring bank or the resulting groupnotice of banks would own a significant market share in loans, defined by the SBIF to be more than 15.0% of all loans in the Chileansuch agreement within 10 banking system. The intended purchase, merger or expansionbusiness days (which may be denied by the SBIF; or, if the acquiring bank or resulting group would own a market share in loans determined to be more than 20.0% of all loans in the Chilean banking system, the purchase, merger, or expansion may be conditioned on one or more of the following:

·the bank or banks maintaining regulatory capital higher than 8.0% and up to 14.0% of risk-weighted assets;

·the technical reserve established in Article 65 of the General Banking Law being applicable when deposits exceed one and a half times the resulting bank’s paid-in capital and reserves; or

·the margin for interbank loans be reduced to 20.0% of the resulting bank’s regulatory capital.

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If the acquiring bank or resulting group would own a market share in loans determined by the SBIF to be more than 15.0% but less than 20.0%, the authorization will be conditioned on the bank or banks maintaining a regulatory capital not lower than 10.0% of their risks weighted assets for the period specified by the SBIF, which may not be less than one year. The calculation of the risk weighted assets is based on a five category risk classification system applied to a bank’s assets that is based on the Basel Committee recommendations.extended under Law 18,840).

 

According to the General Banking Law, 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 New General Banking Law andprovides that the regulations issuedFMC will determine, by the SBIF creates the presumption that natural personsmeans of a general rule, who are holders of shares and who beneficially own more than 1.0%must be considered a related party of the shares arebank. In addition, the FMC will establish rules to determine if certain persons constitute a group of related to the bank and imposes certain restrictions on the amounts and terms of loans made by banks to related parties. This presumption would also apply to beneficial owners of ADSs representingparties in one or more than 1.0% of the shares.following circumstances: (i) business or administrative relationships that allow a person to exercise relevant and permanent influence over another’s decisions; (ii) an assumption will be made that the loans granted to one person will be used in benefit of the other; and (iii) an assumption will be made that diverse persons maintain relationships that create a unit of economic interests. Finally, according to the regulations of the SBIF, Chilean banks that issue ADSs are required to inform the SBIF if any person, directly or indirectly, acquires ADSs representing 5.0% or more of the total amount of shares of capital stock issued by such bank.

 

Article 16bis of the General Banking Law provides that the individuals or legal entities that, individually or with other people, directly control a bank and who individually own more than 10.0% of its shares must send to the SBIFFMC reliable information on their financial situation inwith the formcontent and in the opportunity set forth in Resolution No. 3,156 ofa general rule issued by the SBIF.FMC, which will not exceed the information required for open-stock corporations (sociedad anónima abierta).

 

There are no limitations for non-resident or foreign shareholders to hold or exercise voting rights on the securities.

 

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. According to our by-laws, options for subscription of capital increases must be offered on a preemptive basis to the shareholders, in proportion to the number of shares each shareholder owns, and the released shares which are issued shall be distributed in the same proportion.

 

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 ADRs. 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. We cannot assure you 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.

 


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

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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.

 

C.    Material Contracts

 

During the past two years, we were not a party to any material contract outside the ordinary course of business.

 

D.    Exchange Controls

 

The Central Bank is responsible for, among other things, monetary policies and exchange controls in Chile. Appropriate registration of a foreign investment in Chile grants the investor access to the Formal Exchange Market. See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates.” Foreign investments can be registered with the Foreign Investment Committee under Decree Law No. 600 or can be registered with the Central Bank under the Central Bank Act. The Central Bank Act is an organic constitutional law requiring a “special majority” vote of the Chilean Congress to be amended. Since April 18, 2001, all exchange controls in Chile have been eliminated.

 

Previously, Chilean law mandated that holders of shares of Chilean companies that were not residents of Chile register as foreign investors under one of the foreign investment regimes contemplated by Chilean law in order to receive dividends, sale proceeds or other amounts with respect to their shares remitted outside Chile through the Formal Exchange Market. Under the Foreign Investment Contract (as defined herein), the Depositary, on behalf of ADS holders, is granted access to the Formal Exchange Market to convert cash dividends from Chilean pesos to U.S. dollars and to pay such U.S. dollars to ADS holders outside Chile, net of taxes, and no separate registration by ADR holders is required. As of April 19, 2001, the Central Bank deregulated the Exchange Market, eliminating the need to obtain approval from the Central Bank in order to remit dividends, but at the same time eliminating the possibility of guaranteeing access to the Formal Exchange Market. However, this did not affect the current Foreign Investment Contract, which was signed prior to April 19, 2001, and which still permits access to the Formal Exchange Market based on the prior approval of the Central Bank. Therefore the holders of ADRs of Santander-Chile are still subject to the Foreign Investment Contract, including its clauses referring to the prior exchange rules including the now extinct Chapter XXVI of the Compendium.

 

E.     Taxation

 

The following discussion summarizes certain Chilean tax and United States federal income tax consequences to beneficial owners arising from the ownership and disposition of our common stock or ADSs. The summary does not purport to be a comprehensive description of all potential Chilean and United States federal income tax considerations that may be relevant to a decision to own or dispose of our common stock or ADSs and is not intended as tax advice to any particular investor. This summary does not describe any tax consequences arising under the laws of any state, locality or other taxing jurisdiction other than Chile and the United States. There is currently no income tax treaty between the United States and Chile. However, the U.S. government and the government of Chile signed on February 4, 2010 the Proposed Income Tax Treaty between the United States of America and the Republic of Chile (the “Proposed U.S.-Chile Treaty”), which is now subject to ratification by the U.S. Senate and Chilean Congress. If the Proposed U.S.-Chile Treaty becomes effective, U.S. investors should consult their tax advisers as to the applicability of the treaty in their particular circumstances.

 

Material Tax Consequences of Owning Shares of Our Common Stock or ADSs

 

Chilean Taxation

 

The following is a summary of certain Chilean tax consequences of the ownership and disposition of shares of our common stock or of ADSs evidenced by ADRs by Foreign Holders (as defined herein). The summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to own or dispose shares of our common stock or ADSs and does not purport to address the tax consequences applicable to all categories of investors, some of whom may be subject to special rules. Holders of shares of our common stock or ADSs are advised to consult their tax advisers concerning the Chilean and other tax consequences of the ownership and disposition of shares of our common stock or of ADSs evidenced by ADRs.

 


The description of Chilean tax laws set forth below is based on Chilean laws in force as of the date of this Annual Report and can be subject to any changes in such laws occurring after the date of this Annual Report. These

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Although it is uncommon, legal changes can be made on a retroactive basis, butbasis. However, changes in regulations or interpretations held by the Chilean tax authorities may not be used retroactively against taxpayers who acted in good faith relying on such modified regulations or interpretations that were in force at that moment.interpretations.

 

For purposes of this summary, the term “Foreign Holder” means either (1) in the case of an individual, a person who is not resident or domiciled in Chile; or (2) in the case of a legal entity, a legal entity that is not organized under the laws of Chile, unless the shares of our common stock or ADSs are assigned to a branch or a permanent establishment of such entity in Chile. For purposes of Chilean taxation, (a) an individual holder is resident in Chile if he or she has remained in Chile for more than six months in one calendar year, or a total of more than six months in two consecutive fiscal years, and (b) an individual is domiciled in Chile if he or she resides in Chile with the actual or presumptive intent of staying in Chile (intention that can be evidenced by circumstances such as the acceptance of an employment in Chile or the relocation to Chile of his or her family).

 

The Income Tax Law provides that a Foreign Holder is subject to income taxes on his or her Chilean-sourced income. For these purposes, Chilean source income means earnings from activities performed within Chilean territory or from sale, disposition or other transactions in connection with assets or goods located in Chile. Indirect sale regulations may also attribute Chilean sourced Chilean income.

 

Taxation of Dividends

 

Cash dividends paid by us with respect to shares of our common stock held by a Foreign Holder, including shares represented by ADSs, will be subject to a 35% Chilean Withholding Tax (“WHT”), which is withheld and paid over by us (the “Withholding Tax”). us.

If we have paid Corporate Income Tax (the “First Category Tax”)CIT on the income from which the dividend is paid, a credit for the First Category TaxCIT (reduced, in certain circumstances by a related fiscal debit, as described below) effectively reduces the rate of Withholding Tax. WHT.

When a credit is available, the Withholding TaxWHT is computed by applying the 35% rate to the pre-tax amount needed to fund the dividend and then subtracting from the tentative withholding taxWHT so determined the amount of First Category TaxCIT actually paid on the pre-tax income. For determining the pre-tax amount of the dividend, the First Category TaxCIT credit will depend on the amounts accumulated in the Accumulated Credit Balance (SAC), at the date of withdrawal or distribution.

 

In general, 35% of CIT paid on the income from which a dividend is paid gives rise to a fiscal debit owed to the Chilean Treasury at the time the dividend distribution is made to a Foreign Holder. Accordingly, a Foreign Holder generally may apply a net credit equal to only 65% of the CIT to reduce WHT.

However, if the Foreign Holder is a resident of a country with which Chile has a Double Tax Treaty in force, the Foreign Holder may be entitled to apply the entire CIT against WHT otherwise due. Moreover, if the Foreign Holder is a resident of a country with a signed Double Tax Treaty that has not entered into force on January 1, 2017, (as in the case of United States) the Foreign Holder would also be entitled to a 100% CIT credit, without reduction by any related fiscal debit, until December 31, 2021. If at such date the treaty has not entered into force, the Foreign Holder will be subject to the general rules, and hence entitled only to a net credit of 65% of the CIT as described above.

To prove residency in a country with which Chile has a Double Tax Treaty, whether signed or in force, a Foreign Holder must produce a government-issued residence certificate, recognizing the taxpayer as a resident of the corresponding country. Foreign Holders are urged to consult with their tax advisers regarding all requirements to be entitled to the 100% CIT credit.

The effective rate of Withholding Tax to be imposedWHT on dividends paid by us will vary depending upon the amountrate of First Category Tax paid by us onCIT. In order to determine the earnings underlying the dividends. The statutory rate for the First Category Tax attributed toCIT credit available upon dividend distributions, earnings generated during the years 2008, 2009 and 2010 was 17.0%. For years 2011, 2012 and 2013, it was 20.0%, for 2014 it was 21.0%, for 2015 it was 22.5% and for 2016 it was 24.0%. For the current year should be allocated first (at the statutory rate forin force during the First Category Tax for our company is 25.5%year). Distributions made in excess of current year earnings would be entitled to use as CIT credit the average rate applied to the accumulated earnings generated from January 1, 2017.


The example below illustrates the effective Chilean Withholding TaxWHT burden on a cash dividend received by a Foreign Holder, assuming a Withholding TaxWHT rate of 35.0%, a statutory First Category TaxCIT rate of 25.5%27.0% and a distribution of all of the net proceeds available after payment of the First Category Tax.CIT.

100% Credit available

 

Taxable income U.S.$100
First Category Tax (25.5%CIT (27.0% of U.S.$100)  (25.527.0)
Net proceeds available  74.573.0 
Dividend payment  74.573.0 
Withholding Tax (35.0% of the sum of the dividend (U.S.$74.5)73.0) and the available First Category TaxCIT credit (U.S.$25.5)27.0)  35.0 
First Category TaxCIT credit  (25.527.0)
Payable Withholding TaxWHT  9.58.0 
Net dividend received  

65 (74.5-9.5)(73.0-8.0

)
11.0%
Effective dividend withholding tax rate (8.0/73.0)

65% Credit available

Taxable incomeU.S.$100
CIT (27.0% of U.S.$100)(27.0)
Net proceeds available73.0
Dividend payment73.0
Withholding Tax (35.0% of the sum of the dividend (U.S.$73.0) and the available CIT credit (U.S.$27.55)35.0
CIT credit(27.00)
CIT debit9.45
Payable WHT17.45
Net dividend received

55.55 (73.0-17.45

)
24.0%
Effective dividend withholding tax rate  12.8%

(9.5/74.517.45/73.0

)

 

Dividend distributions made in kind would be subject to the same Chilean tax rules as cash dividends.

Stock dividends received by the Foreign Holder are not subject to Chilean taxation. The distributions of preemptive rights relating to shares of common stock will not be subject to Chilean taxation.

If the Proposed U.S.-Chile Treaty becomes effective, U.S. investors should consult their tax advisers as to the applicability of the treaty in their particular circumstances.

 

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Taxation of Capital Gains

 

Gain realized on the sale, exchange or other disposition by a Foreign Holder of ADSs will not be subject to Chilean taxation, provided that such sale or disposition occurs outside Chile or that it is performed under the rules of Title XXIV of the Chilean Securities Market Law, as amended by Law No. 19,601, dated January 18, 1999. The deposit and withdrawal of shares of common stock in exchange for ADSs will not be subject to any Chilean taxes.

 

Gain recognized on a 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 both to First Category Tax (currently imposed at a rate of 25.5%) and Withholding Tax (the first can be used as credit against the second) if (1) the Foreign Holder has held such shares of common stock for less than one year since exchanging ADSs for the shares of common stock, (2) the Foreign Holder acquired and disposed of the shares of common stock in the ordinary course of its business or as a regular trader of stock or (3) the sale is made to a company in which the Foreign Holder holds an interest. In certain other cases where the Foreign Holder of shares of common stock has some connection with Chile, gain on the disposition of shares of common stock will be subject only to First Category Tax as a single tax (currently imposed at a rate of 25.5%).

The sale of shares of common stock by a Foreign Holder to an individual or entity non-residentthat is not resident or domiciled in Chile iswill be subject to a provisional withholding. Such a provisional withholding willWHT. This tax must be equal to (i)withheld by the purchaser, with an interim rate of 10.0% of the total amount to remit,price without any deduction, paid to, credited to or putted at the disposal of the Foreign Holder unless the gain subject to taxation can be determined, in which case the withholding will be equal to a 35.0% on the gain.


Notwithstanding the above, if the seller evidences that no capital gain was generated, the WHT would not be applicable. For income tax purposes, the capital gain shall be the difference between the sales price and the acquisition cost of the stock.

The tax basis of shares of common stock received in exchange for ADSs will be the acquisition value of such shares. The valuation procedure set forth in the deposit agreement which values shares of common stockstates that are being exchanged at the highest price at which they tradeshares of common stock were exchanged on the Santiago Stock Exchange on the date of the exchange generally will determine the acquisition value for this purpose. Consequently, the conversion of ADSs into shares of common stock and sale of such shares of common stock for the value established under the deposit agreement made on the date of the exchange will not generate a capital gain subject to taxation in Chile.

In the case where ADSs were exchanged for shares and the subsequent sale of the shares is made on a different day that is different thanfrom the dateone on which the exchange is recorded in the shareholders’ registry of the issuer, capital gains subject to taxation in Chile may be generated. generated, depending on the difference between the acquisition value and the sale price.

On October 1, 1999, the Chilean Internal Revenue Service issued Ruling N°3,708 whereby it allowed Chilean issuers of ADSs to amend the Deposit Agreements in which they are parties in order to include a clause that states that, in the case that the exchanged shares are sold by the ADSs’ holder on a Chilean Stock Exchange,stock exchange, either on the same day on which the exchange is recorded in the shareholders’ registry of the issuer or within the two prior business days to such date, the acquisition price of such exchanged shares shall be the price registered in the invoice issued by the stock broker that participated in the sale transaction.

Consequently, as we have included this clause in the form of ADRs attached to the deposit agreement, the capital gain that maymight be generated if the shares received in exchange for ADSs were sold within two days prior to the date on which the exchange is recorded in the shareholders’ registry of the issuer, will not be subject to Chilean taxation.

The distribution Distribution and exercise of preemptive rights relating to the shares of common stock will not be subject to Chilean taxation.

Cash amounts received in exchange for the shares or assignment of preemptive rights relating to the shares will be subject to both the First Category TaxCIT and the Withholding TaxWHT (the former being creditable against the latter to the extent described above).

 

In certain cases and provided certain requirements are met, capital gains realized on the sale of actively traded stock of Chilean public companies may be exempt from Chilean income taxes.

Our stock is currently considered to be an actively traded stock in the Santiago Stock Exchange, and Foreign Holders of the stock may qualify for an income tax exemption. Foreign Holders are urged to consult with their own tax advisers to determine whether an exemption applies to them.

 

If the Proposed U.S.-Chile Double Tax Treaty becomes effective, it may further restrict the amount of Chilean tax, if any, imposed on gains derived from the sale or exchange of shares of common stock by U.S. residents eligible for the benefits of the treaty. If the Proposed Tax Treaty becomes effective, U.S. investors should consult their tax advisers as to the applicability of the treaty in their particular circumstances.

 

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Other Chilean Taxes

 

No Chilean inheritance, donation or succession taxes apply to the transfer or disposition of the ADSs by a Foreign Holder, but such taxes generally will apply to the transfer at death or by donation of shares of our common stock by a Foreign Holder. No Chilean stamp, issue, registration or similar taxes or duties apply to Foreign Holders of shares or ADSs.

 

Withholding Tax Certificates

 

Upon request, we will provide to Foreign Holders appropriate documentation evidencing the payment of Withholding Taxes. For further information, the investor should contact: Robert Moreno,robert.moreno@santander.cirelations@santander.cll. Dividends payable to holders of ADSs are net of foreign currency conversion expenses of the Depositary and will be subject to the Withholding Tax currently at the rate of 35% (subject to credits in certain cases as described above).

 


Impact of Chilean Tax ReformModernization Bill

 

On September 29, 2014,August 23, 2018, the LawPresident of Chile sent to the National Congress, Bill No. 20,780107-366 containing the Tax Reform was published inModernization Project.

Among its changes, this bill proposes a single, fully integrated tax regime with a CIT rate of 27% under which CIT paid would be fully creditable against tax imposed on the Official Gazette. The Tax Reform introduced significant changes to the Chilean taxation system and strengthened the powers of the Chilean Tax Authority to control and prevent tax avoidance. The Tax Reform contemplates, among other reforms, changes to the Corporate Tax regime to create two different tax regimes:shareholder.

If this bill becomes effective, the Attributed Income Regime(Sistema de Renta Atribuida) and the Semi-Integrated Regime(Sistema Parcialmente IntegradoIntegrado)).

On February 8, 2016, Law No. 20,899 (that simplifies the taxation systems introduced by the Tax Reform Law) was published, which introduced changes thatprevious tax reform would be repealed and taxpayers who, as of December 31, 2018, are intendedsubject to simplify certain provisionsthe current regimes would be considered as fully entitled to the new general regime as of January 1, 2019.

This bill proposes to restore the integrated CIT regime, where 100% of the Tax Reform. The amendments appliedtaxes paid under the Semi-Integrated Regime (Sistema Parcialmente Integrado) to corporations, limited joint-stock companies and any other entity with at least one non-final taxpayer owner. In addition,concept of CIT can be used as a credit against WHT. Thus the amendments limited the Attributed Income Regime (Sistema de Renta Atribuida) to use by individuals, personal holding companies with limited liability, communities, non-residents that have any kind of permanent establishment in Chile and limited liability companies. Certain taxpayers in the Attributed Income Regime can opt into the Semi-Integrated regime.

Under the Attributed Income Regime, shareholders will be taxed on an accrual basis. The regime imposes a First Category Tax of 25% imposed at the level of the operating entity, plus a global complementarycombined Chilean tax at progressive ratesburden for resident individuals or an additional withholding income tax (withholding tax) of 35% for nonresident shareholders (the First Category Tax being 100% creditable), resulting in an overall income tax charge of 35% for nonresidents. Under this regime, profitsForeign Holders would be required to be attributed to the owners,35% irrespective of whether a distribution actually is made.

Under the Semi-integrated Regime, shareholders would be taxed on a cash basis (when profits are distributed). The regime imposes a First Category Tax of 25.5% for 2017 (and 27.0% as from 2018) at the level of the operating entity, plus a global complementary tax at progressive rates for resident individuals or an additional withholding income tax (Withholding Tax) of 35.0% for nonresident shareholders. The First Category Tax still would be creditable against the 35.0% Withholding Tax under that regime, but 35.0% of the credit shall be paid to the Treasury, so, in practice, only 65.0% of the First Category Tax would be creditable. Thus, taxpayers would pay for the ability to defer shareholder taxation until profits actually are distributed with a higher overall income tax rate than under the Attributed Income Regime.

However, the Tax Reform (as supplemented by Law No. 20,899 that simplifies the taxation systems introduced by the Tax Reform Law) considered that investors from countries with which Chile has signed a Double Tax Treaty a convention foris in place with the avoidancecountry of double taxation and the preventioninvestor. In other words, by virtue of fiscal evasion, as of January 1, 2017 would bebeing entitled to usethis credit, the 100.0%residency of the First Category Tax credit, even if at that timeshareholder who receives the agreement was not yet in force. Under such circumstances, the full tax credit woulddividends will cease to be applicable until December 31, 2019 if at that time the relevant Double Tax Treaty had not yet entered into force. Thus, investors from such treaty countries would enjoy the advantage of deferring shareholder taxation until profits were distributed, and yet retain the benefit of the overall 35.0% income tax charge.relevant.

 

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For banking enterprises,Changes introduced by this bill are not definitive. This project is still in discussion before the default regime is the Semi-integrated Regime.Chilean National Congress and cannot be considered as currently in force.

Year 

Rate 

201421.0%
201522.5%
201624.0%
201725.0% (Attributed Income Regime) /
 25.5% (Semi-Integrated Regime)
201825.0% (Attributed Income Regime) /
 27.0% (Semi-Integrated Regime)

 

U.S. Federal Income Tax Considerations

 

The following is a discussion of material U.S. federal income tax consequences of owning and disposing of shares of our common stock or ADSs to U.S. holders described below, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to hold such common stock or ADSs. The discussion applies only if you are a U.S. holder holding shares of our common stock or ADSs as capital assets for U.S. federal income tax purposes. It does not address all aspects of U.S. federal income taxation that may be relevant to you in light of your particular circumstances, including the alternative minimum tax and the Medicare contribution tax, nor does it describe all tax consequences that may be relevant to U.S. holders subject to special rules, such as:

 

·●certain financial institutions;

 

·●insurance companies;

 

·●dealers and traders in securities who use a mark-to-market method of tax accounting;

 

·●persons holding shares or ADSs as part of a hedge, “straddle,” conversion transaction, integrated transaction or similar transaction;

 

·●persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;

 

·●partnerships or other entities classified as partnerships for U.S. federal income tax purposes;

 

·●tax-exempt entities, including “individual retirement accounts” or “Roth IRAs”;

 

·●persons holding shares of our common stock or ADSs that own or are deemed to own ten percent or more of the voting power or value of our voting stock;

 

·●persons who acquired shares of our common stock or ADSs pursuant to the exercise of any employee stock option plan or otherwise as compensation; or

 

·●persons whose shares or ADSs are held in connection with a trade or business conducted outside the United States.

 

If an entity that is classified as a partnership for U.S. federal income tax purposes owns shares of our common stock or ADSs, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and upon the activities of the partnership. Partnerships owning shares of our common stock or ADSs and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of owning and disposing of the shares of our common stock or ADSs.

 


This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury regulations, all as of the date hereof. These laws are subject to change, possibly on a retroactive basis. It is also based in part on representations by the Depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms. In addition, this discussion does not address U.S. state, local and non-U.S. tax consequences. Please consult your tax advisers concerning the U.S. federal, state, local and non-U.S. tax consequences of owning and disposing of shares or ADSs in your particular circumstances.

 

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As used herein, a “U.S. holder” is a person that for U.S. federal income tax purposes is a beneficial owner of shares of our common stock or ADSs and is:

 

·●a citizen or individual resident of the United States;

 

·●a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, a state thereof or the District of Columbia; or

 

·●an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

 

In general, if you own ADSs, you will be treated as the owner of the underlying shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, no gain or loss will be recognized if you exchange ADSs for the underlying shares represented by those ADSs.

 

The U.S. Treasury has expressed concerns that parties to whom American Depositary Shares are released prior to delivery of shares to the Depositary (“pre-release”) or intermediaries in the chain of ownership between U.S. holders of American Depositary Shares and the issuer of the security underlying the American Depositary Shares may be taking actions that are inconsistent with the claiming of foreign tax credits for holders of American Depositary Shares. These actions would also be inconsistent with the claiming of the favorable tax rates, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the creditability of Chilean taxes and the availability of the favorable tax rates for dividends received by certain non-corporate holders, each described below, could be affected by actions that may be taken by such parties or intermediaries.

 

This discussion assumes that we are not, and will not become, a passive foreign investment company, as described below.

 

Taxation of Distributions

 

Distributions paid on shares of our common stock or ADSs, other than certain pro rata distributions of common shares or rights, will be treated as dividends to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally will be reported to U.S. holders as dividends. Subject to applicable limitations and the discussion above regarding concerns expressed by the U.S. Treasury, certain dividends paid by “qualified foreign corporations” to certain non-corporate U.S. holders may be taxable at rates applicable to long-term capital gains. A foreign corporation is treated as a qualified foreign corporation with respect to dividends paid on stock that is readily tradable on a securities market in the United States, such as the NYSE where our ADSs are traded. You should consult your tax advisers to determine whether the favorable rates may apply to dividends you receive and whether you are subject to any special rules that limit your ability to be taxed at the favorable rates. The amount of the dividend will include any amounts withheld by us or our paying agent in respect of Chilean taxes at the effective rate (after credit for First Category Taxes)CIT) as described above under “ — Material Tax Consequences of Owning Shares of Our Common Stock or ADSs—Taxation of Dividends.” You should consult with your tax adviser to determine the amount considered withheld with respect to a distribution if you are subject to the Attributed Income Regime for Chilean tax purposes, starting in 2017, as described above under “—Material Tax Consequences of Owning Shares of Our Common Stock or ADSs—Impact of Chilean Tax Reform.Taxation.” The amount of the dividend will be treated as foreign-source dividend income to you and will not be eligible for the dividends-received deduction generally allowed to U.S. corporations under the Code.

 

Dividends will be included in your income on the date of your (or in the case of ADSs, the Depositary’s) receipt of the dividend. The amount of any dividend income paid in Chilean pesos will be the U.S. dollar amount calculated by reference to the exchange rate in effect on the date of receipt regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, you should not be required to recognize foreign currency gain or loss in respect of the dividend income. You may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt.

 

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Subject to applicable limitations that may vary depending upon your circumstances and the discussion above regarding concerns expressed by the U.S. Treasury, Chilean taxes withheld from cash dividends on shares of our common stock or ADSs, reduced by the credit for any First Category Tax,CIT, as described above under “—Chilean Taxation,” generally will be creditable against your U.S. federal income tax liability. Starting in 2017, ifIf you are subject to the Attributed Income Regime, as described above under “—Material Tax Consequences of Owning Shares of Our Common Stock or ADSs—Impact of Chilean Tax Reform,Taxation,” amounts paid by you or withheld by us, reduced by the credit for any First Category Tax,CIT, may be creditable for U.S. tax purposes. If creditable, it is uncertain whether such tax would be creditable in the year the Chilean tax is imposed, irrespective of whether a distribution is actually made. You should consult your tax adviser concerning the creditability and timing issues pertaining to such tax. If, however, the Proposed U.S.-Chile Treaty becomes effective, any Chilean income taxes withheld from dividends on shares or ADSs in excess of the rate provided by the treaty will not be creditable by a U.S. holder who is eligible for the benefits of the treaty. The rules governing foreign tax credits are complex and you should consult your tax advisers to determine whether you are subject to any special rules that limit your ability to make effective use of foreign tax credits. Instead of claiming a credit, you may, at your election, deduct such Chilean taxes in computing your taxable income, subject to generally applicable limitations under U.S. law. An election to deduct foreign taxes instead of claiming foreign tax credits must apply to all foreign taxes paid or accrued in the taxable year.

 

Sale or Other Disposition of Shares or ADSs

 

For U.S. federal income tax purposes, gain or loss you realize on the sale or other disposition of shares of our common stock or ADSs generally will be capital gain or loss, and will be long-term capital gain or loss if you held the shares of our common stock or ADSs for more than one year. The amount of your gain or loss will be equal to the difference between your tax basis in the shares of our common stock or ADSs disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. If a Chilean tax is withheld on the sale or disposition of the shares of our common stock or ADSs, your amount realized will include the gross amount of the proceeds of such sale or disposition before deduction of the Chilean tax. See “—Chilean Taxation—Taxation of Capital Gains” for a description of when a disposition may be subject to taxation by Chile. Such gain or loss generally will be U.S.-source gain or loss for foreign tax credit purposes. Consequently, you may not be able to credit any Chilean tax imposed on the disposition of shares of our common stock or ADSs against your taxable income unless you have other foreign-source income in the appropriate foreign tax credit category. If the Proposed U.S.-Chile Treaty becomes effective, however, a U.S. holder who is eligible for the benefits of the treaty and whose gain from the sale of shares is not exempt from Chilean tax under such treaty may elect to treat disposition gain that is subject to Chilean tax as foreign-source gain and claim a credit in respect of the tax. You should consult your tax advisers as to whether the Chilean tax on gains may be creditable against your U.S. federal income tax on foreign-source income from other sources. Alternatively, instead of claiming a credit, you may elect to deduct otherwise creditable taxes in computing your income, subject to generally applicable limitations under U.S. law. An election to deduct foreign taxes instead of claiming foreign tax credits must apply to all foreign taxes paid or accrued in the taxable year.

 

Passive Foreign Investment Company Rules

 

Based on proposed Treasury regulations (the “Proposed Regulations”), which are proposed to be effective for taxable years beginning after December 31, 1994, we believe that we were not a “passive foreign investment company” (a “PFIC”) for U.S. federal income tax purposes for the year ended December 31, 2016.2018. However, since the Proposed Regulations may not be finalized in their current form and since PFIC status depends upon the composition of a company’s income and assets and the market value of its assets (including, among others, less than 25 percent owned equity investments) from time to time, there can be no assurance that we will not be a PFIC for any taxable year. If we were a PFIC for any taxable year during which you held an ADS or a share of our common stock, certain adverse tax consequences could apply to you.

 


If we were a PFIC for any taxable year during which you held shares of our common stock or ADSs, gain recognized by you on a sale or other disposition (including certain pledges) of a share of our common stock or an ADS would generally be allocated ratably over your holding period for the share of our common stock or ADS. The amounts allocated to the taxable year of the sale or other disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the resulting tax liability for that taxable year. Similar rules would apply to any distribution in

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respect of shares of our common stock or ADSs that exceeds 125% of the average of the annual distributions on shares of our common stock or ADSs received by you during the preceding three years or your holding period, whichever is shorter. Certain elections may be available that would result in alternative treatments of the shares of our common stock or ADSs (including, with respect to our ADSs, a mark-to-market election). In addition, if we were a PFIC for a taxable year in which we pay a dividend or the prior taxable year, the favorable rates discussed above with respect to dividends paid to non-corporate holders would not apply.

 

If we were to be treated as a PFIC in any taxable year, a U.S. holder may be required to file reports with the Internal Revenue Service containing such information as the Treasury Department may require.

 

Information Reporting and Backup Withholding

 

Payment of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and may be subject to backup withholding, unless you are a corporation or other exempt recipient or in the case of backup withholding, you provide a correct taxpayer identification number and certify that you are not subject to backup withholding.

 

The amount of any backup withholding from a payment to you will be allowed as a credit against your U.S. federal income tax liability and may entitle you to a refund, provided that the required information is timely furnished to the Internal Revenue Service.

 

Certain U.S. holders may be required to report information relating to stock of a non-U.S. person, subject to certain exceptions (including an exception for stock held in custodial accounts maintained by a U.S. financial institution). You.You should consult your tax advisers regarding any reporting obligations you may have with respect to shares of our common stock or ADSs.

 

F.Dividends and Paying Agents

 

Not applicable.

 

G.Statement by Experts

 

Not applicable.

 

H.Documents on Display

 

The documents concerning us which are referred to in this Annual Report may be inspected at our offices at Bandera 140, 20thfloor, Santiago, Chile. We are subject to the information reporting requirements of the Exchange Act, except that, as a foreign issuer, we are not subject to the proxy rules or the short-swing profit and disclosure rules of the Exchange Act. In accordance with these statutory requirements, we file or furnish reports and other information with the SEC. Reports and other information filed or furnished by us with the SEC may be inspected and copied at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material may be obtained by mail from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You may obtain information on the operation of the Public Reference Section by calling the SEC at 1-800-732-0330. The SEC maintains a website on the Internet at http://www.sec.gov that contains reports and information statements and other information regardingabout us. The reports and information statements and other information about us can be downloaded from the SEC’s website or our investor relations websitewww.santandercl.gcs-web.comand can also be inspected and copied at the offices of the NYSE, Inc., 20 Broad Street, New York, New York 10005. None of the information contained on our website is incorporated by reference into, or forms part of, this Annual Report.

 

I.Subsidiary Information

 

Not applicable.

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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Introduction

 

The principal types of risk inherent in Santander-Chile’s business are market, liquidity, operational and credit risks. The effectiveness with which we are able to manage the balance between risk and reward is a significant factor in our ability to generate long term, stable earnings growth. Toward that end, our Board and senior management places great emphasis on risk management.

 

A.Integral Risk Committee

 

The Integral Risk Committee of the Board is responsible for reviewing and monitoring all risks that may affect us, including reputation risk, allowing for an integral risk management. This committee serves as the governing body through which the Board supervises risk in general. It also evaluates the reasonability of the systems for measurement and control of risks.

 

·●Credit risk

·●Market risk

·●Operational risk

·●Cybersecurity

●Solvency risk (BIS)

·●Legal risks

·●Compliance risks

·●Reputational risks

 

This Committee includes the Vice Chairman of the Board and five6 Board members. This committee also includes the CEO, the Director of Risk and other senior level executives from the commercial side of our business: The Board members of this committee are:

 

Board member

Position in Committee

Alfonso Gomez MoralesPresident
Claudio Melandri HinojosaMember
Oscar von Chrismar CarvajalChairmanMember
Juan Pedro Santa MaríaFirst Vice Chairman
Roberto MéndezSecond Vice Chairman
Roberto Zahler PérezMember
Raimundo MongeLucía Santa Cruz SutilMember
Blanca Bustamante BravoMember

 

B.Audit Committee

B. Audit Committee

 

Board member

Position in Committee

Marco ColodroChairman
Mauricio LarrainFirst Vice Chairman and Financial Expert
Orlando Poblete IturrateSecond Vice ChairmanPresident
Felix de Vicente MingoMember
Rodrigo Vergara MontesMember
Juan Pedro Santa María PérezSecretary

 

The Audit Committee (Comité de Directores y Auditoría) is comprised of three members of the Board of Directors. TheDirectors and the Committee Secretary is Juan Pedro Santa María. The Chief Executive Officer, General Counsel, General Auditor and other persons from the Bank can be invited to the meetings if necessary and are present on specific matters. This Committee’s primary responsibility is to support the Board of Directors in the continuous improvement of our system of internal controls, which includes reviewing the work of both the external auditorsindependent registered public accounting firm and the Internal Audit Department. The committee is also responsible for analyzing observations made by regulatory entities of the Chilean financial system about us and for recommending measures to be taken by our management in response. The external auditors are recommended by this committee to our Board of Directors and appointed by our shareholders at the annual shareholders’ meeting.

 

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C. Asset and Liability Committee

C.Asset and Liability Committee

 

The ALCO includes the ChairmanVice-President of the Board and fivethree additional members of the Board, the Chief Executive Officer, the Chief Financial Officer, the Corporate Financial Controller, the Manager of the Financial Management Division, the Manager of Market Risk, the Manager of the Treasury Division, and other senior members of management. The ALCO meets monthly. All limits reviewed by the ALCO are measured and prepared by the Market Risk Department. The non-Board members of the ALCO meet weekly to review liquidity, funding, capital and market risk related matters.

 

Board member

Position in Committee

Rodrigo Vergara MontesVittorio CorboChairmanPresident
Mauricio LarraínVice-Chairman
Oscar von Chrismar CarvajalSecond Vice-ChairmanMember
Marco ColodroAlfonso Gomez MoralesMember
Roberto ZahlerJosé Félix de Vicente MingoMember
Raimundo MongeMember

 

The main functions of the ALCO are:

 

·●Making the most important decisions, approving the risk appetite and limits regarding our exposure to inflation, interest rate risk, inflation risk, funding, capital and liquidity levels. The main limits set and monitored by the ALCO (and measured by the Market Risk Department) are:

Risk

Measure

Interest ratesSensitivity Capital
Sensitivity NIM
LiquidityRegulatory limit 30 Days
Regulatory limit 90 Days
Liquidity coverage ratio
Net stable funding ratio
Structural liquidity limit
CapitalCore capital ratio
BIS ratio
BIS ratio with market risk
BIS ratio with market and operational risk
Foreign exposuresIntergroup exposure: Derivatives, deposits, loans
Foreign assets: Derivatives, Deposits, Loans
·Review of the Bank’s inflation gap.

 

·●Review of the evolution of the most relevant local and international markets and monetary policies.

 

The main limits set and monitored by the ALCO (and measured by the Market Risk Department) are:

Risk

Measure

Interest ratesSensitivity Capital
Sensitivity NIM
Regulatory limit 30 Days
Regulatory limit 90 Days
Inflation GAP
LiquidityLiquidity coverage ratio
Net stable funding ratio
Stress tests
Structural liquidity limit
Wholesale funding limits
Deposit concentration
Asset encumbrance
CapitalLeverage ratio
Core capital ratio
BIS ratio
ROE - COE
RORAC - COE
Foreign exposuresIntergroup exposure: Derivatives, deposits, loans
Foreign assets: Derivatives, Deposits, Loans

D.Market Committee

 

The Market Committee includes the Vice-ChairmanChairman of the Board, threethe Vice Chairman of the Board, two additional members of the Board, the Chief Executive Officer, the ManagerDirector of GlobalCorporate Investment Banking, and Markets,the Chief Financial Officer, the Manager of the Treasury Division, the Manager of the Financial Management Division, the Manager of Market Risk, the Financial Controller and other senior members of management.

 

Board member 

Position in Committee 

Vittorio CorboChairman
Oscar von Chrismar CarvajalVice-ChairmanPresident
Roberto ZahlerClaudio Melandri HinojosaSecond Vice-ChairmanMember
Marco ColodroRodrigo Vergara MontesMember
Alfonso Gomez MoralesMember

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The Market Committee is responsible for:

 

·●Establishing a strategy for the Bank’s trading investment portfolio.

 

·●Establishing the Bank’s policies, procedures and limits with respect to its trading portfolio. The Bank’s Market Risk Department measures all risks and limits and reports these to the Market Committee.

 

·●Reviewing the net foreign exchange exposure and limitlimit.

 

·●Reviewing the results of the Bank’s client treasury business

●Reviewing the evolution of the most relevant local and international markets and monetary policies.

 

E. Risk Department

 

All issues regarding risk in the Bank are the responsibility of the Bank’s Risk Department. The Risk Department reports to the CEO but has full independence, and no risk decisions can be made without its approval. Below is an organizational chart of the Risk Department:

 

1.Credit risk

Credit risk

 

See “Item 5—Selected Statistical Information—Classification of Loan Portfolio for a complete description of credit risk management.

 


 

1.       Credit Risk

Credit Risk Governance

The Risk Division, our credit analysis and risk management group, is largely independent of our business areas. Risk evaluation teams interact regularly with our clients. For larger transactions, risk teams in our headquarters work directly with clients when evaluating credit risks and preparing credit applications. Various credit approval committees, all of which include Risk Division and Commercial Division personnel, must verify that the appropriate qualitative and quantitative parameters are met by each applicant. Each committee’s powers are defined by our Board of Directors.

Santander-Chile’s governance rules establish an Integral Risk Committee. This committee is responsible for revising and following all risks that may affect us, including reputational risk, allowing for an integral risk management. This committee serves as the governing body through which the Board supervises all risk functions. It also evaluates the reasonability of the systems for measurement and control of risks. This Committee includes the Vice Chairman of the Board and five Board members.

The Board has delegated the duty of credit risk management to the Risk Committee, as well as to the Bank’s risk departments, whose roles are summarized below:

2.●Formulate credit policies by consulting with the business units, meeting requirements of guarantees, credit evaluation, risk rating and submitting reports, documentation and legal procedures in compliance with the regulatory, legal and internal requirements of the Bank.

●Establish the structure to approve and renew credit requests. The Bank structures credit risks by assigning limits to the concentration of credit risk in terms of individual debtor, debtor group, industry segment and country. Approval levels are assigned to the corresponding officials of the business unit (commercial, consumer, SMEs) to be exercised by that level of management. In addition, those limits are continually revised. Teams in charge of risk evaluation at the branch level interact on a regular basis with customers; however, for larger credit requests, the risk team from the head office and the Executive Risk Committee works directly with customers to assess credit risks and prepare risk requests.

●Limit concentrations of exposure to customers or counterparties in geographic areas or industries (for accounts receivable or loans), and by issuer, credit rating and liquidity.

●Develop and maintain the Bank’s credit risk classifications for the purpose of classifying risks according to the degree of exposure to financial loss that is exhibited by the respective financial instruments, with the aim of focusing risk management specifically on the associated risks.


●Revise and evaluate credit risk. Management’s risk divisions are largely independent of the Bank’s commercial division and evaluate all credit risks in excess of the specified limits prior to loan approvals for customers or prior to the acquisition of specific investments. Credit renewal and reviews are subject to similar processes.

The following diagram illustrates the governance of our credit risk division including the committees with approval power:

 

(1)       Includes various approval committees for the Middle Market and high net worth clients.

2.Non-financial risks

 

All issues regarding operational risks in the Bank fall under the Non-Financial Risk Department that reports to the Risk Department. Below is an organization chart of this department.

 

  

 

All operational risks are measured in this Department and reported simultaneously to local management and the Board through various channels.

 

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Cyber-security and data security plans

 

Throughout 2016, theThe Bank maintained its focus oncontinuously monitors cyber-security risks, and has implemented additional preventative measures to be prepared for any attack of this kind. The Bank has evolved its internal cyber-security model to reflect international standards, incorporating concepts which can be used to assess the degree of maturity in deployment. Based on this new assessment model, individual in-situ analyses have been carried out to identify deficiencies and steps to remedy any such deficiencies have been identified in our cyber-security defense plans.

 


The Bank’s organizationalBank has created a Cybersecurity Framework which defines the governance and governance structurepolicies on preventing and confronting cybercrime. The Chief of Cybersecurity or CISO (Chief Information Security Officer) has been defined as the officer responsible for cybersecurity, a function performed by the managementDirector of Technology and control of cyber-security risk has also been strengthened. Specific committees have been set up and cyber-security metrics have been included in the Bank’s risk appetite.Operations. Embedded in the Bank’s Technology and Operations division is the Technology and Operations Risk Department, which is the front line of defense against cyber-security threats and data security. In addition, the Non-Financial Risk Department through the TechnologicalCyber Risk area(a new specialized area) enforces the policies and controls that the different areas must follow regarding technology and cyber-security risks. Both areas coordinate throughIn turn, there is a group of supervisory bodies that include the various operational risk committees shownCybersecurity Committee, the Non-Financial Risk Committee, the Chief Executive Officer’s Management Committee and the Board’s Integral Risk Committee. All this architecture has been created with the aim of identifying cyber risks, the development of a culture and education in cybersecurity, the diagram above.creation of cyber scenarios to anticipate potential threats, and the fulfillment of the regulatory framework set by the authorities.

 

Finally, the intelligence and analysis function has also been reinforced by contracting bank threat monitoring service, and progress has been made in the incident registration, notification and escalation mechanisms for internal reporting and reporting to supervisors. In addition, observation and analytical assessment of the events in the sector and in other industries enables us to update and adapt our models for emerging threats. We also coordinate with Santander Spain’s headquarters and units in other countries regarding strategy, best practices and communicating of experiences. Among other things, we have implemented, or are currently in the process of implementing, the following controls to limit cybersecurity threats:

 

●Contracting a Tier IV data center.

●Reducing the technological obsolescence of our databases, operating systems, end points, network devices, virtual servers and ATMs.

●Establishing two-factor authentication for certain wire instructions to verify significant wire transactions.

●Developing employee education, including mandatory training on cybersecurity risks and phishing and subsequent testing through ethical phishing.

●Constantly monitoring the web and blocking Internet domains that are similar to the company’s actual domain name.

●Establishing law enforcement contacts and legal procedures to prosecute cybercrime.

●Obtaining insurance coverage to cover potential losses.

●Continuously checking for updates on the latest business email compromise scams.

●Building a media room to monitor cybersecurity events globally.

●Replacing all of our client’s credit cards that do not have a chip to reduce fraud.

●Installing advanced tools in anti-malware.

●Increasing segregation of IT networks.

●Improving access control to our installations.

●Prohibiting trading of the Bank’s securities if a material cybersecurity event occurs.

During 2018, the Bank did not face a material loss due to cybersecurity breaches and even though we have thorough cybersecurity practices and governance in place, we cannot assure that in the future a material event will not occur.


Role of Santander Spain’sGrupo Santander’s Global Risk Division: Operational Risk

 

In matters regarding operational risk, Santander Spain’s Global Risk Department’s role is to define certain global policies, guidelines and procedures regarding operational risk. The Corporate Operational Risk Committee is the main body in which the different units of Santander discuss and review the major operational risk events and policies.

 

3.Market Risks

 

This section describes the market risks that we are exposed to, the tools and methodology used to control these risks, the portfolios over which these market risk methods were applied and quantitative disclosure that demonstrate the level of exposure to market risk that we are assuming. This section also discloses the derivative instruments that we use to hedge exposures and offer to our clients.

 

Market risk is the risk of losses due to unexpected changes in interest rates, foreign exchange rates, inflation rates and other rates or prices. We are exposed to market risk mainly as a result of the following activities:

 

·●trading in financial instruments, which exposes us to interest rate and foreign exchange rate risk;

 

·●engaging in banking activities, which subjects us to interest rate risk, since a change in interest rates affected gross interest income, gross interest expense and customer behavior;

 

·●engaging in banking activities, which exposes us to inflation rate risk, since a change in expected inflation affects gross interest income, gross interest expense and customer behavior;

 

·●trading in the local equity market, which subjects us to potential losses caused by fluctuations of the stock market; and

 

·●investing in assets whose returns or accounts are denominated in currencies other than the Chilean peso, which subjects us to foreign exchange risk between the Chilean peso and such other currencies.

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The main decisions that relate to market risk for the Bank and the limits regarding market risk are made in the Asset and Liability Committee and the Market Committee. The measurement and oversight of market risks is performed by the Market Risk Department. Below is a list of the main reports produced by the Market Risk Department and who they are addressed to:

Report 

Unit 

Objective 

Addressed to: 

Periodicity 

Daily Global ReportMarket risksGive a global vision of the market, positions, risks, sensitivity, vision and alerts of the trading and non-trading positionsMarket Risk (local and global), Senior Management, Internal AuditorsDaily
Stress TestMarket risksStress test report over the Bank's trading and ALCO booksMarket Risk (local and global), Senior Management, Internal AuditorsMonthly
Sensitivity AnalysisMarket risksSensitivity analysis of the ALCO bookMarket Risk (local and global), Senior Management, Internal AuditorsDaily
Fixed income positionsMarket risksFixed income positions and general informationMarket Risk (local and global), Senior Management, Internal AuditorsDaily
Interest rate gapMarket risksInterest rate gap sensitivity and limit levelsMarket Risk (local and global), Senior Management, Internal AuditorsMonthly
Liquidity gapMarket risksLiquidity levels and limitsMarket Risk (local and global), Senior Management, Internal AuditorsMonthly
Market reportMarket risksMain market indicators and evolutionMarket Risk (local and global), Senior Management, Internal AuditorsDaily
VaRMarket risksVaR position and limits- Market risk (local and global) and Senior ManagementDaily
Trading Portfolio LimitsMarket risksTrading book evolution, instruments and limitsMarket Risk (local and global), Senior Management, Internal AuditorsDaily
Largest depositorsMarket risksLargest 20 and largest 50 depositors- Market risk (local and global) and Senior ManagementWeekly
Follow-up reportMarket risksSummary of Market risk information for Senior ManagementMarket Risk (local and global), Senior Management (local and global), Internal AuditorsMonthly
Liquidity stress-testMarket risksLiquidity stress test simulationMarket Risk (local and global), Senior Management, Internal AuditorsQuarterly
Interest rate riskMarket risksInterest rate risk report, limits and estimates of results from interest rate risk- Market risk (local and global), Manager of Global banking and markets, Manager of Treasury, Manager of Market Making and Prop TradingDaily
BacktestingMarket risksBacktesting of VaR estimates to actual resultsMarket Risk (local and global), Senior Management, Internal AuditorsWeekly
PNL TreasuryMarket risksTreasury income statement- Market risk (local and global), Manager of Global banking and markets, Manager of Treasury, Manager of Market Making and Prop TradingDaily

Santander-Chile’s governance rules have established the existence of two high-level committees that, among other things, function to monitor and control market risks: the Asset and Liability Committee and the Market Committee.

 

Role of Santander Spain’sGrupo Santander’s Global Risk Division: Market Risk

 

In matters regarding Market Risk, the role of Santander Spain’s Global Risk Department is to define certain global policies, guidelines and procedures regarding market risk. The information produced by our local Market Risk Department is standardized for the whole group in order to facilitate a consolidation of risks being taken on a global basis. They review daily the consumption of limits and provide valuable input on the evolution of markets, especially regarding the Eurozone.

 

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4.Market Risk: Quantitative Disclosure

 

Impact of inflation

Our assets and liabilities are denominated in Chilean pesos, Unidades de Fomento (UF) and foreign currencies. The Bank no longer recognizes inflation accounting and has eliminated price-level restatement in line with IFRS, but inflation impacts our results of operations as some loan, deposit and other liabilities are contracted in UF. The UF is revalued in monthly cycles. Each day in the period beginning on the tenth day of the current month through the ninth day of the succeeding month, the nominal peso value of the UF is indexed up (or down in the event of deflation) in order to reflect a proportionate amount of the change in the Chilean Consumer Price Index during the prior calendar month. One UF equaled Ch$26,347.98 at December 31, 2016, Ch$25,629.09 at December 31, 2015, and Ch$24,627.10 at December 31, 2014. High levels of inflation in Chile could adversely affect the Chilean economy and could have an adverse effect on our business, financial condition and results of operations. Negative inflation rates also negatively impact our results. Inflation measured as the annual variation of the UF was 2.8% in 2016, 4.1% in 2015 and 5.7% in 2014. There can be no assurance that Chilean inflation will not change significantly from the current level. Although we currently benefit from moderate levels of inflation, due to the current structure of our assets and liabilities (i.e., a significant portion of our loans are indexed to the inflation rate, but there are no corresponding features in deposits or other funding sources that would increase the size of our funding base), there can be no assurance that our business, financial condition and result of operations in the future will not be adversely affected by changing levels of inflation. In summary:

 

·●Our assets and liabilities are denominated in Chilean pesos, Unidades de Fomento (UF) and foreign currencies. The Bank no longer recognizes inflation accounting and has eliminated price-level restatement in line with IFRS, but inflation impacts our results of operations as some loan, deposit and other liabilities are contracted in UF. The UF is revalued in monthly cycles. Each day in the period beginning on the tenth day of the current month through the ninth day of the succeeding month, the nominal peso value of the UF is indexed up (or down in the event of deflation) in order to reflect a proportionate amount of the change in the Chilean Consumer Price Index during the prior calendar month. One UF equaled Ch$27,565.79 at December 31, 2018, Ch$ 26,798.14 at December 31, 2017 and Ch$26,347.98 at December 31, 2016. High levels of inflation in Chile could adversely affect the Chilean economy and could have an adverse effect on our business, financial condition and results of operations. Negative inflation rates also negatively impact our results. Inflation measured as the annual variation of the UF was 2.9% in 2018, 1.7% in 2017 and 2.8% in 2016. There can be no assurance that Chilean inflation will not change significantly from the current level. Although we currently benefit from moderate levels of inflation, due to the current structure of our assets and liabilities (i.e., a significant portion of our loans are indexed to the inflation rate, but there are no corresponding features in deposits or other funding sources that would increase the size of our funding base), there can be no assurance that our business, financial condition and result of operations in the future will not be adversely affected by changing levels of inflation. In summary:


●UF-denominated assets and liabilities. The effect of any changes in the nominal peso value of our UF-denominated interest earning assets and interest bearing liabilities is reflected in our results of operations as an increase (or decrease, in the event of deflation) in interest income and expense, respectively. Our net interest income will be positively affected by an inflationary environment to the extent that our average UF-denominated interest earning assets exceed our average UF-denominated interest bearing liabilities. Our net interest income will be positively affected by deflation in any period in which our average UF-denominated interest bearing liabilities exceed our average UF-denominated interest earning assets. Our net interest income will be negatively affected in a deflationary environment if our average UF-denominated interest earning assets exceed our average UF-denominated interest bearing liabilities.

 

·●Inflation and interest rate hedge. A key component of our asset and liability policy is the management of interest rate risk. The Bank’s assets generally have a longer maturity than our liabilities. As the Bank’s mortgage portfolio grows, the maturity gap tends to rise as these loans, which are contracted in UF, have a longer maturity than the average maturity of our funding base. As most of our long term financial instruments and mortgage loans are contracted in UF and most of our deposits are in nominal pesos, the rise in mortgage lending increases the Bank’s exposure to inflation and to interest rate risk. The size of this gap is limited by internal and regulatory guidelines in order to avoid excessive potential losses due to strong shifts in interest rates.rates or inflation. In order to keep this duration gap below regulatory limits, the Bank issues long term bonds denominated in UF or interest rate swaps. The financial cost of the bonds and the efficient part of these hedges is recorded as net interest income. In 2016,2018, the lossgain from the swaps taken in order to hedge mainly for inflation and interest rate risk and included in net interest income totaled Ch$18,799 million compared to a gain of Ch$15,408 million in 2017 and a loss of Ch$42,420 million compared to a loss of Ch$107,867 million in 2015 and a loss of Ch$130,254 million in 2014.2016. The average gap between our interest earnings assets and total liabilities linked to the inflation, including hedging was Ch$4,534,6654,432,261 million in 2016,2018, Ch$3,507,2504,340,626 million in 20152017 and Ch$4,193,7014,659,534 million in 2014.2016.

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·●The financial impact of the gap between our interest earning assets and liabilities denominated in UFs including hedges was Ch$126,260 million in 2018, Ch$73,050 million in 2017 and Ch$133,702 million in 2016, Ch$130,666 million in 2015 and Ch$229,946 million in 2014.2016. The 2.3% rise72.8% increase in the results from our UF gap was due to the higher gap in 20162018 compared to 2015, which was partially offset by2017 and the lowerhigher UF inflation rate in 20162018 compared to 2015.2017.

 

  As of December 31, % Change % Change
Impact of inflation on net interest income 2016 2015 2014 2016/2015 2015/2014
  (in millions of Ch$)
Results from UF GAP (1)  133,702   130,666   229,946   2.3%  (43.2%)
Annual  UF inflation  2.8%  4.1%  5.7%        
  As of December 31,  % Change  % Change 
Impact of inflation on net interest income 2018  2017  2016  2018/2017  2017/2016 
  (in millions of Ch$) 
Results from UF GAP(1)  126,260   73,050   133,702   72.8%  (45.4%)
Annual UF inflation  2.9%  1.7%  2.8%        

 

 

(1)UF GAP is net interest income from asset and liabilities denominated in UFs and include the results from hedging the size of this gap via interest rate swaps.

 

·●Peso-denominated assets and liabilities. Interest rates prevailing in Chile during any period primarily reflect the inflation rate during the period and the expectations of future inflation. The sensitivity of our peso-denominated interest earning assets and interest bearing liabilities to changes to such prevailing rates varies. See “Item 5. Operating5.Operating and Financial Review and Prospects—A. Operating Results—Interest Rates.” We maintain a substantial amount of non-interest bearing peso-denominated demand deposits. Because such deposits are not sensitive to inflation, any decline in the rate of inflation would adversely affect our net interest margin on inflation indexed assets funded with such deposits, and any increase in the rate of inflation would increase the net interest margin on such assets. The ratio of the average of such demand deposits and average shareholder’s equity to average interest-earning assets was 29.0%30.6%, 29.9%,29.8% and 30.2%29.0% for the years ended December 31, 2016, 2015,2018, 2017 and 2014,2016, respectively.

 


Interest rate sensitivity

 

Interest rates earned and paid on our assets and liabilities reflect, to a certain degree, inflation, expectations regarding inflation, changes in short term interest rates set by the Central Bank and movements in long term real rates. The Central Bank manages short term interest rates based on its objectives of balancing low inflation and economic growth. Because our liabilities are generally re-priced sooner than our assets, changes in the rate of inflation or short term rates in the economy are reflected in the rates of interest paid by us on our liabilities before such changes are reflected in the rates of interest earned by us on our assets. Therefore, when short term interest rates fall, our net interest margin is positively impacted, but when short term rates increase, our interest margin is negatively affected. At the same time, our net interest margin tends to be adversely affected in the short term by a decrease in inflation rates since generally our UF-denominated assets exceed our UF-denominated liabilities. (See “Item 5. Operating5.Operating and Financial Review and Prospects—A. Operating Results—Impact of Inflation—Peso-denominated assets and liabilities”). An increase in long term rates has a positive effect on our net interest margin, because our interest earning assets generally have longer terms than our interest bearing liabilities. In addition, because our peso-denominated liabilities have relatively short re-pricing periods, they are generally more responsive to changes in inflation or short term rates than our UF-denominated liabilities. As a result, during periods when current inflation or expected inflation exceeds the previous period’s inflation, customers often switch funds from UF-denominated deposits to peso-denominated deposits, which generally bear higher interest rates, thereby adversely affecting our net interest margin.

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As of December 31, 2016,2018 and 2017, the breakdowndetail of the maturities of assets and liabilities is as follows:

 

As of December 31, 2016 

Demand 

 

Up to 1 month 

 

Between 1 and 3 months 

 

Between 3 and 12 months 

 

Subtotal up to 1 year 

 

Between 1 and 5 years 

 

More than 5 years 

 

Subtotal More than 1 year 

 

Total 

Assets                  
As of December 31, 2018 Demand  

Up to 

1 month

 

Between 1 and

3 months

 

Between 3 and

12 months

 

Subtotal

up to 1 year

 

Between 1 and

3 years

 

Between 3 and

5 years

 

More than

5 years

 

Subtotal

More than 1 year

  Total 
 MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ 
                     
Financial assets                                        
Cash and deposits in banks  2,279,389   —   —   —   2,279,389   —   —   —   2,279,389   2,065,411   —   —   —   2,065,411   —   —   —   —   2,065,411 
Cash items in process of collection  495,283   —   —   —   495,283   —   —   —   495,283   353,757   —   —   —   353,757   —   —   —   —   353,757 
Trading investments  —   52,443   13,252   118,845   184,540   182,186   30,261   212,447   396,987 
Financial assets held for trading  —   1,064   —   11,642   12,706   16,331   20,080   27,924   64,335   77,041 
Investments under resale agreements  —   6,736   —   —   6,736   —   —   —   6,736   —   —   —   —   —   —   —   —   —   — 
Financial derivative contracts  —   82,243   120,653   292,801   495,697   888,927   1,116,158   2,005,085   2,500,782   —   111,268   128,024   543,722   783,014   723,622   552,133   1,041,866   2,317,621   3,100,635 
Interbank loans (*)  —   12,859   135,756   124,143   272,758   44   5   49   272,807 
Loans and accounts receivables from customers (**)  717,306   2,393,216   2,108,001   4,488,993   9,707,516   7,846,411   9,379,697   17,226,108   26,933,624 
Available-for-sale investments  —   1,581,682   250,222   314,842   2,146,746   417,950   824,210   1,242,160   3,388,906 
Guarantee deposits (threshold)  396,289   —   —   —   396,289   —   —   —   396,289 
Total assets  3,888,267   4,129,179   2,627,884   5,339,624   15,984,954   9,335,518   11,350,331   20,685,849   36,670,803 
Liabilities                                    
Loans and accounts receivables at amortised cost (*)  238,212   3,295,003   2,323,442   4,880,726   10,737,383   5,474,289   3,236,349   10,765,393   19,476,031   30,213,414 
Loans and account receivable at FVOCI (**)  —   —   —   25,294   25,294   4,949   —   38,451   43,400   68,694 
Debt instruments at FVOCI  —   2,391,329   —   1   2,391,330   86   —   2,907   2,993   2,394,323 
Equity instruments at FVOCI  —   —   —   —   —   —   —   483   483   483 
Guarantee deposits (margin accounts)  170,232   —   —   —   170,232   —   —   —   —   170,232 
Total financial assets  2,827,612   5,798,664   2,451,466   5,461,385   16,539,127   6,219,277   3,808,562   11,877,024   21,904,863   38,443,990 
                                        
Financial liabilities                                        
Deposits and other demand liabilities  7,539,315   —   —   —   7,539,315   —   —   —   7,539,315   8,741,417   —   —   —   8,741,417   —   —   —   —   8,741,417 
Cash items in process of being cleared  288,473   —   —   —   288,473   —   —   —   288,473   163,043   —   —   —   163,043   —   —   —   —   163,043 
Obligations under repurchase agreements  —   212,437   —   —   212,437   —   —   —   212,437   —   48,545   —   —   48,545   —   —   —   —   48,545 
Time deposits and other time liabilities  121,527   6,105,767   4,193,906   2,537,299   12,958,499   132,014   61,196   193,210   13,151,709   122,974   5,248,418   4,108,556   3,326,199   12,806,147   191,547   6,137   63,988   261,672   13,067,819 
Financial derivative contracts  —   92,335   122,565   263,893   478,793   841,487   971,881   1,813,368   2,292,161   —   131,378   120,361   349,551   601,290   495,789   471,185   949,464   1,916,438   2,517,728 
Interbank borrowings  4,557   373,423   115,769   1,154,063   1,647,812   268,556   —   268,556   1,916,368   39,378   16,310   404,575   1,188,692   1,648,955   139,671   —   —   139,671   1,788,626 
Issued debt instruments  —   43,141   185,425   922,705   1,151,271   2,612,710   3,562,391   6,175,101   7,326,372   —   71,465   39,267   745,830   856,562   2,431,849   1,549,743   3,277,079   7,258,671   8,115,233 
Other financial liabilities  153,049   1,461   1,161   2,817   158,488   66,407   15,121   81,528   240,016   179,681   934   2,412   22,844   205,871   9,261   92   176   9,529   215,400 
Guarantees received (threshold)  480,926   —   —   —   480,926   —   —   —   480,926 
Total liabilities  8,587,847   6,828,564   4,618,826   4,880,777   24,916,014   3,921,174   4,610,589   8,531,762   33,447,777 
Guarantees received (margin accounts)  540,091   —   —   —   540,091   —   —   —   —   540,091 
Total financial liabilities  9,786,584   5,517,050   4,675,171   5,633,116   25,611,921   3,268,117   2,027,157   4,290,707   9,585,981   35,197,902 

 

(*)Interbank loansLoans and accounts receivables at amortized cost are presented on a gross basis.basis, The amount of allowance is Ch$4,135882,414 million.

 

(**)Loans and accounts receivables from customersat FVOCI are presented on a gross basis. Provisions amounts according to typebasis, The amount of loan are detailed as follows: Commercial loansallowance is Ch$429,442 million, Mortgage loans Ch$57,009 million, and Consumer loans Ch$300,019106 million.

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The following table sets forth our average daily balance of liabilities for the years ended December 31, 2016, 20152018, 2017 and 2014,2016, in each case together with the related average nominal interest rates paid thereon.

 

 

2016 

 

2015 

 

2014 

 

2018

 

2017

 

2016

 
 

Average Balance 

 

% of Total Average Liabilities 

 

Average Nominal Rate 

 

Average Balance 

 

% of Total Average Liabilities 

 

Average Nominal Rate 

 

Average Balance 

 

% of Total Average Liabilities 

 

Average Nominal Rate 

 

Average Balance

 

% of Total Average Liabilities

 

Average Nominal Rate

 

Average Balance

 

% of Total Average Liabilities

 

Average Nominal Rate

 

Average Balance

 

% of Total Average Liabilities

 

Average Nominal Rate

 
 (in millions of Ch$, except percentages) (in millions of Ch$, except percentages) 
Interest-bearing liabilities                                                      
Savings accounts  116,339   0.3%  2.5%  114,330   0.3%  3.4%  108,185   0.3%  5.0%  117,885   0.3%  2.7%  117,305   0.3%  1.6%  116,339   0.3%  2.5%
Time deposits  13,620,848   38.6%  3.3%  12,685,504   36.7%  3.2%  11,952,994   36.6%  3.4%  13,154,916   35.3%  2.8%  13,146,520   37.0%  2.9%  13,620,848   38.6%  3.3%
Central Bank borrowings  871   0.0%  3.4%  4,891   —%   1.0%  6,906   0.0%  0.2%  4   0.0%  6.0%  6   0.0%  2.2%  871   0.0%  3.4%
Repurchase agreements  121,875   0.3%  2.4%  228,050   0.7%  3.1%  413,263   1.3%  2.0%  291,913   0.8%  2.3%  294,368   0.8%  2.3%  121,875   0.3%  2.4%
Mortgage finance bonds  52,414   0.1%  8.1%  63,061   0.2%  10.2%  81,805   0.2%  11.9%  28,685   0.1%  8.0%  38,714   0.1%  7.0%  52,414   0.1%  8.1%
Other interest bearing liabilities  7,856,201   22.3%  5.0%  7,500,408   21.7%  5.5%  6,865,084   21.0%  6.9%  9,401,475   25.3%  4.8%  8,632,128   24.3%  4.0%  7,856,201   22.3%  5.0%
Subtotal interest-bearing liabilities  21,768,547   61.8%  3.7%  20,596,244   59.6%  4.0%  19,428,237   59.4%  4.6%  22,994,878   61.8%  3.6%  22,229,041   62.6%  3.3%  21,768,548   61.8%  3.7%
                                                                        
Non-interest bearing liabilities                                                                        
Non-interest bearing deposits  5,753,622   16.3%      5,719,889   16.6%      5,386,272   16.5%      6,763,546   18.2%      6,117,644   17.2%      5,753,622   16.3%    
Derivatives  2,724,994   7.7%      2,958,942   8.6%      2,719,386   8.3%      2,020,857   5.4%      2,175,063   6.1%      2,724,994   7.7%    
Other non-interest bearing liabilities  2,156,015   6.1%      2,454,037   7.1%      2,501,651   7.6%      2,170,906   5.8%      1,997,799   5.6%      2,156,015   6.1%    
Shareholders’ equity  2,840,843   8.1%      2,816,116   8.2%      2,689,037   8.2%      3,263,155   8.8%      3,001,680   8.5%      2,840,843   8.1%    
Subtotal non-interest bearing liabilities  13,475,473   38.2%      13,948,984   40.4%      13,296,346   40.6%    
Subtotal non-interest bearing liabilities and equity  14,218,464   38.2%      13,292,186   37.4%      13,475,474   38.2%    
Total liabilities  35,244,021   100.0%      34,545,228   100.0%      32,724,383   100.0%      37,213,342   100.0%      35,521,228   100.0%      35,244,020   100.0%    

Foreign exchange fluctuations

 

The Chilean government’s economic policies and any future changes in the value of the Chilean peso against the U.S. dollar could adversely affect our financial condition and results of operations. The Chilean peso has been subject to significant devaluation in the past and may be subject to significant fluctuations in the future. The Central Bank exchange rate depreciated 13.1% in 2018 and appreciated 5.7%7.8% in 2016 and depreciated 16.5% in 2015.2017. See “Item 3. Key Information—A. Selected Financial Data—Exchange Rates.”

 

A significant portion of our assets and liabilities are denominated in foreign currencies, principally the U.S. dollar, and we historically have maintained, and may continue to maintain, material gaps between the balances of such assets and liabilities. Because such assets and liabilities, as well as interest earned or paid on such assets and liabilities, and gains and losses realized upon the sale of such assets, are translated to Chilean pesos in preparing our financial statements, our reported income is affected by changes in the value of the Chilean peso relative to foreign currencies (principally the U.S. dollar).

 

Our current strategy is not to maintain a significant difference between the balances of our assets and liabilities in foreign currencies. In 2016, 20152018, 2017 and 2014,2016, the Bank’s spot position in foreign currency held more liabilities than assets in foreign currencies, mainly U.S. dollars as a result of an ample supply of U.S.$ deposits from companies that receive export revenues, foreign correspondent bank loans and bonds issued abroad. This difference is usually hedged using forwards and cross-currency swaps. In general, the Bank is not permitted, due to guidelines set by the ALCO and the Market Committee, to open a meaningful gap in foreign currency. Therefore, all foreign currency risk is included in the trading portfolio and is measured using VaR. The average VAR of our foreign currency position was U.S.$1.911.14 million in 2016.2018. The translation gain or loss over assets and liabilities (excluding derivatives held for trading) is included as foreign exchange transactions in the income statement. The translation and mark-to-market of foreign currency derivatives held for trading is recognized as a gain or loss in the net results from mark-to-market and trading.

 

As of December 31, 2016,2018, the net difference between assets and liabilities in foreign currency was a net assetliability position of U.S.105.4U.S.$8.2 million. The average gap, be it a net asset or liability position in foreign currency, in 20162018 was U.S.$121.6 21.5 million or 0.2%0.0% of our total assets. Both figures include derivatives used to hedge foreign currency risk.


Below is a graph that illustrates the net daily foreign currency position in 2016.2018.

 

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We also set an absolute limit on the size of Santander-Chile’s consolidated net foreign currency trading position, which is equivalent to the maximum differential allowed between assets and liabilities in foreign currencies, including hedging of this gap. The limit on the size of the net foreign currency position is determined by the Market Committee and is calculated and monitored by the Market Risk Department. At December 31, 2016,2018, this was equal to U.S.$350 million. This limit in various other currencies is as follows:

 

Currency

Limit (in millions of U.S.$)

U.S. dollars350
Euros100110
Yen2327
RealBritish pound1520
Mexican peso1530
Brazilian real30
Colombian peso1530
Peruvian Sol20
Other European currencies1530
Other Latin American currencies1530
Other currencies1547.5
Total Limit350

Liquidity risk management

 

The Financial Management Division receives information from all the business units on the liquidity profile of their financial assets and liabilities, as well as breakdowns of other projected cash flows stemming from future businesses. On the basis of that information, the Financial Management Division maintains a portfolio of liquid short–term assets, comprised mainly of liquid investments, loans and advances to other banks, to make sure the Bank has sufficient liquidity. The business units’ liquidity needs are met through short–term transfers from the Financial Management Division to cover any short–term fluctuations and long–term financing to address all the structural liquidity requirements.

 

The Bank monitors its liquidity position every day, determining the future flows of its outlays and revenues. In addition, stress tests are performed at the close of each month, for which a variety of scenarios encompassing both normal market conditions and conditions of market fluctuation are used. The liquidity policy and procedures are subject to review and approval by the Bank’s Board. Periodic reports are generated by the Market Risk Department, providing a breakdown of the liquidity position of the Bank and its subsidiaries, including any exceptions and the corrective measures adopted, which are regularly submitted to the ALCO for review.

 

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The Bank relies on demand deposits from Retail, Middle-Market and Corporates, obligations to banks, debt instruments, and time deposits as its main sources of funding. Although most obligations to banks, debt instruments and time deposits mature in over a year, customer (retail) and institutional deposits tend to have shorter maturities and a large proportion of them are payable within 90 days. The short–term nature of these deposits increases the Bank’s liquidity risk, and hence, the Bank actively manages this risk by continual supervision of the market trends and price management.

 


Liquidity risk management seeks to ensure that, even under adverse conditions, we have access to the funds necessary to cover client needs, maturing liabilities and capital requirements. Liquidity risk arises in the general funding for our financing, trading and investment activities. It includes the risk of unexpected increases in the cost of funding the portfolio of assets at appropriate maturities and rates, the risk of being unable to liquidate a position in a timely manner at a reasonable price and the risk that we will be required to repay liabilities earlier than anticipated. The following table sets forth the balance of our liquidity portfolio managed by our Financial Management Division in the manner in which it is presented to the Asset and Liability Committee (ALCO) and the Board. The ALCO has determined that our liquidity portfolio must be comprised of cash plus assets that can be readily convertible into cash either through the Chilean Central Bank window, overnight deposits or instruments or the local secondary market. The management of the Bank’s liquidity portfolio is performed by the Financial Management Division under rules determined by the ALCO.ALCO and based on classifications by the SBIF and the Bank’s management.

 

 December 31, 2016 December 31, 2015 December 31,
2018		 December 31,
2017		 
 Ch$ million Ch$ million 
Balance as of:            
Financial investments for trading  396,987   324,271   77,041   485,736 
Available-for-sale investments  3,388,906   2,044,411   2,394,323   2,574,546 
Encumbered assets (net) (1)  (205,703)  (77,647)  (48,843)  (268,330)
Net cash (2)  16,259   (315,415)  149,321   (37,628)
Net interbank deposits (3)  1,335,017   1,683,208   967,095   768,595 
Total liquidity portfolio  4,931,466   3,658,829   3,538,937   3,522,919 

 

 December 31, 2016 December 31, 2015 December 31,
2018		 December 31,
2017		 
 Ch$ million Ch$ million 
Average balance as of:            
Financial investments for trading  277,775   405,352   259,654   457,546 
Available-for-sale investments  2,455,220   1,902,050   2,690,184   2,562,753 
Encumbered assets (net) (1)  (90,460)  (74,664)  (134,408)  (254,563)
Net cash (2)  (202,771)  (244,186)  109,757   (49,425)
Net interbank deposits (3)  1,263,768   1,197,325   613,259   1,025,280 
Total liquidity portfolio  3,703,533   3,185,876   3,538,446   3,741,591 

 

 

(1)Assets encumbered through repurchase agreements are deducted from the liquidity portfolio

 

(2)Total cash minus reserve requirement of the Central Bank

 

(3)Includes overnight deposits in the Central Bank, domestic banks and foreign banks

 

The Central Bank also requires us to comply with the following liquidity limits:

 

·●The sum of the liabilities with a maturity of less than 30 days may not exceed the sum of the assets with a maturity of less than 30 days by an amount greater than our capital. This limit must be calculated in local currency and foreign currencies together as one gap. At December 31, 20162018 the percentage of (i) our liabilities with a maturity of less than 30 days in excess of our assets with a maturity of less than 30 days to (ii) our capital and reserves was 15.0%25%, thus resulting in our compliance.

 

·●The sum of the liabilities in foreign currency with a maturity of less than 30 days may not exceed the sum of the assets in foreign currency with a maturity of less than 30 days by more than an amount greater than our capital. At December 31, 20162018 the percentage of (i) our liabilities with a maturity of less than 30 days in foreign currency in excess of our assets in foreign currency with a maturity of less than 30 days to (ii) our capital and reserves was 0%, as the Bank had more foreign currency assets than liabilities for the calculation of this limit.limit, thus resulting in our compliance.

 

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·●The sum of the liabilities with a maturity of less than 90 days may not exceed the sum of the assets with a maturity of less than 90 days by more than 2 times our capital. This limit must be calculated in local currency and foreign currencies together as one gap. At December 31, 20162018 the percentage of (i) our liabilities with a maturity of less than 90 days in excess of our assets with a maturity of less than 90 days to (ii) two times our capital and reserves was 37.0%39%, thus resulting in our compliance.

 

New liquidity requirements in line with BIS III

 

The SBIF and the Chilean Central Bank published new liquidity corporate governance standards and ratios that must be implemented and calculated by all banks. These will eventually replace the current regulatory limits imposed by the SBIF and the Central Bank described above. These new liquidity standards are in line with those established in BIS III. The most important liquidity ratios that will eventually be adopted by Chilean banks are:

 

·●Liquid assets. The Bank’s must inform the liquid assets according to BIS III liquid levels. As of December 31, 20162018 the breakdown of the Bank’s liquid assets by levels was the following:

 

 

December 31, 2016 

2018

 Ch$ million
Balance as of: 
Cash and cash equivalent1,337,2081,894,603
Level 1 liquid assets (1)2,676,9952,174,625
Level 2 liquid assets (2)19,00414,694
Total liquid assets4,033,2074,083,922

 

 

(1)       Includes instruments issued by the Central Bank of Chile or other central banks with a AAA rating, instruments issued by the Chilean government or other sovereign with a AAA rating and instruments issued by development banks with a AAA rating.

(2)       Includes instruments issued by governments, central banks and development banks of foreign countries with a risk rating of A- to AA+ and mortgage bonds issued by Chilean banks that are acceptable at the Chilean Central Bank’s repo window.

 

·●Liquidity coverage ratio (LCR), which measures the percentage of Liquid Assets over Net Cash Outflows. By April 2019, Chilean banks will begin reporting their local LCR figures with a minimum level of 60%. This minimum will gradually rise to 100% by 2020. As of December 31, 20162018 this indicator for Banco Santander Chile was 185.1%151.6%.

 

·●Net Stable Funding Ratio (NSFR) which will measure a bank’s stable funding sources over required stables needs both concepts also defined in the new regulations. As of December 31, 20162018 this was 96.3%.109.5% according to our internal liquidity model. The Central Bank and the SBIF are still making adjustments to the methodology for calculating this ratio and the initial limits banks must meet in order to comply with these new ratios have not been published yet. For this reason, and even though the Bank has advanced liquidity management models, we cannot assure that the implementation of this model will not have a material effect on our business and that the figure presented above may change.

 

The Central Bank and the SBIF are still making adjustments to the methodology for calculating these ratios and the initial limits banks must meet in order to comply with these new ratios have not been published yet. For this reason, and even though the Bank has advanced liquidity management models, we cannot assure that the implementation of these models will not have a material effect on our business and that the figures presented above may change.

Market risk management

 

The Bank’s internal management of market risk is based chiefly on the procedures and standards of Santander Spain, which are in turn based on analysis of management in three principal components:

 

·●trading portfolio;

 

·●local financial management portfolio; and

 

·●foreign financial management portfolio.

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The trading portfolio is comprised chiefly of investments valued at fair market value and free of any restriction on their immediate sale, which are often bought and sold by the Bank with the intention of selling them in the short term to benefit from short–term price fluctuations. The trading portfolio also includes the Bank’s exposure to foreign currency. The financial management portfolios include all the financial investments not considered to be part of trading portfolio.

 


Market risk – management of trading portfolio

 

The Bank applies VaR methodologies to measure the market risk of its trading portfolio. The Bank has a consolidated commercial position comprised of fixed–income investments and foreign currency trading. This portfolio is comprised mostly of Central Bank of Chile bonds, mortgage bonds, locally issued, low–risk corporate bonds and foreign currencies, mainly U.S. dollars. At the end of each year, the trading portfolio included no stock portfolio investments.

 

For the Bank, the VaR estimate is made under the historical simulation methodology, which consists of observing the behavior of the profits and losses that would have occurred in the current portfolio if the market conditions for a given historical period had been in force, in order to infer the maximum loss on the basis of that information, with a given degree of confidence. The methodology has the advantage of precisely reflecting the historical distribution of the market variables and not requiring any assumptions regarding the distribution of specific probabilities. All the VaR measures are intended to determine the distribution function for a change in the value of a given portfolio, and once that distribution is known, to calculate the percentile related to the necessary degree of confidence, which will be equal to the value at risk by virtue of those parameters. As calculated by the Bank, the VaR is an estimate of the maximum expected loss of market value for a given portfolio over a 1–day horizon, with a 99.00% confidence level. It is the maximum 1–day loss that the Bank could expect to experience in a given portfolio, with a 99.00% confidence level. In other words, it is the loss that the Bank would expect to experience only 1.0% of the time. The VaR provides a single estimate of market risk which is not comparable from one market risk to another. Returns are calculated through the use of a 2–year time window or at least 520 data points obtained since the last reference date for calculation of the VaR going backward in time.

 

We do not calculate three separate VaRs. We calculate a single VaR for the entire trading portfolio, which in addition is segregated by risk type. The VaR software performs a historical simulation and calculates a Profit and Loss Statement (P&L) for 520 data points (days) for each risk factor (fixed income, foreign currency and variable income.) The P&L of each risk factor is added together and a consolidated VaR is calculated with 520 points or days of data. At the same time a VaR is calculated for each risk factor based on the individual P&L calculated for each individual risk factor . Furthermore, a weighted VaR is calculated in the manner described above, but which gives a greater weighting to the 30 most recent data points. The larger of the two VaRs is the one that is reported. In 2016, 20152018, 2017 and 2014,2016, we used the same VaR model and there has been no change in methodology or assumptions for subsequent periods.

 

The Bank uses the VaR estimates to provide a warning when the statistically estimated incurred losses in its trading portfolio would exceed prudent levels, and hence, there are certain predetermined limits.

 

Limitations of the VaR model

 

When applying a calculation methodology, no assumptions are made regarding the probability distribution of the changes in the risk factors; the historically observed changes are used for the risk factors on which each position in the portfolio will be valued.

 

It is necessary to define a valuation function fj(xi) for each instrument j, preferably the same one used to calculate the market value and income of the daily position. This valuation function will be applied in each scenario to generate simulated prices for all the instruments in each scenario.

 

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In addition, the VaR methodology is subject to the following limitations:

 

·●Changes in market rates and prices may not be independent and identically distributed random variables, and may not have a normal distribution; Inin particular, the assumption of normal distribution may underestimate the probability of extreme market movements;

 

·●The historical data used by the Bank may not provide the best estimate of the joint distribution of changes in the risk factors in the future, and any modification of the data may be inadequate; In particular, the use of historical data may fail to capture the risk of potential extreme and adverse market fluctuations, regardless of the time period used;

 

·●A 1–day time horizon may not fully capture the market risk positions which cannot be liquidated or covered in a single day; Itit would not be possible to liquidate or cover all the positions in a single day;

 

·●The VaR is calculated at the close of business, but trading positions may change substantially in the course of the trading day;

 

·●The use of a 99% degree of confidence does not take account of, or make any statement about, the losses that could occur outside of that degree of confidence; and

 

·●A model such as the VaR does not capture all the complex effects of the risk factors over the value of the positions or portfolios, and accordingly, it could underestimate potential losses.

 

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At no time in 2016, 20152018, 2017 and 20142016 did the Bank exceed the VaR limits in respect of the three components which comprise the trading portfolio: fixed–income investments, variable–income investments and foreign currency investments. We perform back-testing daily and generally find that trading losses exceed our VaR estimate approximately one out of every 100 trading days. At the same time, we set a limit to the maximum VaR that we are willing to accept over our trading portfolio. In 2016,2018, the Bank remained within the maximum limit it had set for VaR, including those instances in which the actual VaR exceeded the estimate.

 

The high, low, and average levels for each component and each year below were as follows:

 

Consolidated

2016 

2015 

2014 

 2018 2017 2016 
(in millions of U.S.$) (in millions of U.S.$) 
VaR:        
High3.953.613.77  5.23   5.71   3.95 
Low1.080.621.06  1.21   1.56   1.08 
Average2.251.381.91  2.01   3.01   2.25 
            
Fixed–income investments:              
High2.713.133.99  2.54   5.51   2.71 
Low0.550.611.06  1.19   1.15   0.55 
Average1.331.231.78  1.71   2.36   1.33 
            
Variable–income investments:              
High0.030.190.15  0.01   0.01   0.03 
Low0.000.00  0.00   0.00   0.00 
Average0.000.00  0.00   0.00   0.00 
            
Foreign currency investments:              
High3.833.432.39  4.29   4.21   3.83 
Low0.610.040.06  0.09   0.53   0.61 
Average1.910.640.58  1.14   1.71   1.91 

 

Market risk – local and foreign financial management

 

The Bank’s financial management portfolio includes most of the Bank’s non–trading assets and liabilities, including the credit/loan portfolio. For these portfolios, investment and financing decisions are strongly influenced by the Bank’s commercial strategies.

 


The Bank uses a sensitivity analysis to measure the market risk of local and foreign currency (not included in the trading portfolio). The Bank performs a simulation of scenarios, which will be calculated as the difference between the present value of the flows in the chosen scenario (a curve with a parallel movement of 100 bpbps in all its segments) and their value in the base scenario (current market). All the inflation–indexed local currency (UF) positions are adjusted by a sensitivity factor of 0.57, which represents a 57 basis point change in the rate curve for the real rates and a 100 basis point change for the nominal rates. The same scenario is performed for the net foreign currency positions and the interest rates in U.S. dollars. The Bank has also established limits in regard to the maximum loss which these interest rate movements could impose on the capital and net financial income budgeted for the year.

 

Limitations of the sensitivity models

 

The most important assumption is the use of a 100 basis point change in the yield curve (57 basis points for the real rates). The Bank uses a 100 basis point change because sudden changes of that magnitude are considered realistic. The Santander Spain Global Risk Department has established comparable limits by country, to be able to compare, monitor and consolidate the market risk by country in a realistic and orderly way. In addition, the sensitivity simulation methodology should be interpreted with consideration for the following limitations:

 

·●The simulation of scenarios assumes that the volumes remain in the Bank’s Consolidated General Balance Sheet and are always renewed at maturity, thereby omitting the fact that certain credit risk and prepayment considerations may affect the maturity of certain positions.

 

·●This model assumes an identical change along the entire length of the yield curve and takes no account of the different movements for different maturities.

 

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·●The model takes no account of the sensitivity of volumes which results from interest rate changes.

 

·●The limits to losses of budgeted financial income are calculated on the basis of the financial income foreseen for the year, which may not be actually earned, meaning that the real percentage of financial income at risk may be higher than the expected one.

 

Market Risk – Financial management portfolio – December 31, 2016, 20152018, 2017 and 20142016

 

 2016 2015 2014 2018 2017 2016 
 Effect on net interest income Effect on equity Effect on net interest income Effect on equity Effect on net interest income Effect on equity  

Effect on net
interest income

   

Effect on
equity

   

Effect on net
interest
income

   

Effect on
equity

   

Effect on net
interest
income

   

Effect on
equity

 
Financial management portfolio – local currency (in millions of Ch$)                                    
Loss limit  48,000   175,000   32,500   150,000   38,150   192,660   48,000   192,001   48,000   175,000   48,000   175,000 
High  30,853   146,208   29,721   103,091   27,707   112,133   43,742   189,725   (37,148)  (141,287)  30,853   146,208 
Low  21,978   108,249   13,882   72,104   16,904   77,231   27,854   170,450   (22,958)  (112,818)  21,978   108,249 
Average  26,119   120,159   22,695   88,394   21,077   92,809   37,569   180,972   (29,110)  (128,506)  26,119   120,159 
                        
Financial management portfolio – foreign currency (in millions of U.S.$)                                                
Loss limit  30.0   75.0   30.0   70.0   40.0   70.0   30   75   30   75   30   75 
High  14.0   35.0   9.0   15.0   16.0   39.0   12   38   16   42   14   35 
Low  6.0   13.0   —   5.0   —   10.0   4   (10)  4   15   6   13 
Average  10.0   26.0   2.0   12.0   10.0   28.0   9   22   10   23   10   26 
                        
Financial management portfolio – consolidated (in millions of Ch$)                                                
Loss limit  48,000   175,000   34,500   150,000   40,650   172,390   48,000   192,002   48,000   175,000   48,000   175,000 
High  31,764   145,566   29,232   102,002   27,949   112,364   45,492   192,848   (38,249)  (142,442)  31,764   145,566 
Low  23,088   107,959   14,129   70,741   17,441   77,848   29,167   168,766   (23,571)  (112,277)  23,088   107,959 
Average  27,390   119,632   22,390   87,095   21,404   93,245   38,908   182,557   (29,948)  (128,360)  27,390   119,632 

 


Market risk –Regulatory method

 

The following table illustrates our market risk exposure according to the Chilean regulatory method, as of December 31, 2016.2018. This information is sent to the SBIF on a quarterly basis. Our maximum exposure to long-term interest rate fluctuations is set at 35% of regulatory capital and is approved by the Board of Directors.

 

Regulatory Market Risk

As of December 31, 2016 

2018
 (Ch$ million)
Market risk of trading portfolio (EMR) 
Interest rate risk of trading portfolio153,513225,471
Foreign currency risk of trading portfolio1,8112,800
Risk from interest rate options59,36261,648
Risk from foreign currency options35140
Total market risk of trading portfolio214,721290,059
10% x Risk-weighted assets2,751,2003,001,948
Subtotal2,965,9213,292,007
Limit = Regulatory Capital3,635,4264,043,470
Available margin669,505751,463
Non-trading portfolio market risk 
Short-term interest rate risk79,02988,477
Inflation risk94,66185,778
Long-term interest rate risk884,7741,063,517
Total market risk of non-trading portfolio1,058,4641,237,772
Regulatory limit of exposure to short-term interest rate and inflation risk 
Short-term exposure to interest rate risk79,02988,477
Exposure to inflation risk94,66185,778
Limit: 22% of (net interest income + net fee income sensitive to interest rates)280,565311,223
Available margin106,875
Available margin136,968
Regulatory limit of exposure to long-term interest rate risk 
Long-term exposure to interest rate risk884,7741,063,517
35% of regulatory capital1,272,3991,415,215
Available margin387,625351,698

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Derivative activities

 

At December 31, 2016, 20152018, 2017 and 2014,2016, derivatives are valued at market price on the balance sheet and the net unrealized gain (loss) on derivatives is classified as a separate line item on the income statement. Notional amounts are not recorded on the balance sheet. Banks must mark to market derivatives. A derivative financial instrument held for trading purposes must be marked to market and the unrealized gain or loss recognized in the income statement. The SBIF recognizes three kinds of hedge accounting: (i) cash flow hedges, (ii) fair value hedges and (iii) hedging of foreign investments.

 

·●When a cash flow hedge exists, the fair value movements on the part of the hedging instrument that is effective are recognized in equity. Any ineffective portion of the fair value movement on the hedging instrument is recognized in the income statement.

 

·●When a fair value hedge exists, the fair value movements on the hedging instrument and the corresponding fair value movements on the hedged item are recognized in the income statement. Hedged items in the balance sheet are presented at their market value.

 

·●When a hedge of foreign investment exposure exists (i.e. investment in a foreign branch), the fair value movements on the part of the hedging instrument that is effective are recognized in equity. Any ineffective portion of the fair value movement on the hedging instrument is recognized in the income statement.

 

In order to reduce the credit risk in its derivative contracts, the Bank has entered into Credit Support Annex (CSA) agreements with the majority of its counterparties, which include obligations to post daily cash collateral. The majority of the agreements include an obligation to post collateral with a threshold amount of zero. In the table below we identify those contracts with CSA and breakdown the fair value of our derivative portfolio by collateral threshold requirements for 20162018 and 2015.2017.

 

Fair value of derivative contracts 2016 2015 2018 2017 
 Asset Liabilities Asset Liability Asset Liabilities Asset Liability 
                 
Derivative contracts with zero threshold collateral amount in CSA  2,134,917   1,986,345   2,613,217   2,410,696   2,639,835   2,133,149   1,898,220   1,773,471 
Derivative contracts with threshold collateral amounts in CSA that are greater than zero  233,945   238,450   388,677   311,056   344,520   262,683   221,030   316,840 
Derivative contracts without CSA agreements  131,920   67,366   204,032   140,854   116,280   121,896   119,397   49,177 
Total  2,500,782   2,292,161   3,205,926   2,862,606   3,100,635   2,517,728   2,238,647   2,139,488 

 

We classify some of our derivative financial instruments as being financial assets held for trading, due to the guidelines from the SBIF. We enter into derivative contracts with some clients who seek hedging instruments. However, substantially all of our derivatives are not actually used for speculative purposes or trading. We also use derivatives to hedge our exposure to foreign exchange, interest rate and inflation risks. We had the following derivative financial instruments portfolio as of December 31, 2016, 20152018, 2017 and 2014:2016:

 

Derivative financial instruments portfolio 

As of December 31, 2018

 
  Notional amounts  Fair Value 
  Up to 3 months  More than 3 months to one year  More than one year  Assets  Liabilities 
  (Ch$ million) 
Fair value hedge derivative instruments                    
Interest rate swaps  80,000   491,600   1,191,012   14,789   9,188 
Cross currency swaps  —   1,276,909   6,706,197   96,357   36,708 
Subtotal  80,000   1,768,509   7,897,209   111,146   45,896 
                     
Cash Flow hedge derivative instruments                    
Currency forwards  205,750   168,151   —   —   8,013 
Cross currency swaps  1,920,900   1,970,412   9,191,209   79,859   32,712 
Subtotal  2,126,650   2,138,563   9,191,209   79,859   40,725 
                     
Derivative instruments for trading                    
Currency forwards  15,301,943   13,080,875   6,062,183   613,063   466,741 
Interest rate swaps  12,024,095   22,064,681   69,453,618   723,870   577,835 
Cross currency swaps  2,173,111   8,853,306   68,976,339   1,568,365   1,385,314 
Call currency options  26,731   60,235   57,579   4,332   854 
Call interest rate options  —   —   —   —   — 
Put currency options  23,411   50,445   56,392   —   363 
Subtotal  29,549,291   44,109,542   144,606,111   2,909,630   2,431,107 
Total  31,755,941   48,016,614   161,694,529   3,100,635   2,517,728 

Derivative financial instruments portfolio 

As of December 31, 2017

 
  Notional amounts  Fair Value 
  Up to 3 months  More than 3 months to one year  More than one year  Assets  Liabilities 
  (Ch$ million) 
Fair value hedge derivative instruments                    
Interest rate swaps  —   162,985   1,554,171   23,003   1,424 
Cross currency swaps  —   715,701   5,362,772   15,085   65,724 
Subtotal  —   878,686   6,916,943   38,088   67,148 
                     
Cash Flow hedge derivative instruments                    
Currency forwards  801,093   218,982   —   39,233   59 
Cross currency swaps  421,428   1,637,604   6,672,566   36,403   128,355 
Subtotal  1,222,521   1,856,586   6,672,566   75,636   128,414 
                     
Derivative instruments for trading                    
Currency forwards  17,976,683   10,679,327   3,091,393   412,994   502,555 
Interest rate swaps  9,069,964   14,389,389   46,342,779   467,188   392,366 
Cross currency swaps  2,963,641   7,503,144   47,111,371   1,241,632   1,042,120 
Call currency options  190,386   37,099   49,853   1,322   1,950 
Call interest rate options  —   —   —   —   — 
Put currency options  192,722   28,616   50,470   1,787   4,935 
Subtotal  30,393,396   32,637,575   96,645,866   2,124,923   1,943,926 
Total  31,615,917   35,372,847   110,235,375   2,238,647   2,139,488 

 

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  As of December 31, 2016 
  Notional amounts  Fair Value 
  Up to 3 months  More than 3 months to one year  More than one year  Assets  Liabilities 
  (Ch$ million) 
Fair value hedge derivative instruments                    
Interest rate swaps  74,086   514,454   1,402,870   38,977   211 
Cross currency swaps  424,086   505,902   1,239,490   32,640   32,868 
Subtotal  498,172   1,020,356   2,642,360   71,617   33,079 
                     
Cash Flow hedge derivative instruments                    
Interest rate swaps  915,879   639,939   —   10,216   3,441 
Cross currency swaps  897,480   2,613,706   4,260,194   43,591   68,894 
Subtotal  1,813,359   3,253,645   4,260,194   53,807   72,335 
                     
Derivative instruments for trading                    
Currency forwards  15,840,731   11,240,251   3,358,765   185,618   209,955 
Interest rate swaps  6,889,665   12,512,285   49,747,459   627,047   526,695 
Cross currency swaps  3,966,443   7,589,201   53,148,109   1,562,068   1,449,549 
Call currency options  73,943   20,994   2,664   521   5 
Call interest rate options  —   —   —   —   — 
Put currency options  52,143   7,892   2,664   104   542 
Other Derivatives  —   —   —   —   — 
Subtotal  26,822,925   31,370,623   106,259,661   2,375,358   2,186,746 
Total  29,134,456   35,644,624   113,162,215   2,500,782   2,292,161 

 

  As of December 31, 2016
  Notional amounts Fair Value
  Up to 3 months More than 3 months to one year More than one year Assets Liabilities
  (Ch$ million)
Fair value hedge derivative instruments          
Interest rate swaps  74,086   514,454   1,402,870   38,977   211 
Cross currency swaps  424,086   505,902   1,239,490   32,640   32,868 
Subtotal  498,172   1,020,356   2,642,360   71,617   33,079 
Cash Flow hedge derivative instruments                    
Currency forwards  915,879   639,939   —   10,216   3,441 
Cross currency swaps  897,480   2,613,706   4,260,194   43,591   68,894 
Subtotal  1,813,359   3,253,645   4,260,194   53,807   72,335 
Derivative instruments for trading                    
Currency forwards  15,840,731   11,240,251   3,358,765   185,618   209,955 
Interest rate swaps  6,889,665   12,512,285   49,747,459   627,047   526,695 
Cross currency swaps  3,966,443   7,589,201   53,148,109   1,562,068   1,449,549 
Call currency options  73,943   20,994   2,664   521   5 
Call interest rate options  —   —   —   —   — 
Put currency options  52,143   7,892   2,664   104   542 
Subtotal  26,822,925   31,370,623   106,259,661   2,375,358   2,186,746 
Total  29,134,456   35,644,624   113,162,215   2,500,782   2,292,161 

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  As of December 31, 2015
  Notional amounts Fair Value
  Up to 3 months More than 3 months to one year More than one year Assets Liabilities
  (Ch$ million)
Fair value hedge derivative instruments          
Interest rate swaps  327,955   1,184,795   630,970   5,480   6,364 
Cross currency swaps  9,441   30,040   1,842,421   181,557   1,483 
Subtotal  337,396   1,214,835   2,473,391   187,037   7,847 
Cash Flow hedge derivative instruments                    
Interest rate swaps  —   —   —   —   — 
Cross currency swaps  7,281,184   4,445,006   2,720,520   273,291   69,716 
Subtotal  7,281,184   4,445,006   2,720,520   273,291   69,716 
Derivative instruments for trading                    
Currency forwards  18,731,575   13,328,727   3,459,386   341,236   318,416 
Interest rate swaps  7,272,523   15,677,393   56,140,894   533,416   540,011 
Cross currency swaps  5,881,627   5,898,094   44,921,355   1,826,977   1,883,185 
Call currency options  49,067   60,380   477,057   42,325   41,451 
Call interest rate options  —   —   264,473   1,148   1,253 
Put currency options  48,958   52,682   —   422   684 
Other Derivatives  125,258   —   —   74   43 
Subtotal  32,109,008   35,017,276   105,263,165   2,745,598   2,785,043 
Total  39,727,588   40,677,117   110,457,076   3,205,926   2,862,606 

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  As of December 31, 2014
  Notional amount Fair value
  Up to 3 months More than 3 months to 1 year More than 1 year Assets Liabilities
  Ch$mn
Fair value hedge derivatives          
Interest rate swaps  97,812   846,168   668,166   9,821   2,540 
Cross currency swaps  —   193,704   694,852   110,448   7,997 
Subtotal  97,812   1,039,872   1,363,018   120,269   10,537 
Cash flow hedge derivatives                    
Interest rate swaps  —   —   —   —   — 
Cross currency swaps  11,329   850,555   1,727,283   131,880   21,996 
Subtotal  11,329   850,555   1,727,283   131,880   21,996 
Trading derivatives                    
Currency forwards  8,740,802   20,156,612   2,155,381   342,726   277,789 
Interest rate swaps  1,675,560   16,147,587   37,838,280   518,392   485,798 
Cross currency swaps  524,274   4,395,731   19,028,968   1,609,197   1,761,196 
Call currency options  160,560   89,701   —   1,587   2,597 
Call interest rate options  —   —   103,474   795   633 
Put currency options  153,999   157,757   34,491   2,575   485 
Other derivatives  258,425   —   —   142   353 
Subtotal  11,513,620   40,947,388   59,160,594   2,475,414   2,528,851 
Total  11,622,761   42,837,815   62,250,895   2,727,563   2,561,384 
                     

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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

A.Debt Securities

 

Not applicable.

 

B.Warrants and Right

 

Not applicable.

 

C.Other Securities

 

Not applicable.

 


D.American Depositary Shares

 

Our Depositary is The Bank of New York Mellon, with its principal executive office located at One Wall Street, New York, N.Y. 10286.

 

Each ADS represents the right to receive 400 shares of Common Stock without par value.

 

Persons depositing or withdrawing shares or ADS holders must pay:
$5.00 (or less) per 100 ADSs

Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property

 

Cancellation of ADSs for the purpose of withdrawal, including if the Deposit Agreement terminates

$.05 (or less) per ADS (or a portion thereof)Any cash distribution to ADS holders
A fee equivalent to the fee that would be payable if securities distributed to you had been deposited with the DepositaryDistribution of securities distributed to holders of deposited securities (including rights) that are distributed by the Depositary to ADS holders
$.05 (or less) per ADS (or a portion thereof) per calendar yearDepositary services
Registration and transfer feesTransfer and registration of shares on our share register to or from the name of the Depositary or its agent when you deposit or withdraw shares
Expenses of the Depositary

Cable (including SWIFT), telex and facsimile transmissions (when expressly provided in the Deposit Agreement)

 

Converting foreign currency to U.S. dollars

Taxes and other governmental charges the Depositary or the custodian has to pay on any ADSs or shares underlying ADSs, such as stock transfer taxes, stamp duty or withholding taxes

As necessary

 

Any other charges incurred by the Depositary or its agents for servicing the shares or other deposited securitiesAs necessary

 

The Depositary may collect any of its fees by deducting those fees from any cash distributions payable to owners, or by selling a portion of distributable property to pay the fees. The Depositary may also collect its annual fee for Depositary services and its fees for any other charges incurred by deducting those fees from any cash distributions or by directly billing ADS holders.

 

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The Depositary may convert currency itself or through any of its affiliates and, in those cases, acts as principal for its own account and not as agent, advisor, broker or fiduciary on behalf of any other person and earns revenue, including, without limitation, transaction spreads, that it will retain for its own account. The revenue is based on, among other things, the difference between the exchange rate assigned to the currency conversion made under the Deposit Agreement and the rate that the Depositary or its affiliate receives when buying or selling foreign currency for its own account. The Depositary makes no representation that the exchange rate used or obtained in any currency conversion under the Deposit Agreement will be the most favorable rate that could be obtained at the time or that the method by which that rate will be determined will be the most favorable to ADS holders, subject to the Depositary’s obligations under the Deposit Agreement. The methodology used to determine exchange rates used in currency conversions is available upon request.

 

In performing its duties under the Deposit Agreement, the Depositary may use brokers, dealers, foreign currency dealers or other service providers that are owned by or affiliated with the Depositary and that may earn or share fees, spreads or commissions.

 


Direct and Indirect Payments

 

The Depositary has agreed to make payments to us to reimburse us for costs and expenses generally arising out of establishment and maintenance of the ADS program, waive fees and expenses for services provided to us by the Depositary or share revenue from the fees collected from ADS holders from time to time. Under certain circumstances, including termination of the program, we are required to repay to the Depositary amounts reimbursed in prior periods.

 

The reimbursements include direct payments (legal and accounting fees incurred in connection with preparation of Form 20-F and ongoing SEC compliance and listing requirements, listing fees, investor relations expenses, advertising and public relations expenses and fees payable to service providers for the distribution of hard copy materials to beneficial ADR holders in the Depositary Trust Company, such as information related to shareholders’ meetings and related voting instruction cards); and indirect payments (third-party expenses paid directly and fees waived).

 

In 2016,2018, the Depositary made direct payments and reimbursements to us in the gross amount of U.S. 947,793$1,301,296.85 for expenses related to investor relations of which 30%28.6% was withheld for tax purposes in the U.S.

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PART II

 

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

Not applicable.

 

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

Not applicable.

 

ITEM 15. CONTROLS AND PROCEDURES

 

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

 

As of December 31, 2016,2018, the Bank, under the supervision and with the participation of the Bank’s management, including its Disclosure Committee, the Chief Executive Officer, the Chief Financial Officer and the Financial Controller, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). There are, as described below, inherent limitations to the effectiveness of any control system, including disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can provide only reasonable assurance of achieving their control objectives.

 

Based on such evaluation, the Bank’s Disclosure Committee, the Chief Executive Officer, the Chief Financial Officer and the Financial Controller concluded that the Bank’s disclosure controls and procedures were effective in ensuring that information relating to the Bank, including its consolidated subsidiaries, required to be disclosed in the reports it files under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to the Bank’s management, including its Disclosure Committee and principal financial officers as appropriate to allow timely decisions regarding required disclosure.

 

Management’s Report on Internal Control Over Financial Reporting

 

The Bank’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. The Bank’s internal control over financial reporting is a process designed by, or under the supervision of, the Bank’s principal executive and principal financial officers and effected by the Bank’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS-IASB and includes those policies and procedures that:

 

·●Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Bank;

 

·●Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS-IASB, and that our receipts and expenditures are being made only in accordance with authorizations of the Bank’s management and directors; and

 

·●Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting, no matter how well designed may not prevent or detect misstatements, due to the possibility that a control can be circumvented or overridden or that misstatements due to error or fraud may occur that are not detected. 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.

 

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We have adapted our internal control over financial reporting to international standards and comply with the guidelines set by the Committee of Sponsoring Organizations of the Treadway Commission in itsInternal


Control―Integrated Framework (2013). The general framework assigns to management specific responsibilities regarding the structure and effectiveness of the processes related directly and indirectly with the production of consolidated financial statements, as well as the controls needed to mitigate the risks inherent in these processes.

 

Under the supervision and with the participation of the Bank’s management, including the Disclosure Committee, the Chief Executive Officer, the Chief Financial Officer and the Financial Controller, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established inInternal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

Based on this assessment, our management concluded that, as of December 31, 2016,2018, our internal control over financial reporting was effective based on those criteria.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change in the Bank’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

 

Our internal control over financial reporting as of December 31, 20162018 has been audited by an independent registered public accounting firm, as stated in its report, which follows below.is referenced below

 

Report of Independent Registered Public Accounting Firm

 

For the report of PricewaterhouseCoopers Consultores Auditores y Compañía,SpA, independent registered public accounting firm, dated March 24, 2017,22, 2019, on the effectiveness of our internal control over financial reporting as of December 31, 2016,2018, see page F-2 of our Audited Consolidated Financial Statements.

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ITEM 16. [RESERVED]

 

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

 

Our Board of Directors has determined that one of the members of our Audit Committee, Mauricio Larraín, meetsRodrigo Vergara, met the requirements of an “audit committee financial expert” in accordance with SEC rules and regulations, in that he has an understanding of IFRS-IASB and financial statements, the ability to assess the general application of IFRS-IASB in connection with the accounting for estimates, accruals and reserves, experience analyzing and evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by our consolidated financial statements, an understanding of internal controls over financial reporting, and an understanding of audit committee functions. All fourthree members of our Audit Committee have experience overseeing and assessing the performance of Santander-Chile and its consolidated subsidiaries and our external auditors with respect to the preparation, auditing and evaluation of our consolidated financial statements.

 

All three members of our Audit Committee are considered to be independent according to applicable NYSE criteria.

 

ITEM 16B. CODE OF ETHICS

 

The Bank has adopted a code of ethics that is applicable to all of the Bank’s employees and a copy is included as an exhibit hereto. We will provide to any person without charge, upon request, a copy of our code of ethics. Please email accionistas@santander.cl to request a copy. Our code of ethics is available on our website, which does not form part of this Annual Report on Form 20-F, at www.santander.cl under the heading “Información Corporativa”.http://www.santander.cl/accionistas/pdf/otros_documentos/codigo_general_de_conducta_banco-santander.pdf

 

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Amounts paid to the auditors for statutory audit and other services were as follows:

 

 2016 2015 2018 2017 
 (in millions of Ch$) (in millions of Ch$) 
Audit Fees            
- Statutory audit  402   509   420   410 
- Audit-related regulatory reporting  248   245   313   318 
- Other audit-related fees  14   63   112   408 
Tax Fees                
- Compliance  —   —   —   — 
- Advisory Services  —   264   —   — 
Total  664   1,081   845   1,136 

 

Statutory audit: Consists of fees billed for professional services rendered in connection with the audit of our consolidated financial statements that are provided by PricewaterhouseCoopers Consultores Auditores y Compañía LimitadaSpA in 20162018 and Deloitte Auditores y Consultores Limitada in 20152017 in connection with statutory and regulatory filings or engagements, and attest services.

 

Audit-related regulatory reporting: Consists of fees billed for assurance and related services that were specifically related to the performance of the audit and review of our filings under the Securities Act.

 

Tax fees: Consist of fees billed for related services that were specifically related to tax related matters such as assuring the Bank was in compliance with tax laws and other tax advisory services.

 

The Audit Committee is required to pre-approve the audit and non-audit services performed by the Bank auditors in order to assure that the provision of such services do not impair the audit firm’s independence.

 

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In the first months of each year the Audit Committee proposes to the Board the appointment of the independent auditor. As a matter of policy, at that time, the Audit Committee pre-approves the audit and audit related services that the appointed auditors will be required to carry out during the year to comply with the applicable regulation. These services will be included in the corresponding audit contracts of the Bank with its principal auditing firm.

 

In addition, under such policy, non-recurring audit or audit-related services and all non-audit services provided by the Bank principal auditing firm or other auditing firms are subject to case-by-case approval by the Audit Committee.

 

The Chief Accounting Officer is in charge of managing the process and must report monthly to the Audit Committee detailing all services to be provided by auditors, and others requiring individual approval.

 

All services provided by the Bank principal auditing firm in 20162018 detailed in the table above were approved by the Audit and Compliance Committee.

 

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

 

Not applicable.

 

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

In 2016,2017, neither Santander-Chile nor any of its affiliates purchased any of Santander-Chile’s equity securities.

 

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

 

Not applicable.

 

ITEM 16G. CORPORATE GOVERNANCE

 

Summary Comparison of Corporate Governance Standards and NYSE Listed Company Standards

 

Our corporate governance standards, dictated by Chilean corporate law, differ from the standards followed by U.S. companies under the New York Stock Exchange (NYSE) listing standards in a number of ways. Consequently, you will not have the same protections afforded to shareholders of companies that are subject to all NYSE corporate governance requirements. The following is a non-exhaustive summary of a few key differences:

 

·●Whether a company’s executive officers may serve as its directors – the NYSE standards do not prohibit a U.S. company’s executive officer from also serving as a director, whereas our corporate governance standards prohibits this.

 

·●Whether the shareholders must be given an opportunity to vote on equity-compensation plans – the NYSE standards require that shareholders be allowed to vote on all equity compensation plans of a U.S. company, whereas our corporate governance standards only require that shareholders be allowed to vote on director compensation.

 

·●The adoption and disclosure of corporate governance guidelines – the NYSE standards require all U.S. companies listed on the NYSE to adopt the NYSE corporate governance guidelines, whereas we follow the corporate governance guidelines established under Chilean law.

 

As more than 50% of our voting power is held by another company, Santander Spain, we would be permitted to elect for certain exemptions under NYSE corporate governance standards if we were a U.S. company. Specifically, as a U.S. company, we could elect to be exempted from the requirements (i) that we have a majority of independent directors (as defined by the NYSE), (ii) that we have a nominating/corporate governance committee meeting certain conditions, and (iii) that we have a compensation committee meeting certain requirements. Because we would not be required to follow these standards if we were a U.S. company, we have not summarized the differences, if any, between these provisions and our own corporate governance procedures.

 

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Summary of Corporate Governance Standards

 

For a summary of our Board’s corporate governance practices please see “Item 6C—Board Practices,” which describes in detail the governing standards of the board committees. Santander-Chile has also adopted diverse measures to promote good corporate governance. Among the measures adopted are:

 

·●Independent Audit Committee comprised of three independent Board of Directors mainly composed of professionals not related to Santander Spain, our parent company.members.

 

·●Separation of Chairman and Chief Executive Officer functions.

●All personnel must subscribe to a code of ethics and good conduct. Those who interact directly with the capital markets must also subscribe to an additional code of conduct.

 

·●Segregation of functions in order to assure adequate management of risks. Commercial areas separated from back office areas. Risk management independent of commercial areas. Main credit decisions taken in committees.

 

·●Internal Auditing Area clearly independent from the Administration.

 

·●The Bank also has an Internal Compliance Division that oversees the fulfillment of the Bank’s codes of conduct.

 

Santander-Chile has a commitment to transparency. This includes:

 

·●Equal treatment for all shareholders: one share equals to one vote.

 

·●Monthly publication of the Bank’s results by the SBIF.

 

·●Quarterly report of a detailed analysis of Bank results published by us at least 30 days after the close of each interim quarter and 40 days after close of the full year.

 

·●Quarterly conference call open to the public.

 

·●All information relevant to the public available immediately on the web page www.santander.cl.

 

·●Ample and periodic coverage of the Bank by international and local stock analysts.

 

·●The Bank has five credit risk ratings by five independent rating agencies, domestic and international.

 

In addition, our corporate governance practices reflect the Santander Spain corporate governance framework described below.

 

In December 2012, primarily in response to the requirements of the European Banking Authority, our controlling shareholder, Santander Spain, adopted a corporate governance framework (Marco de Gobierno Interno del Grupo Santander). The purpose of the framework is to organize and standardize the corporate governance practices of Santander Spain and its most significant subsidiaries, including us, in order to enhance the ability of Santander Spain to manage the risks arising from its operations around the world.

 

The three pillars of the framework are (i) an organizational model based on functions subject to internal governance, (ii) terms of reference according to which Santander Spain exercises control and oversight over its subsidiaries and participates in specific decisions at the subsidiary level and (iii) corporate models establishing common guidelines for the management and control of Santander Spain’s subsidiaries, subject to local autonomy considerations. In general, the framework purports to implement organizational and procedural changes rather than mandating particular substantive outcomes. However, in some cases, and subject to the limitations set forth in the framework, the framework states that Santander Spain may require that its subsidiaries make substantive changes or take specific actions. The framework enables Santander Spain to participate in the decision-making processes of its subsidiaries by requiring its approval of certain decisions that may have a significant impact on the Santander Group as a whole due to their significance or potential risk, such as decisions relating to mergers and acquisitions, capital structure, dividends and risk appetite, among other things. The framework also requires that a single person at each subsidiary be in charge of each function subject to internal governance and gives Santander Spain the authority to participate in the appointment, evaluation and compensation of each such person.

 


By its own terms, the framework as a whole is premised on the legal and financial autonomy of the subsidiaries and does not empower Santander Spain to supplant its subsidiaries’ decision-making processes. Moreover, each of the three pillars of the framework is explicitly made subject to local legal requirements. Our Board of Directors

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approved the adoption of this corporate governance framework in April 2013, subject to certain overarching principles:

 

·●the precedence of applicable laws and regulations and orders of competent authorities over the framework to the extent they are in conflict; and

 

·●the disclosure of the adoption of the corporate governance framework to the public and to our employees and subsidiaries.

 

As a result of the precedence given to local legal requirements in the framework itself and in our Board of Directors’ adopting resolutions, we do not expect that the adoption of the corporate governance framework will affect our ability to comply with applicable corporate governance regulations, including SEC and NYSE rules applicable to foreign private issuers. For example, although one provision of the framework states that we must obtain Santander Spain’s approval for our audit plan and that Santander Spain may request additional audits at its discretion, to the extent that this provision of the framework would prevent our Audit Committee from fulfilling any of the requirements of applicable SEC or NYSE rules (including, for example, the audit committee’s obligation to be directly responsible for the appointment, compensation, retention and oversight of the work of any registered public accounting firm engaged for the purpose of preparing an audit report), we understand that this provision would be limited so as not to conflict with such requirements due to the precedence given to local legal requirements in the framework and our adopting resolutions. Similarly, we understand that the authorities given to Santander Spain under the framework to approve certain decisions by us and to approve the compensation of certain persons in charge of functions subject to internal governance are limited by the framework and the adopting resolutions so as not to limit the ability of members of our Audit Committee to make independent decisions or take independent actions as required by the audit committee independence requirements of applicable SEC and NYSE rules.

 

ITEM 16H. MINE SAFETY DISCLOSURE

 

Not applicable.


PART III

 

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PART III

ITEM 17. FINANCIAL STATEMENTS

 

We have responded to Item 18 in lieu of this Item.

 

ITEM 18. FINANCIAL STATEMENTS

 

Reference is made to Item 19 for a list of all financial statements filed as part of this Annual Report.

 

ITEM 19. EXHIBITS

 


a) Index to Financial Statements

 

Report of PricewaterhouseCoopers Consultores Auditores y Compañía Limitada,SpA, independent registered public accounting firmF-2
Report of Deloitte Auditores y Consultores Limitada, independent registered public accounting firmF-3
Audited Consolidated Financial Statements
 
Consolidated Statements of Financial Position as of December 31, 2016 and 2015F-5
F-4
Consolidated Statements of Income for each of the three years in the period ended December 31, 2016, 2015 and 2014

F-6F-5

 

Consolidated Statements of Other Comprehensive Income for each of the three years in the period ended December 31, 2016, 2015 and 2014

F-7F-6

 

Consolidated Statements of Changes in Equity for each of the three years in the period ended December 31, 2016, 2015 and 2014

F-8

 

Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2016, 2015 and 2014

F-10F-9

 

Notes to consolidated financial statementsF-12F-10

 

b) Index to Exhibits

 

Exhibit
Number		Description
1A.1Restated Articles of Incorporation of Santander-Chile (Spanish Version) (incorporated by reference to exhibit 3(a) to our Registration Statement on Form F-4 (Registration No. 333-100975) filed with the Commission on December 12,9, 2002).
1A.2Restated Articles of Incorporation of Santander-Chile (English Version) (incorporated by reference to exhibit 3(b) to our Registration Statement on Form F-4 (Registration No. 333-100975) filed with the Commission on December 12,9, 2002).
1BAmended and Restated By-Laws (estatutos) of Santander-Chile (English Version) (incorporated by reference to exhibit 99.1 to our Report on Form 6-K (File No. 001-14554) filed with the Commission on March 15, 2017).
2A.1Form of Amended and Restated Deposit Agreement among Banco Santander-Chile, The Bank of New York Mellon (as depositary) and Owners and Holders of American Depositary Shares (incorporated by reference to our Registration Statement on Form F-6 (Registration No. 333-205890) filed with the Commission on July 27, 2015).

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Exhibit
Number2A.2		Description
2A.2English translation of the Foreign Investment Contract among Banco Santander Chile, JPMorgan Chase Bank, N.A. and the Central Bank of Chile relating to the foreign exchange treatment of an investment in ADSs.ADSs (incorporated by reference to exhibit 2.A.2 to Banco Santander-Chile’s Annual Report on Form 20-F for the fiscal year ended December 31, 2015 (File No. 1-14554) filed with the Commission on May 2, 2016).
2A.3English translation of the Assignment of Rights under the Foreign Investment Contract from JPMorgan Chase Bank, N.A. to The Bank of New York Mellon.Mellon (incorporated by reference to exhibit 2.A.3 to Banco Santander-Chile’s Annual Report on Form 20-F for the fiscal year ended December 31, 2015 (File No. 1-14554) filed with the Commission on May 2, 2016).
2A.4Copy of the Central Bank Chapter XXVI Regulations Related to the Acquisition of Shares in Chilean Corporations and the Issuance of Instrument on Foreign Stock Exchanges or under Other Terms and Conditions of Issue (accompanied by an English translation) (incorporated by reference to OldBanco Santander-Chile’s Annual Report on Form 20-F for the fiscal year ended December 31, 1996 (File No. 1-13448) filed in paper with the Commission on June 30, 1997).
2B.1Agreement for the Issuance of Bonds dated November 26, 1996 between Old Santander-Chile and Banco Security (accompanied by an English translation) (incorporated by reference to OldBanco Santander-Chile’s Annual Report for the fiscal year ended December 31, 1996 (File No. 1-13448) filed in paper with the Commission on June 30, 1997).
2B.2Indenture dated December 9, 2004 between Santander-Chile and Deutsche Bank Trust Company Americas, as trustee, providing for issuance of securities in series (incorporated by reference to exhibit 2.B.2 to Banco Santiago’sSantander-Chile’s Annual Report on Form 20-F for the fiscal year ended December 31, 2005 (File No. 1-4554)1-14554) filed with the Commission on April 12, 2006).
2B.38.1Indenture dated March 16, 2001, as amended on May 30, 2003, October 22, 2004, May 3, 2005, and September 20, 2005 between Santander-Chile and Banco de Chile, as trustee, relating to issuance of UF14 million senior notes (copy to be furnished upon request).
8.1List of Subsidiaries.
12.1Section 302 Certification by the Chief Executive Officer.
12.2Section 302 Certification by the Chief Financial Officer.
12.3Section 302 Certification by the Financial Controller.
13.1Section 906 Certification.

We will furnish to the Securities and Exchange Commission, upon request, copies of any unfiled instruments that define the rights of holders of long-term debt of Banco Santander-Chile.

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SIGNATURES

 

The registrant 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.

 

BANCO SANTANDER-CHILE
 
 
 /s/ Cristian Florence
Name:Cristian Florence
Title:General Counsel

 

Date: March 24, 2017

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22, 2019

 

 

 

 

 

 

CONTENT

 

CONSOLIDATED FINANCIAL

STATEMENTS 2016

Banco Santander Chile

 

Table of Contents

CONTENT

Consolidated Financial Statements 
  
CONSOLIDATED STATEMENTS OF FINANCIAL POSITIONF-5F-4
CONSOLIDATED STATEMENTS OF INCOMEF-6F-5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEF-7F-6
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITYF-8F-7
CONSOLIDATED STATEMENTS OF CASH FLOWF-10F-8
 
Notes to the Consolidated Financial Statements 
  
Notes to the Consolidated Financial Statements 
NOTE 01SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESF-12F-10
NOTE 02ACCOUNTING CHANGESF-42
NOTE 03SIGNIFICANT EVENTSF-40F-46
NOTE 03  04REPORTING SEGMENTSF-44
NOTE 04  CASH AND CASH EQUIVALENTSF-48
NOTE 05  TRADING INVESTMENTSF-49CASH AND CASH EQUIVALENTSF-53
NOTE 06FINANCIAL ASSETS HELD FOR TRADINGF-54
NOTE 07INVESTMENTS UNDER RESALE AGREEMENTS AND OBLIGATIONS UNDER REPURCHASE AGREEMENTSF-50F-55
NOTE 07  08DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTINGF-53F-57
NOTE 08  INTERBANK LOANS09F-60LOANS AND ACCOUNT RECEIVABLE AT AMORTISED COSTF-63
NOTE 09  10LOANS AND ACCOUNTS RECEIVABLE AT FVOCIF-67
NOTE 11LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS & INTERBANK LOANSF-61F-68
NOTE 10  AVAILABLE FOR SALE INVESTMENTS12F-70DEBT INSTRUMENTS AT FVOCIF-73
NOTE 11  13INVESTMENTS IN ASSOCIATES AND OTHER COMPANIESF-74
NOTE 12  INTANGIBLE ASSETSF-76F-77
NOTE 13  14INTANGIBLE ASSETSF-79
NOTE 15PROPERTY, PLANT, AND EQUIPMENTF-78
NOTE 14 CURRENT AND DEFERRED TAXESF-81
NOTE 15  OTHER ASSETS16CURRENT AND DEFERRED TAXESF-84
NOTE 16  17OTHER ASSETSF-87
NOTE 18TIME DEPOSITS AND OTHER TIME LIABILITIESF-85
NOTE 17  INTERBANK BORROWINGSF-86F-88
NOTE 18  19INTERBANK BORROWINGSF-89
NOTE 20ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIESF-89F-92
NOTE 19  21MATURITY OF ASSETS AND LIABILITIESF-95
NOTE 20  PROVISIONSF-97F-99
NOTE 21  OTHER LIABILITIES22F-98
NOTE 22  CONTINGENCIES AND COMMITMENTSPROVISIONSF-98F-101
NOTE 23  EQUITYF-100OTHER LIABILITIESF-103
NOTE 24  NON-CONTROLLING INTERESTCONTINGENCIES AND COMMITMENTSF-104
NOTE 25EQUITYF-105
NOTE 26NON-CONTROLLING INTEREST INCOMEF-108
NOTE 26  27INTEREST INCOMEF-112
NOTE 28FEES AND COMMISSIONSF-110F-114
NOTE 27  29NET INCOME (EXPENSE) FROM FINANCIAL OPERATIONSF-111F-116
NOTE 28  30NET FOREIGN EXCHANGE GAIN (LOSS)F-111F-117
NOTE 29  31PROVISION FOR LOAN LOSSESF-112F-118
NOTE 30  32PERSONNEL SALARIES AND EXPENSESF-113F-119
NOTE 31  33ADMINISTRATIVE EXPENSESF-114F-120
NOTE 32  34DEPRECIATION, AMORTIZATION, AND IMPAIRMENTF-115F-121
NOTE 33  35OTHER OPERATING INCOME AND EXPENSESF-115
NOTE 34  TRANSACTIONS WITH RELATED PARTIESF-117
NOTE 35  PENSION PLANSF-123
NOTE 36TRANSACTIONS WITH RELATED PARTIESF-124
NOTE 37PENSION PLANSF-129
NOTE 38FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIESF-126F-132
NOTE 37  39RISK MANAGEMENTF-134F-140
NOTE 38  40SUBSEQUENT EVENTSF-157F-168

 

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Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of Banco Santander Chile

 

In our opinion,Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated statementstatements of financial position of Banco Santander Chile and its subsidiaries (“the Company”) as of December 31, 20162018 and 2017, and the related consolidated statements of income, comprehensive income, cash flows and changes in equity and cash flows for each of the year thenthree years in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Banco Santander Chile and its subsidiaries atthe Company as of December 31, 2016,2018 and 2017, and the results of theirits operations and theirits cash flows for each of the year thenthree years in the period ended December 31, 2018 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016,2018, based on criteria established inInternal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations ofCOSO.

Change in Accounting Principle

As discussed in Note 2 to the Treadway Commission (COSO). consolidated financial statements, the Company changed the manner in which it accounts for financial instruments in 2018.

Basis for Opinions

The Company´sCompany's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management´sManagement’s Report on Internal Control over Financial Reporting appearing under Item 15 of this annual report.15. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements and on the Company´sCompany's internal control over financial reporting based on our integrated audit. audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company 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 auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our auditaudits of the consolidated financial statements 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 included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our auditaudits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit providesaudits provide a reasonable basis for our opinions.

F-2

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 (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.

 

F-2 

Table of Contents

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/ PricewaterhouseCoopers Consultores, Auditores y Compañía Limitada 

PricewaterhouseCoopers Consultores, Auditores y Compañía LimitadaSpA

 

Santiago, Chile

March 24, 2017

F-3 

Table of Contents

 

Deloitte

Auditores y Consultores Limitada

Rosario Norte 407

Rut: 80.276.200-3

Las Condes, Santiago

Chile

Fono: (56) 227 297 000

Fax: (56) 223 749 177

deloittechile@deloitte.com

www.deloitte.cl

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Banco Santander Chile22, 2019

 

We have auditedserved as the accompanying consolidated statement of financial position of Banco Santander Chile and subsidiaries (the “Bank”) as of December 31, 2015 and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the two years in the period ended December 31, 2015. These financial statements are the responsibility of the Bank´s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Banco Santander Chile and subsidiaries as of December 31, 2015 and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2015 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS-IASB”).

/s/ Deloitte Auditores y Consultores Limitada

Santiago, Chile 

May 1, 2016

Deloitte® se refiere a Deloitte Touche Tohmatsu Limited una compañía privada limitada por garantía, de Reino Unido, y a su red de firmas miembro, cada una de las cuales es una entidad legal separada e independiente. Por favor, vea en www.deloitte.com/cl/acercade la descripción detallada de la estructura legal de Deloitte Touche Tohmatsu Limited y sus firmas miembro.

Deloitte Touche Tohmatsu Limited es una compañía privada limitada por garantía constituida en Inglaterra & Gales bajo el número 07271800, y su domicilio registrado: Hill House, 1 Little New Street, London, EC4A 3TR, Reino Unido. 

Company’s auditor since 2016.

 

F-4 F-3

Table of Contents

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

 As of December 31,
  2016 2015 As of December 31,
NOTE MCh$ MCh$   2018 2017
      Note MCh$ MCh$
ASSETSASSETS     ASSETS    
Cash and deposits in banks4 2,279,389 2,064,806Cash and deposits in banks5 2,065,441 1,452,922
Cash items in process of collection4 495,283 724,521Cash items in process of collection5 353,757 668,145
Trading investments5 396,987 324,271Investments under resale agreements7 - -
Investments under resale agreements6 6,736 2,463Financial derivative contracts8 3,100,635 2,238,647
Financial derivative contracts7 2,500,782 3,205,926Trading investments6 - 485,736
Interbank loans, net8 268,672 9,711Interbank loans, net11 - 162,213
Loans and accounts receivable from customers, net9 26,147,154 24,528,745Loans and accounts receivable from customers, net11 - 26,772,544
Available for sale investments10 3,388,906 2,044,411Available for sale investments12 - 2,574,546
Investments in associates and other companies11 23,780 20,309Financial assets held for trading6 77,041 -
Intangible assets12 58,085 51,137Loans and account receivable at amortised cost9 29,331,001 -
Property, plant, and equipment13 257,379 240,659Loans and account receivable at fair value through other comprehensive income10 68,588 -
Deferred taxes14 359,600 320,527Debt instrument at fair value through other comprehensive income12 2,394,323 -
Other assets15 847,272 1,100,174Equity instruments at fair value through other comprehensive income13 483 -
Investments in associates and other companies13 32,003 27,585
Intangible assets14 66,923 63,219
Property, plant, and equipment15 253,586 242,547
Deferred taxes16 397,515 371,091
Other assets17 991,216 764,410
TOTAL ASSETSTOTAL ASSETS  37,030,025 34,637,660TOTAL ASSETS 

39,132,512

 35,823,605
   
LIABILITIESLIABILITIES  LIABILITIES     
Deposits and other demand  liabilities16 7,539,315 7,356,121Deposits and other demand liabilities18 8,741,417    7,768,166
Cash items in process of being cleared4 288,473 462,157Cash items in process of being cleared5 163,043 486,726
Obligations under repurchase agreements6 212,437 143,689Obligations under repurchase agreements7 48,545 268,061
Time deposits and other time liabilities16 13,151,709 12,182,767Time deposits and other time liabilities18 13,067,819 11,913,945
Financial derivative contracts7 2,292,161 2,862,606Financial derivative contracts8 2,517,728 2,139,488
Interbank borrowings17 1,916,368 1,307,574Interbank borrowings19 1,788,626 1,698,357
Issued debt instruments18 7,326,372 5,957,095Issued debt instruments20 8,115,233    7,093,653
Other financial liabilities18 240,016 220,527Other financial liabilities20 215,400      242,030
Current taxes14 29,294 17,796Current taxes16 8,093        6,435
Deferred taxes14 7,686 3,906Deferred taxes16 15,470        9,663
Provisions20 292,210 274,998Provisions22 305,271      303,798
Other liabilities21 795,785 1,045,869Other liabilities23 900,407      745,363
TOTAL LIABILITIESTOTAL LIABILITIES 34,091,826 31,835,105TOTAL LIABILITIES 35,887,052    32,675,685
   
EQUITYEQUITY  EQUITY     
   Attributable to the shareholders of the Bank: 3,199,297    3,106,037
Attributable to the equity holders of the Bank: 2,908,858 2,772,374Capital25 891,303      891,303
Capital23 891,303 891,303Reserves25 1,923,022    1,781,818
Reserves23 1,640,112 1,527,893Valuation adjustments25 11,353      (2,312)
Valuation adjustments23 6,640 1,288Retained earnings 373,619     435,228
Retained earnings 370,803 351,890 Retained earnings from prior years   (43,114) 41,267
 Retained earnings from prior years   37,551 37,963 Income for the year  595,333      562,801
 Income for the year 476,067 448,466 Minus: Provision for mandatory dividends25  (178,600)     (168,840)
 Minus:  Provision for mandatory dividends23 (142,815) (134,539)Non-controlling interest26 46,163       41,883
Non-controlling interest24 29,341 30,181
TOTAL EQUITYTOTAL EQUITY 2,938,199 2,802,555TOTAL EQUITY 3,245,460 

3,147,920

  
TOTAL LIABILITIES AND EQUITYTOTAL LIABILITIES AND EQUITY  37,030,025 34,637,660TOTAL LIABILITIES AND EQUITY  39,132,512 

35,823,605

 

The accompanying notes form integral part of these consolidated financial statements.

 

F-5 F-4

Table of Contents

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF INCOME

For the years ended

 

  December 31,
    2016 2015 2014
 NOTE  MCh$ MCh$ MCh$
         
OPERATING INCOME        
         
Interest income25  2,137,044 2,085,988 2,227,018
Interest expense25  (855,678) (830,782) (909,914)
         
         Net interest income   1,281,366 1,255,206 1,317,104
         
Fee and commission income26  431,184 402,900 366,729
Fee and commission expense26  (176,760) (165,273) (139,446)
         
         Net fee and commission income   254,424 237,627 227,283
         
Net expense from financial operations27  (367,034) (457,897) (159,647)
Net foreign exchange gain28  507,392 603,396 272,212
Other operating income33  6,427 6,439 6,545
         
         Net operating profit before provision for loan losses   1,682,575 1,644,771 1,663,497
         
Provision for loan losses29  (342,083) (399,277) (354,903)
          
NET OPERATING PROFIT   1,340,492 1,245,494 1,308,594
         
Personnel salaries and expenses30  (395,133) (387,063) (338,888)
Administrative expenses31  (226,413) (220,531) (205,149)
Depreciation and amortization32  (65,359) (53,614) (44,172)
Impairment of property, plant, and equipment32  (234) (21) (36,664)
Other operating expenses33  (68,902) (58,729) (58,946)
         
         Total operating expenses   (756,041) (719,958) (683,819)
         
OPERATING INCOME   584,451 525,536 624,775
         
Income from investments in associates and other companies11  3,012 2,588 2,165
         
          Income before tax   587,463 528,124 626,940
         
Income tax expense14  (109,031) (76,395) (51,050)
         
NET INCOME FOR THE YEAR   478,432 451,729 575,890
         
Attributable to:        
Equity holders of the Bank   476,067 448,466 569,910
Non-controlling interest24  2,365 3,263 5,980

Earnings per share attributable to

 

Equity holders of the Bank :

 

        
Basic earnings23  2,526 2,380 3,024
Diluted earnings23  2,526 2,380 3,024
          

F-6 

Table of Contents

  December 31,
    2018 2017 2016
 Note  MCh$ MCh$ MCh$
OPERATING INCOME        
         
Interest income27  2,244,317 2,058,446 2,137,044
Interest expense27  (829,949) (731,755) (855,678)
         
    Net interest income   1,414,368 1,326,691 1,281,366
         
Fee and commission income28  484,463 455,558 431,184
Fee and commission expense28  (193,578) (176,495) (176,760)
         
    Net fee and commission income   290,885 279,063 254,424
         
         
Net income (expense) from financial operations29  53,174 2,796 (367,034)
Net foreign exchange gain30  51,908 126,956 507,392
Other operating income35  23,129 62,016 6,427
         
    Net operating profit before provision for loan losses   1,833,464 1,797,522 1,682,575
         
Provision for loan losses31  (317,408) (302,255) (342,083)
         
NET OPERATING INCOME   1,516,056 1,495,267 1,340,492
         
Personnel salaries and expenses32  (397,564) (396,967) (395,133)
Administrative expenses33  (245,089) (230,103) (226,413)
Depreciation and amortization34  (79,280) (77,823) (65,359)
Impairment of property, plant, and equipment34  (39) (5,644) (234)
Other operating expenses35  (32,342) (68,413) (68,902)
         
    Total operating expenses   (754,314) (778,950) (756,041)
         
OPERATING INCOME   761,742 716,317 584,451
         
Income from investments in associates and other companies13  5,095 3,963 3,012
         
     Income before tax   766,837 720,280 587,463
         
Income tax expense16  (167,144) (145,031) (109,031)
         
NET INCOME FOR THE YEAR   599,693 575,249 478,432
         
Attributable to:        
Shareholders of the Bank   595,333 562,801 476,067
Non-controlling interest26  4,360 12,448 2,365

Earnings per share attributable to

Shareholders of the Bank :

        
Basic earnings25  3,159 2,987 2,526
Diluted earnings25  3,159 2,987 2,526

 

The accompanying notes form integral part of these consolidated financial statements.

F-5

Banco Santander Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the years ended

 

  December 31,
    2016 2015 2014
 NOTE  MCh$ MCh$ MCh$
         
NET INCOME FOR THE YEAR   478,432 451,729 575,890
         
OTHER COMPREHENSIVE INCOME ITEMS WHICH MAY BE        
RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS        
         
   Available for sale investments10  14,468 (28,777) 20,844
   Cash flow hedge23  (6,338) (2,099) 18,982
         

Other comprehensive income items which may be reclassified subsequently to profit or loss, before tax

   8,130 (30,876) 39,826
         
Income tax related to items which may be reclassified subsequently to profit or loss14  (1,976) 6,462 (8,289)
         
Other comprehensive income items which may be reclassified subsequently to profit or loss, net of tax   6,154 (24,414) 31,537
TOTAL COMPREHENSIVE INCOME FOR THE YEAR   484,586 427,315 607,427
         
    Attributable to:        
      Equity holders of the Bank   481,419 424,154 601,474
      Non-controlling interests24  3,167 3,161 5,953
  December 31,
    2018 2017 2016
 Note  MCh$ MCh$ MCh$
NET INCOME FOR THE YEAR   599,693 575,249 478,432
         

Other comprehensive income that will not be reclassified to profit or loss

        
Equity instruments at fair value through other comprehensive income   (113) - -
Income tax related to the above   31 - -
         
Total items that will not be reclassified to the income statements   (82) - -
         

Other comprehensive income that will be reclassified to profit or loss

        
         
Debt instruments at fair value through other comprehensive income25  4,826 - -
Avalilable for sale financial assets25  - (5,520) 14,468
Cash flow hedge25  13,365 (5,850) (6,338)
Income tax related to the above   (4,903) 2,754 (1,975)
         

Total items that will be reclassified to the income statements

   13,288 (8,616) 6,155
         
Other comprehesive income for the year, net of tax   13,206 (8,616) 6,155
TOTAL COMPREHENSIVE INCOME FOR THE YEAR   612,899 566,633 484,587
         
Attributable to:        
Shareholders of the Bank   608,623 553,849 481,419
Non-controlling interests26  4,276 12,784 3,168

 

The accompanying notes form integral part of these consolidated financial statements.

F-7 


Table of Contents

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the years ended December 31, 2016, 20152018, 2017 and 20142016

 

 RESERVESVALUATION ADJUSTMENTSRETAINED EARNINGS  RESERVESVALUATION ADJUSTMENTSRETAINED EARNINGS 
CapitalReserves and other retained earningsEffects of merger of companies under common controlAvailable for sale investmentsCash flow hedge

Income

tax effects

Retained earnings of prior yearsIncome for the yearProvision for mandatory dividendsTotal attributable to equity holders of the BankNon-controlling interestTotal EquityCapitalReserves and other retained earningsEffects of merger of companies under common controlFair value reserveCash flow hedge

Income tax effects

Retained earnings of prior yearsIncome for the yearProvision for mandatory dividendsTotal attributable to shareholders of the BankNon-controlling interestTotal Equity
MCh$MCh$
Equity as of December 31, 2013891,3031,133,215(2,224)802(8,257)1,49118,016442,294(132,688)2,343,95228,5042,372,456
Distribution of income from previous period-442,294(442,294)-
Equity as of January 1, 2014891,3031,133,215(2,224)802(8,257)1,491460,310-(132,688)2,343,95228,5042,372,456
Increase or decrease of capital and reserves-(1,374)
Dividends distributions/ withdrawals made-(265,156)-132,688(132,468)-(132,468)
Transfer of retained earnings to reserves-176,770-(176,770)-
Provision for mandatory dividends---(170,973)-(170,973)
Subtotal-176,770---(441,926)-(38,285)(303,441)(1,374)(304,815)
Other comprehensive income-20,87818,982(8,296)-31,564(27)31,537
Income for the year-569,910-569,9105,980575,890
Subtotal-20,87818,982(8,296)-569,910-601,4745,953607,427
Equity as of December 31, 2014891,3031,309,985(2,224)21,68010,725(6,805)18,384569,910(170,973)2,641,98533,0832,675,068
Distribution of income from previous period-569,910(569,910)-
Equity as of January 1, 2015891,3031,309,985(2,224)21,68010,725(6,805)588,294-(170,973)2,641,98533,0832,675,068
Dividends distributions/ withdrawals made-(330,199)-170,973(159,226)-(159,226)
Transfer of retained earnings to reserves-220,132-(220,132)-(6,063)
Provision for mandatory dividends---(134,539)-(134,539)
Subtotal-220,132-(550,331)-36,434(293,765)(6,063)(299,828)
Other comprehensive income-(28,645)(2,099)6,432-(24,312)(102)(24,414)
Income for the year-448,466-448,4663,263451,729
Subtotal-(28,645)(2,099)6,432-448,466-424,1543,161427,315
Equity as of December 31, 2015891,3031,530,117(2,224)(6,965)8,626(373)37,963448,466(134,539)2,772,37430,1812,802,555891,3031,530,117(2,224)(6,965)8,626(373)37,963448,466(134,539)2,772,37430,1812,802,555
Distribution of income from previous period-448,466(448,466)--448,466(448,466)-
Equity as of January 1, 2016891,3031,530,117(2,224)(6,965)8,626(373)486,429-(134,539)2,772,37430,1812,802,555891,3031,530,117(2,224)(6,965)8,626(373)486,429-(134,539)2,772,37430,1812,802,555
Dividends distributions/ withdrawals made-(336,659)-134,539(202,120)(4,008)(206,128)-(336,659)-134,539(202,120)(4,008)(206,128)
Transfer of retained earnings to reserves-112,219-(112,219)--112,219-(112,219)--
Provision for mandatory dividends---(142,815)-(142,815)-(142,815)-(142,815)
Subtotal-112,219-(448,878)-(8,276)(344,935)(4,008)(348,943)-112,219-(448,878)-(8,276)(344,935)(4,008)(348,943)
Other comprehensive income-13,414(6,338)(1,724)-5,3528036,155-13,414(6,338)(1,724)-5,3528036,155
Income for the year-476,067-476,0672,365478,432-476,067-476,0672,365478,432
Subtotal-13,414(6,338)(1,724)-476,067-481,4193,168484,587-13,414(6,338)(1,724)-476,067-481,4193,168484,587
Equity as of December 31, 2016891,3031,642,336(2,224)6,4492,288(2,097)37,551476,067(142,815)2,908,85829,3412,938,199891,3031,642,336(2,224)6,4492,288(2,097)37,551476,067(142,815)2,908,85829,3412,938,199
Distribution of income from previous period-476,067(476,067)--
Equity as of January 1, 2017891,3031,642,336(2,224)6,4492,288(2,097)513,618-(142,815)2,908,85829,3412,938,199
Dividends distributions/ withdrawals made-(330,645)-142,815(187,830)(242)(188,072)
Transfer of retained earnings to reserves-141,706-(141,706)--
Provision for mandatory dividends-(168,840)-(168,840)
Subtotal-141,706-(472,351)-(26,025)(356,670)(242)(356,912)
Other comprehensive income-(5,990)(5,850)2,888-(8,952)336(8,616)
Income for the year-562,801-562,80112,448575,249
Subtotal-(5,990)(5,850)2,888-562,801-553,84912,784566,633
Equity as of December 31, 2017891,3031,784,042(2,224)459(3,562)79141,267562,801(168,840)3,106,03741,8833,147,920
Distribution of income from previous period-562,801(562,801)--
Equity as of January 1, 2018891,3031,784,042(2,224)459(3,562)791604,068-(168,840)3,106,03741,8833,147,920
Impact of adopting IFRS 9-394-(19)(82,367)-(81,992)-(81,992)
Restated opening balance under IFRS 9891,3031,784,042(2,224)853(3,562)772521,701-(168,840)3,024,04541,8833,065,928
Dividends distributions/ withdrawals made- -(423,611)-168,840(254,771)4(254,767)
Transfer of retained earnings to reserves-141,204-(141,204)--
Provision for mandatory dividends- -(178,600)-(178,600)
Subtotal-141,204-(564,815)-(9,760)(433,371)4(433,367)
Other comprehensive income-4,79913,365(4,874)-13,290(84)13,206
Income for the year-595,333-595,3334,360599,693
Subtotal-4,79913,365(4,874)-595,333-608.6234,276612,899
Equity as of December 31, 2018891,3031,925,246(2,224)5,6529,803(4,102)(43,114)595,333(178,600)3.199.29746,1633,245,460

PeriodTotal attributable to shareholders of the Bank 

Allocated to

reserves 

 Allocated to dividends 

Percentage

 distributed

 

Number of

shares

 

Dividend per share

(in pesos)

 MCh$ MCh$ MCh$ %    
Year 2017 (Shareholders Meeting April 2018)564,815 141,204 423,611 75 188,446,126,794 2.248
Year 2016 (Shareholders Meeting April 2017)472,351 141,706 330,645 70 188,446,126,794 1.755

The accompanying notes form integral part of these consolidated financial statements.

 

F-8 F-7

Table of Contents

Banco Santander Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended

 

    December 31,
    2018 2017 2016
 NOTE  MCh$ MCh$ MCh$
         
A - CASH FLOWS FROM OPERATING ACTIVITIES        
NET INCOME FOR THE YEAR    599,693 575,249 478,432
Adjustments for non-cash items included in net income   (1,249,728) (1,198,330) (1,082,975)
Depreciation and amortization34  79,280 77,823 65,359
Impairment of property, plant, and equipment34  39 5,644 234
Provision for loan losses31  405,889 385,782 420,381
Mark to market of trading investments   1,438 1,438 (2,682)
Income from investments in associates and other companies13  (5,095) (3,962) (3,012)
Net gain on sale of assets received in lieu of payment35  (7,106) (3,330) (1,663)
Provision on assets received in lieu of payment35  816 3,912 9,246
Net gain on sale of property, plant and equipment35  (2,490) (23,229) (2,017)
Net interest income27  (1,414,368) (1,326,691) (1,281,366)
Net fee and commission income28  (290,885) (279,063) (254,424)

Other non-cash items

   (8,271) (29,903) 4,238
Changes in deferred taxes16  (25,517) (6,751) (37,269)
Increase/decrease in operating assets and liabilities   1,672,577 206,724 1,340,696
(Increase) of loans and accounts receivables from customers, net   (2,703,700) (629,605) (1,643,744)
Decrease (increase) of financial investments   588,918 725,611 (1,417,211)
Decrease (increase) due to resale agreements (assets)   - 6,736 (4,273)
Decrease (increase) of interbank loans   147,534 110,036 (261,744)
Decrease of assets received or awarded in lieu of payment   722 4,125 18,238
Increase of debits in customers checking accounts   521,476 127,968 268,695
(Decrease) increase of time deposits and other time liabilities   1,153,874 (1,237,764) 968,942
Increase (decrease) of obligations with domestic banks   (480) (364,956)365,436
Increase (decrease) of other demand liabilities or time obligations   451,775 100,883 (85,502)
Increase of obligations with foreign banks   90,754 146,947243,355
(Decrease) increase of obligations with Central Bank of Chile   (5) (2) 3
(Decrease) increase of obligations under repurchase agreements   (219,516) 55,62468,748
Increase in other financial liabilities   (26,630) 2,014 19,489
(Decrease) increase of other assets and liabilities   (888,776) (158,281) 259,899
Redemption of letters of credit   (8,989) (11,772) (16,606)
Senior bond issuances   1,156,057 911,5813,537,855
Redemption of mortgage bonds and payments of interest   (5,911) (5,736) (5,492)
Redemption of senior bonds and payments of interest   (289,837) (1,167,656) (2,499,271)
Redemption of subordinated bonds and payments of interest   - (14,899) (12,128)
Interest received   2,244,317 2,058,446 2,137,044
Interest paid   (829,949) (731,755) (855,678)
Dividends received from investments in other companies13   38 116 217
Fees and commissions received28  484,463 455,558 431,184
Fees and commissions paid28  (193,578) (176,495) (176,760)
Total cash flow (used in) provided by operating activities   1,022,522 (416,357) 736,153

Banco Santander Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the years ended December 31, 2016, 2015 and 2014

PeriodTotal attributable to equity holders of the Bank 

Allocated to

reserves

 Allocated to dividends 

Percentage

distributed

 

Number of

shares

 

Dividend per share

(in pesos)

 MCh$ MCh$ MCh$ %    
            
Year 2015 (Shareholders Meeting April  2016)448,878 112,219 336,659 75 188,446,126,794 1.787
            
Year 2014 (Shareholders Meeting April  2015)550,331 220,132 330,199 60 188,446,126,794 1.752

F-9 

Table of Contents

Banco Santander Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended

 

    December 31,   
    2016 2015 2014
 NOTE  MCh$ MCh$ MCh$
         
A - CASH FLOWS FROM OPERATING ACTIVITIES        
NET INCOME FOR THE YEAR   478,432 451,729    575,890
Debits (credits) to income that do not represent cash flows   (1,082,975) (927,591) (1,022,091)
Depreciation and amortization32  65,359 53,614      44,127
Impairment of property, plant, and equipment32  234 21      36,664
Provision for loan losses29  420,381 467,417   413,880
Mark to market of trading investments   (2,682) (3,001) (11,285)
Income from investments in associates and other companies11  (3,012) (2,588) (2,165)
Net gain on sale of assets received in lieu of payment33  (1,663) (2,455) (2,811)
Provision on assets received in lieu of payment33  9,246 7,803   1,577
Net gain on sale of property, plant and equipment33  (2,017) (381) (687)
Net interest income25  (1,281,366) (1,255,206) (1,317,104)
Net fee and commission income26  (254,424) (237,627) (227,283)
Debits (credits) to income that do not represent cash flows   4,238 90,484    115,240
Changes  in deferred taxes14  (37,269) (45,672) (72,244)
Increase/decrease in operating assets and liabilities   1,340,697 1,163,658 728,624
(Increase) of loans and accounts receivables from customers, net   (1,643,744) (2,083,854) (1,674,156)
(Increase) decrease of financial investments   (1,417,211) (57,731) (437,853)
Decrease (increase) due to resale agreements (assets)   (4,273) 2,463      17,469
Decrease (increase) of interbank loans   (261,744) (1,057)    113,477
Decrease of assets received or awarded in lieu of payment   18,238 4,157   4,431
Increase of debits in customers checking accounts   268,695 744,863    727,604
Increase of time deposits and other time liabilities   968,942 1,768,827    738,668
Increase (decrease) of obligations with domestic banks   365,436 (66,006)      65,506
Increase of other demand liabilities or time obligations   (85,502) 130,763    132,130
Increase (decrease) of obligations with foreign banks   243,355 142,069 (516,156)
(Decrease) of obligations with Central Bank of Chile   3 (90) (126)
(Decrease) increase of obligations under repurchase agreements   68,748 (248,437)    183,154
Increase (decrease) in other financial liabilities   19,489 15,402 15,344
Net increase of other assets and liabilities   259,900 (1,286,057)     (805,865)
Redemption of letters of credit   (16,606) (26,720) (29,668)
Mortgage bond issuance   - -      36,941
Senior bond issuances   3,537,855 878,389 1,196,273
Redemption of mortgage bonds and payments of interest   (5,492) (5,343) (4,195)
Redemption of senior bonds and payments of interest   (2,499,271) (231,972) (574,507)
Redemption of subordinated bonds and payments of interest   (12,128) (10,397) (8,886)
Interest received   2,137,044 2,093,028 2,235,437
Interest paid   (855,678) (836,544) (913,800)
Dividends received from investments in other companies11  217 278      119
Fees and commissions received26  431,184 402,900 366,729
Fees and commissions paid26  (176,760) (165,273) (139,446)
Total cash flow provided by (used in) operating activities   736,154 687,796 282,423
            
    December 31,
     2018 2017 2016
 NOTE   MCh$ MCh$ MCh$
          
B - CASH FLOWS FROM INVESTMENT ACTIVITIES:         
Purchases of property, plant, and equipment15   (68,329) (58,771) (62,355)
Sales of property, plant, and equipment15   6,297 17,939 560
Purchases of investments in associates and other companies13   - (3) (1,123)
Purchases of intangible assets14   (29,563) (32,624) (27,281)
Total cash flow .used in investment activities    (91,565) (73,459) (90,199)
          
C - CASH FLOW FROM FINANCING ACTIVITIES:         
From shareholders’ financing activities    (423,611) (330,645) (336,659)
Dividends paid    (423,611) (330,645) (336,659)
Total cash flow used in financing activities    (423,611) (330,645) (336,659)
          
D – NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING THE YEAR    507,316 (820,460) 309,295
          
E – EFFECTS OF FOREIGN EXCHANGE RATE FLUCTUATIONS    114,498 (31,398) (150,266)
          
F - INITIAL BALANCE OF CASH AND CASH EQUIVALENTS    1,634,341 2,486,1992,327,170
          
FINAL BALANCE OF CASH AND CASH EQUIVALENTS5   2,256,155 1,634,341 2,486,199

   December 31,
Reconciliation of provisions for the Consolidated Statements of Cash Flow for the year ended   2018 2017 2016
    MCh$ MCh$ MCh$
         
Provision for loan losses for cash flow purposes31  405,889 385,782 420,381
Recovery of loans previously charged off31  (88,481) (83,527) (78,298)
Provision for loan losses – net   317,408 302,255 342,083

   Changes not related to cash flows 
Reconciliation of liabilities that arise from financing activities

31.12.2017

MCh$

Cash flow

MCh$

Adquisition

Foreign
currency
exchange

Price level
restatement

UF

Fair value
changes

31.12.2018

MCh$

Subordinated bonds

773,192

-

-

-

22,769

-

795,957

Paid dividend-(423,611)----(423,611)
Other liabilities-------
Total liabilities related to financing activities

773,192

(423,611)

-

-

22,769

-

372,346

The accompanying notes form integral part of these consolidated financial statements.

F-10 


Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CORPORATE INFORMATION

 

Banco Santander Chile and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended

    December 31,
     2016 2015 2014 
 NOTE   MCh$ MCh$ MCh$ 
           
B - CASH FLOWS FROM INVESTMENT ACTIVITIES:          
Purchases of property, plant, and equipment13   (62,356) (65,111) (59,088) 
Sales of property, plant, and equipment13   560 121      172 
Purchases of investments in associates and other companies11   (1,123) (302) (6,313) 
Purchases of intangible assets12   (27,281) (27,573) (27,437) 
Total cash flow (used in) provided by investment activities    (90,200) (92,865) (92,666) 
           
C - CASH FLOW FROM FINANCING ACTIVITIES:          
From shareholders’ financing activities    (336,659) (330,199) (265,156) 
Dividends paid    (336,659) (330,199) (265,156) 

Total cash flow used in financing activities

    (336,659) (330,199) (265,156) 
           
D – NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS DURING THE YEAR    309,295 264,732 (75,399) 
           
E – EFFECTS OF FOREIGN EXCHANGE RATE FLUCTUATIONS    (150,266) 203,436      34,893 
           
F - INITIAL BALANCE OF CASH AND CASH EQUIVALENTS    2,327,170 1,859,002 1,899,508 
           
FINAL BALANCE OF CASH AND CASH EQUIVALENTS4   2,486,199 2,327,170 1,859,002 

   December 31, 
Reconciliation of provisions for the Consolidated Statement of Cash Flow for the year ended   2016 2015 2014
    MCh$ MCh$ MCh$
         
Provision for loan losses for cash flow purposes29  420,381 467,417 413,880
Recovery of loans previously charged off29  (78,298) (68,140)  (58,977)
Provision for loan losses – net   342,083 399,277 354,903
          

F-11 

Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CORPORATE INFORMATION

Banco Santander Chile (formerly Banco Santiago) is a banking corporation (limited company) operating under the laws of the Republic of Chile, headquartered at Bandera N°140, Santiago. The corporation provides a broad range of general banking services to its customers, ranging from individuals to major corporations. Banco Santander Chile and its subsidiaries (collectively referred to herein as the “Bank” or “Banco Santander Chile”) offers commercial and consumer banking services, including (but not limited to) factoring, collection, leasing, securities and insurance brokering, mutual and investment fund management brokering, and investment banking.

 

Banco Santander Spain controls Banco Santander-Chile through its holdings in Teatinos Siglo XXI Inversiones Ltda. and Santander-Chile Holding S.A., which are controlled subsidiaries of Banco Santander Spain. As of December 31, 20162018 Banco Santander Spain owns or controls directly and indirectly 99.5% of Santander-Chile Holding S.A. and 100% of Teatinos Siglo XXI Inversiones Ltda. This gives Banco Santander Spain, through its subsidiaries, has control over 67.18% of the Bank’s shares.

 

a)       Basis of preparation

 

These Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) (hereinafter referred to as IFRS).

 

For purposes of these financial statements we use certain terms and conventions. References to “US$”, “U.S. dollars” and “dollars” are to United States dollars, references to “EUR” are to European Economic Community Euro, references to “CNY” are to Chinese Yuan, reference to “JPY” are to Japanese Yuan, references to “CHF” are to Swiss franc, references to “Chilean pesos”, “pesos” or “Ch$” are to Chilean pesos, and references to “UF” are to Unidades de Fomento. The UF is an inflation-indexed Chilean monetary unit with a value in Chilean pesos that changes daily to reflect changes in the official Consumer Price Index (“CPI”) of the Instituto Nacional de Estadísticas (the Chilean National Institute of Statistics) for the previous month.

 

The UF is revalued in monthly cycles. Each day in the period beginning on the tenth day of the current month through the ninth day of the succeeding month, the nominal peso value of the UF is indexed up (or down in the event of deflation) in order to reflect a proportionate amount of the change in the Chilean Consumer Price Index during the prior calendar month. One UF is equaled to Ch$26,347.9827,565.79 as of December 31, 20162018 and Ch$25,629.0926,798.14 as of December 31, 2015.2017. In 2016,2018, UF inflation was 2.7%2.6% compared to 4.4%2.3% in 2015.2017. The effect of any changes in the nominal peso value of our UF-denominated interest earning assets and interest bearing liabilities is reflected in our results of operations as an increase (or decrease, in the event of deflation) in interest income and expense, respectively.

 

The Notes to the Consolidated Financial Statements contain additional information to support the figures submitted in the Consolidated StatementStatements of Financial Position, Consolidated StatementStatements of Income, Consolidated StatementStatements of Comprehensive Income, Consolidated StatementStatements of Changes in Equity and Consolidated StatementStatements of Cash Flows for the period.

 

b)       Basis of preparation for the Consolidated Financial Statements

 

The Consolidated Financial Statements as of December 31, 2015 and 2014 and for the years ended December 31, 2016, 20152018, 2017 and 2014,2016, incorporate the financial statements of the entities over which the Bank has control (including structured entities); and includes the adjustments, reclassifications and eliminations needed to comply with the accounting and valuation criteria established by IFRS. Control is achieved when the Bank:

 

I.has power over the investee;

II.is exposed, or has rights, to variable returns from its involvement with the investee; and

III.has the ability to use its power to affect its returns.

 

The Bank reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

F-12 

Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

When the Bank has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities over the investee unilaterally. The Bank considers all relevant facts and circumstances in assessing whether or not the Bank’s voting rights in an investee are sufficient to give it power, including:

 

F-10

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

·●the size of the Bank’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders;

·●potential voting rights held by the Bank, other vote holders or other parties;

·●rights arising from other agreements; and

·●any additional facts and circumstances that indicate that the Bank has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings.

 

Consolidation of a subsidiary begins when the Bank obtains control over the subsidiary and ceases when the Bank loses control over the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the Consolidated StatementStatements of Income and in the Consolidated Statement of Comprehensive Income from the date the Bank gains control until the date when the Bank ceases to control the subsidiary.

 

Profit or loss and each component of other comprehensive income are attributed to the owners of the Bank and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Bank and to the non-controlling interests even if this results in the non-controlling interests having a deficit in certain circumstances.

 

When necessary, adjustments are made to the financial statements of the subsidiaries to ensure their accounting policies are consistent with the Bank’s accounting policies.

 

All intragroup assets, liabilities, equity, income, expenses and cash flows relating to transactions between consolidated entities are eliminated in full on consolidation.

 

Changes in the consolidated entities ownership interests in subsidiaries that do not result in a loss of control over the subsidiaries are accounted for as equity transactions. The carrying values of the Bank’s equity and the non-controlling interests’ equity are adjusted to reflect the changes to their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognizedrecognised directly in equity and attributed to owners of the Bank.

 

In addition, third parties’ shares in the Bank’s consolidated equity are presented as “Non-controlling interests” in the Consolidated StatementStatements of Changes in Equity. Their share in the income for the year is presented as “Attributable to non-controlling interest” in the Consolidated StatementStatements of Income.

 

The following companies are considered entities controlled by the Bank and are therefore within the scope of consolidation:

 

i.Entities controlled by the Bank through participation in equity

 

Name of the Subsidiary  Percent ownership share
  As of December 31,
 Place of Incorporation and
operation		2016 2015 2014
 DirectIndirectTotal DirectIndirectTotal DirectIndirectTotal
Main Activity%%%%%% %%%
              
Santander Corredora de Seguros LimitadaInsurance brokerageSantiago, Chile99.750.0199.76 99.750.0199.76 99.750.0199.76
Santander Corredores de Bolsa Limitada(*)Financial instruments brokerageSantiago, Chile50.590.4151.00 50.590.4151.00 50.590.4151.00
Santander Agente de Valores LimitadaSecurities brokerageSantiago, Chile99.03-99.03 99.03-99.03 99.03-99.03
Santander S.A. Sociedad SecuritizadoraPurchase of credits and issuance of debt instrumentsSantiago, Chile99.64-99.64 99.64-99.64 99.64-99.64
Santander Servicios de Recaudación y Pagos Limitada (**)Support society, making and receiving paymentSantiago, Chile--- --- 99.900.1100.00

(*) On June 19, 2015, Santander Corredores de Bolsa Limitada, our stock broker company has changed its corporate structure to limited liability company. This situation was informed to SVS through an “essential fact” in accordance with the Law 18.045 articles 9° and 10°, and General Regulation (NCG) N°16 and N°30.

(**) From May 1, 2014, this entity was absorbed by the Bank, previous authorization obtained from the SBIF on March 26, 2014.

Name of the Subsidiary  Percent ownership share
  As of December 31,
 Place of
Incorporation and
operation		2018 2017 2016
 DirectIndirectTotal DirectIndirectTotal DirectIndirectTotal
Main Activity%%%%%% %%%
              
Santander Corredora de Seguros LimitadaInsurance brokerageSantiago, Chile99.750.0199.76 99.750.0199.76 99.750.0199.76
Santander Corredores de Bolsa LimitadaFinancial instruments brokerageSantiago, Chile50.590.4151.00 50.590.4151.00 50.590.4151.00
Santander Agente de Valores Limitada (*)Securities brokerageSantiago, Chile99.03-99.03 99.03-99.03 99.03-99.03

Santander S.A. Sociedad Securitizadora

 

Purchase of credits and issuance of debt instrumentsSantiago, Chile99.64-99.64 99.64-99.64 99.64-99.64

  

The detail of non-controlling participation on all the remaining subsidiaries can be seen in Note 24–25– Non-controlling interest.

 

(*) On July 25, 2018, the company has ceased conducting foreign currency purcharse and sale operations, hence forth this operation will be carried out directly by the Bank.

F-13 F-11

Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

ii.Entities controlled by the Bank through other considerations

ii.Entities controlled by the Bank through other considerations

 

The following companies have been consolidated based on the determination that the Bank has control as previously defined above and in accordance with IFRS 10,Consolidated Financial Statements:

-Santander Gestión de Recaudación y Cobranza Limitada (collection services)

-Bansa Santander S.A. (management of repossessed assets and leasing of properties)

During 2015 Multinegocios S.A. (management of sales force), Servicios Administrativos y Financieros Limitada (management of sales force) and Multiservicios de Negocios Limitada (call center) have ceased rendering sales services to the Bank and the Bank no longer controls their relevant activities. Therefore as of June 30, 2015 these entities have been excluded from the consolidation perimeter.

 

As of August 1, 2014, Servicios de Cobranza Fiscalex Limitada was absorbed by-  Santander Gestión de Recaudación y Cobranza Limitada.Limitada (collection services)

-  Bansa Santander S.A. (management of repossessed assets and leasing of properties)

 

iii. Associates

iii.Associates

 

An associate is an entity over which the Bank has significant influence. Significant influence, in this case, is defined as the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. An investment in an associate is accounted for using the equity method from the date on which the investee becomes an associate.

 

The following companies are considered “Associates” in which the Bank accounts for its participation using the equity method:

 

   Percentage of  ownership share
   As of December 31,
  Place of Incorporation and
operation		2018 2017 2016
AssociatesMain activity% % %
Redbanc S.A.ATM servicesSantiago, Chile33.43 33.43 33.43
Transbank S.A. (*)Debit and credit card servicesSantiago, Chile25.00 25.00 25.00
Centro de Compensación AutomatizadoElectronic fund transfer and compensation servicesSantiago, Chile33.33 33.33 33.33
Sociedad Interbancaria de Depósito de Valores S.A.Delivery of securities on public offerSantiago, Chile29.29 29.29 29.29
Cámara Compensación de Alto Valor S.A.Payments clearingSantiago, Chile15.00 15.00 14.93
Administrador Financiero del Transantiago S.A.Administration of boarding passes to public transportationSantiago, Chile20.00 20.00 20.00
Sociedad Nexus S.A.Credit card processorSantiago, Chile12.90 12.90 12.90
Servicios de Infraestructura de Mercado OTC S.A.Administration of the infrastructure for the financial market of derivative instrumentsSantiago, Chile12.48 12.48 12.07

    Percentage of  ownership share 
   As of December 31, 
  Place of
Incorporation and

operation		2016 2015 2014 
AssociatesMain activity% % % 
Redbanc S.A.ATM servicesSantiago, Chile33.43 33.43 33.43 
Transbank S.A.Debit and credit card servicesSantiago, Chile25.00 25.00 25.00 
Centro de Compensación AutomatizadoElectronic fund transfer and compensation servicesSantiago, Chile33.33 33.33 33.33 
Sociedad Interbancaria de Depósito de Valores S.A.Delivery of securities on public offerSantiago, Chile29.29 29.29 29.28 
Cámara Compensación de Alto Valor S.A.Payments clearingSantiago, Chile14.93 14.23 14.14 
Administrador Financiero del Transantiago S.A.Administration of boarding passes to public transportationSantiago, Chile20.00 20.00 20.00 
Sociedad Nexus S.A.Credit card processorSantiago, Chile12.90 12.90 12.90 
Servicios de Infraestructura de Mercado OTC S.A.Administration of the infrastructure for the financial market of derivative instrumentsSantiago, Chile12.07 11.11 11.11 
          

(*) The Bank has given a mandate to third party to exercise its rights as shareholder in Transbank.

 

In the case of Sociedad Nexus S.A. and Cámara Compensación de Pagos Alto Valor S.A., Banco Santander Chile has a representative on the Board of Directors. As per the definition of associates, the Bank has concluded that it exerts significant influence over those entities.

 

In the case of Servicios de Infraestructura de Mercado OTC S.A.The Bank participates, through its executives, actively in the administration and in the process of organization, which is why the Administration has concluded that it exerts significant influence on it.

During 2017, Rabobank Chile in liquidation process and Banco París, ceded to Banco Santander Chile a portion of its share in the company “Sociedad Operadora de la Cámara de Compensación de pagos de Alto Valor S.A.”, thereby increasing the Bank’s share in 15%.

During the last quarter of 2016, Banco Penta ceded to Banco Santander Chile a portion of its share in the companies "Sociedad“Sociedad Operadora de la Cámara de Compensación de pagos de Alto Valor S.A."” and "Servicios“Servicios de Infraestructura de Mercado OTC S.A."”, wherewiththereby increasing the Bank'sBank’s share has increased to 14.93% and 12.07% respectively.

 

As of

At the ended of the third quarterend of 2016, DeutscheD eutsche Bank ceded to Banco Santander Chile a portion of its share in the companies "Sociedad Operadora de la Cámara de Compensación de pagos de Alto Valor S.A." and "Servicios de Infraestructura de Mercado OTC S.A.", wherewiththereby increasing the Bank's share has increased to 14.84% and 11.93% respectively.

F-14 

Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

At the Extraordinary Shareholders meeting held in April 21, 2016, Transbank S.A. agreed to increase its capital by capitalizing the accumulated profits, through the issuance of shares redeemed for payment, and the placement of shares of payment for $4,000Ch$4,000 million approximately. Banco Santander Chile participated proportionally toin its participation (25%), reason why ittherefore subscribed and paid sharesin for approximately $1,000Ch$1,000 million. Previously, Transbank agreed ato capital increase at an Extraordinary Shareholders'Shareholders’ Meeting held in April 2015, Banco Santander subscribed to that agreement, maintaining its ownership.

 

In October 2015, HSBC Bank Chile sold its ownership share in Camara de Compensación de Pagos de Alto Valor S.A. to F-12

Banco Santander Chile increasing our participationand Subsidiaries

Notes to 14.23%.the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

c)   Non-controlling interest

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

c)Non-controlling interest

 

Non-controlling interest represents the portion of net income and net assets which the Bank does not own, either directly or indirectly. It is presented as “Attributable to non-controlling interest” separately in the Consolidated StatementStatements of Income, and separately from shareholders’ equity in the Consolidated StatementStatements of Financial Position.

 

In the case of entities controlled by the Bank through other considerations, income and equity are presented in full as non-controlling interest, since the Bank controls them, but does not have any ownership expressed as a percentage.

 

d)   Reporting segments

d)Reporting segments

 

Operating segments with similar economic characteristics often exhibit similar long-term financial performance. are components of an entity:

i.that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses from transactions with other components of the same entity);

ii.whose operating results are regularly reviewed by the entity’s chief executive officer, who makes decisions about resources allocated to the segment and assess its performance; and

iii.for which discrete financial information is available.

Two or more segments can be combined only if aggregation is consistent with International Financial Reporting Standard 8 “Operating Segments” (IFRS 8) and the segments have similar economic characteristics and are similar in each of the following respects:

 

i.the nature of the products and services;

ii.the nature of the production processes;

iii.the type or class of customers that use their products and services;

iv.the methods used to distribute their products or services; and

v.if applicable, the nature of the regulatory environment, for example, banking, insurance, or public utilities.

 

The Bank reports separately on each operating segment that exceeds any of the following quantitative thresholds:

 

i.its reported revenue, from both external customers and intersegment sales or transfers, is 10% or more of the combined internal and external revenue of all the operating segments.

ii.the absolute amount of its reported profit or loss is 10% or more of the greater in absolute amount of: (i) the combined reported profit of all the operating segments that did not report a loss; (ii) the combined reported loss of all the operating segments that reported a loss.

iii.its assets represent 10% or more of the combined assets of all the operating segments.

 

Operating segments that do not meet any of the quantitative threshold may be treated as segments to be reported, in which case the information must be disclosed separately if management believes it could be useful for the users of the Consolidated Financial Statements.

 

Information about other business activities of the operating segments not separately reported is combined and disclosed in the “Other segments” category.

 

F-15 

Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

According to the information presented, the Bank’s segments were determined under the following definitions: An operating segment is a component of an entity:

i.e)that engages in business activities from which it may earn revenuesFunctional and incur expenses (including revenues and expenses from transactions with other components of the same entity);presentation currency

ii.whose operating results are regularly reviewed by the entity’s chief executive officer, who makes decisions about resources allocated to the segment and assess its performance; and

iii.for which discrete financial information is available.

e)      Functional and presentation currency

 

According to International Accounting Standard (IAS) 21 “The Effects of Changes in Foreign Exchange Rates”, the Chilean peso, which is the currency of the primary economic environment in which the Bank operates and the currency which influences its costs and revenue structure, has been defined as the Bank’s functional and presentation currency.

 

Accordingly, all balances and transactions denominated in currencies other than the Chilean Peso are treated as “foreign currency”.

 

The Bank maintains its accounting records and prepares its financial statements in Chilean pesos. The US dollar amounts disclosed in the accompanying financial statements are presented solely for the convenience of the reader as of December 31,

F-13

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

2018 using the observed exchange rate of Ch$666.00697.76 per US$1.00. Such translations should not be construed as representations that the (local currency) amounts represent, or have been or could be converted into, United States dollars at that or any other rate.

 

f)       Foreign currency transactions

f)Foreign currency transactions

 

The Bank makes transactions in amounts denominated in foreign currencies, mainly the U.S. dollar. Assets and liabilities denominated in foreign currencies, held by the Bank are translated to Chilean pesos based on the market rate published by Reuters at 1:30 p.m. representative of the month end reported; the rate used was Ch$666.00697.76 per US$1 as of December 31, 20162018 (Ch$707.80616.85 per US$1 as of December, 2015)2017).

 

The amounts of net foreign exchange gains and losses includes recognition of the effects that exchange rate variations have on assets and liabilities denominated in foreign currencies and the profits and losses on foreign exchange spot and forward transactions undertaken by the Bank.

 

g)Classification and measurement of financial instrument – under IFRS 9 (first adoption)

g)

Financial instruments must be classified and measured in accordance with IFRS 9 starting from January 1, 2018, which  established guidance for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entity’s future cash flows.

I. Classification of financial instrument

i) Classification of financial assets

Financial assets are classified into a measurement category based on both the Bank’s business model for managing the financial asset and the contractual cash flow characteristics of the financial asset.

Contractual cash flow assessment determine if the cash flows from the financial asset meet the SPPI (solely payment of principal and interest) criterion, i.e. whether the contractual terms of the financial asset give rise, on specific dates, to cash flows that are solely payments of principal and interest. Principal is the fair value of the financial assets at initial recognition, and interest is the consideration for the time value of money, the credit risk associated with the principal outstanding, and also may include liquidity risk, administrative cost and profit margin.

For classification process the Bank perform the SPPI test, which assesses the contractual term to identify wheter they meet SPI criterion, ie, the contract is a basic lending arrangement. The Bank applies judgement and considers relevant factors such as currency in which the financial asset is denominated, and period for which the interest rate is set.

Business model refers to how the Bank manages its financial assets in order to generate cash flows. The Bank determined its business model on initial application of IFRS 9 at the level that best reflects how it manages groups of financial assets to achieve its business objective.

The Banks’s business model is not assessed on an instrument-by- instrument basis, but at a higher level of aggregated portfolio and is based on observable factors such as: performance of the financial assets, the risk that affect the performance, and the expected frequency, value and timing of sales.

In accordance with IFRS 9 the business models  are:

●Held to collect business model (HTC) - financial assets that are held within a business model whose objective is to hold assets in order to collect contractual cash flows are managed to realise cash flows by collecting contractual payments over the life of the instrument, under this business model sales made when there is an increase in the credit risk, or to manage credit concentration risk are not inconsistent with a business model whose objective is to hold financial assets to collect contractual cash flows.

●Held to collect and sell (HTC&S) - financial assets under this business model achieve the objective by both collecting contractual cash flows and selling financial assets, then involve a greater frequency and value of sales than HTC business model.

●Other business model - financial assets held in this business has the objective of realising cash flows through the sale of the assets. The Bank makes decisions based on the assets’ fair values and manages the assets to realise those fair values.

F-14

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 01
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

ii) Classification of financial liabilities

The Bank classified all financial liabilities as subsequently measured at amortised cost, except for derivatives that are liabilities, which are measured at fair value through profit or loss.

iii) Reclassification

Reclassification of financial assets is required if, and only if, the objective of the Bank’s business model for managing those financial assets changes. Financial liabilities cannot be reclassified.

II. Measurement of financial instruments

i) Initial measurement

On initial recognition, financial assets and financial liabilities are measured at the transaction price, i.e. the fair value of the consideration given or received (IFRS 13). In the case of financial instruments not at fair value through profit or loss, transaction costs are directly attributable to the acquisition or issue of the financial asset or financial liability.

ii) Subsequent measurement- financial assets

After initial recognition, the Bank shall measures a financial asset at:

(a)Amortised cost

Financial assets that are held in a business model to collect the contractual cash flows and contain contractual terms that give rise on specific dates to cash flows that are SPPI, are measured at amortised cost.

The effective interest method is used in the calculation of the amortised cost of a financial asset or a financial liability and in the allocation and recognition of the interest revenue or interest expense in profit or loss over the relevant period. The effective interest rate (EIR) is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the amortised cost of a financial liability.

(b)Fair value through other comprehensive income (FVOCI)

Financial assets that are debt instruments held in a business model that is achieved by both collecting contractual cash flows and selling, and that contain contractual terms that give rise on specific dates to cash flows that are SPPI, are measured at FVOCI. They are subsequently remeasured at fair value and changes therein (except for those relating to impairment, interest income and foreign currency exchange gains and losses) are recognised in other comprehensive income, until the assets are sold. Upon disposal, the cumulative gain and losses in OCI are recognised in the income statements.

(c)Fair value through profit or loss (FVTPL)

Financial assets that do not contain contractual terms that give rise on specified dates to cash flows that are SPPI, or if the financial assets, or if the financial asset is not held in a business model that is either (i) a business model to collect the contractual cash flows or (ii) a business model that is achieved by both collecting contractual cash flows and selling.

Financial assets held for trading are recognised at fair value through profit or loss, likewise derivatives contracts for trading purposes.

(d)Equity instruments

For certain equity instruments, the Bank may make an irrevocable election to present subsequent changes in the fair value of the instrument in other comprehensive  income, except for dividend income which is recognised in profit or loss. Gains or losses on derecognition of these equity instruments are not transferred to profit or loss.

iii) Subsequent measurement- financial liabilities

After initial recognition, the Bank shall measure a financial liability at amortised cost.

IV. Derecognition of financial assets and liabilities

Financial assets are derecognised when, and only when:

●the contractual rights to the cash flows from the financial asset expire , or

●the Bank transfers substantially all the risks and rewards of ownership of the financial asset, and therefore the Bank derecognises the financial asset and recognise separately any rights and obligations created or retained in the transfer.

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

In some cases, the Bank enters into transactions for which it retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows in an arrangement that meets all the conditions required, i.e. the Bank only transfers collected amounts from original assets, selling or pledging original assets is prohibited, and the Bank has the obligation to remit cash flows collected without material delay.

When a financial asset is sold and the Bank simultaneously agrees to repurchase it (or an asset that is substantially the same) at a fixed price on a future date, the Bank continues to recognise the financial assets in their entirety in the statements of financial position because it retains substantially all of the risks and rewards of ownership. The cash consideration received is recognised as a financial asset and a financial liability is recognised for the obligation to pay the repurchase price.

Financial liabilities are derecognised when, and only when,  they are extinguished, cancelled or expired.

VI. Contingent loan

The Bank issues contingent liabilities (including letters of credit, foreign letters of credit and performance guarantee) and loan commitments.

Contingent liabilities and undrawn loan commitments are commitments under which, over the duration of the commitment, the Bank is required to provide a loan with pre-specified term to the customer.

The nominal contractual loan value, when the loan agreed to be provided is on market terms, is not recorded in the statements of financial position. The related ECL allowances are disclosed in Note 22.

h)       Definitions and classification of financial instruments – under IAS 39 (for 2017 balances)

 

i.Definitions

 

A “financial instrument” is any contract that gives rise to a financial asset of one entity, and a financial liability or equity instrument of another entity.

 

An “equity instrument” is a legal transaction that evidences a residual interest in the assets of an entity deducting all of its liabilities.

 

A “financial derivative” is a financial instrument whose value changes in response to the changes in an underlying observable market variable (such as an interest rate, a foreign exchange rate, a financial instrument’s price, or a market index, including credit ratings), whose initial investment is very small compared with other financial instruments having a similar response to changes in market factors, and which is generally settled at a future date.

 

“Hybrid financial instruments” are contracts that simultaneously include a non-derivative host contract together with a financial derivative, known as an embedded derivative, which is not separately transferable and has the effect that some of the cash flows of the hybrid contract vary in a way similar to a stand-alone derivative.

 

ii.Classification of financial assets for measurement purposes

 

Financial assets are classified into the following specified categories: financial assets trading investments at fair value through profit or loss (FVTPL), ‘held to maturity investments’, ‘available for sale investments (AFS)’ financial assets and ‘loans and accounts receivable from customers'customers’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial asset are recognizedrecognised and derecognizedderecognised on a trade basis.

F-16 

Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Regular way purchases or sales of financial assets require delivery of the asset within the time frame established by regulation or convention in the marketplace.

Financial assets are initially recognized at fair value plus, in the case of financial assets not at fair value through profit or loss, transaction costs that are directly attributable

F-16

Banco Santander Chile and Subsidiaries

Notes to the acquisition or issue.Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

  

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Effective interest method

 

The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.

 

Income is recognised on an effective interest basis for loans and accounts receivables other than those financial assets classified as at fair value through profit or loss.

 

Financial assets FVTPL - Trading investments– trading investment

 

Financial assets are classified as FVTPL when the financial asset is either held for trading or it isthey are designated as at fair value through profit or loss.

 

A financial asset is classified as held for trading if:

·●it has been acquired principally for the purpose of selling it in the near term; or

·●on initial recognition it is part of a portfolio of identified financial instruments that the Bank manages together and has a recent actual pattern of short-term profit-taking; or

·●it is a derivative that is not designated and effective as a hedging instrument.

A financial asset other than a financial asset held for trading may be designated as FVTPL upon initial recognition if:

 

·●such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or

·●the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Bank'sBank’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or

·●it forms part of a contract containing one or more embedded derivatives, and IAS 39 permits the entire combined contract to be designated as FVTPL.

 

Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the ‘net income (expense) from financial operations'operations’ line item.

 

Held to maturity investments

 

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Bank has the positive intent and ability to hold to maturity. Subsequent to initial recognition, held-to-maturity investments are measured at amortised cost using the effective interest method less any impairment.

 

Available for sale investments (AFS investments)

 

AFS investments are non-derivatives that are either designated as AFS or are not classified as (a) loans and accounts receivable from customers, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss (trading investments).

F-17 

Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Financial instruments held by the Bank that are traded in an active market are classified as AFS and are stated at fair value at the end of each reporting period. The Bank also has investments in financial instruments that are not traded in an active market but that are also classified as AFS investments and stated at fair value at the end of each reporting period (because the Bank considers that fair value can be reliably measured). Changes in the carrying amount of AFS monetary financial assets relating to changes in foreign currency rates, interest income calculated using the effective interest method and dividends on AFS equity investments are recognised in profit or loss. Other changes in the carrying amount of available for sale investments are recognised in other comprehensive income and accumulated under the heading of “Valuation Adjustment”. When the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation reserve is reclassified to profit or loss.

 

Dividends on AFS equity instruments are recognised in profit or loss when the Bank'sBank’s right to receive the dividends is established.


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

The fair value of AFS monetary financial assets denominated in a foreign currency is determined in that foreign currency and translated as the described in f) above. The foreign exchange gains and losses that are recognised in profit or loss are determined based on the amortised cost of the monetary asset.

 

Loans and accounts receivable from customers

 

Loans and accounts receivable from customers are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and accounts receivables from customers (including loans and accounts receivable from customers and interbank loans) are measured at amortised cost using the effective interest method, less any impairment.

 

Interest income is recognised by applying the effective interest rate, except for short-term receivables when the effect of discounting is immaterial.

 

iii.Classification of financial assets for presentation purposes

 

For presentation purposes, the financial assets are classified by their nature into the following line items in the Consolidated Financial Statements:

 

-Cash and deposits in banks: this line includes cash balances, checking accounts and on-demand deposits with the Central Bank of Chile and other domestic and foreign financial institutions. Amounts invested as overnight deposits are included in this item.

 

-Cash items in process of collection: this item represents domestic transactions in the process of transfer through a central domestic clearinghouse or international transactions which may be delayed in settlement due to timing differences, etc.differences.

 

-Trading investments: this item includes financial instruments held-for-tradingheld for trading and investments in mutual funds which must be adjusted to their fair value in the same way as instruments acquired for trading.

 

-Investments under resale agreements: includes balances of financial instruments purchased under resale agreement.

 

-Financial derivative contracts: financial derivative contracts with positive fair values are presented in this item. It includes both independent contracts as well as derivatives that should and can be separated from a host contract, whether they are for trading or accounted for as derivatives held for hedging, as shown in Note 7 to the Consolidated Financial Statements.

·Trading derivatives: includes the fair value of derivatives which do not qualify for hedge accounting, including embedded derivatives separated from hybrid financial instruments.

·Hedging derivatives: includes the fair value of derivatives designated as being in a hedging relationship, including the embedded derivatives separated from the hybrid financial instruments.

-Interbank loans:loans : this item includes the balances of transactions with domestic and foreign banks, including the Central Bank of Chile, other than those reflected in certain other financial asset classifications listed above.

F-18 

Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

-Loans and accounts receivables from customers: these loans are non-derivative financial assets for which fixed or determined amounts are charged, that are not listed on an active market and which the Bank does not intend to sell immediately or in the short term. When the Bank is the lessor in a lease, and it substantially transfers the risks and rewards incidental to the leased asset, the transaction is presented in loans and accounts receivable from customers while the leased asset is derecognizedderecognised in the Bank´s statementstatements of financial position.

 

-Investment instruments: are classified into two categories: held-to-maturity investments, and available-for-sale investments. The held-to-maturity investment classification includes only those instruments for which the Bank has the ability and intent to hold to maturity. The remaining investments are treated as available for sale.

 

iv.Classification of financial liabilities for measurement purposes

 

Financial liabilities are classified as eitherThe Bank classifies all financial liabilities FVTPL or other financial liabilities.as subsequently measured at amortised cost, except for:

 

Financial liabilities at FVTPL

 

FinancialAs of December 31, 2018 and 2017 the Bank does not maintain financial liabilities are classified as FVTPL when the financial liability is either held for trading or it is designated asat FVTPL.

 

A financial liability is classified as held for trading if:

·it has been incurred principally for the purpose of repurchasing it in the near term; or
·on initial recognition it is part of a portfolio of identified financial instruments that the Bank manages together and has a recent actual pattern of short-term profit-taking; or
·it is a derivative that is not designated and effective as a hedging instrument.

A financial liability other than a financial liability held for trading may be designated as FVTPL upon initial recognition if:

·such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or
·the financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Bank's documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or
·it forms part of a contract containing one or more embedded derivatives, and IAS 39 permits the entire combined contract to be designated as FVTPL.

Financial liabilities FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability and is included in the ‘net income (expense) from financial operations' line item.

Other financial liabilities

 

Other financial liabilities (including interbank borrowings, and tradeissued debt instruments and other payables) are initially recorded at fair value and subsequently measured at amortised cost using the effective interest method.

 

The effective interest method is a method of calculating the amortised cost of a financial liabilityF-18

Banco Santander Chile and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period,Subsidiaries

Notes to the net carrying amount on initial recognition.Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

v.Classification of financial liabilities for presentation purposes

 

The financial liabilities are classified by their nature into the following line items in the consolidated statements of financial position:

 

-Deposits and other on- demand liabilities: this includes all on-demand obligations except for term savings accounts, which are not considered on-demand instruments in view of their special characteristics. Obligations whose payment may be required during the period are deemed to be on-demand obligations. Operations which become callable the day after the closing date are not treated as on-demand obligations.

 

F-19 

Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

-Cash items in process of being cleared: this represents domestic transactions in the process of transfer through a central domestic clearing house or international transactions which may be delayed in settlement due to timing differences, etc.

 

-Obligations under repurchase agreements: this includes the balances of sales of financial instruments under securities repurchase and loan agreements. The Bank does not record asin its own portfolio instruments acquired under repurchase agreements.

 

-Time deposits and other time liabilities: this shows the balances of deposit transactions in which a term at the end of which they become callable has been stipulated.

-Financial derivative contracts: this includes financial derivative contracts with negative fair values (i.e. a liability of the Bank), whether they are for trading or for hedge accounting, as set forth in Note 7.

·Trading derivatives: includes the fair value of derivatives which do not qualify for hedge accounting, including embedded derivatives separated from hybrid financial instruments.

·Hedging derivatives: includes the fair value of derivatives designated as being in a hedging relationship, including the embedded derivatives separated from the hybrid financial instruments.

 

-Interbank borrowings: this includes obligations due to other domestic banks, foreign banks, or the Central Bank of Chile, other than those reflected in certain other financial liability classifications listed above.

 

-Issued debt instruments: there are three types of instruments issued by the Bank: Obligations under letters of credit, Subordinated bonds and Senior bonds placed in the local and foreign market.

 

-Other financial liabilities: this item includes credit obligations to persons other than domestic banks, foreign banks, or the Central Bank of Chile, for financing purposes or operations in the normal course of business.

 

vi.Offsetting of financial instruments

h)      Valuation

Financial asset and liability balances are offset, i.e., reported in the Consolidated Statements of Financial Position at their net amount, only if there is a legally enforceable right to offset the recorded amounts and the Bank intends either to settle them on a net basis or to realize the asset and settle the liability simultaneously. As of December 31, 2018 and 2017 the Bank does not have balance offsetting of financial instruments.

vii.Derecognition of financial assets and liabilities

The accounting treatment of transfers of financial assets is determined by the extent and the manner in which the risks and rewards associated with the transferred assets are transferred to third parties:

i.If the Bank transferssubstantially all the risks and rewards of ownership to third parties, as in the case of unconditional sales of financial assets, sales under repurchase agreements at fair value at the date of repurchase, sales of financial assets with a purchased call option or written put option deeply out of the money, utilization of assets in which the transferor does not retain subordinated debt nor grants any credit enhancement to the new holders, and other similar cases, the transferred financial asset is derecognised from the Consolidated Statements of Financial Position and any rights or obligations retained or created in the transfer are simultaneously recorded.

ii.If the Bank retains substantially all the risks and rewardsof ownership associated with the transferred financial asset, as in the case of sales of financial assets under repurchase agreements at a fixed price or at the sale price plus interest, securities lending agreements under which the borrower undertakes to return the same or similar assets, and other similar cases, the transferred financial asset is not derecognised from the Consolidated Statements of Financial Position and continues to be measured by the same criteria as those used before the transfer. However, the following items are recorded:

-An associated financial liability for an amount equal to the consideration received; this liability is subsequently measured at amortised cost.

-Both the income from the transferred (but not removed) financial asset as well as any expenses incurred due to the new financial liability.

F-19

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

iii.If the Bank neither transfers nor substantially retains all the risks and rewards of ownership associated with the transferred financial asset—as in the case of sales of financial assets with a purchased call option or written put option that is not deeply in or out of the money, securitization of assets in which the transferor retains a subordinated debt or other type of credit enhancement for a portion of the transferred asset, and other similar cases—the following distinction is made:

a.If the transferor does not retain control of the transferred financial asset: the asset is derecognised from the Consolidated Statements of Financial Position and any rights or obligations retained or created in the transfer are recognised.

b.If the transferor retains control of the transferred financial asset: it continues to be recognised in the Consolidated Statements of Financial Position for an amount equal to its exposure to changes in value and a financial liability associated with the transferred financial asset is recorded. The net carrying amount of the transferred asset and the associated liability is the amortised cost of the rights and obligations retained, if the transferred asset is measured at amortised cost, or the fair value of the rights and obligations retained, if the transferred asset is measured at fair value.

Accordingly, financial assets are only derecognised from the Consolidated Statements of Financial Position when the rights over the cash flows they generate have terminated or when all the inherent risks and rewards of ownership have been substantially transferred to third parties. Similarly, financial liabilities are only derecognised from the Consolidated Statements of Financial Position when the obligations specified in the contract are discharged or cancelled or the contract has matured.

i)       Derivatives and hedging activities

The Bank has elected to continue apllying the hedge accounting requirements of IAS 39 on adoption of IFRS 9.

The Bank has not provided comparative information for prior periods on the date of initial application of IFRS 9 for the new disclosures introduces by IFRS 9 as a consequential amendment to IFRS 7, as permitted by IFRS 7 paragraph 44z.

A “financial derivative” is a financial instrument whose value changes in response to the changes in an underlying observable market variable (such as an interest rate, a foreign exchange rate, a financial instrument’s price, or a market index, including credit ratings), whose initial investment is very small compared with other financial instruments having a similar response to changes in market factors, and which is generally settled at a future date.

For presentation purposes, derivatives are presented in accordance with its positive or negative fair value as assets or liabilities, respectively, and include trading and hedging instruments separately (see Note 8).

Hedging transactions

The bank has elected to continue applying the hedge accounting requirements in IAS 39 instead of the requirements of IFRS 9, thus the Bank uses financial derivatives for the following purposes:

i.to sell to customers who request these instruments in the management of their market and credit risks;

ii.to use these derivatives in the management of the risks of the Bank entities’ own positions and assets and liabilities (“hedging derivatives”), and

iii.to obtain profits from changes in the price of these derivatives (trading derivatives).

All financial derivatives that are not held for hedging purposes are accounted for as trading derivatives.

A derivative qualifies for hedge accounting if all the following conditions are met:

1.The derivative hedges one of the following three types of exposure:

a. Changes in the value of assets and liabilities due to fluctuations, among others, in the interest rate and/or exchange rate to which the position or balance to be hedged is subject (“fair value hedge”);

b. Changes in the estimated cash flows arising from financial assets and liabilities, and highly probable forecasted transactions (“cash flow hedge”);

c. The net investment in a foreign operation (“hedge of a net investment in a foreign operation”).


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

2.It is effective in offsetting exposure inherent in the hedged item or position throughout the expected term of the hedge, which means that:

a.At the date of arrangement the hedge is expected, under normal conditions, to be highly effective (“prospective effectiveness”).

b.There is sufficient evidence that the hedge was actually effective during the life of the hedged item or position (“retrospective effectiveness”).

3.There must be adequate documentation evidencing the specific designation of the financial derivative to hedge certain balances or transactions and how this effective hedge was expected to be achieved and measured, provided that this is consistent with the Bank’s management of own risks.

The changes in the value of financial instruments and recognitionqualifying for hedge accounting are recorded as follows:

a.For fair value hedges, the gains or losses arising on both hedging instruments and the hedged items (attributable to the type of risk being hedged) are included as “Net income (expense) from financial operations” in the Consolidated Statements of Income.

b.For fair value hedges of interest rate risk on a portfolio of financial instruments, gains or losses that arise in measuring hedging instruments within “Interest income and expense”, and other gains or losses due to changes in fair value of the underlying hedged item (attributable to the hedged risk) are recorded in the Consolidated Statements of Income under “Net income (expense) from financial operations”.

c.For cash flow hedges, the change in fair value of the hedging instrument is included as “Cash flow hedge” in “Other comprehensive income”.

d.The differences in valuation of the hedging instrument corresponding to the ineffective portion of the cash flow hedging transactions are recorded directly in the Consolidated Statements of Income under “Net income (expense) from financial operations”.

If a derivative designated as a hedging instrument no longer meets the requirements described above due to expiration, ineffectiveness or for any other reason, hedge accounting treatment is discontinued. When “fair value hedging” is discontinued, the fair value changesadjustments to the carrying amount of the hedged item arising from the hedged risk are amortised to gain or loss from that date, where applicable.

When cash flow hedges are discontinued, any cumulative gain or loss of the hedging instrument recognised under “Other comprehensive income” (from the period when the hedge was effective) remains recorded in equity until the hedged transaction occurs, at which time it is recorded in the Consolidated Statements of Income, unless the transaction is no longer expected to occur, in which case any cumulative gain or loss is recorded immediately in the Consolidated Statements of Income.

j)       Fair value measurement

 

In general, financial assets and liabilities are initially recognizedrecognised at fair value which, in the absence of evidence to the contrary, is deemed to be the transaction price.Financial instruments, other than those measured at fair value through profit or loss, are initially recognizedrecognised at fair value plus transaction costs. Subsequently, and at the end of each reporting period, financial instruments are measured pursuant to the following criteria:

 

i.Valuation of financial instruments

 

Financial assets are measured according to their fair value, gross of any transaction costs that may be incurred in the course of a sale, except for credit investmentsloans and held to maturity investments.accounts receivable from customers.

 

According to IFRS 13“Fair Value Measurement (effective date from January 1, 2013), “fair value” is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e. an exit price) regardless of whether that price is directly observable or estimated using another valuation technique. When measuring fair value an entity shall take into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date.

F-21

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

The fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either: (a) in the principal market for the asset or liability, or (b) in the absence of a principal market, the most advantageous market for the asset or liability. Even when there is no observable market to provide pricing information in connection with the sale of an asset or the transfer of a liability at the measurement date, the fair value measurement shall assume that the transaction takes place, considered from the perspective of a potential market participant who intends to maximize value associated with the asset or liability.

F-20 

Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

When using valuation techniques, the Bank shall maximize the use of relevant observable inputs and minimize the use of unobservable inputs as available. If an asset or a liability measured at fair value has a bid price and an ask price, the price within the bid-ask spread that is most representative of fair value in the circumstances shall be used to measure fair value regardless of where the input is categorized within the fair value hierarchy (i.e. Level 1, 2 or 3). IFRS 13 establishes a fair value hierarchy that categorizes into three levels the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

 

All derivatives are recorded in the Consolidated Statements of Financial Position at the fair valuepreviously described. This value is compared to the valuation as at the trade date. If the fair value is subsequently measured positive, this is recorded as an asset. If the fair value is subsequently measured negative, this is recorded as a liability. The fair value on the trade date is deemed, in the absence of evidence to the contrary, to be the transaction price. The changes in the fair value of derivatives from the trade date are recorded in “Net income (expense) from financial operations” in the Consolidated StatementStatements of Income.

 

Specifically, the fair value of financial derivatives included in the portfolios of financial assets or liabilities held for trading is deemed to be their daily quoted price. If, for exceptional reasons, the quoted price cannot be determined on a given date, the fair value is determined using similar methods to those used to measure over the counter (OTC) derivatives. The fair value of OTC derivatives is the sum of the future cash flows resulting from the instrument, discounted to present value at the date of valuation (“present value” or “theoretical close”) using valuation techniques commonly used by the financial markets: “net present value” (NPV) and option pricing models, among other methods. Also, within the fair value of derivatives are included Credit Valuation Adjustment (CVA) and Debit Valuation Adjustment (DVA), all with the objective that the fair value of each instrument includes the credit risk of its counterparty and Bank´s own risk. The Credit valuation adjustment (CVA) is a valuation adjustment to OTC derivatives as a result of the risk associated with the credit exposure assumed by each counterparty. The CVA is calculated taking into account potential exposure to each counterparty in each future period. The debit valuation adjustment (DVA) is a valuation adjustment similar to the CVA but, in this case, it arises as a result of the Bank’s own risk assumed by its counterparties in OTC derivatives. As of December 31, 2016,2018, CVA and DVA amounts to MCh$17,0048,142 and MCh$15,002,15,406, respectively.

“Loans and accounts receivable from customers” and Held-to-maturity instrument portfolio are measured at amortized cost using the effective interest method. Amortized cost is the acquisition cost of a financial asset or liability, plus or minus, as appropriate, prepayments of principal and the cumulative amortization (recorded in the consolidated income statement) of the difference between the initial cost and the maturity amount as calculated under the effective interest method. For financial assets, amortized cost also includes any reductions for impairment or uncollectibility. For loans and accounts receivable designated as hedged items in fair value hedges, the changes in their fair value related to the risk or risks being hedged are recorded in “Net income (expense) from financial operations”.

The “effective interest rate” is the discount rate that exactly matches the initial amount of a financial instrument to all its estimated cash flows over its remaining life. For fixed-rate financial instruments, the effective interest rate incorporates the contractual interest rate established on the acquisition date plus, where applicable, the fees and transaction costs that are a part of the financial return are included. For floating-rate financial instruments, the effective interest rate matches the current rate of return until the date of the next review of interest rates.

Equity instruments whose fair value cannot be determined in a sufficiently objective manner and financial derivatives, whose underlying is an equity instrument that are settled by delivery of those instruments, are measured at acquisition cost adjusted for any related impairment loss.

The amounts at which the financial assets are recorded represent the Bank’s maximum exposure to credit risk as at the reporting date. The Bank has also received collateral and other credit enhancements to mitigate its exposure to credit risk, which consist mainly of mortgage guarantees, equity instruments and personal securities, assets under leasing agreements, assets acquired under repurchase agreements, securities loans and derivatives.

 

ii.Valuation techniques

 

Financial instruments at fair value, determined on the basis of price quotations in active markets, include government debt securities, private sector debt securities, equity shares, short positions, and fixed-income securities issued.

 

In cases where price quotations cannot be observed in available markets, the Bank’s management determines a best estimate of the price that the market would set using its own internal models. In most cases, these models use data based on observable market parameters as significant inputs however for some valuations of financial instruments, significant inputs are unobservable in the market. To determine a value for those instruments, various techniques are employed to make these estimates, including the extrapolation of observable market data.

F-21 

Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

The most reliable evidence of the fair value of a financial instrument on initial recognition usually is the transaction price, however due to lack of availability of market information, the value of the instrument may be derived from other market transactions performed with the same or similar instruments or may be measured by using a valuation technique in which the variables used include only observable market data, mainly interest rates.

 

The main techniques used as of December 31, 20162018 and 20152017 by the Bank’s internal models to determine the fair value of the financial instruments are as follows:

 

i.In the valuation of financial instruments permitting static hedging (mainly forwards and swaps), the present value method is used. Estimated future cash flows are discounted using the interest rate curves of the related currencies. The interest rate curves are generally observable market data.

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

ii.In the valuation of financial instruments requiring dynamic hedging (mainly structured options and other structured instruments), the Black-Scholes model is normally used. Where appropriate, observable market inputs are used to obtain factors such as the bid-offer spread, exchange rates, volatility, correlation indexes and market liquidity.

 

iii.In the valuation of certain financial instruments exposed to interest rate risk, such as interest rate futures, caps and floors, the present value method (futures) and the Black-Scholes model (plain vanilla options) are used. The main inputs used in these models are observable market data, including the related interest rate curves, volatilities, correlations and exchange rates.

 

The fair value of the financial instruments calculated by the aforementioned internal models considers contractual terms and observable market data, which include interest rates, credit risk, exchange rates, quoted market price of shares, volatility and prepayments, among others. The Bank’s management considers that its valuation models are not significantly subjective, since these methodologies can be adjusted and evaluated, as appropriate, through the internal calculation of fair value and the subsequent comparison with the related actively traded price.

 

iii.Hedging transactions

The Bank uses financial derivatives for the following purposes:

i.to sell to customers who request these instruments in the management of their market and credit risks;

ii.to use these derivatives in the management of the risks of the Bank entities’ own positions and assets and liabilities (“hedging derivatives”), and

iii.to obtain profits from changes in the price of these derivatives (trading derivatives).

All financial derivatives that are not held for hedging purposes are accounted for as trading derivatives.k)       Recognising income and expenses

 

A derivative qualifies for hedge accounting if all the following conditions are met:

1.The derivative hedges one of the following three types of exposure:

a.Changes in the value of assets and liabilities due to fluctuations, among others, in the interest rate and/or exchange rate to which the position or balance to be hedged is subject (“fair value hedge”);

b.Changes in the estimated cash flows arising from financial assets and liabilities, and highly probable forecasted transactions (“cash flow hedge”);

c.     The net investment in a foreign operation (“hedge of a net investment in a foreign operation”).

F-22 

Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

2.It is effective in offsetting exposure inherent in the hedged item or position throughout the expected term of the hedge, which means that:

a.At the date of arrangement the hedge is expected, under normal conditions, to be highly effective (“prospective effectiveness”).

b.There is sufficient evidence that the hedge was actually effective during the life of the hedged item or position (“retrospective effectiveness”).

3.There must be adequate documentation evidencing the specific designation of the financial derivative to hedge certain balances or transactions and how this effective hedge was expected to be achieved and measured, provided that this is consistent with the Bank’s management of own risks.

The changes in the value of financial instruments qualifying for hedge accounting are recorded as follows:

a.For fair value hedges, the gains or losses arising on both hedging instruments and the hedged items (attributable to the type of risk being hedged) are included as “Net income (expense) from financial operations” in the Consolidated Statement of Income.

b.For fair value hedges of interest rate risk on a portfolio of financial instruments, gains or losses that arise in measuring hedging instruments and other gains or losses due to changes in fair value of the underlying hedged item (attributable to the hedged risk) are recorded in the Consolidated Statement of Income under “Net income (expense ) from financial operations”.

c.For cash flow hedges, the change in fair value of the hedging instrument is included as “Cash flow hedge” in “Other comprehensive income”, until the hedged transaction occurs, thereafter being reclassified to the Consolidated Statement of Income, unless the hedged transaction results in the recognition of non–financial assets or liabilities, in which case it is included in the cost of the non-financial asset or liability.

d.The differences in valuation of the hedging instrument corresponding to the ineffective portion of the cash flow hedging transactions are recorded directly in the Consolidated Statement of Income under “Net income (expense) from financial operations”.

If a derivative designated as a hedging instrument no longer meets the requirements described above due to expiration, ineffectiveness or for any other reason, hedge accounting treatment is discontinued. When “fair value hedging” is discontinued, the fair value adjustments to the carrying amount of the hedged item arising from the hedged risk are amortized to gain or loss from that date, where applicable.

When cash flow hedges are discontinued, any cumulative gain or loss of the hedging instrument recognized under “Other comprehensive income” (from the period when the hedge was effective) remains recorded in equity until the hedged transaction occurs, at which time it is recorded in the Consolidated Statement of Income, unless the transaction is no longer expected to occur, in which case any cumulative gain or loss is recorded immediately in the Consolidated Statement of Income.

iv.Derivatives embedded in hybrid financial instruments

Derivatives embedded in other financial instruments or in other hybrid contracts are accounted for separately as derivatives if 1) their risks and characteristics are not closely related to the host contracts, 2) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative, and 3) provided that the hybrid contracts are not classified as “Trading investments” or as other financial assets (liabilities) at fair value through profit or loss.

v.Offsetting of financial instruments

Financial asset and liability balances are offset, i.e., reported in the Consolidated Statements of Financial Position at their net amount, only if there is a legally enforceable right to offset the recorded amounts and the Bank intends either to settle them on a net basis or to realize the asset and settle the liability simultaneously.

F-23 

Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

vi.Derecognition of financial assets and liabilities

The accounting treatment of transfers of financial assets is determined by the extent and the manner in which the risks and rewards associated with the transferred assets are transferred to third parties:

i.If the Bank transfers substantially all the risks and rewards of ownership to third parties, as in the case of unconditional sales of financial assets, sales under repurchase agreements at fair value at the date of repurchase, sales of financial assets with a purchased call option or written put option deeply out of the money, utilization of assets in which the transferor does not retain subordinated debt nor grants any credit enhancement to the new holders, and other similar cases, the transferred financial asset is derecognized from the Consolidated Statement of Financial Position and any rights or obligations retained or created in the transfer are simultaneously recorded.

ii.If the Bank retains substantially all the risks and rewards of ownership associated with the transferred financial asset, as in the case of sales of financial assets under repurchase agreements at a fixed price or at the sale price plus interest, securities lending agreements under which the borrower undertakes to return the same or similar assets, and other similar cases, the transferred financial asset is not derecognized from the Consolidated Statement of Financial Position and continues to be measured by the same criteria as those used before the transfer. However, the following items are recorded:

- An associated financial liability for an amount equal to the consideration received; this liability is subsequently measured at amortized cost.

- Both the income from the transferred (but not removed) financial asset as well as any expenses incurred due to the new financial liability.

If the Bank neither transfers nor substantially retains all the risks and rewards of ownership associated with the transferred financial asset—as in the case of sales of financial assets with a purchased call option or written put option that is not deeply in or out of the money, securitization of assets in which the transferor retains a subordinated debt or other type of credit enhancement for a portion of the transferred asset, and other similar cases—the following distinction is made:

a.If the transferor does not retain control of the transferred financial asset: the asset is derecognized from the Consolidated Statement of Financial Position and any rights or obligations retained or created in the transfer are recognized.
b.If the transferor retains control of the transferred financial asset: it continues to be recognized in the Consolidated Statement of Financial Position for an amount equal to its exposure to changes in value and a financial liability associated with the transferred financial asset is recorded. The net carrying amount of the transferred asset and the associated liability is the amortized cost of the rights and obligations retained, if the transferred asset is measured at amortized cost, or the fair value of the rights and obligations retained, if the transferred asset is measured at fair value.

Accordingly, financial assets are only derecognized from the Consolidated Statement of Financial Position when the rights over the cash flows they generate have terminated or when all the inherent risks and rewards of ownership have been substantially transferred to third parties. Similarly, financial liabilities are only derecognized from the Consolidated Statement of Financial Position when the obligations specified in the contract are discharged or cancelled or the contract has matured.

i)Recognizing income and expenses

The most significant criteria used by the Bank to recognizerecognise its revenues and expenses are summarized as follows:

 

i.Interest revenue, interest expense, and similar items

 

Interest revenue and expense are recorded on an accrual basis usingincome is calculated by applying the effective interest method.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 amortised cost (i.e. net of the ECL provision).

 

ii.Commissions, fees, and similar items

 

Fee and commission income and expenses are recognizedrecognised in the Consolidated StatementStatements of Income using criteria established in IFRS 15 “Revenue from contracts with customers”. See disclosure in Note 2 relating adoption and impact of IFRS 15.

Under IFRS 15, the Bank recognises revenue when (or as) satisfied a performance obligations by transferring a service (ie an asset) to a customer; under this definition an asset is transferred when (or as) the customer obtains control of that varyasset. The Bank considers the terms of the contract and its customary business practices to determine the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.

The Bank transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, and/or the Bank satisfies the performance obligation at a point in time.

The main revenues arising from commissions, fees and similar items correspond to:

-Fees and commissions for lines of credits and overdrafts: includes accrued fees related to granting lines of credit and overdrafts in checking accounts.

-Fees and commissions for guarantees and letters of credit: includes accrued fees in the period relating to granting of guarantee payment for current and contingent third party obligations.

-Fees and commissions for card services: includes accrued and earned commissions in the period related to use of credit cards, debit cards and other cards

-Fees and commissions for management of accounts: includes accrued commissions for the maintenance of checking, savings and other accounts

-Fees and commissions for collections and payments: includes income arising from collections and payments services provided by the Bank.
-Fees and commissions for intermediation and management of securities: includes income from brokerage, placements, administration and securitie's custody services.


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

-Fees and commissions for insurance brokerage fees: includes income arising for insurances distribution.

-Other fees and commissions: includes income arising from currency changes,financial advisory, cashier check issuance, placement of financial products and onlilne banking services.

The main expenses arising from commissions, fees and similar items correspond to:

-Compensation for card operation: includes commission expenses for credit and debit card operations related to income commissions card services.

-Fees and commissions for securities transactions: includes commissions expense for deposits, securities custody service and securitie's brokerage.

-Other fees and commissions: includes mainly expenses generayed from online services.

The Bank has incorporated disaggregated revenue and expense disclosures and reportable segment relationship in Note 28.

Additionaly, the Bank maintains certain loyalty programs associated to its credit cards services, for which it has deferred a percentage of the consideration received in the statements of financial position to comply with its related performance obligation, or has liquidated on a monthly basis as far they arise.

Revenue recognition accounting and discloures for the year 2017, is under IAS 18 “Revenue recognition”, fees and commission income and expense were recognised in according to their nature. The main criteria are:were: 

 

-Fee and commission income and expenses on financial assets and liabilities are recognizedrecognised when they are earned.

-Those arising from transactions or services that are performed over a period of time are recognizedrecognised over the life of these transactions or services.

-Those relating to services provided in a single transaction are recognizedrecognised when the single transaction is performed.

F-24 

Table of Contents

iii.       Loan arrangement fees

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

iii.Loan arrangement fees

 

Fees that arise as a result of the origination of a loan, mainly application and analysis-related fees, are deferred and charged to the Consolidated StatementStatements of Income over the term of the loan.

 

j)l)       Impairment

i.Financial assets:

A financial asset, other than that at fair value through profit and loss, is evaluated on each financial statement filing date to determine whether objective evidence of impairment exists.

A financial asset or group of financialnon-financial assets will be impaired if, and only if, objective evidence of impairment exists as a result of one or more events that occurred after initial recognition of the asset (“event causing the loss”), and this event or events causing the loss have an impact on the estimated future cash flows of a financial asset or group of financial assets.

An impairment loss relating to financial assets recorded at amortized cost is calculated as the difference between the recorded amount of the asset and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate.

Individually significant financial assets are individually tested to determine their impairment. The remaining financial assets are evaluated collectively in groups that share similar credit risk characteristics.

All impairment losses are recorded in income. Any impairment loss relating to a financial asset available for sale previously recorded in equity is transferred to profit or loss.

The reversal of an impairment loss occurs only if it can be objectively related to an event occurring after the initial impairment loss was recorded. The reversal of an impairment loss shall not exceed the carrying amount that would have been determined if no impairment loss has been recognized for the asset in prior years. The reversal is recorded in income with the exception of available for sale equity financial assets, in which case it is recorded in other comprehensive income.

ii. Non-financial assets:

 

The Bank’s non-financial assets, are reviewed at the reporting date to determine whether they show signs of impairment (i.e. its carrying amount exceeds its recoverable amount). If any such evidence exists, the recoverable amount of the asset is estimated, in order to determine the extent of the impairment loss.

 

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

 

If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognizedrecognised immediately in profit or loss.

 

In connection with other assets, impairment losses recorded in prior periods are assessed at each reporting date to determine whether the loss has decreased and should be reversed. The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognizedrecognised for the asset in prior years. Goodwill impairment is not reversed.

 

k)F-24

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

m)     Property, plant, and equipment

 

This category includes the amount of buildings, land, furniture, vehicles, computer hardware and other fixtures owned by the consolidated entities or acquired under finance leases. Assets are classified according to their use as follows:

 

F-25 

Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

i.       Property, plant and equipment for own use

 

Property, plant and equipment for own use includes but is not limited to tangible assets received by the consolidated entities in full or partial satisfaction of financial assets representing accounts receivable from third parties which are intended to be held for continuing own use and tangible assets acquired under finance leases. These assets are presented at acquisition cost less the related accumulated depreciation and, if applicable, any impairment losses (when net carrying amount was higher than recoverable amount).

 

Depreciation is calculated using the straight line method over the acquisition cost of assets less their residual value, assuming that the land on which buildings and other structures stand has an indefinite life and, therefore, is not subject to depreciation.

 

The Bank applies the following useful lives for the tangible assets that comprise its assets:

 

ITEM 

Useful life

(Months)

   
Land -
Paintings and works of art -
Carpets and curtains 36
Computers and hardware 36
Vehicles 36
IT systems and software 36
ATMs 60
Other machines and equipment 60
Office furniture 60
Telephone and communication systems 60
Security systems   60
Rights over telephone lines 60
Air conditioning systems 84
Other installations 120
Buildings 1,200
   

 

The consolidated entities assess at each reporting date whether there is any indication that the carrying amount of any tangible asset exceeds its recoverable amount. If this is the case, the carrying amount of the asset is reduced to its recoverable amount and future depreciation charges are adjusted in accordance with the revised carrying amount and to the new remaining useful life.

 

The estimated useful lives of the items of property, plant and equipment held for own use are reviewed at the end of each reporting period to detect significant changes. If changes are detected, the useful lives of the assets are adjusted by correcting the depreciation charge to be recorded in the Consolidated StatementStatements of Income in future years on the basis of the new useful lives.

 

Maintenance expenses relating to tangible assets held for own use are recorded as an expense in the period in which they are incurred.

 

ii.      Assets leased out under operating leases

 

The criteria used to record the acquisition cost of assets leased out under operating leases, to calculate their depreciation and their respective estimated useful lives, and to record the impairment losses thereof, are consistent with those described in relation to property, plant and equipment held for own use.


l)      Leasing

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

n)      Leasing

i.       Finance leases

 

Finance leases are leases that substantially transfer all the risks and rewards incidental to ownership of the leased asset to the lessee.

 

F-26 

TableThe Bank recognised as lending to third parties under “Loans and accounts receivable from customers” in the Consolidated Statements of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

When the consolidated entities act as the lessor of an asset,Financial Position, the sum of the present value of the lease payments receivable from the lessee, including the exercise price of the lessee’s purchase option at the end of the lease term, which is equivalent to one additionalwhen at the inception of the lease payment and soit is reasonably certain to be exercised, is recognizedthat the lessee will exercise the option.

When consolidated entities acts as lending to third parties and is therefore included under “Loans and accounts receivable from customers”lessees, the leased assets are classified based on their nature in the Consolidated Statement of Financial Position.

When the consolidated entities act as lessees, they show the cost of the leased assets in the Consolidated StatementStatements of Financial Position, based on the nature of the leasedand recognising an asset and simultaneously record a liability forat the same amount (which is the(the lower ofbetween the fair value of the leased assetproperty and the sum of the present value of the minimum lease payments, payable to the lessor plus if appropriate, the exercise of the purchase option). The depreciation policy for theseThese assets is consistentare depreciated in accordance with that for property, plant and equipment for own use.use criterion.

 

In both cases, the finance income and finance expenses arising from these contracts are credited and debited, respectively, torecorded under “Interest income” and “Interest expense” respectively, in the Consolidated StatementStatements of Income so as to achieve a constant return rate of return over the lease term.

 

ii.      Operating leases

 

In operating leases, ownership of the leased asset and substantially all the risks and rewards incidental thereto remain with the lessor.

 

When the consolidated entities act as the lessor, they present the acquisition cost of the leased assets are classified at their acquisition cost under "Property, plant and equipment”. The depreciation policycriterion for these assets is consistent with that for similar items of property, plant and equipment held for own use and revenues from operating leases is recorded on a straight line basis under “Other operating income” in the Consolidated StatementStatements of Income.

 

When the consolidated entities act as the lessees, the lease expenses, including any incentives granted by the lessor, are charged on a straight line basis to “Administrative expenses” in the Consolidated StatementStatements of Income.

 

iii.     Sale and leaseback transactions

 

For sale at fair value and operating leasebacks, the profit or loss generated is recorded at the time of sale except in the case of excess of proceeds over fair value, which difference is amortizedamortised over the period of use of the asset. In the case of finance leasebacks, the profit or loss generated is amortizedamortised over the lease term.

 

m)o)      Intangible assets

 

Intangible assets are identified as non-monetary assets (separately identifiable from other assets) without physical substance which arise as a result of legal or contractual rights or it is separable. The Bank recognizesrecognises an intangible asset, whether purchased or self-created (at cost), when the cost of the asset can be measured reliably and it is probable that the future economic benefits that are attributable to the asset will flow to the Bank.

 

Intangible assets are recorded initially at acquisition or production cost and are subsequently measured at cost less any accumulated amortization and any accumulated impairment losses.

 

Internally developed computer software is recorded as an intangible asset if, among other requirements (basically the Bank’s ability to use or sell it), it can be identified and its ability to generate future economic benefits can be demonstrated.

 

Intangible assets are amortizedamortised on a straight-line basis over their estimated useful life; which has been defined as 36 months.

 

Expenditure on research activities is recorded as an expense in the year in which it is incurred and cannot be subsequently capitalized.


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

n)NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

p)      Cash and cash equivalents

 

For the preparation of the cash flow statement,statements, the indirect method was used, starting with the Bank’s consolidated pre-tax income and incorporating non-cash transactions, as well as income and expenses associated with cash flows, which are classified as operating, investment or financing activities.

 

F-27 

Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

For the preparation of the cash flow statement,statements, the following items are considered:

  

i.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.

 

ii.Operating activities: Principal revenue-producing activities performed by banks and other activities that cannot be classified as investing or financing activities.

 

The Bank’s activity of granting loans encompasses not only the activities with its debtors but also the related activities that provide the funding to the loans granted. Since the funding for granting such loans is provided by, among other sources, senior bonds, mortgage bonds and subordinated bonds, the Bank presents the related cash flows as operating activities.

iii.Investing activities: The acquisition and disposal of long-term assets and other investments not included in cash and cash equivalents.

 

iv.Financing Activities: Activities that result in changes in the size and composition of the equity and liabilities that are not operating activities.

 

q)      Expected credit losses allowance – under IFRS 9

Starting from January 1, 2018, the Bank replaced the “incurred loss” model of IAS 39 with an “expected credit loss (ECL)” model established by IFRS 9. The new single impairment model applies to all financial assets measured at amortised cost and fair value through other comprehensive income (FVOCI), including commitment and contingent loans. Investments in equity are outside of the scope of the new impairment requirements.

The Bank accounted ECL related to financial assets measured at amortised cost as a loss allowance in the statements of financial position, but the carrying amount of these assets is stated net of the loss allowance. ECL related to contingent loans is accounted as a provision in the statements of  financial position. The Bank recognises in profit or loss, as an impairment gain or loss, the amount of ECL (or reversal) that is required to adjust the loss allowance at the reporting date to the amount that is required to be recognised in accordance IFRS 9, for financial assets measured at amortised cost and contingent loans.

The new model uses a dual measurement approach, under which the loss allowance is measured as either:

o)-Allowances for loan12-month expected credit losses

-Lifetime expected credit losses

 

The Bank has defined default on individual or collective basis:

●

Individual: when exposure is more than 89 days past due, it has been restructured, it is in judicial collection, it has been write-off, drag effect define as the entire outstanding amount on any loan which is 89 days or more past due. 

●Collective: when exposure is more than 89 days past due, it has been restructured, or has been identified as impaired by an interal risk committee.

The measurement basis depends on whether there has been a significant increase in credit risk since initial recognition. Based on changes in credit quality since initial recognition, IFRS 9 outlines a “three-stage” model impairment in accordance with the following diagram:


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

  Change in credit quality since initial recognition  
Stage 1Stage 2Stage 3
Initial recognitionSignificant increase in credit risk since initial recognitionCredit impaired assets
12-month expected credit lossesLifetime expected credit lossesLifetime expected credit losses

The Bank, at the end of each reporting period, evaluated whether financial instrument's credit risk has significantly increased since initial recognition or whether an asset is considered to be credit-impaired, and consequently classified financial instrument in the respective stage:

●Stage 1: When loans are first recognised, the Bank recognises an allowance based on 12 months ECL. Stage 1 loans also include facilities where the credit risk has improved and the loan has been returned to Stage 1.

●Stage 2: When a loan has shown a significant increase in credit risk since origination, the Bank records an allowance for the lifetime ECL. Stage loans also include facilities, where the credit risk has improved and the loan has been returned to stage 2.

●Stage 3: Loans considered credit-impaired. The Bank records an allowance for the lifetime ECL, setting the PD at 100%.

The Bank considers reasonable and supportable information that is available without undue cost or effort and that may affect the credit risk on a financial instrument, including forward looking information to determine a significant increase in credit risk since initial recognition. Forward looking information includes past events, current conditions and forecast or future economic conditions (macro-economic data).

Credit risk assessment and forward looking information (including macro-economic factors), includes quantitative and qualitative information based on the Bank’s historical experience, some examples are:

a.Financial or economic conditions that are expected to cause a significant change in the borrower’s ability to meet its debt obligations

b.An actual or expected internal credit rating downgrade for the borrower or decrease in behavioral scoring

c.An actual or expected significant change in the operating results of the borrower.

d.Significant increases in credit risk on other financial instruments of the same borrower.

e.Significant changes in the value of the collateral supporting the obligation or in the quality of third-party guarantees or credit enhancements.

f.Reductions in financial support from a parent entity or other affiliate.

g.Expected changes in the loan documentation including an expected breach of contract that may lead to covenant waivers or amendments, interest payment holidays, interest rate step-ups, requiring additional collateral or guarantees, or other changes to the contractual framework of the instrument.

The Bank has considered that if contractual payments are more than 30 days past due, the credit risk is deemed to have increased significantly since initial credit recognition, but is not an absolute indicator. The bank di not rebut the backstop presumption of IFRS 9 relating to SICR or default.

i.Expected credit loss measurement

The ECL are the probability-weighted estimate of credit losses, i.e. the present value of all cash shortfalls. A cash shortfalls is the difference between the cash flows that are due to an entity in accordance with the contract and the cash flows that the entity expects to receive. The three main components to measure the ECL are:

PD: The Probability of default is an estimate of the likelihood of default over a given time horizon. A default may only happen at a certain time over the assessed period, if the facility has not been previously derecognised and is still in the portfolio.

LGD: The loss given default is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, including from the realization of any collateral.


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

EAD: The Exposure at default is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments of principal and interest, whether scheduled by contract or otherwise, expected drawdown on committed facilities, and accrued interest from missed payments.

For measuring 12-month and lifetime ECL, cash shortfalls are identified as follow:

-12-month expected credit losses: the portion of lifetime expected credit losses that represents the expected credit losses that result from default events on the financial instruments that are possible within the 12 months after the reporting date.

-Lifetime expected credit losses: the expected credit losses that result from all possible default events over the expected life of the financial instrument.

The Bank considered a multi-factor analysis to perform credit risk analysis. The type of portfolio or transactions, and individual or collective evaluated.

The Bank divides its portfolio as:

i.Commercial loans,

ii.Mortgage loans, and

iii.Consumer loans.

iv.Contingent loans

The Bank evaluates individually whether objective evidence of impairment exists for loans that are individually significant, then collectively assesses loans that are not individually significant and loans which are significant but for which there is no objective evidence of impairment available under individually assessment.

ii.Contingent loans

The Bank enters into various irrevocable loan commitments and contingent liabilities. Even though these obligations may not be recognised on the statements of financial position, they contain credit risk and, therefore, form part of the overall risk of the Bank.

When the Bank estimates the ECLfor contingent loans, it estimates the expected portion of the loan commitment that will be drawn down over its expected life.

iii.Forward looking information

The ECL model includes a broad range of forward looking information as economic inputs, such as:

●GDO growth

●Unemployment rates

●Central Banks interest rates

●Real state prices

iv.Modifications of financial assets

When loan measured at amortised cost has been renegotiated or modified but not derecognised, the Bank recognises the resulting gains or losses as the difference between the carrying amount of the original loans, and modified contractual cash flows discounted using the EIR before modification.

For ECL estimation purposes on financial assets that have been modified, is required to distinguish between modification that result in derecognition from those that does not result in derecognition. If the modification does not result in derecognition, then the subsequent assessment of whether there is a significant increase in credit risk is made comparing the risk at the reporting date based on the modified contractual term and the risk at initial recognition based on the original, unmodified contractual term.

If the modification results in derecognition, then the modified asset is considered to be a new asset. Accordingly, the date of modification is treated as the date of initial recognition for the purposes of the impairment requerments.  


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

v.Collateral

The Banks seeks to use collateral to mitigate its credit risks on financial assets, where possible. Types of collateral are:cash, securities, letters of credit, real state and inventories.The Bank’s accounting policy for collateral assigned to it through its lending arrangements under IFRS 9 is the same is it was under IAS 39. Collateral, unless repossessed, is not recorded on the Bank’s statements of financial position. However, the fair value of collateral affects the calculation of ECLs. The main collateral associated to mortgage loans are real state, which are valued based on data provided by specialized third parties.

The estimation of ECL reflects the cash flows expected from collateral and other credit enhancement that are part of the contractual terms of the financial instruments.

According to the Bank’s policy when an asset (real state) is repossessed are transferred to aseets held for sale at their fair value less cost to sell as non-financial assets at the repossession date.

vi.Write-offs

The gross carrying amount of a financial asset is reduced when there is no reasonable expectation of recovery. A write-off constitutes a derecognition event of the corresponding loan transaction in its entirety, and therefore, include portions not past-due for installments loans or leasing operation (no partial write-off).

Subsequent recoveries of amounts previously writen-off are credited to the income statements, as recovery of loans previously write-off,as a deduction from provisions for loan losses.

Loan and accounts receivable charge-offs are recorded for overdue and current installments based on the time periods expired since reaching overdue status, as described below:

Type of loanTerm
Consumer loans with or without collateral6 months
Other transactions without collateral24 months
Commercial loans with collateral36 months
Mortgage loans48 months
Consumer leasing6 months
Other non-mortgage leasing transactions12 months
Mortgage leasing (household and business)36 months

r)       Allowance for loan losses – under IAS 39

The Bank established allowances to cover incurred losses on loans and account receivables from customers in accordance with its internal models and risk assessment as approved by the Board of Directors.

 

The Bank performsperformed an assessment of the risk associated with loans and accounts receivable from customers to determine their allowance for loan losses as described below:

 

-Individual assessment - represented cases where the Bank assesses a debtor as individually significant, or when he/she could not be classified within a group of financial assets with similar credit risk characteristics, due to their size, complexity or level of exposure.

- Individual assessment – represents cases where the Bank assesses a debtor as individually significant, or when he/she cannot be classified within a group of financial assets with similar credit risk characteristics, due to their size, complexity or level of exposure.

- Group assessment - a group assessment is relevant for analyzing a large number of operations with small individual balances from individuals or small companies. The Bank groups debtors with similar credit risk characteristics giving to each group a default probability and recovery rate based on a historical analysis.

-Group assessment - a group assessment was relevant for analyzing a large number of transactions with small individual balances from individuals or small companies. The Bank grouped debtors with similar credit risk characteristics giving to each group a default probability and recovery rate based on a historical analysis.

 

The Bank models determinedetermined allowances and provisions for loan losses according to the type of portfolio or operations.transactions. Loans and accounts receivables from customers arewere divided into three categories:

 

i.Commercial loans,

ii.Mortgage loans, and

iii.Consumer loans.

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

The models used to determine credit risk allowances are described as follows:

 

I.Allowances for individual assessment

I.Allowances for individual assessment

 

An individual assessment of commercial debtors iswas necessary in the case of companies which, due to their size, complexity or level of exposure regarding the entity, must be known and analyzed in detail.

 

For the purposes of establishing its provisions, the Bank assignsassigned a risk category to each debtor, their loans and contingent loans. The risk factors considered are:were: industry or economic sector of the borrower, owners or managers of the borrower, their financial situation and payment capacity, and payment behavior.

 

The Bank’s risk categories arewere as follows:

 

1. Debtors may be classified in risk categories A1, A2, A3 or B (if they are current on their payment obligations and show no sign of deteriorationimpairment in their credit quality). B is different from the A categories by a certain history of late payments. The A and B categories arewere distinguished by different PNPs (as defined below).

 

2. Debtors classified as C1, C2, C3, C4, D1 or D2 includeincluded debtors whose loans with us have been charged off or administered by our Recovery Unit, or classifiedidentified as Precontenciosos (PRECO or deteriorated).

F-28 

Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continuedimpaired by an internal risk committee.

 

For loans classified as A1, A2, A3 and B, we assignassigned a specific provision level on an individual basis to each borrower and, therefore, the amount of loan loss allowance is determined on a case by case basis.

 

Estimated Incurred Loan Loss = Loan Loss Allowance.

 

The estimated incurred loss iswas obtained by multiplying all risk factors defined in the following equation:

 

EIL= EXP x PNP x SEV

 

EIL = Estimated Incurred Loan Loss. The estimated incurred loan loss is how much could be lost in the event a debtor does not perform the obligations under the loan.

 

EXP = Exposure. This corresponds to the value of commercial loans.

 

PNP = Probability of Non-Performance. This variable, expressed as a percentage, indicates the probability that a debtor will default. This percentage is associated with the internal rating that we give to each debtor, which is determined by analyzing such parameters as debt servicing capacity (including, usually, projected cash flows), the company’s financial history, the solvency and capacity of shareholders and management, and projections for the economic sector in which it operates.

 

SEV = Severity. This is the effective loss rate given default for debtors in the same segment, which is determined statistically based on the historical effective losses for each segment.

 

Every year, models together with PNP and SEV assumptions, arewere tested by the Bank’sBank's Credit Risk Department, to ensure that they are appropriate at each reporting date so as to make sure any difference between the estimated incurred losses and actual losses is reduced.

 

These tests focusfocused on the validation of the sufficiency of the Bank’sBank's allowances, and consistconsisted of comparisons between actual write-offs to allowances established by the model, and the coverage of the total allowance to actual write-offs in the most current periods. Individual loan classification and improvements to any customer classification arewere also presented for approval to our Risk Committee.

 

For loans classified in the C and D categories, loan loss allowances arewere based mainly on the fair value of the collateral, adjusted for an estimated cost to sell, that each of these loans have. Allowance percentage for each category iswas then based on the fair value of the collateral, or the expected future cash flow from the loan for each individually evaluated non-performing loans.


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

II. Allowances for group assessments

 

The Bank usesused the concept of estimation of incurred loss to quantify the allowances levels over the group-evaluated portfolios, considering the risk and the guarantees associated with each transaction.

 

Following the Bank’sBank's definition, the Bank usesused group evaluation to approach transactions that have similar credit risk features, which indicateindicated the debtor’sdebtor's payment capacity over the entire debt, principal and interests, pursuant to the contract’scontract's terms. In addition, this allowsallowed us to assess a high number of transactions with low individual amounts, whether they belong to individuals or SMEs (small and medium sized companies). Therefore, debtors and loans with similar features arewere grouped together and each group has a risk level assigned to it.

 

These models arewere meant to be used mainly to analyze loans granted to individuals (including consumer loans, credit lines, mortgage loans and commercial loans) and commercial loans to small to middle-sized entities (SMEs).

 

Allowances arewere established using these models, taking into account the historical Impairment and other known circumstances at the time of evaluation. After this, a historical loss rate iswas assigned to each portfolio profile constituting each evaluated group.

 

Allowances for group-evaluated loans arewere established based on the credit risk of the profile to which the loan belongs. The method for assigning a profile is establishedwas based on statistical building method, establishing a relation through logistic regression of various variables, such as payment behavior in the Bank, payment behavior outside the Bank, various sociodemographic data, among others, and a response variable that determinesdetermined a client’sclient's risk level, which in this case iswas 90 days of non-performance (the chosen features are relevant when calculating future cash flows per group of assets). Afterwards, common profiles arewere established and with differentiated default rates, applying the real historical loss the Bank has had with that portfolio.

F-29 

Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

The different risk categories arewere constructed and updated periodically based on the payment behavior of the client’sclient's profile to which they belong, as well as his or her sociodemographic characteristics. Therefore, when a customer hashad past due balance or has missed some payments, the outcome iswas that the customer will move to a different segment with a higher loss rate, therefore capturing current trends for each risk profile.

 

Allowance quantification, once the customers have been classified, iswas the product of three factors: exposure (EXP), Probability of Non-Performance (PNP) and Severity (SEV), the same equation used for individual assessment mentioned above.

 

The estimated incurred loss rates for group-evaluated loans correspond to charge-offs net of recoveries. The methodology establishesestablished the period in which the estimated incurred loss for each risk profile emerges. Once the loss has been considered to have been incurred, the estimated incurred loss rates arewere applied to the corresponding risk profile to obtain the net charge-off level associated with this period. The loss rates applied to each risk profile are based only on the historical net charge-off data for that specific profile within one of the four groups of loans (consumer loans, credit lines, mortgage loans and commercial loans). No other statistical or other information other than net charge-offs iswas used to determine the loss rates.

 

To determine the estimated incurred loss for commercial and mortgage loans collectively evaluated for impairment, we mainly analyzeanalyzed the payment behavior of clients, particularly the payment behavior of clients with payments that are more than 90 days overdue, clients with other weaknesses, such as early non performance (i.e., payments that are past-due, though by less than 90 days), clients with modified loans and clients with renegotiated loans, as well as success in recovery against these clients. We also taketook into account whether the loan is supported by collateral.

 

In connection with mortgage loans, historical net charge-offs arewere considered in the model to calculate loss rates for loans collectively evaluated for impairment. The risk categories arewere such that when a customer has a past-due balance or has missed some payments, the outcome iswas that the customer will move to a different risk category with a higher loss rate, therefore capturing current trends of the customer and, when aggregate, current trends in the market.

 

Our models for loans analyzed on a group basis (consumer loans, residential mortgage loans and small-and-mid- sized commercial loans) arewere monitored on a monthly basis with respect to predictability and stability, using indicators that seek to capture the underlying need to update the models for current loss trends. Therefore, the periods of historical net charge-offs used in the allowance model may bewere more than a year old as we only updateupdated the historical net charge-offs when our assessment of predictability and stability indicators determine it iswas necessary.


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

During the second semester of 2014, and as a response to the ongoing improvement of the allowances models for loans, the Bank recalibrated its allowances model for consumer loans and commercial loans. The models were recalibrated with the aim of improving the prediction of client behavior and maintaining statistical and management standards. Part of these improvements consisted of the advancement of the models’ governance allowing technical and defined approvals at different points of the approval process, better statistical techniques and the use of the entire extent of historical information, allowing more clarified definition of the Probability of Non-Performance (PNP) and the Severity (SEV) involved in the provision calculation. This model improvement resulted in the release of consumer provisions of Ch$26,563 million and an increase in commercial provisions of Ch$45,141 million. As this is a change in estimation, the net increase of these improvements (Ch$18,578 million) was recognized under the "Provisions for loan losses" in the Consolidated Statement of Income for the year in accordance with IAS 8 Accounting policies, changes in Accounting Estimates and Errors.

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

III.     Charge-offs

 

As a general rule, charge-offs should be done when all collection efforts have been exhausted. These charge-offs consistconsisted of derecognition from the Consolidated StatementStatements of Financial Position of the corresponding loans operationstransactions in its entirety, and, therefore, includeincluded portions not past-due of a loan in the case of installments loans or leasing operationstransactions (no partial charge-offs exist).

 

Subsequent payments obtained from charged-off loans will be recognizedwere recognised in the Consolidated StatementStatements of Income as a recovery of loans previously charged-off.

 

F-30 

Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Loan and accounts receivable charge-offs arewere recorded for overdue and current installments based on the time periods expired since reaching overdue status, as described below:

  

Type of loan Term
   
Consumer loans with or without collateral 6 months
Other transactions without collateral 24 months
Commercial loans with collateral 36 months
Mortgage loans 48 months
Consumer leasing 6 months
Other non-mortgage leasing transactions 12 months
Mortgage leasing (household and business) 36 months

 

IV.     Recovery of loans previously charged off and accounts receivable from customers

 

Any payment agreement of an already charged-off loan willdid not give rise to income—as long as the operation is stillwas in an impaired status—and the effective payments received arewere accounted for as a recovery from loans previously charged-off.

  

Recovery of previously charged-off loans and accounts receivable from customers, arewere recorded in the Consolidated StatementStatements of Income as a deduction from provisions for loan losses.

 

In accordance with our charge-off policy described in iii) above, we may subsequently recoverrecovered a portion of the amount charged-off (at 100%). The allowance for loan losses on our collectively evaluated loans incorporates an expected recovery rate based on historical information. At the time we charge-offcharged-off the carrying amount of any loans which have been collectively evaluated for impairment, the allowance for loan losses on collectively evaluated loans iswas replenished to reflect incurred losses based on statistical models developed in compliance with IAS 39 on the remaining pool of loans. The amounts required for replenishment arewere recorded in the financial statements as provision established.

  

p)s)      Provisions, contingent assets, and contingent liabilities

 

Provisions are liabilities of uncertain timing or amount. Provisions are recognizedrecognised in the Consolidated Statements of Financial Position when the Bank:

 

i.has a present obligation (legal or constructive) as a result of past events, and

ii.it is probable that an outflow of resources will be required to settle these obligations and the amount of these resources can be reliably measured.

 

Contingent assets or contingent liabilities are any potential rights or obligations arising from past events whose existence will be confirmed only by the occurrence or non-occurrence if one or more uncertain future events that are not wholly within control of the Bank.

 

The Consolidated StatementStatements of Financial Position and annual accounts reflect all significant provisions for which it is estimated that it is probable an outflow of resources will be required to meet the obligation where the probability of having to meet the obligation is more likely than not. Provisions are quantified using the best available information on the consequences of the event giving rise to them and are reviewed and adjusted at the end of each year. Provisions must specify the liabilities for which they were originally recognized.recognised. Partial or total reversals are recognizedrecognised when such liabilities cease to exist or are reduced.


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

Provisions are classified according to the obligation covered as follows:

 

-Provision for employee salaries and expenses

-Provision for mandatory dividends

-Provision for contingent credit risks

-Provisions for contingencies

 

F-31 

Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

q)t)       Deferred income taxes and other 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. 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.

 

r)u)       Use of estimates

 

The preparation of the financial statements requires the Bank’s management to make estimates and assumptions that affect the application of the accounting policies and the reported balances of assets, liabilities, revenues and expenses. Actual results may differ from these estimates.

 

In certain cases, International Financial Reporting Standards (IFRS) require that assets or liabilities be recorded or disclosed at their fair values. The fair value is 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. When available, quoted market prices in active markets have been used as the basis for measurement. When quoted market prices in active markets are not available, the Bank has estimated such values based on the best information available, including the use of modeling and other valuation techniques.

 

The Bank has established allowances to cover incurred losses to estimate allowances. These allowances must be regularly reviewed taking into consideration factors such as changes in the nature and volume of the loan portfolio, trends in forecasted portfolio quality, credit quality and economic conditions that may adversely affect the borrowers’ ability to pay. Increases in the allowances for loan losses are reflected as “Provision for loan losses” in the Consolidated StatementStatements of Income. Loans are charged-off when the Bank’s management determines that a loan or a portion thereof is impaired. Charge-offs are recorded as a reduction of the allowance for loan losses.

 

The relevant estimates and assumptions made to calculate provisions are regularly reviewed by the Bank’s Management to quantify certain assets, liabilities, revenues, expenses, and commitments.

 

These estimates, made on the basis of the best available information, mainly refer to:

 

-Allowances for loan losses (Notes 8, 9 and 29)
-Impairment losses of certain assets (Notes 7, 8, 9, 10, and 32)
-The useful lives of tangible and intangible assets (Notes 12, 13 and 32)
-The fair value of assets and liabilities (Notes 5, 6, 7, 10 and 36)
-Commitments and contingencies (Note 22)
-Current and deferred taxes (Note 14)

-   Allowances for loan losses

-   Impairment losses of certain assets

-   The useful lives of tangible and intangible assets

-   The fair value of assets and liabilities

-   Commitments and contingencies

-   Current and deferred taxes

 

s)v)       Non-current assets held for sale (in “Other Assets”)

 

Non-current assets (or a group holding assets and liabilities for disposal) expected to be recovered mainly through the sale of these items rather than through the continued use, are classified as held for sale. Immediately prior to this classification, assets (or elements of a disposable group) are re-measured in accordance with the Bank’s policies. The assets (or disposal group) are measured at the lower of carrying amount and fair value less cost to sell.


Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Assets received or awarded in lieu of payment

 

Assets received or awarded in lieu of payment of loans and accounts receivable from clients are recognizedrecognised at their fair value (as determined by an independent appraisal). A price is agreed upon by the parties through negotiation or, when the parties do not reach an agreement, at the amount at which the Bank is awarded those assets at a judicial auction. In the both cases, an independent appraisal is performed. The excess of the outstanding loan balance over the fair value is charged to net income for the period, under “Provision for loan losses”. Any excess of the fair value over the outstanding loan balance, less costs to sell of the collateral, is returned to the client. These assets are subsequently adjusted to their net realizable value less cost to sale (assuming a forced sale). The difference between the carrying value of the asset and the estimated fair value less costs to sell is charged to net income for the period, under “Other operating expenses”. The result obtained in the sale of the asset is subsequently recorded under “Other operating income”.

 

F-32 

Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Independent appraisals are obtained at least every 18 months and fair values are adjusted accordingly. No adjustments have been made between appraisals with respect to the period covered by these financial statements considering the stability of the real estate market in Chile during past years and expected stability of the real estate market in the coming years.

 

At least once a year, the Bank performs the necessary analysis to update the “cost to sale” of assets received or awarded in lieu of payments. According to the Bank’s survey, as of December 31, 20162018 the average cost to sale was estimated at 5.1%2.2% of the appraisal value (5.0%(3.4% as of December 31, 2015)2017).

 

t)w)       Earnings per share

 

Basic earnings per share are determined by dividing the net income attributable to the equity holdersshareholders of the Bank for the reported period by the weighted average number of shares outstanding during the reported period.

 

Diluted earnings per share are determined in the same way as basic earnings, but the weighted average number of outstanding shares is adjusted to take into consideration the potential diluting effect of stock options, warrants, and convertible debt.

 

As of December 31, 20162018 and 20152017 the Bank did not have any instruments that generated dilution.

 

u)x)       Temporary acquisition (assignment) of assets and liabilities

 

Purchases or sales of financial assets under non-optional repurchase agreements at a fixed price are recorded in the Consolidated Statements of Financial Position based on the nature of the debtor (creditor) under “Deposits in the Central Bank of Chile,” “Deposits in financial institutions” or “Loans and accounts receivable from customers” (“Central Bank of Chile deposits,” “Deposits from financial institutions” or “Customer deposits”), in Note 6.7.

 

Differences between the purchase and sale prices are recorded as financial interest over the term of the contract.

 

v)y)       Provision for mandatory dividends

 

As of December 31, 20162018 and 20152017 the Bank recorded a provision for mandatory dividends. This provision is made pursuant to Article 79 of the Corporations Act, which is in accordance with the Bank’s internal policy, pursuant to which at least 30% of net income for the period is distributed, except in the case of a contrary resolution adopted at the respective shareholders’ meeting by unanimous vote of the outstanding shares. This provision is recorded, as a deducting item, under the “Retained earnings – provision for mandatory dividends” line of the Consolidated StatementStatements of Changes in Equity with offset to Provisions.

 

w)z)       Employee benefits

 

i.Post-employment benefits – Defined Benefit Plan:

 

According to current collective labor agreements and other agreements, the Bank has an additional benefit available to its principal executives, consisting of a pension plan whose purpose is to endow them with funds for a better supplementary pension upon their retirement.

 


Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Features of the Plan:

 

The main features of the Post-Employment Benefits Plan promoted by the Banco Santander Chile are:

 

a.Aimed at the Bank’s management.

b.The general requirement to apply for this benefit is that the employee must be carrying out his/her duties when turning 60 years old.

c.The Bank will create a pension fund, with life insurance, for each beneficiary in the plan. Periodic contributions into this fund are made by the manager and matched by the Bank.

d.The Bank will be responsible for granting the benefits directly.

 

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TableThe Bank uses the method of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Toprojected unit credit, to determine the present value of the defined benefit obligation and the current service cost, the method of projected unit credit is used.cost.

 

Components of defined benefit cost include:

 

-current service cost and any past service cost, which are recognizedrecognised in profit or loss for the period;

-net interest on the liability (asset) for net defined benefit, which is recognizedrecognised in profit or loss for the period;

-new liability (asset) remeasurements for net defined benefit include:

(a) actuarial gains and losses;

(b) the difference between the actual return on plan assets and the interest on plan assets included in the net interest component and;

(c) changes in the effect of the asset ceiling.

 

The liability (asset) for net defined benefit is the deficit or surplus, determined as the difference between the present value of the defined benefit obligation less the fair value of plan assets.

 

Plan assets comprise the pension fund taken out by the Group with a third party that is not a related party. These assets are held by an entity legally separated from the Bank and exist solely to pay benefits to employees.

 

The Bank recognizesrecognises the present service cost and the net interest of the Personnel salaries and expenses on the Consolidated StatementStatements of Income.

 

The post-employment benefits liability, recognizedrecognised in the Consolidated StatementStatements of Financial Position represents the deficit or surplus in the defined benefit plans of the Bank. Any surplus resulting from the calculation is limited to the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions.

 

When employees leave the plan before meeting the requirements to be eligible for the benefit, contributions made ​​by the Bank are reduced.

 

ii.       Cash-settled share based compensation

 

The Bank allocates cash-settled share based compensation to executives of the Bank and its Subsidiaries in accordance with IFRS 2. The Bank measures the services received and the obligation incurred at fair value. Until the obligation is settled, the Bank determines the fair value at the end of each reporting period, as well as at the date of settlement, recognizingrecognising any change in fair value in the income statementstatements of the period.


Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

x)NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

aa)     Application of new and revised International Financial Reporting Standards

 

i.1.  New and revised standards effective in current year

 

The following new and revised IFRS have been adopted in these financial statements:

 

Accounting for Acquisitions of interests in Joint Operations (Amendments to IFRS 11) -issued on May 6, 2014 the IASB has issued “Accounting for Acquisitions of Interests in Joint Operations (amendments to IFRS 11)”, the amendments clarify the accounting for acquisitions of an interest in a joint operation when the operation constitutes a business.

Amends IFRS 11 Joint Arrangements to require an acquirer of an interest in a joint operation in which the activity constitutes a business (as defined in IFRS 3 Business Combinations) to:

·apply all of the business combinations accounting principles in IFRS 3 and other IFRSs, except for those principles that conflict with the guidance in IFRS 11;
·disclose the information required by IFRS 3 and other IFRSs for business combinations.

The amendments are effective for annual periods beginning on or after 1 January 2016. Earlier application is permitted but corresponding disclosures are required. The amendments apply prospectively.The implementation of this amendment did not have material impact on the consolidated financial statement of the Bank.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Clarification of Acceptable Methods of Depreciation and Amortization (Amendments to IAS 16 and IAS 38) - issued on May 12, 2014 the IASB has published “Clarification of Acceptable Methods of depreciation and amortization (amendments to IAS 16 and IAS 38)”.The amendments provide additional guidance on how the depreciation or amortization of property, plant and equipment and intangible assets should be calculated. They are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted.The implementation of this amendment did not have material impact on the consolidated financial statement of the Bank.

Equity Method in Separate Financial Statements (Amendments to IAS 27) - issued on August 12, 2014, the IASB has published “Equity Method in Separate Financial Statements (Amendments to IAS 27)”. The amendments reinstate the equity method as an accounting option for investments in subsidiaries, joint ventures and associates in an entity's separate financial statements. The amendments allow an entity to account for investments in subsidiaries, joint ventures and associates in its separate financial statements:

·at cost, in accordance with IFRS 9 Financial Instruments (or IAS 39 Financial Instruments: Recognition and Measurement for entities that have not yet adopted IFRS 9), or

·using the equity method as described in IAS 28 Investments in Associates and Joint Ventures.

The accounting option must be applied by category of investments. In addition to the amendments to IAS 27, there are consequential amendments to IAS 28 to avoid a potential conflict with IFRS 10 Consolidated Financial Statements and to IFRS 1 First-time Adoption of International Financial Reporting Standards. The accounting option must be applied by category of investments. In addition to the amendments to IAS 27, there are consequential amendments to IAS 28 to avoid a potential conflict with IFRS 10 Consolidated Financial Statements and to IFRS 1 First-time Adoption of International Financial Reporting Standards. The amendments are effective for annual periods beginning on or after 1 January 2016. Earlier application is permitted.

The amendments are to be applied retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.The implementation of this amendment did not have material impact on the consolidated financial statement of the Bank.

Disclosure initiative (Amendments to IAS 1) - issued on December 18, 2014 the IASB added an initiative on disclosure to its work program in 2013 to complement the work being done in the Conceptual Framework project. The initiative is made up of a number of smaller projects that aim at exploring opportunities to see how presentation and disclosure principles and requirements in existing Standards can be improved. They are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted.The implementation of this amendment did not have material impact on the consolidated financial statement of the Bank.

Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28) - issued on December 18, 2014 the IASB has published 'Investment Entities: Applying the Consolidation Exception, Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities and IAS 28 Investments in Associates and Joint Ventures (2011) to address issues that have arisen in the context of applying the consolidation exception for investment entities. They are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted.The implementation of this amendment did not have material impact on the consolidated financial statement of the Bank.

Annual Improvements 2012-2014 Cycle

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, Changes in methods of disposal - Adds specific guidance in IFRS 5 for cases in which an entity reclassify an asset from held for sale to held for distribution or vice versa and cases in which held-for-distribution accounting is discontinued.

IFRS 7 Financial Instruments: Disclosures (with consequential amendments to IFRS 1), Servicing contracts - Adds additional guidance to clarify whether a servicing contract is continuing involvement in a transferred asset for the purpose of determining the disclosures required.

IAS 19 Employee Benefits, Discount rate – Clarifies that the high quality corporate bonds used in estimating the discount rate for postemployment benefits should be denominated in the same currency as the benefits to be paid (thus, the depth of the market for high quality corporate bonds should be assessed at currency level).

IAS 34 Interim Financial Reporting, Disclosure of information “elsewhere in the interim financial report” - Clarifies the meaning of 'elsewhere in the interim report' and requires a cross-reference.

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Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

The improvements are effective for annual periods beginning on or after 1 July 2016, with earlier application being permitted.The implementation of this amendment did not have material impact on the consolidated financial statement of the Bank

ii. New and revised IFRS issued but not effective

IFRS 9 Financial Instrumentsinstruments (2014) (IFRS 9) - IFRS 9 (2014) – In July 2014, the International Accounting Standards Board (IASB) approvedissued IFRS 9 as a complete standard, to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’.

This standard is effective for reporting periods beginning on or after 1 January 2018. IFRS 9 sets out theincludes requirements for recognition and measurement of financial instruments. The main new developmentsChanges in accounting policies resulting from the adoption of IFRS 9 will be applied retrospectively adjusting open balance as of 1 January 2018, applying the standard are discussed below.transition exemption that allow not to restate comparative information for prior periods.

 

Classification and measurement of financial assets and financial liabilities: Under& measurement: IFRS 9 financial assets are classified on the basis of the business model within which they are held and their contractual cash flow characteristics. These factors determine whetherdefined the financial asset and certain non-financial assets are measured at amortised cost, fair value through other comprehensive income or fair value through profit or loss. For many financial assets, thepurchases agreements classification and measurement outcomes will be similarmodel changes requirements. The main aspects included in the new standard are:

a)Classification of financial instruments: The criterion for classifying financial assets will depend both on their business management model and the features of the contractual flows. Consequently, the asset will be measured at amortised cost, at fair value with changes in other comprehensive income (equity), or at fair value with changes in profit and loss for the period. IFRS 9 also establishes the option of designating an instrument at fair value with changes in Profit and loss under certain conditions. The main activity of the Bank is the concession of retail banking transactions and does not concentrate its exposure on complex financial products. The main objective of the Bank is to achieve a homogeneous implementation of the classification of financial instruments of the portfolios established under IFRS 9 and, for this purpose, it has developed standardized guidelines to enable a homogeneous analysis in all of its units.

The Bank prepared an analysis of its portfolios under the mentioned guidelines in order to identify and classify the financial instruments into their corresponding portfolio under IFRS 9. Based on the analysis carried out, the Group considered that:

●The Bank offers commercial and consumer banking services, which are consistent with a basic lending arrangement. In accordance with the above mentioned, most of the financial assets classified as “loans and account receivable from customers” continued to be classified at amortised cost, except for 0.4% over the outstanding amount as of December 31, 2017 that was reclassified to be measured at fair value with changes in profit or loss. No other reclassification was made to this portfolio.

●As of December 31, 2017, financial assets classified as “available for sale investments” continued to be classified at fair value with changes reported in other comprehensive income, except for a small ownership in shares that were classified at fair value, with changes reported in other comprehensive income (irrevocably), which representeda 0.01% of the “available for sale investments” as of December 31, 2017.

●The financial assets classified as “trading investments” remained classified at fair value, with changes reported in profit and loss for the year,

●IAS 39 financial liabilities classification and measurement criteria remained substantially under IFRS 9. The Bank considered that all the changes in classification mentioned above were not significant.

In October 12, 2017, the IASB issued “Prepayment features with negative compensation” to IAS 39. However,address particular prepaid options under IFRS 9, embedded derivativesassessment whether contractual clash flows are solely payments of principal and interest. The Bank concluded that this amendment did not separated from hosthave significant impact over its financial statements.

b)Credit risk Impairment model: The most important difference of the current model compared with the prior one was that the new accounting standard introduced the concept of expected loss, whereas IAS 39 was based on incurred loss.

●Scope of application: The IFRS 9 asset impairment model is applicable to financial assets valued at amortised cost, to debt instruments valued at fair value through other comprehensive income, to leasing receivables, and to contingent risks and commitments not valued at fair value.

Banco Santander Chile and equity securities are measured at fair value either through profit or loss or, in certain circumstances, an irrevocable election may be made to present fair value movements in other comprehensive income. The requirements for the classification and measurement of financial liabilities were carried forward unchanged from IAS 39, however, the requirements relatingSubsidiaries 

Notes to the fair value option for financial liabilities were changed to address own credit risk and, in particular, the presentation of gains and losses within other comprehensive income.Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

Impairment: IFRS 9 introduces fundamental changesNOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

●" Rebuttable presumption that the credit risk has increased significantly when payments are more than 30 days past due: this threshold is used as an additional - but not primary - indicator of significant risk increase.

●" Financial instruments that have low credit risk at the reporting date.

●" Impairment estimation methodology: The portfolio of financial instruments subject to impairment is divided into three categories, based on the phase of each instrument with regard to its level of credit risk:

–Phase 1: a financial instrument is considered to be in this phase when there has been no significant increase in risk since its initial recognition. In this case, the value correction reflects expected credit losses arising from defaults over the 12 months from the reporting date.

–Phase 2: financial instruments are included in this phase when there has been a significant increase in risk since the date of initial recognition, but the impairment has not materialized. In this case, the value correction for losses l reflects the expected losses from defaults over the residual life of the financial instrument. The existence of a significant increase in credit risk is determined by considering the quantitative indicators used in the ordinary management of credit risk, together with other qualitative variables, such as the indication of whether refinanced transactions are considered non-impaired and transactions included in special debt sustainability agreements.

–Phase 3: financial instruments are catalogued in this phase when they show effective signs of impairment as a result of one or more events that have already occurred that will result in a loss. In this case, the amount of the value correction reflects the expected losses for credit risk over the expected residual life of the financial instrument.

The methodology required for quantification of financial assets measured at amortised cost or at fair value through other comprehensive income, lease receivables and certain commitments to extendexpected loss for credit and financial guarantee contracts. Itevents is no longer necessary for losses to be incurred before credit losses are recognised. Instead, under IFRS 9, an entity always accounts for expected credit losses (ECLs), and any changes in those ECLs. The ECL approach must reflect both current and forecast changes in macroeconomic data over a horizon that extends from 12 months to the remaining life of the asset if a borrower’s credit risk is deemed to have deteriorated significantly at the reporting date compared to the origination date. The estimate of ECLs, should reflectbased on an unbiased and probability-weighted amount that is determined by evaluatingweighted consideration of the occurrence of a range of possible outcomes and considering reasonable and supportable information at the reporting date. Similar to the current incurred credit loss provisioning approach, management will exercise judgment as to whether additional adjustments are required in order to adequately reflect possible events or current conditionsfuture scenarios that could affect credit risk.

For financial assets, an ECL isimpact the current valuecollection of the difference between the contractual cash flows, owedtaking into account the time-value of money, all available information relevant to past events, and current conditions and projections of macroeconomic factors deemed relevant to the entity according to the contract and the cash flows which the entity expects to receive. For undrawn loan commitments, an ECL is the current valueestimation of the difference between the contractual cash flows owed to the entity and the cash flows which the entity expects to receive if the loan is drawn.

An assessment of each facilities’ credit risk profile will determine whether they are to be allocated to one of three stages:

-  Stage 1: when it is deemed there has been no significant increase in credit risk since initial recognition, a loss allowance equal to a 12-month ECL – i.e. the proportion of lifetime expected losses resulting from possible default events within the next 12-months - will be applied;

- Stage 2: when it is deemed there has been a significant increase in credit risk since initial recognition, but no credit impairment has materialised, a loss allowance equal to the lifetime ECL – i.e. lifetime expected loss resulting from all possible defaults throughout the residual life of a facility – will be applied; and

- Stage 3: when the facility is considered credit impaired, a loss allowance equal to the lifetime ECL will be applied. Similar to incurred losses under IAS 39, objective evidence of credit impairment is required.this amount.

 

The assessment of whether a significant increase in credit risk has occurred since initial recognition involves the application of both quantitative measures and qualitative factors, requires management judgmentjudgement and is a key aspect of the IFRS 9 methodology.

 

Hedge accounting: The general hedge accounting requirements align more closelykey inputs into the measurement of the ECL (expected credit loss) are EAD (exposure at default), PD (probability of default) and LGD (loss given default). These parameters are derived from internally developed statistical models and other historical data that leverage regulatory models. They are adjusted to reflect forward-looking information. The Bank has focused in developing an “expected credit loss” model in accordance with risk management practices and establish a more principle-based approach thereby allowing hedge accounting to be applied to a wider variety of hedging instruments and risks. Macro hedge accounting is being dealt with as a separate project. Until such time as that project is complete, and to remove any potential conflict between any existing macro hedge accounting undertaken under IAS 39 and the new general hedge accounting requirements ofall IFRS 9 entities can chooserequirements, including all essential definitions:

●Significant increase in credit risk: when determining whether the credit risk on a financial instrument has increased significantly since initial recognition, the Bank considers reasonable and supportable information that is relevant and available without undue cost or effort, including both quantitative and qualitative information, analysis based on the Bank historical experience, expert credit assessment and forward looking information.

●Default: this definition is largely consistent with the current definition used by the Bank. In assessing whether a borrower is in default, the Bank considers indicator as: overdue status, non-payment of another obligation of the same issuer to the Bank, data developed internally and obtained from external sources, among others. Inputs into the assessment may vary over the time to reflect changes in circumstances.

●Forward-looking information: the Bank has incorporated forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since initial recognition and its measurement of ECLs. Following this, the Bank has developed macroeconomic scenarios and considers the relative probability of each outcome. External information includes macroeconomic factor as PIB, among others.

●Financial assets expected lives: the Bank considers contractual terms of the instruments (amortization, prepayments features, extension terms, etc.). The bank measures ECLs considering the risk of default over the maximum contractual period. For certain revolving facilities (e.g. credit card and overdraft), the expected lives is the credit risk exposure period and credit risk management actions that the Bank expects to take and that serve to mitigate ECLs.

●Impairment records: IFRS 9 established changes related to the FVOCI financial assets, where the amount of the change in the fair value that is attributable to changes in the credit risk of the financial asset is presented in other comprehensive income, and the remaining amount of the change in the fair value is presented in profit or loss.

Banco Santander Chile and Subsidiaries 

Notes to continue to apply the existing hedge accounting requirements in IAS 39.Consolidated Financial Statements

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AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

c)Hedge accounting: The general hedge accounting requirements align more closely with risk management practices and establish a more principle-based approach thereby allowing hedge accounting to be applied to a wider variety of hedging instruments and risks. Macro hedge accounting is being dealt with as a separate project.

 

The Bank has established a work stream withapplied IFRS 9 and IFRS 7R, effective for annual periods beginning on January 1, 2018, for the aimfirst time. Changes include updated accounting policies, classification and measurement of adapting its processes to the new classification standards for financial instruments, accountingassets and liabilities and impairment of hedges and estimating credit risk impairment. Accordingly, the Bank is working towards defining an objective internal model and analyzing all the changes which are needed to adapt accounting classifications and credit risk impairment estimation models in force in each unit to the previous definitions. The governance structure currently implemented complies with the requirements set out in the new standards. The Bank during this exercise, has successfully completed the design phase of the implementation plan. The major milestones achieved include the identification of technological needs have been identifiedfinancial assets, as well as transition disclosure (Note 2), detailed qualitative and quantitative information about ECL calculations, reconciliations from opening to closing ECL allowance and gross carrying amount of Account and receivable measured at amortised cost and FVOCI. As permitted by the necessary adaptationstransitional provisions of IFRS 9, the Bank has elected not to restate comparative figures. Any adjustments to the existing control environment.carrying amounts of financial assets and liabilities at the transition date were recognised in the opening retained earnings and other reserves of the current period. The comparative period notes to the financial statements present the same disclosures made in prior year.

 

The Bank is currently in the development and implementation phase of the models and requirements defined. The objective of the Bank at these stages is to develop an operational model adapted to the requirements of IFRS 9 and ensure the definition of functional requirements At the IT environment, an efficient implementation, optimizing its resources as well as the designs elaborated in the previous stages.

Once the implementation phase is completed, the Bank will test the effective performance of the model through several simulations and ensuring that the transition to the new operating model meets the objectives established in the previous phases. This last stage includes the parallel execution of the provisions calculation.

IFRS 15, RevenueIncome from Contractscontracts with Customersclients -issued on On May 28, 2014, the IASB has published IFRS 15, which aims to establish principles for reporting useful information to users of financial information about the nature, amount, timing and uncertainty of The income and cash flows generated from an entity’s contracts with its new standard,customers. IFRS 15 eliminates IAS 11 Construction Contracts, IAS 18 Income, IFRIC 13 Loyalty Programs with Customers, IFRIC 15 Real Estate Construction Agreements, IFRIC 18 Transfer of Assets from Customers and SIC 31 Revenue - Exchange of Advertising Services.

On April 12, 2016, the IASB issued “Clarifications to IFRS 15 Revenue from contracts with customers. Atcustomers”, this amendments do not change the same time,underlying principles of the Financial Accounting Standards Board (FASB) has published its equivalent revenue standard, ASU 2014-09.just clarify and offer some additional transition relief. The newmain topics addressed by this amendment comprise: Indentifying performance obligations, Principal versus agent cosniderations and licensing in addition to transition relief.

This standard provideswas applicable from January 1, 2018, with early application permitted.Management performed a single, principles baseddetailed review of the new five-step model of revenue recognition, and concluded that this standard did not have a material impact on the Bank's financial statements. See Note 2 for additional information regarding the adoption of this standard.

Amendments to IFRS 2 Classification and measurement of share-based payment transactions – These amendments were published on June 20, 2016, to address issues with:

• The accounting of share- based payment transactions paid in cash that include a performance condition

• The classification of share-based transactions

• Accounting for modifications of share-based payment transactions from cash-settled to equity-settled.

This standard was applicable from January 1, 2018, with early application permitted.Management evaluation concluded that this amendment did not have a material impact on the Bank’s financial statements.

Amendments to IFRS 4:Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts - The amendments are intended to address concerns about the different effective dates of IFRS 9 and the forthcoming new insurance contracts standard (expected as IFRS 17 within the next six months). The amendments provide two options for entities that issue insurance contracts within the scope of IFRS 4:

-an option that permits entities to reclassify, from profit or loss to other comprehensive income, some of the income or expenses arising from designated financial assets (the “overlay approach”);

-an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4 (the “deferral approach”).

An entity would apply the overlay approach retrospectively to qualifying financial assets when it first applies IFRS 9 while an entity would apply the deferral approach for annual periods beginning on or after January 1, 2018.Management evaluation conclude that this amendment did not have a material impact on the Bank's financial statements.


Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

IFRIC 22 Foreign Currency Transactions and Advance Consideration – This interpretation issued on December 8, 2016, clarifies the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency. The Interpretation covers foreign currency transactions when an entity recognises a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration before the entity recognises the related asset, expense or income. It does not apply when an entity measures the related asset, expense or income on initial recognition at fair value or at the fair value of the consideration received or payed at a date other than the date of initial recognition of the non-monetary asset or non-monetary liability. Also, the Interpretation need not be applied to allincome taxes, insurance contracts with customers, i) identify the contract with the customer, ii) identify the performance obligations in the contract, iii) determineor reinsurance contracts.

The date of the transaction, price, iv) allocatefor the purpose of determining the exchange rate, is the date of initial recognition of the non-monetary prepayment asset or deferred income liability. If there are multiple payments or receipts in advance, a date of transaction price to the performance obligations in the contracts, v) recognize revenue when (or as) the entity satisfies a performance obligation.is established for each payment or receipt.

 

IFRS 15 must be applied in an entity’s firstIFRIC 22 was effective for annual IFRS financial statements forreporting periods beginning on or after 1 January 2018. ApplicationEarlier application was permitted. Management evaluation concluded that this amendment did not have a material impact on the Bank’s financial statements.

Annual Improvement 2014-2016

IFRS 1 First time adoption of IFRS - Deletion of short-term exemptions for first-time adopters.

IAS 28 Investments in Associates and Joint Ventures - Measuring an associate or joint venture at fair value.

The amendments to IFRS 1 and IAS 28 were effective for annual periods beginning on or after 1 January 2018.Management concluded that this amendment did not have a material impact on the Bank’s financial statements.

2.  New and revised IFRS issued but not effective

As of the Standard is mandatory and early adoption is permitted. An entity that chooses to apply IFRS 15 earlier than 1 January 2018 must disclose this fact.The Bank’s management is assessing the potential impactclosing date of the adoption of this standard on the consolidatedthese financial statements, new International Financial Reporting Standards had been published as well as interpretations of them, which were not mandatory as of December 31, 2018. Although in some cases the Bank.application is permitted by the IASB, the Bank has not made its application on that date.

 

Sale or Contributions of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) -Issued on September 11, 2014, the IASB has published 'Sale‘Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)'’. The amendments address a conflict between the requirements of IAS 28

'Investments ‘Investments in Associates and Joint Ventures'Ventures’ and IFRS 10 'Consolidated‘Consolidated Financial Statements'Statements’ and clarifyclarifies the treatment of the sale or contribution of assets from an investor to its associate or joint venture, as follows:

 

·●requirerequires full recognition in the investor'sinvestor’s financial statements of gains and losses arising on the sale or contribution of assets that constitute a business (as defined in IFRS 3 Business Combinations);

·●requirerequires the partial recognition of gains and losses where the assets do not constitute a business, i.e. a gain or loss is recognizedrecognised only to the extent of the unrelated investors’ interests in that associate or joint venture.

 

On December 17, 2015 the IASB has published final amendments to “Sale or Contribution of Assets between an Investor and its Associate or Joint Venture”. The amendments defer the effective date of the September 2014 amendments to these standards indefinitely until the research project on the equity method has been concluded.The Bank’s management has considered that these amendments will not have a material impact on the consolidated financial statements of the Bank.

 

IFRS 16 LeasesIAS 28 Investments in Associates and Joint Ventures – issued on January 13, 2016, the IASB has published its new standard for leases, which replaces IAS 17 Leases, IFRIC 4 Determining whether- Measuring an arrangement contains a lease, SIC15 Operating leases and SIC27 Evaluating the substance of transactions involving the legal form of a lease. IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of lowassociate or joint venture at fair value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payment. Lessor accounting however remains largely unchanged and the distinction between operating and finance leases is retained.

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NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

 

IFRS 16 is effective for periods beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15 “Revenue from Contracts with Customer” has also been applied.The Bank has initially determined the operating lease contract inventory (lessee) and beginning its review to determine the potential impact it will have on the consolidated financial statement of the Bank.

Recognition of Deferred Tax Assets for Unrealized Losses (Amendments to IAS 12)- On January 19, 2016, the IASB published final amendments to IFRS 1 and IAS 12 “Income Taxes”. The amendments clarify the following aspects:

·Unrealized losses on debt instruments measured at fair value and measured at cost for tax purposes give rise to a deductible temporary difference regardless of whether the debt instrument’s holder expects to recover the carrying amount of the debt instrument by sale or by use.

·The carrying amount of an asset does not limit the estimation of probable future taxable profits.

·Estimated for future taxable profits exclude tax deductions resulting from the reversal of deductible temporary differences.

·An entity asses a deferred tax asset in combination with other deferred tax assets. Where tax law restricts the utilization of tax losses, an entity would assess a deferred tax asset in combination with other deferred tax assets of the same type.

The amendments are28 were effective for annual periods beginning on or after 1 January 1, 2017. Earlier2018.Management concluded that this amendment did not have a material impact on the Bank’s financial statements.

2.  New and revised IFRS issued but not effective

As of the closing date of these financial statements, new International Financial Reporting Standards had been published as well as interpretations of them, which were not mandatory as of December 31, 2018. Although in some cases the application is permitted.permitted by the IASB, the Bank has not made its application on that date.

Sale or Contributions of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) -Issued on September 11, 2014, the IASB has published ‘Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)’. The amendments address a conflict between the requirements of IAS 28 ‘Investments in Associates and Joint Ventures’ and IFRS 10 ‘Consolidated Financial Statements’ and clarifies the treatment of the sale or contribution of assets from an investor to its associate or joint venture, as follows:

●requires full recognition in the investor’s financial statements of gains and losses arising on the sale or contribution of assets that constitute a business (as defined in IFRS 3 Business Combinations);

●requires the partial recognition of gains and losses where the assets do not constitute a business, i.e. a gain or loss is recognised only to the extent of the unrelated investors’ interests in that associate or joint venture.

On December 17, 2015 the IASB has published final amendments to “Sale or Contribution of Assets between an Investor and its Associate or Joint Venture”. The amendments defer the effective date of the September 2014 amendments to these standards indefinitely until the research project on the equity method has been concluded.The Bank’s management has considered that these amendments will not have material impact on the consolidated financial statements of the Bank.

Disclosure Initiative (Amendments to IAS 7)-The amendments are part of the IASB’s Disclosure initiative project and introduce additional disclosure requirements intended to address investors’ concerns that financial statements do not currently enable them to understand the entity’s cash flows; particularly in respect of the management of financing activities. The amendments require disclosure of information enabling users of financial statements to evaluate changes in liabilities arising from financial activities. Although there is no specific format required to comply with the new requirements, the amendments include illustrative examples to show how an entity can meet the objective of these amendments.

The amendments are effective for annual periods beginning on or after January 1, 2017. Earlier application is permitted.The Bank’s management has considered that these amendments will not havea material impact on the consolidated financial statements of the Bank.

 

Clarifications to IFRS 15 Revenue from Contracts with Customers-The amendments were published on April 12, 2016 and do not change the underlying principles of the Standard. They just clarify and provide alternatives for the transition. The amendment clarifies identification of performance obligations, determination of principal and agent licenses.

These modifications are applicable from January 1, 2018, with early application permitted.Management is assessing the potential impact of applying this standard.

Amendments to IFRS 2 Classification and measurement of share-based payment transactions– These amendments were published June 20, 2016, to address issues with:

·The accounting of share- based payment transactions paid in cash that include a performance condition

·The classification of share-based transactions

·Accounting for modifications of share-based payment transactions from cash-settled to equity-settled.

This standard is applicable from January 1, 2018, with early application permitted.Management is assessing the potential impact of applying this standard.

Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts- The amendments are intended to address concerns about the different effective dates of IFRS 9 and the forthcoming new insurance contracts standard (expected as IFRS 17 within the next six months). The amendments provide two options for entities that issue insurance contracts within the scope of IFRS 4:

-an option that permits entities to reclassify, from profit or loss to other comprehensive income, some of the income or expenses arising from designated financial assets (the "overlay approach");

-an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4 (the "deferral approach"). An entity would apply the overlay approach retrospectively to qualifying financial assets when it first applies IFRS 9 while an entity would apply the deferral approach for annual periods beginning on or after January 1, 2018.Management has assessed that the implementation of these modifications will not have a material impact on the Unaudited Consolidated Interim Financial Statements of the Bank.

F-38 

Table of Contents

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

IFRIC 22 Foreign Currency Transactions and Advance Consideration –This interpretations issued on December 8, 2016, clarifies the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency.

The Interpretation covers foreign currency transactions when an entity recognises a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration before the entity recognises the related asset, expense or income. It does not apply when an entity measures the related asset, expense or income on initial recognition at fair value or at the fair value of the consideration received or paid at a date other than the date of initial recognition of the non-monetary asset or non-monetary liability. Also, the Interpretation need not be applied to income taxes, insurance contracts or reinsurance contracts.

Consensus

The date of the transaction, for the purpose of determining the exchange rate, is the date of initial recognition of the non-monetary prepayment asset or deferred income liability.

If there are multiple payments or receipts in advance, a date of transaction is established for each payment or receipt.

IFRIC 22 is effective for annual reporting periods beginning on or after 1 January 2018. Earlier application is permitted.The Bank’s management has considered that these amendments will not have material impact on the consolidated financial statements of the Bank.

Annual Improvement 2014-2016

IFRS 1 First time adoption of IFRS -Deletion of short-term exemptions for first-time adopters.

IFRS 12 Disclosure of Interests in Other Entities -Clarification of the scope of the Standard.

IAS 28 Investments in Associates and Joint Ventures - Measuring an associate or joint venture at fair value.

 

The amendments to IFRS 1 and IAS 28 arewere effective for annual periods beginning on or after 1 January 2018,2018.Management concluded that this amendment did not have a material impact on the amendmentBank’s financial statements.

2.  New and revised IFRS issued but not effective

As of the closing date of these financial statements, new International Financial Reporting Standards had been published as well as interpretations of them, which were not mandatory as of December 31, 2018. Although in some cases the application is permitted by the IASB, the Bank has not made its application on that date.

Sale or Contributions of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) -Issued on September 11, 2014, the IASB has published ‘Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)’. The amendments address a conflict between the requirements of IAS 28 ‘Investments in Associates and Joint Ventures’ and IFRS 10 ‘Consolidated Financial Statements’ and clarifies the treatment of the sale or contribution of assets from an investor to its associate or joint venture, as follows:

●requires full recognition in the investor’s financial statements of gains and losses arising on the sale or contribution of assets that constitute a business (as defined in IFRS 3 Business Combinations);

●requires the partial recognition of gains and losses where the assets do not constitute a business, i.e. a gain or loss is recognised only to the extent of the unrelated investors’ interests in that associate or joint venture.

On December 17, 2015 the IASB has published final amendments to “Sale or Contribution of Assets between an Investor and its Associate or Joint Venture”. The amendments defer the effective date of the September 2014 amendments to these standards indefinitely until the research project on the equity method has been concluded.The Bank’s management has considered that these amendments will not have a material impact on the consolidated financial statements of the Bank.

IFRS 16 Leases – issued on January 13, 2016, the IASB has published its new standard for leases, which replaces IAS 17 Leases, IFRIC 4 Determining whether an arrangement contains a lease, SIC15 Operating leases and SIC27 Evaluating the substance of transactions involving the legal form of a lease. IFRS 16 introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payment. Lessor accounting however remains largely unchanged and the distinction between operating and finance leases is retained.


Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 01

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

The bank has established a team that has reviewed the Bank’s lease agreements, under the new lease accounting guidelines in IFRS 16. The standard mainly affects the accounting of the Bank’s operating leases. To date, the Bank has non-cancelable operating lease commitments and short-term leases, which will be recognised directly as lease expenses in results.

For lease commitments that are in scope of the standard, the Bank will recognise, as of January 1, 2019, assets for the right to use of approximately MM $ 154,284 and lease liabilities for the same amount, since it has been elected to apply the simplified transition approach in which no comparative information is restated, instead, the cumulative effect of the application of the standard (if any) is recognised as an adjustment to the initial balance of retained earnings to the date of the initial application.

The Bank will apply the standard from its mandatory adoption date on January 1, 2019.The Bank has elected to apply the simplified transition approach and will not re-state the comparative amounts for the year prior to adoption. The right-of-use assets for property leases will be measured in the transition as if the new rules had always been applied. All other assets for right of use will be measured at the amount of the lease liability in the adoption (adjusted for any lease expense paid in advance or accrued).

IFRIC 23 Uncertainty over Income Tax Treatments –This standard issued on June 7, 2017, clarifies how the recognition and measurement requirements of IAS 12 apply when there is uncertainty about tax treatments. The standard applies to annual periods beginning on or after January 1, January 2017.2019, with early application permitted.The Bank’s management has considered that these amendments will not have material impact on the consolidated financial statements of the Bank.

Amendments to IAS 28 long-term interest in Associates and Joint Ventures -This standard was issued in October 12, 2017 to clarify that an entity applies IFRS 9 including its impairment requirements, to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied. The amendments are effective for periods beginning on or after January 1, 2019, early application is permitted.

The Bank’s management has considered that these amendments will not have a material impact on the consolidated financial statements of the Bank.

Annual Improvements to IFRS Standards 2015–2017 Cycle

This annual improvements issued in December 12, 2017, containing the following amendments:

IFRS 3 Business Combination and IFRS 11 Joint Arrangements – The amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, it remeasures previously held interests in that business. The amendments to IFRS 11 clarify an entity obtains joint control of a business that is a joint operation, the entity does not remeasure previously held interest in that business.

IAS 12 Income taxes – The amendments clarify that all income tax consequences of dividends should be recognised in profit or loss, regardless of how the tax arises.

IAS 23 Borrowing cost – The amendments clarify that if any specific borrowing remain outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalization rate on general borrowings.

The amendments are effective for periods beginning on or after January 1, 2019, early application is permitted.The Bank’s management has considered that these amendments will not have a material impact on the consolidated financial statements of the Bank.


Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 02

ACCOUNTING CHANGES

A.IFRS 15 ADOPTION

On January 1, 2018, IFRS 15 revenues from contracts with customers has become effective. In accordance with the Bank’s activities, income and expenses arising from fees and commission are under the scope of this new standard. Consequently a review over fees and comissions has been performed, to ensure the five step approach is fully met.

The Bank has elected to adopt IFRS 15 using a modified retrospective approach where the cumulative effect of initially applying it is recognised as an adjustment to the opening balance of retained earnings and comparatives are not restated.

The Bank concluded that there is no impact as of January 1, 2018, however new disclosure requirements must be adopted. See Note 1 and Note 28. 


Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 02

ACCOUNTING CHANGES, continued

B.IFRS 9 ADOPTION – Transition disclosure

The following disclosure provides the impact of adopting IFRS 9 on the statements of financial position and retained earnings including the effect of replacing IAS 39’s incurred credit loss provision with IFRS 9’s ECLs. 

  IAS 39 carrying amount  IFRS 9 carrying amount
 RefCategoryAmountReclassificationRemeasurementAmountCategory
 MCh$MCh$MCh$MCh$MCh$MCh$
AMORTISED COST       
Cash and deposit in banks       
Opening balance under IAS 39 and closing under  IFRS 9 AC1,452,922--1,452,922AC
        
Interbank loans, net       
Opening balance under IAS 39 AC162,213----
Remeasurement: ECL AllowanceA--(162,213)---
Closing balance under IFRS9 ------
        
Loans and accounts receivable from customers, net       
Opening balance under IAS 39 AC26,772,544----
Addition: from interbank loansA--162,213---
Subtraction to FVOCI (net of allowance)B--(107,846)   
Remeasurement: ECL Allowance ---(97,322)- 
Closing balance under IFRS 9 ----26,729,589AC
Total financial assets measured at amortised cost  28,387,679(107,846)(97,322)28,182,511 
        
FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (FVOCI)    
Available for sale investment (debt securities)       
Opening balance under IAS 39 FVOCI2,574,546--- 
Remeasurement: ECL Allowance  -- - 
Closing balance under IFRS 9  ---2,574,546FVOCI
        
Loans and accounts receivable from customers , net    
Opening balance under IAS 39 AC---- 
Addition: from amortised cost (net of allowance)B -107,846-- 
Remeasurement: from cost to FVB --(236)- 
Remeasurement:  ECL AllowanceB --291- 
Closing balance under IFRS 9  -107,84655107,901FVOCI
        
Investment in associate and other companies – Bladex (equity instuments)    
Opening balance under IAS 39 Cost136--- 
Remeasurement: from cost to FVC --306- 
Closing balance under IFRS 9  --306442FVOCI
        
Investment in associate and other companies- Stock exchange (equity instruments)   
Opening balance under IAS 39 FV287--- 
Remeasurement: from cost to FV  ---- 
Closing balance under IFRS 9C ---287FVOCI
Total financial assets measured at FVOCI  2,574,969107,8463612,683,176 

F-39 F-43

Table of Contents


Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 02

ACCOUNTING CHANGES, continued

 RefIAS 39 carrying amount  IFRS 9 carrying amount
 CategoryAmountReclassificationRemeasurementAmountCategory
 MCh$MCh$MCh$MCh$MCh$MCh$
FAIR VALUE THROUGH PROFIR OR LOSS (FVPL)     
Trading investment       
Opening balance under IAS 39 and closing under IFRS 9 FVPL485,736  485,736FVPL
        
Derivatives contracts (hedging + trading       
Opening balance under IAS 39 and closing under IFRS 9 FVPL2,238,647  2,238,647FVPL
Total financial assets measured at FVTPL  2,724,383  2,274,383 

The following explains how applying the new requirements of IFRS 9 led to changes in classification of certain financial assets held by the Bank as shown in the table above:

(A)Interbank loans

According to the new balance presentation, the Bank has grouped interbank loans with the loans and account receivable since both are measured at amortised cost, and evaluated together for impairment purposes.

(B)Loans and account receivable measured at fair value through other comprehensive income

The Bank enters into arrangements with its major customers for project finance and syndicated loans and, sometimes the amount requested exceeds the Bank’s limit for a single client exposure under the established credit risk policy, accordingly, the transaction is approved under the condition to sell a portion of the facility in the near term, which is classified under this category. Also, the Bank has decided to include loans that the Bank are expecting to sell if the market conditions are favourable to the Bank in this category. These loans are measured at fair value through other comprehensive income, and subject to impairment requirements.

(C)Investment in equity instrument

The Bank has elected to irrevocably designate non-trading equity securities required to operates in Chile and outside at FVOCI as permited under IFRS 9. Bladex and stock exchange securities were previously measured at cost as permited by IAS 39. The changes in fair value will no longer be reclassified to profit or loss when they are disposed of.


Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 02

ACCOUNTING CHANGES, continued

The following table reconcilies the prior period’s closing impairment allowance measured in accordance with the IAS 39 incurred loss model to the new impairment model:

      Loans loss allowance under IAS 39ReclassificationRemeasurement

Loans loss allowance

under IFRS 9

 MCh$MCh$MCh$MCh$
Loans and receivable (IAS 39)/ Financial assets at amortised cost (IFRS 9)  
Interbank loans472(472)--
Loans and account receivable from customers790,6858497,322888,091
Total loans and account receivable at amortised cost791,157(388)97,322888,091
     
Available for sale investment (IAS39)/Financial assets at FVOCI (IFRS 9)  
Loans and account receivable from customer – at FVOCI-388(291)97
Total financial assets at FVOCI-388(291)97
     
Other credit- related commitments    
Contingent liabilities8,404-(3,767)4,637
Loan commitments--19,12419,124
Total contingents8,404-15,35723,761
     
Total provision for loan losses799,561-112,388911,949


Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 02

ACCOUNTING CHANGES, continued

The composition of the loan portfolio as of January 1, 2018 is as follows:

As of January 1, 2018

 

Assets before allowances ECL allowance 

Net 

Assets

 

Stage 1Stage 2Stage 3TotalStage 1Stage 2Stage 3Total 
  
MCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$ MCh$
            
Commercial loans           
Interbank loans 162,685--  162,685       13--    13   162,672
Commercial loans     8,743,179 595,436 543,807   9,882,422         56,546   36,541 246,870   339,957    9,542,465
Foreign trade loans     1,464,059   56,110   54,344   1,574,513     4,883  849   33,480 39,212    1,535,301
Checking accounts debtors173,738     8,005   13,953  195,696      2,302  411     9,385 12,098    183,598
Factoring transactions 441,014     4,035     4,841   449,890      837   91     3,366 4,294   445,596
Student loans  70,984     7,402     9,904  88,290     3,644     2,329     6,092 12,065    76,225
Leasing transactions   1,235,103 161,882   60,019   1,457,004      8,946     9,553   27,835 46,334    1,410,670
Other loans and account receivable      110,307     5,663   36,623      152,593      2,640     1,549   24,551 28,740       123,853
Subtotal 12,401,069 838,533 723,49113,963,093         79,811   51,323 351,579 482,713  13,317,708
            
Mortgage loans           
Loans with mortgage finance bonds  21,529     1,230     1,301   24,060      25          51        172             248   23,812
Endorsable mortgage mutual loans  107,900 2,973     4,205 115,078    100        143  628             871       114,207
Other mortgage mutual loans     8,061,800 465,146 430,811   8,957,757         14,477   20,033   72,390      106,900    8,850,857
Subtotal   8,191,229 469,349 436,317   9,096,895         14,602   20,227   73,190 108,019    8,988,876
            
Consumer loans           
Installment consumer loans   2,378,614 234,044 298,084   2,910,742   51,172   46,866 157,811  255,849    2,654,893
Credit card balances   1,324,742   20,916   19,322   1,364,980   20,443     7,633   11,982     40,058    1,324,922
Leasing transactions   4,627   47  41    4,715    1,013  23  74  1,110  3,605
Other consumer loans   270,410     2,573     4,272      277,255      84   35        223  342       276,913
Subtotal   3,978,393 257,580 321,719   4,557,692         72,712   54,557 170,090   297,359    4,260,333
            
Total 24,570,691 1,565,4621,481,52727,617,680       167,125 126,107 594,859 888,091 26,566,917


Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 03

SIGNIFICANT EVENTS

 

As of December 31, 2016,2018, the following significant events have occurred and affected the Bank`s operations and Consolidated Financial Statements.

 

a) The Board

 

In

During the Ordinary Board Meeting of Banco Santander Chile held on March 15, 2016, Mr. Víctor Arbulú Crousillat resigned as director. In view of his resignation and the vacancy left by Mr. Lisandro Serrano, at the Ordinary Board Meeting held on October 20, 2015, the Board appointed Mr. Andreu Plaza López and Mrs. Ana Dorrego de Carlos. Finally, it is reported that Mr. Mauricio Larraín Garcés has been designated as a member of the Directors and Audit Committee in replacement of Mr. Víctor Arbulú Crousillat.

In the Ordinary Board Meeting dated April 26, 2016, the appointment of directors, Mr. Andreu Plaza López and Mrs. Ana Dorrego de Carlos, have been ratified, and they have been appointed titular directors at the Ordinary Sessionordinary session of the Board of Directors of Banco Santander-Chile, held on October 20, 2015.February 27, 2018, the following matters were agreed:

 

- On the occasion of the resignation of Mr. Vittorio Corbo Lioi from his position as Director, it was effective during the said session, who was also exercised as Chairman of the Board of Directors, Mr. Claudio Melandri Hinojosa was appointed in his place as Director and Chairman of the Board of Banco Santander-Chile, who will temporarily hold the position of General Manager until February 28, 2018 inclusive, in accordance with the provisions of Article 49 No. 8 of the General Banking Law.

- Mr. Miguel Mata Huerta, has been appointed as Bank's General Manager, as of March 1, 2018, who served as Deputy General Manager, this position was eliminated.

During the ordinary session of the Board of Directors of Banco Santander-Chile, held on March 27, 2018, the following matters were agreed:

- On the occasion of the resignation of the Regular Directors, Mr. Roberto Méndez Torres and Mr. Roberto Zahler Mayanz, made on this date, the Board of Directors has appointed Mrs. Félix de Vicente Mingo and Alfonso Gómez Morales as their principal independent Directors.

- Mr. Orlando Poblete Iturrate has been appointed First Vice President and Oscar Von Chrismar Carvajal as Second Vice President.

- It was agreed to call an Ordinary Meeting of Shareholders for April 24, 2018.

At the Ordinary Shareholders' Meeting of Banco Santander-Chile, held on April 24, 2018, Claudio Melandri Hinojosa was appointed Chairman and the independent directors Alfonso Gómez Morales and José Félix de Vicente Mingo, were appointed as principal directors, previously designated by the Board.

During the ordinary session of the Board of Directors of Banco Santander-Chile, held on July 12, 2018, the following agreements were adopted:

- On the occasion of the resignation of the substitute director Mr. Raimundo Monge Zegers, the board of directors has appointed Mr. Oscar Von Chrismar Carvajal, who was a principal Director.

- Mr. Rodrigo Vergara Montes has been appointed independent director.

- Mr. Rodrigo Vergara Montes have been appointed First Vice President and Second Vice President, Mr. Orlando Poblete Iturrate.

b) Use of Profits and Distribution of Dividends

 

TheAt the Ordinary Shareholders’ Meeting of Banco Santander ChileSantander-Chile held on April 26, 2016, was chaired by Mr. Vittorio Corbo Lioi (President), Mr. Oscar Vön Chrismar Carvajal (First Vice-President), Mr. Roberto Méndez Torres (Second Vice-Chairman), Mr. Marco Colodro Hadjes, Mr. Lucia Cruz, Mr. Ana Dorrego de Carlos, Mauricio Larraín Garcés, Juan Pedro Santa Maria, Orlando Poblete Iturrate, Andreu Plaza López and Blanca Bustamante Bravo. In addition,24, 2018, together with approving the General Manager Mr. Claudio Melandri Hinojosa and the Manager of Strategic Planning Mr. Raimundo Monge. attended the meeting.

AccordingConsolidated Financial Statements corresponding to the information presented in aforementioned meeting, 2015year 2017, it was agreed to distribute 75% of the net income (designatedprofits for the year (which are denominated in the financial statements as “Incomestatements). consolidated “Profit attributable to equity holdersshareholders of the Bank”), which amounted to Ch$448,878 million, according$ 564,815 million. These profits correspond to local regulations. The Board approved the distributiona dividend of 75% of such net income, yielding a Ch$1.786 dividend per share, payable starting on April 29, 2016. Also,$ 2.24791611 for each share. Likewise, it wasis approved that the remaining 25% of the profits will be retained inused to increase the Bank’s reserves.

 

c) Appointment of External Auditors

 

In the Ordinary General Shareholders' MeetingBoard indicated above, it was agreed to appoint the firm PricewaterhouseCoopers Consultores, Auditores y Compañía Limitada,SpA,  as external auditors of the Bank and its affiliatessubsidiaries for the 20162018 fiscal year.


d) Capital increase of Transbank S.A.

In the Extraordinary Shareholders' Meeting of Transbank S.A. held on April 21, 2016, it was agreed to increase the capital of the company by capitalizing the accumulated profits, through the issuance of shares redeemed for payment, and placement of payment shares for approximately $4,000 million. Banco Santander Chile participated proportionallyand Subsidiaries 

Notes to its participation (25%), reason why it subscribed and paid shares for approximately $1 million.the Consolidated Financial Statements

F-40 

Table of Contents

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 0203

SIGNIFICANT EVENTS, continued

 

e) Issuance of bonds -d) Bods issued at December 31, 20162018

 

Ind.1 Senior bonds

During the year ended December 31, 20162018 the Bank has issued senior bonds inint the amount of UF 96,000,000, CLP 100,000,000,000,AUD 20,000,000, EUR 66,000,000, CHF 115,000,000, JPY 7,000,000,000 and USD 215,000,000, JPY 3,000,000,000, EUR 104,000,000 and CHF 125,000,000.70,000,000 Debt issuance information is included in Note 18.19.

 

e.1) Senior bonds

SeriesCurrencyAmountTerm
(annual)		Issuance rate (annual)

Issuance

date

Maturity

date

T1UF7,000,0004.02.20%02-01-201602-01-2020
T2UF5,000,0004.52.25%02-01-201608-01-2020
T3UF5,000,0005.02.30%02-01-201612-01-2020
T4UF8,000,0005.52.35%02-01-201608-01-2021
T5UF5,000,0006.02.40%02-01-201602-01-2022
T6UF5,000,0006.52.45%02-01-201608-01-2022
T7UF5,000,0007.02.50%02-01-201602-01-2023
T8UF8,000,0007.52.55%02-01-201608-01-2023
T9UF5,000,0008.02.60%02-01-201602-01-2024
T10UF5,000,0008.52.60%02-01-201608-01-2024
T11UF5,000,0009.02.65%02-01-201602-01-2025
T12UF5,000,0009.52.70%02-01-201608-01-2025
T13UF5,000,00010.02.75%02-01-201602-01-2026
T14UF18,000,00011.02.80%02-01-201602-01-2027
T15UF5,000,00012.53.00%02-01-201608-01-2028
TotalUF96,000,000    
T16CLP100,000,000,0005.55,20%02-01-201608-01-2021
TotalCLP100,000,000,000    
DNUSD10,000,0005.0Libor-USD 3M+1.05%06-02-201606-09,2021
DNUSD10,000,0005.0Libor-USD 3M+1.22%06-08-201606-17-2021
DNUSD10,000,0005.0Libor-USD 3M+1.20%08-01-201608-16-2021
DNUSD185,000,0005.0Libor-USD 3M+1.20%11-10-201611-28-2021
TotalUSD215,000,000    
JPYJPY3,000,000,0005.00.115%06-22-201606-29-2021
TotalJPY3,000,000,000    
EUREUR20,000,0008.00.80%08-04-201608-19-2024
EUREUR54,000,00012.01.307%08-05-201608-17-2028
EUREUR30,000,0003.00.25%12-09-201612-20-2019
TotalEUR104,000,000    
CHFCHF125,000,0008.50.35%11-14-201605-30-2025
TotalCHF125,000,000    
SeriesCurrency            AmountTerm (annual)Issuance rate (annual)

Issuance

date

Maturity

date

AUDAUD20,000,00053.5605-11-201813-11-2023
TotalAUD20,000,000    
CHFCHF115,000,00050.4404-09-201821-12-2023
TotalCHF115,000,000    
EUREUR26,000,00071.0004-05-201828-05-2025
EUREUR40,000,000121.7808-06-201815-06-2030
TotalEUR66,000,000    
JPYJPY4,000,000,00010.50.6505-07-201813-01-2029
JPYJPY3,000,000,00050.5623-10-201823-10-2023
TotalJPY7,000,000,000    
USDUSD50,000,000103.6902-10-201810-10-2028
USDUSD20,000,00024.1705-11-201816-11-2020
TotalUSD70,000,000    

 

e.2)d.2 Subordinated bonds

 

As at December 31, 20162018 the Bank had not issued subordinated bonds in this financial year.

 

e.3)d.3 Mortgage bonds

 

As at December 31, 20162018 the Bank had not issued mortgagesmortage bonds in this financial year.

 

F-41 

Table of Contents

NOTE 02

SIGNIFICANT EVENTS, continued

e.4)d.4       Repurchase of bonds

 

The Bank has conducted the following repurchase of bonds as of December 31, 2016:2018:

 

DateSeriesAmount
01-13-201604-01-2018Senior bondCLP         12,890,000,000
04-01-2018Senior bondCLP           4,600,000,000
22-01-2018Senior bondUF                         24,000
05-04-2018Senior bondUF                       484,000
06-04-2018Senior bondUF                       184,000
23-04-2018Senior bondUF                       216,000
24-04-2018Senior bondUF                           4,000
25-04-2018Senior bondUF                       262,000
10-05-2018Senior bondUF                       800,000
07-06-2018 Senior bondUSD                 600,0003,090,000
01-27-201611-12-2018 Senior bondUSD             960,000
03-08-2016Senior bondUSD 481,853,000
03-08-2016Senior bondUSD 140,104,000
05-10-2016Senior bondUSD   10,000,000
11-29-2016Senior bondUSD     6,895,000250,000,000

 

As of December 31, 2015, the following significant events have occurred and affected the Bank`s operations and Consolidated Financial Statements.

F-48

 

a) The Board

 

In the Ordinary Board Meeting of Banco Santander Chile held on April 28, 2015, Orlando Poblete Iturrate was confirmed as a Director, having been previously appointed Alternate Director inand Subsidiaries 

Notes to the Ordinary Board Meeting on April 22, 2014 and replacing Carlos Olivos Marchant as Director since September 23, 2014. Also, Blanca Bustamante Bravo was appointed as Alternate Director.Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

In the Ordinary Board Meeting dated November 17, 2015 the Board appointed the director Orlando Poblete Iturrate as a member of the Audit Committee of Directors, replacing Lisandro Serrano Spoerer who had resigned in the Ordinary Board Meeting held on October 20, 2015.NOTE 04

b) Use of Profits and Distribution of Dividends

The Shareholders’ Meeting of Banco Santander Chile held on April 28, 2015, was chaired by Mr. Vittorio Corbo Lioi (Chairman), and attended by Roberto Méndez Torres (Second Vice President), the Directors: Marco Colodro Hadjes, Lucía Santa Cruz Sutil, Juan Pedro Santa María Pérez, Lisandro Serrano Spoerer, Roberto Zahler Mayanz and Orlando Poblete Iturrate. Also, the CEO Claudio Melandri Hinojosa and CAO Felipe Contreras Fajardo attended the meeting.

According to the information presented in aforementioned meeting, 2014 net income (designated in the financial statements as “Income attributable to equity holders of the Bank”) amounted to Ch$550,331 million. The Board approved the distribution of 60% of such net income, yielding a Ch$1.752 dividend per share, payable starting on April 29, 2015. Also, it was approved that the remaining 40% of the profits will be retained in the Bank’s reserves.

F-42 

Table of Contents

NOTE 02

SIGNIFICANT EVENTS, continued

c) Issuance of bonds - at December 31, 2015

In the year ended December 31, 2015 the Bank has issued senior bonds in the amount of CLP 500,000,000,000 UF 14,000,000 CHF 150,000,000, and JPY 1,200,000,000. Debt issuance information is included in Note 18.

c.1) Senior bonds

SeriesCurrencyAmountTermIssuance rate

Issuance

date

Maturity
date
P1CLP50,000,000,00010 years5.80% per annum simple01-01-201501-01-2025
P2CLP100,000,000,0005 years5.20% per annum simple01-01-201501-01-2020
P3CLP50,000,000,0007 years5.50% per annum simple01-01-201501-01-2022
P4CLP150,000,000,0005 years4.80% per annum simple03-01-201503-01-2020
P5CLP150,000,000,0006 years5.30% per annum simple03-01-201503-01-2022
TotalCLP500,000,000,000
P6UF3,000,0005 years2.25% per annum simple03-01-201503-01-2020
P7UF3,000,0007.5 years2.40% per annum simple03-01-201509-01-2022
P8UF3,000,0005.5 years2.25% per annum simple03-01-201509-01-2020
P9UF5,000,00010.5 years2.60% per annum simple03-01-201509-01-2025
TotalUF14,000,000
CHF fixed bondCHF150,000,0007 years0.38% quarterly04-19-201510-19-2022
TotalCHF150,000,000
JPY current bondJPY1,200,000,0005 years0.42% biannually12-17-201512-17-2020
TotalJPY1,200,000,000

c.2) Subordinated bonds

As at December 31, 2015 the Bank had not issued subordinated bonds in this financial year.

c.3)       Repurchase of bonds

The Bank has conducted the following repurchase of bonds as of December 31, 2015:

DateSeriesAmount
12-01-2015Senior bondUSD 19,000,000

c.4)       Mortgage bonds at December 31, 2015

As of December 31, 2015 the Bank has issued the following bonds:

SeriesCurrencyAmountTermIssuance rate

Issuance

date

Maturity
date
AC      CLP 100,000,000,00010 years5,50% per annum simple01-01-201501-01-2025
TotalCLP 100,000,000,000

F-43 

Table of Contents

NOTE 03

REPORTING SEGMENTS

 

The Bank manages and measures the performance of its operations by business segments. The information disclosed in this note is not necessarily comparable to that of other financial institutions, since it is based on management’s internal information system by segment.

 

Inter-segment transactions are conducted under normal arm’s length commercial terms and conditions. Each segment’s assets, liabilities, and income include items directly attributable to the segment to which they can be allocated on a reasonable basis.

Due to changes aimed at allocating customers to those segments best capable of servicing them, and streamlining processes, the Bank has modified its internal structure during 2015. This change in composition of the segments resulted in the following:

-Commissions paid in “Net fee and commission income “were reassigned among segments to more appropriately reflect the distributions in accordance with the management of each segment;

-The effects of changes in foreign exchange rates of provisions were reallocated to the line item “Other”, to more appropriately reflect the effects directly attributable to the respective segments;

-The improvement of the allocation of interest costs at time of placement of the loan.

  

Under IFRS 8, the Bank has aggregated operating segments with similar economic characteristics according to the aggregation criteria specified in the standard. A reporting segment consists of clients that are offered differentiated but, considering how their performance is measured, are homogenous services based on IFRS 8 aggregation criteria, thus they form part of the same reporting segment. Overall, this aggregation has no significant impact on the understanding of the nature and effects of the Bank’s business activities and the economic environment.

 

The Bank has the reportable segments noted below:

 

Retail Banking

 

Consists of individuals and small to middle-sized entities (SMEs) with annual income less than Ch$2,0001,200 million. This segment gives customers a variety of services, including consumer loans, credit cards, auto loans, commercial loans, foreign exchange, mortgage loans, debit cards, checking accounts, savings products, mutual funds, stockbrokerage, and insurance brokerage. Additionally the SME clients are offered government-guaranteed loans, leasing and factoring.

 

Middle-market

 

This segment is made up of companies and large corporations with annual sales exceeding Ch$2,0001,200 million. It serves institutions such as universities, government entities, local and regional governments and companies engaged in the real estate industry who carry out projects to sell properties to third parties and annual sales exceeding Ch$800 million with no upper limit. The companies within this segment have access to many products including commercial loans, leasing, factoring, foreign trade, credit cards, mortgage loans, checking accounts, transactional services, treasury services, financial consulting, savings products, mutual funds, and insurance brokerage. Also companies in the real estate industry are offered specialized services to finance projects, chiefly residential, with the aim of expanding sales of mortgage loans.

 

Global Corporate Banking

 

This segment consists of foreign and domestic multinational companies with sales over Ch$10,000 million. The companies within this segment have access to many products including commercial loans, leasing, factoring, foreign trade, credit cards, mortgage loans, checking accounts, transactional services, treasury services, financial consulting, investments, savings products, mutual funds and insurance brokerage.

 

This segment also consists of a Treasury Division which provides sophisticated financial products, mainly to companies in the Middle-market and Global Corporate Banking segments. These include products such as short-term financing and fund raising, brokerage services, derivatives, securitization, and other tailor-made products. The Treasury area may act as brokers to transactions and also manages the Bank’s investment portfolio.

 

F-44 


Table of Contents
 

Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 0304

REPORTING SEGMENTS, continued

 

Corporate Activities (“Other”)

 

This segment mainly includes the results of our Financial Management Division, which develops global management functions, including managing inflation rate risk, foreign currency gaps, interest rate risk and liquidity risk. Liquidity risk is managed mainly through wholesale deposits, debt issuances and the Bank’s available for sale portfolio. This segment also manages capital allocation by unit. These activities usually result in a negative contribution to income.

 

In addition, this segment encompasses all the intra-segment income and all the activities not assigned to a given segment or product with customers.

 

The segments’ accounting policies are those described in the summary of accounting policies. The Bank earns most of its income in the form of interest income, fee and commission income and income from financial operations. To evaluate a segment’s financial performance and make decisions regarding the resources to be assigned to segments, the Chief Operating Decision Maker (CODM) bases his assessment on the segment'ssegment’s interest income, fee and commission income, and expenses.

 

Below are the tables showing the Bank’s results by reporting segment for the years ended December 31, 2016, 20152018, 2017 and 20142016 in addition to the corresponding balances of loans and accounts receivable from customers:

 

  For the year ended December 31, 2018
 

Loans and accounts receivable at amortised cost

(1)

Net interest
income
Net fee and commission
income

Financial transactions, net

(2)

Expected credit losses

Support expenses 

(3)

Segment`s
net
contribution
 MCh$MCh$MCh$MCh$MCh$MCh$MCh$
        
Retail Banking20,786,637949,764220,53219,694(287,739)(553,157)349,094
Middle-market7,690,380272,91236,74616,848(26,314)(92,377)207,815
Commercial Banking28,477,0171,222,676257,27836,542(314,053)(645,534)556,909
        
Global Corporate Banking1,613,08896,72235,06457,3402,339(64,913)126,552
Other123,30994,970(1,457)11,200(5.694)(11,486)87,533
        
Total30,213,4141,414,368290,885105,082(317,408)(721,933)770,994
        
Other operating income    23,129
Other operating expenses and impairment    (32,381)
Income from investments in associates and other companies    5,095
Income tax expense    (167,144)
Net income for the year    599,693
         

(1) Corresponds to loans and accounts receivable at amortised cost under IFRS 9, without deducting their allowances for loan losses.

  As of December 31, 2016
 

Loans and accounts receivable from customers

(1)

Net interest incomeNet fee and commission income

Financial transactions, net

(2)

Provision for loan losses

Support expenses

(3)

Segment`s
net contribution
 MCh$MCh$MCh$MCh$MCh$MCh$MCh$
        
Retail Banking18,604,936931,105196,84521,141(323,888)(529,909)295,294
Middle-market6,396,376244,96030,85119,577(26,748)(83,412)185,228
Commercial Banking25,001,3121,176,065227,69640,718(350,636)(613,321)480,522
        
Global Corporate Banking2,121,51395,10525,07755,9277,579(53,935)129,753
Other83,60610,1961,65143,713974(19,649)36,885
        
Total27,206,4311,281,366254,424140,358(342,083)(686,905)647,160
        
Other operating income    6,427
Other operating expenses and impairment    (69,136)
Income from investments in associates and other companies    3,012
Income tax expense    (109,031)
Net income for the year    478,432
         

(2) Corresponds to the sum of the net income from financial operations and the foreign exchange profit or loss.

(3) Corresponds to the sum of personnel salaries and expenses, administrative expenses, depreciation and amortization.


Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 04

REPORTING SEGMENTS, continued

  For the year ended December 31, 2017
 

Loans and accounts receivable from customers 

(1)

Net interest income
Net fee and commission income

Financial transactions, net

(2)

Provision
for loan
losses

Support expenses

(3)

Segment`s
net
contribution
 MCh$MCh$MCh$MCh$MCh$MCh$MCh$
        
Retail Banking19,233,169970,332206,44920,595(293,956)(534,970)368,450
Middle-market6,775,734264,66336,28013,751(19,235)(91,882)203,577
Commercial Banking26,008,9031,234,995242,72934,346(313,191)(626,852)572,027
        
Global Corporate Banking1,633,796100,80827,62650,7146,440(62,685)122,903
Other83,215(9,112)8,70844,6924,496(15,356)33,428
        
Total27,725,9141,326,691279,063129,752(302,255)(704,893)728,358
        
Other operating income    62,016
Other operating expenses and impairment    (74,057)
Income from investments in associates and other companies    3,963
Income tax expense    (145,031)
Net income for the year    575,249
         

(1) Corresponds to loans and accounts receivable from customers, without deducting their allowances for loan losses.

(2) Corresponds to the sum of the net income from financial operations and the foreign exchange profit or loss.

(3) Corresponds to the sum of personnel salaries and expenses, administrative expenses, depreciation and amortization.

 

F-45 


Table of Contents
 

Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 0304

REPORTING SEGMENTS, continued

 

  As of December 31, 2015
 

Loans and accounts receivable from customers

(1)

Net interest incomeNet fee and commission incomeFinancial transactions, net (2)Provision for loan losses

Support expenses

(3)

Segment`s
net contribution
 MCh$MCh$MCh$MCh$MCh$MCh$MCh$
        
Retail Banking17,034,707873,026190,38016,245(332,657)(533,086)213,908
Middle-market6,006,282229,81228,53717,897(26,147)(77,261)172,838
Commercial Banking23,040,9891,102,838218,91734,142(358,804)(610,347)386,746
        
Global Corporate Banking2,178,64385,55315,23150,327(28,426)(49,533)73,152
Other81,12566,8153,47961,030(12,047)(1,328)117,949
        
Total25,300,7571,255,206237,627145,499(399,277)(661,208)577,847
        
Other operating income    6,439
Other operating expenses and impairment    (58,750)
Income from investments in associates and other companies    2,588
Income tax expense    (76,395)
Net income for the year    451,729

  For the year ended December 31, 2016
 

Loans and accounts receivable from customers

(1)

Net interest
income
Net fee and commission income

Financial transactions, net

(2)

Provision
for loan
losses

Support expenses

(3)

Segment`s
net
contribution
 MCh$MCh$MCh$MCh$MCh$MCh$MCh$
        
Retail Banking18,604,936931,105196,84521,141(323,888)(529,909)295,294
Middle-market6,396,376244,96030,85119,577(26,748)(83,412)185,228
Commercial Banking25,001,3121,176,065227,69640,718(350,636)(613,321)480,522
        
Global Corporate Banking2,121,51395,10525,07755,9277,579(53,935)129,753
Other83,60610,1961,65143,713974(19,649)36,885
        
Total27,206,4311,281,366254,424140,358(342,083)(686,905)647,160
        
Other operating income    6,427
Other operating expenses and impairment    (69,136)
Income from investments in associates and other companies    3,012
Income tax expense    (109,031)
Net income for the year    478,432
         

(1) Corresponds to loans and accounts receivable from customers, without deducting their allowances for loan losses.

(2) Corresponds to the sum of the net income from financial operations and the foreign exchange profit or loss.

(3) Corresponds to the sum of personnel salaries and expenses, administrative expenses, depreciation and amortization.

 

F-46 


Table of Contents
 

Banco Santander Chile and Subsidiaries 

NOTE 03Notes to the Consolidated Financial Statements

REPORTING SEGMENTS, continuedAS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

  As of December 31, 2014
 

Loans and accounts receivable from customers

(1) 

Net interest incomeNet fee and commission incomeFinancial transactions, net (2)Provision for loan losses

Support expenses

(3)

Segment`s
net contribution
 MCh$MCh$MCh$MCh$MCh$MCh$MCh$
        
Retail Banking15,191,808833,139175,00718,458(325,621)(479,954)221,029
Middle-market5,443,983200,67527,05516,342(22,034)(66,321)155,717
Commercial Banking20,635,7911,033,814202,06234,800(347,655)(546,275)376,746
        
Global Corporate Banking2,201,91371,99222,33842,1861,924(44,195)94,245
Other54,945211,2982,88335,579(9,172)2,261242,849
        
Total22,892,6491,317,104227,283112,565(354,903)(588,209)713,840
        
Other operating income    6,545
Other operating expenses and impairment    (95,610)
Income from investments in associates and other companies    2,165
Income tax expense    (51,050)
Net income for the year    575,890

NOTE 05

(1) Corresponds to loans and accounts receivable from customers, without deducting their allowances for loan losses.

(2) Corresponds to the sum of the net income from financial operations and the foreign exchange profit or loss.

(3) Corresponds to the sum of personnel salaries and expenses, administrative expenses, depreciation and amortization.

F-47 

Table of Contents

NOTE 04

CASH AND CASH EQUIVALENTS

 

a)       The detail of the balances included under cash and cash equivalents is as follows:

 

  As of December 31,
  2016 2015
  MCh$ MCh$
     
Cash and deposits in banks    
 Cash 570,317 632,435
 Deposits in the Central Bank of Chile 507,275 184,510
 Deposits in domestic banks 1,440 192
 Deposits in foreign banks   1,200,357 1,247,669
Subtotals – Cash and deposits in banks 2,279,389 2,064,806
     
 Cash in process of collection, net 206,810 262,364
      
Cash and cash equivalents 2,486,199 2,327,170
       

  As of December 31,
  2018 2017
  MCh$ MCh$
     
Cash and deposits in banks    
 Cash 824,863 613,361
 Deposits at the Central Bank of Chile 953,016 441,683
 Deposits in local banks 664   393
 Deposits in banks abroad 286,898        397,485
Subtotals – Cash and deposits in banks 2,065,411     1,452,922
     
 Net cash items in process of collection            190,714       181,419
      
Cash and cash equivalents         2,256,155     1,634,341
        

The balance of funds held in cash and at the Central Bank of Chile reflects the monthly average that the Bank must maintain in accordance with the regulations governing minimum reserves although the balance can be withdrawn on demand.

 

b)       Cash in process of collection and in process of being cleared:

 

Cash items in process of collection and in process of being cleared represent domestic transactions which have not been processed through the central domestic clearinghouse or international transactions which may be delayed in settlement due to timing differences. These transactions were as follows:

 

 As of December 31,  As of December 31,
 2016 2015             2018 2017
 MCh$ MCh$             MCh$ MCh$
         
AssetsAssets    Assets    
Documents held by other banks (documents to be cleared) 200,109 296,634Documents held by other banks (documents to be cleared) 210,546 199,619
Funds receivable 295,174 427,887Funds receivable 143,211 468,526
SubtotalSubtotal 495,283 724,521Subtotal 353,757 668,145
LiabilitiesLiabilities   Liabilities   
Funds payable 288,473 462,157Funds payable 163,043 486,726
Subtotal 288,473 462,157Subtotal 163,043 486,726
      
Cash in process of collection, netCash in process of collection, net 206,810 262,364Cash in process of collection, net 190,714 181,419

 

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Table of Contents
 

Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 0506

FINANCIAL ASSETS HELD FOR TRADING / TRADING INVESTMENTS

 

The detail of instruments deemed as financial trading investments is as follows:

 

 As of December 31,  As of December 31,
 2016 2015             2018      2017
 MCh$ MCh$             MCh$       MCh$
       
Chilean Central Bank and Government securitiesChilean Central Bank and Government securities   Chilean Central Bank and Government securities   
Chilean Central Bank Bonds 158,686 159,767Chilean Central Bank Bonds 22,947 272,272
Chilean Central Bank Notes - -Chilean Central Bank Notes - -
Other Chilean Central Bank and Government securities 237,325 123,468Other Chilean Central Bank and Government securities 48,211 209,370
SubtotalSubtotal 396,011 283,235Subtotal 71,158 481,642
     
Other Chilean securitiesOther Chilean securities  Other Chilean securities  
Time deposits in Chilean financial institutions - -Time deposits in Chilean financial institutions - -
Mortgage finance bonds of Chilean financial institutions - -Mortgage finance bonds of Chilean financial institutions - -
Chilean financial institution bonds - -Chilean financial institution bonds - -
Chilean corporate bonds 976 37,630Chilean corporate bonds - -
Other Chilean securities - -Other Chilean securities - -
SubtotalSubtotal 976 37,630Subtotal - -
      
Foreign financial securitiesForeign financial securities  Foreign financial securities  
Foreign Central Banks and Government securities - -Foreign Central Banks and Government securities - -
Other foreign financial instruments - -Other foreign financial instruments 5,883 -
SubtotalSubtotal - -Subtotal 5,883 -
     
Investments in mutual fundsInvestments in mutual funds  Investments in mutual funds  
Funds managed by related entities - 3,406Funds managed by related entities - 4,094
Funds managed by others - -Funds managed by others - -
SubtotalSubtotal - 3,406Subtotal - 4,094
     
TotalTotal 396,987 324,271Total 77,041 485,736

 

As of December 31, 20162018 and 2015,2017, there were no trading investments sold under contracts to resell to clients andor financial institutions.

 

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Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016


NOTE 0607

INVESTMENTS UNDER RESALE AGREEMENTS AND OBLIGATIONS UNDER REPURCHASE AGREEMENTS

 

a)Rights arising from resale agreements

 

The Bank purchases financial instruments agreeing to resell them at a future date. As of December 31, 20162018 and 2015,2017, rights associated with instruments acquired under contracts to resell are as follows:

 

 As of December 31,
 2016 2015
 From 1 day and less than 3 months

More than 3

months and

less than

1 year

More than 1 yearTotal From 1 day and less than 3 months

More than 3 months and

less than

1 year

More than 1 yearTotal
 MCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$
          

Securities from the Chilean Government and the Chilean Central Bank

         
Chilean Central Bank Bonds3,260--3,260 1,978--1,978
Chilean Central Bank Notes---- 2--2

Other securities from the Government and the Chilean Central Bank

3,476--3,476 483--483
Subtotal6,736--6,736 2,463--2,463
          
Total6,736--6,736 2,463--2,463

F-50 

Table of Contents
 As of December 31,
 2018 2017
 From 1 day and less than 3 months

More than 3

months and

less than

1 year

More than 1 yearTotal From 1 day and less than 3 months

More than 3 months and

less than

1 year

More than 1 yearTotal
 MCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$
          

Securities from the Chilean Government and
the Chilean Central Bank

         
Chilean Central Bank Bonds---- ----
Chilean Central Bank Notes---- ----

Other securities from the Government and
the Chilean Central Bank

---- ----
Subtotal---- ----
          
Total---- ----

 

NOTE 06

INVESTMENTS UNDER RESALE AGREEMENTS AND OBLIGATIONS UNDER REPURCHASE AGREEMENTS, continued

b)       Obligations arising from repurchase agreements

 

The Bank raises funds by selling financial instruments and committing itself to buy them back at future dates, plus interest at a predetermined rate. As of December 31, 20162018 and 2015,2017, obligations related to instruments sold under repurchase agreements are as follows:

 

As of December 31,As of December 31,
2016 20152018 2017

From 1 day

to less than

3 months

More than 3

months and

less than

1 year

More than

1 year

Total 

From 1 day

to less than

3 months

More than 3

months and

less than

1 year

More than

1 year

Total

From 1 day

to less than

3 months

More than 3 

months and

less than

1 year

More than

1 year

Total 

From 1 day

to less than

3 months

More than 3

months and

less than

1 year

More than

1 year

Total
MCh$ MCh$MCh$ MCh$
  

Securities from Chilean Government and the Chilean Central Bank

 

Securities from Chilean Government and
the Chilean Central Bank:

 
Chilean Central Bank Bonds-- 64,337-64,33748,307-48,307 --
Chilean Central Bank Notes155,044-155,044 22-22-- --
Other securities from the Government and the Chilean Central Bank-- 11,006-11,006110-110 241,995-241,995
Subtotal155,044-155,044 75,365-75,36548,417-48,417 241,995-241,995

Instruments from other domestic institutions:

 128-128 
Time deposits in Chilean financial institutions56,898495-57,393 68,324-68,324  1,11838-1,156
Subtotal56,898495-57,393 68,324-68,324128-128 1,11838-1,156

Instruments from other
foreign institutions:

   
Securities from Government or foreign Central Banks- 24,910-24,910
Subtotal- 24,910-24,910
    
Total211,942495-212,437 143,689-143,68948,545-48,545 268,02338-268,061

 

F-51 


Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 

 

NOTE 0607 

INVESTMENTS UNDER RESALE AGREEMENTS AND OBLIGATIONS UNDER REPURCHASE AGREEMENTS, continued

 

c) Below is the detail by portfolio of collateral associated with repurchase agreements as of December 31, 2016 and 2015, valued at fair value:

c)Below is the detail by portfolio of collateral associated with repurchase agreements as of December 31, 2018 and 2017, valued at fair value:

 

 As of December 31,
 2016 2015
 

Available

for sale

portfolio

Trading

portfolio

Total   

Available

for sale

portfolio

Trading portfolioTotal   
 MCh$MCh$MCh$ MCh$MCh$MCh$
        
Chilean Central Bank and Government securities:      
Chilean Central Bank Bonds--- 62,350-62,350
Chilean Central Bank Notes155,044-155,044 20-20

Other securities from the Government and the Chilean Central Bank

--- 10,531-10,531
Subtotal155,044-155,044 72,901-72,901
Other Chilean securities:       
Time deposits in Chilean financial institutions57,393-57,393 68,321-68,321
Subtotal57,393-57,393 68,321-68,321
        
Total212,437-212,437 141,222-141,222

 As of December 31,
 2018 2017
 

Available 

for sale 

portfolio 

Trading 

portfolio 

Total   

 

Available 

for sale 

portfolio 

Trading
portfolio		Total   
 MCh$MCh$MCh$ MCh$MCh$MCh$
        
Chilean Central Bank and Government securities:       
Chilean Central Bank Bonds49,040-49,040 ---
Chilean Central Bank Notes--- ---

Other securities from the Government and the Chilean Central Bank 

109-109 241,995-241,995
Subtotal49,149-49,149 241,995-241,995
Other Chilean securities:       
Time deposits in Chilean financial institutions132-132 1,156-1,156
Subtotal132-132 1,156-1,156

Instruments from other foreign institutions: 

       
Securities from Government or foreign Central Banks--- 24,910-24,910
Subtotal--- 24,910-24,910
        
Total49,281-49,281 268,061-268,061

F-52 


Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 

 

NOTE 08 

NOTE 07

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING

 

a)As of December 31, 20162018 and 20152017 the Bank holds the following portfolio of derivative instruments:

 

As of December 31, 2016As of December 31, 2018
Notional amount Fair valueNotional amount Fair value

Up to 3

Months

More than 3

months to

1 year

More than

1 year

Total AssetsLiabilities

Up to 3

Months 

More than 3

months to
1 year

More than
1 year

Total AssetsLiabilities
MCh$ MCh$MCh$ MCh$MCh$
   
Fair value hedge derivatives   
Interest rate swaps74,086514,4541,402,8701,991,410 38,97721180,000491,6001,191,0121,762,612 14,7899,188
Cross currency swaps424,086505,9021,239,4902,169,478 32,64032,868-1,276,9096,706,1977,983,106 96,35736,708
Subtotal498,1721,020,3562,642,3604,160,888 71,61733,07980,0001,768,5097,897,2099,745,718 111,14645,896
         
Cash flow hedge derivatives         
Currency forwards915,879639,939-1,555,818 10,2163,441205,750168,151-373,901 -8,013
Cross currency swaps897,4802,613,7064,260,1947,771,380 43,59168,8941,920,9001,970,4129,191,20913,082,521 79,85932,712
Subtotal1,813,3593,253,6454,260,1949,327,198 53,80772,3352,126,6502,138,5639,191,20913,456,422 79,85940,725
         
Trading derivatives         
Currency forwards15,840,73111,240,2513,358,76530,439,747 185,618209,95515,301,94313,080,8756,062,18334,445,001 613,063466,741
Interest rate swaps6,889,66512,512,28549,747,45969,149,409 627,047526,69512,024,09522,064,68169,453,618103,542,394 723,870577,835
Cross currency swaps3,966,4437,589,20153,148,10964,703,753 1,562,0681,449,5502,173,1118,853,30668,976,33980,002,756 1,568,3651,385,314
Call currency options73,94320,9942,66497,601 521526,73160,23557,579144,545 4,332854
Call interest rate options----- --
Put currency options52,1437,8922,66462,699 10454223,41150,44556,392130,248 -363
Other derivatives- --- --
Subtotal26,822,92531,370,623106,259,661164,453,209 2,375,3582,186,74729,549,29144,109,542144,606,111218,264,944 2.909.6302.431.107
         
Total29,134,45635,644,624113,162,215177,941,295 2,500,7822,292,16131,755,94148,016,614161,694,529241,467,084 3,100,6352,517,728

 As of December 31, 2017
 Notional amount Fair value
 

Up to 3

months

More than 3 

months to 

1 year 

More than 

1 year 

Total AssetsLiabilities
 MCh$MCh$MCh$MCh$ MCh$MCh$
        
Fair value hedge derivatives         
Interest rate swaps-162,9851,554,1711,717,156 23,0031,424
Cross currency swaps-715,7015,362,7726,078,473 15,08565,724
Subtotal-878,6866,916,9437,795,629 38,08867,148
        
Cash flow hedge derivatives       
Currency forwards801,093218,982-1,020,075 39,23359
Cross currency swaps421,4281,637,6046,672,5668,731,598 36,403128,355
Subtotal1,222,5211,856,5866,672,5669,751,673 75,636128,414
        
Trading derivatives       
Currency forwards17,976,68310,679,3273,091,39331,747,403 412,994502,555
Interest rate swaps9,069,96414,389,38946,342,77969,802,132 467,188392,366
Cross currency swaps2,963,6417,503,14447,111,37157,578,156 1,241,6321,042,120
Call currency options190,38637,09949,853277,338 1,3221,950
Call interest rate options---- --
Put currency options192,72228,61650,470271,808 1,7874,935
Other derivatives---- --
Subtotal30,393,39632,637,57596,645,866159,676,837 2,124,9231,943,926
        
Total31,615,91735,372,847110,235,375177,224,139 2,238,6472,139,488


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 

 

NOTE 08 

 As of December 31, 2015
 Notional amount Fair value
 

Up to 3

months

More than 3

months to

1 year

More than

1 year

Total AssetsLiabilities
 MCh$MCh$MCh$MCh$ MCh$MCh$
        
Fair value hedge derivatives         
Interest rate swaps327,9551,184,795630,9702,143,720 5,4806,364
Cross currency swaps9,44130,0401,842,4211,881,902 181,5571,483
Subtotal337,3961,214,8352,473,3914,025,622 187,0377,847
        
Cash flow hedge derivatives       
Currency forwards---- --
Cross currency swaps7,281,1844,445,0062,720,52014,446,710 273,29169,716
Subtotal7,281,1844,445,0062,720,52014,446,710 273,29169,716
        
Trading derivatives       
Currency forwards18,731,57513,328,7273,459,38635,519,688 341,236318,416
Interest rate swaps7,272,52315,677,39356,140,89479,090,810 533,416540,011
Cross currency swaps5,881,6275,898,09444,921,35556,701,076 1,826,9771,883,185
Call currency options49,06760,380477,057586,504 42,32541,451
Call interest rate options--264,473264,4731,1481,253
Put currency options48,95852,682-101,640 422684
Other derivatives125,258--125,258 7443
Subtotal32,109,00835,017,276105,263,165172,389,449 2,745,5982,785,043
        
Total39,727,58840,677,117110,457,076190,861,781 3,205,9262,862,606

F-53 

Table of Contents

NOTE 07

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

b)Hedge accounting

 

Fair value hedge:

 

The Bank uses cross-currency swaps and interest rate swaps to hedge its exposure to changes in fair value of hedged items attributable to interest rates. The aforementioned hedging instruments change the effective cost of long-term issuances from a fixed interest rate to a variable interest rate.

 

Below is a detail of the hedged elements and hedge instruments under fair value hedges as of December 31, 20162018 and 2015,2017, classified by term to maturity:

 

As of December 31, 2016As of December 31, 2018
Within 1 yearBetween 1 and 3 yearsBetween 3 and 6 yearsOver 6 yearsTotalWithin 1 yearBetween 1 and 3
years		Between 3 and 6
years		Over 6 yearsTotal
MCh$MCh$MCh$
   
Hedged item    
Available for sale investments 
Loans and accounts receivable at amortised cost  
Endorsable mortgage mutual loans653,8721,272,382276,590603,8182,806,662
Debt instruments at FVOCI     
Yankee bonds-6,66056,61063,270-172,072172,072
Mortgage financing bonds-5,651-5,651-3,779-3,779
Treasury bonds (BTP)-33,300366,300399,600-174,440174,440
Central bank bonds (BCP)--
Chilean Treasury bonds-304,818-220,041524,859
Chilean Central Bank bonds-449,730-449,730
Time deposits and other time liabilities   
Time deposits993,659-993,659321,600-164,413486,013
Issued debt instruments      
Senior bonds524,869652,0461,000,905520,8882,698,708708,6241,117,7791,298,4702,003,2895,128,162
Total1,518,528652,0461,046,516943,7984,160,8881,684,0963,144,7091,578,8393,338,0739,745,717
Hedging instrument      
Cross currency swaps929,988437,046531,556270,8882,169,4781,112,4962,794,7091,228,8392,847,0617,983,105
Interest rate swaps588,540215,000514,960672,9101,991,410571,600350,000491,0121,762,612
Total1,518,528652,0461,046,516943,7984,160,8881,684,0963,144,7091,578,8393,338,0739,745,717

 As of December 31, 2017
 Within 1 yearBetween 1 and 3
years		Between 3 and 6
years		Over 6 yearsTotal
 MCh$MCh$MCh$MCh$MCh$
      
Hedged item     
Loans and accounts receivable from customers       
Endorsable mortgage mutual loans587,412801,230106,910-1,495,552
Available for sale investments     
Yankee bonds--6,16964,76970,938
Mortgage financing bonds--4,738-4,738
Treasury bonds (BTP)---129,539129,539
Chilean Treasury bonds-21,377762,727-784,104
Chilean Central Bank bonds (BCP)128,289218,640443,357-790,286
Time deposits and other time liabilities     
Time deposits137,985---137,985
Issued debt instruments     
Senior bonds25,0001,399,686670,4882,287,3134,382,487
Total878,6862,440,9331,994,3892,481,6217,795,629
Hedging instrument     
Cross currency swaps715,7011,512,2381,813,2212,037,3136,078,473
Interest rate swaps162,985928,695181,168444,3081,717,156
Total878,6862,440,9331,994,3892,481,6217,795,629

F-58

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 

 

NOTE 08

 As of December 31, 2015
 Within 1 yearBetween 1 and 3 yearsBetween 3 and 6 yearsOver 6 yearsTotal
 MCh$MCh$MCh$MCh$MCh$
      
Hedged item     
Available for sale investments     
   Yankee bonds---92,10692,106
   Mortgage financing bonds---6,4606,460
   Treasury bonds (BTP)-----
   Central bank bonds (BCP)-----
Time deposits and other time liabilities     
Time deposits1,542,78965,000--1,607,789
Issued debt instruments     
   Senior bonds9,442573,960867,865868,0002,319,267
Total1,552,231638,960867,865966,5664,025,622
Hedging instrument     
   Cross currency swaps39,481548,960567,865725,5961,881,902
   Interest rate swaps1,512,75090,000300,000240,9702,143,720
Total1,552,231638,960867,865966,5664,025,622

F-54 

Table of Contents

NOTE 07

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

Cash flow hedges

 

The Bank uses cross currency swaps to hedge the risk from variability of cash flows attributable to changes in the interest rates of bonds and interbank loans at a variable rate. To cover the inflation risk in some items, both forwards as well as currency swaps are used.

 

Below is the notional amount of the hedged items as of December 31, 20162018 and 2015,2017, and the period when the cash flows will be generated:

 

As of December 31, 2016As of December 31, 2018

Within 1

year

Between 1 and 3

years

Between 3 and 6

years

Over 6

years

Total

Within 1 

year

Between 1 and 3 

years

Between 3 and 6 

years

Over 6

years

Total
MCh$MCh$MCh$
Hedged item    
Loans and accounts receivables from customers  
Loans and accounts receivable at amortised cost  
Mortgage loans1,083,972312,546900,746956,8033,254,0671,890,6963,026,8241,459,3892,467,0908,843,999
Commercial loans972,360-972,36039,80969,776-109,585
Available for sale investments  
Debt instruments at FVOCI  
Yankee bond-126,140406,881533,021--
Chilean Central Bank bonds20,754-20,754-246,306 246,306
Time deposits26,196-26,196-166,628-166,628
Time deposits and other time liabilities    
Time deposits285,090-285,090--
Issued debt instruments    
Senior bonds (variable rate)854,414399,451285,355-1,539,220-666,823-666,823
Senior bonds (fixed rate)140,765108,409243,121105,600597,895456,478203,594450,835503,7211,614,628
Interbank borrowings   
Interbank loans1,683,453415,142-2,098,5951,764,348-1,764,348
Total5,067,0041,235,5481,555,3621,469,2849,327,1984,151,3313,967,0172,323,1582,970,81113,412,317
Hedging instrument   
Cross currency swaps3,511,1861,235,5481,555,3621,469,2847,771,3803,891,3113,853,1362,323,1582,970,81113,038,416
Currency forwards1,555,818-1,555,818260,020113,881-373,901
Total5,067,0041,235,5481,555,3621,469,2849,327,1984,151,3313,967,0172,323,1582,970,81113,412,317

 As of December 31, 2017
 

Within 1 

year

Between 1 and 3

years

Between 3 and 6

years

Over 6

years

Total
 MCh$MCh$MCh$MCh$MCh$
Hedged item       
Loans and accounts receivables from customers     
Mortgage loans1,153,348583,0611,335,1412,353,8715,425,421
Commercial loans644,608---644,608
Available for sale investments     
Yankee bond--25,290132,572157,862
Chilean Central Bank bonds--242,819-242,819
Time deposits-----
Time deposits and other time liabilities     
Time deposits-----
Issued debt instruments     
Senior bonds (variable rate)120,520647,550302,454-1,070,524
Senior bonds (fixed rate)241,183121,619224,401300,874888,077
Interbank borrowings     
Interbank loans919,448402,914--1,322,362
Total3,079,1071,755,1442,130,1052,787,3179,751,673
Hedging instrument     
Cross currency swaps2,059,0321,755,1442,130,1052,787,3178,731,598
Currency forwards1,020,075---1,020,075
Total3,079,1071,755,1442,130,1052,787,3179,751,673


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 

 

NOTE 08

 As of December 31, 2015
 

Within 1 

year

Between 1 and 3

years

Between 3 and 6

years

Over 6

years

Total
 MCh$MCh$MCh$MCh$MCh$
Hedged item       
Loans and accounts receivables from customers     
   Mortgage loans8,098,639157,462158,649-8,414,750
Commercial loans564,800---564,800
Available for sale investments     
   Yankee bond--80,078585,386665,464
   Chilean Central Bank bonds123,96220,467--144,429
   Time deposits50,023---50,023
Time deposits and other time liabilities     
   Time deposits-----
Issued debt instruments     
   Senior bonds (variable rate)963,8291,176,383--2,140,212
   Senior bonds (fixed rate)--14,036202,562216,598
Interbank borrowings     
   Interbank loans1,924,937325,497--2,250,434
Total11,726,1901,679,809252,763787,94814,446,710
Hedging instrument     
Cross currency swaps11,726,1901,679,809252,763787,94814,446,710
Currency forwards-----
Total11,726,1901,679,809252,763787,94814,446,710

F-55 

Table of Contents

NOTE 07

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

Below is an estimate of the periods in which cash flows are expected to be produced:

 

b.1)b.1 Forecasted cash flows for interest rate risk:

 

As of December 31, 2016As of December 31, 2018

Within 1

year

Between 1 and 3 yearsBetween 3 and 6 years

Over 6

years

Total

Within 1 

year

Between 1 and
3 years		Between 3 and
6 years

Over 6 

years

Total
MCh$MCh$MCh$
Hedged item    
Inflows159,43983,19332,6473,748279,02776,73635,9943,0622,401118,193
Outflows(72,631)(45,857)(18,040)-(136,528)(125,747)(46,372)(13,311)(4,701)(190,131)
Net flows86,80837,33614,6073,748142,499(49,011)(10,378)(10,249)(2,300)(71,938)
   
Hedging instrument   
Inflows72,63145,85718,040-136,528125,74746,37213,3114,701190,131
Outflows (*)(159,439)(83,193)(32,647)(3,748)(279,027)(76,736)(35,994)(3,062)(2,401)(118,193)
Net flows(86,808)(37,336)(14,607)(3,748)(142,499)49,01110,37810,2492,30071,938

 

(*)Only includes cash flow forecast portion of the hedge instruments used to cover interest rate risk.

 

As of December 31, 2015As of December 31, 2017

Within 1

year

Between 1 and 3 yearsBetween 3 and 6 years

Over 6

years

Total

Within 1 

year

Between 1 and
3 years		Between 3 and
6 years

Over 6 

years

Total
MCh$MCh$MCh$
Hedged item    
Inflows69,47723,0039,4664,661106,607308,73760,51513,7802,594385,626
Outflows(40,521)(25,018)(6,216)(650)(72,405)(60,733)(43,507)(7,757)(878)(112,875)
Net flows28,956(2,015)3,2504,01134,202248,00417,0086,0231,716272,751
     
Hedging instrument     
Inflows40,52125,0186,21665072,40560,73343,5077,757878112,875
Outflows (*)(69,477)(23,003)(9,466)(4,661)(106,607)(308,737)(60,515)(13,780)(2,594)(385,626)
Net flows(28,956)2,015(3,250)(4,011)(34,202)(248,004)(17,008)(6,023)(1,716)(272,751)

 

(*)Only includes cash flow forecast portion of the hedge instruments used to cover interest rate risk.

F-56 


Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 

 

NOTE 0708

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

b.2)b.2 Forecasted cash flows for inflation risk:

 

As of December 31, 2016As of December 31, 2018

Within

1 year

Between 1 and 3

years

Between 3 and 6 years

Over 6

years

Total

Within

1 year

Between 1 and
3 years

Between 3 and
6 years

Over 6 

years

Total
MCh$MCh$MCh$
Hedged item    
Inflows22,58611,89656,107115,753206,34237,08673,576166,516310,293587,471
Outflows(4,900)-(4,900)(14,036)-(14,036)
Net flows17,68611,89656,107115,753201,44223,05073,576166,516310,293573,435
     
Hedging instrument     
Inflows4,900-4,90014,036-14,036
Outflows(22,586)(11,896)(56,107)(115,753)(206,342)(37,086)(73,576)(166,516)(310,293)(587,471)
Net flows(17,686)(11,896)(56,107)(115,753)(201,442)(23,050)(73,576)(166,516)(310,293)(573,435)

 As of December 31, 2017
 

Within 

1 year

Between 1 and
3 years 

Between 3 and
6 years

Over 6 

years

Total
 MCh$MCh$MCh$MCh$MCh$
Hedged item     
Inflows20,30029,008103,544286,471439,323
Outflows(1,645)---(1,645)
Net flows18,65529,008103,544286,471437,678
      
Hedging instrument     
Inflows1,645---1,645
Outflows(20,300)(29,008)(103,544)(286,471)(439,323)
Net flows(18,655)(29,008)(103,544)(286,471)(437,678)

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 

 

 As of December 31, 2015
 

Within

1 year

Between 1 and 3 

years

Between 3 and 6 years

Over 6

years

Total
 MCh$MCh$MCh$MCh$MCh$
Hedged item     
Inflows147,37410,554--157,928
Outflows-----
Net flows147,37410,554--157,928
      
Hedging instrument     
Inflows-----
Outflows(147,374)(10,554)--(157,928)
Net flows(147,374)(10,554)--(157,928)

F-57 

Table of Contents

NOTE 08

NOTE 07

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

 

b.3)b.3 Forecasted cash flows for exchange rate risk:

 

As of December 31, 20162018 and 20152017 the Bank has no forecasted cash flows for exchange rate risk.

 

c)The accumulated effect of the mark to market adjustment of cash flow hedges produced by hedge instruments used in hedged cash flow was recorded in the Consolidated StatementStatements of Changes in Equity, specifically within Other comprehensive income, as of December 31, 20162018 and 2015,2017, is as follows:

 

  As of December 31,
Hedged item 2016 2015
  MCh$ MCh$
     
Interbank loans (6,019) 2,700
Time deposits and other time liabilities (294) -
Issued debt instruments (8,169) 2,462
Available for sale investments 12,833 573
Loans and accounts receivable from customers 3,937 2,891
Net flows 2,288 8,626



  As of December 31,
Hedged item            2018           2017
            MCh$          MCh$
     
Interbank loans 309 (4,779)
Time deposits and other time liabilities - -
Issued debt instruments (10,893) (8,683)
Available for sale investments - (364)
Loans and accounts receivable from customers - 10,264
Debt instruments at FVOCI (1,392) -
Loans and accounts receivable at amortised cost 21,779 -
Net flows 9,803 (3,562)

 

Since the inflows and outflows for both the hedged element and the hedging instrument mirror each other, the hedges are nearly 100% effective, which means that the fluctuations of fair value attributable to risk components are almost completely offset.

 

As of December 31, 2018 and 2017 the Bank recorded ineffectiveness for an amount of Ch$2,912 million and Ch$1,187 million, respectively

During the year, the Bank did not haveenter into any cash flow hedges of forecastrelating to forecasted transactions.

F-58 

Table of Contents

NOTE 07

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING, continued

  

d)Below is a presentation of income generated by cash flow hedges amount that were reclassified from other comprehensive income to income for the year:

 

 For the years ended December 31,  
 2016 2015 2014
 MCh$ MCh$ MCh$
      
Bond hedging derivatives(77) 6 (16)
Interbank loans hedging derivatives- - 446
      
Cash flow hedge net income(77) 6 430

See Note 23 - Equity, letter e)

 For the years ended December 31,  
 2018 2017 2016
 MCh$ MCh$ MCh$
      
Bond hedging derivatives- - (77)
Interbank loans hedging derivatives(683) - -
      
Cash flow hedge net gain (loss)(683) - (77)
See Note 25 - Equity, letter e)     

 

e)Net investment hedges in foreign operations:

 

As of December 31, 20162018 and 2015,2017, the Bank does not have any foreign net investment hedges in its hedge accounting portfolio.

F-59 


Table of Contents

NOTE 08

INTERBANK LOANS

a)As of December

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 and 2015, balances of “Interbank loans” are as follows:

 

 As of December 31,
 2016 2015
 MCh$ MCh$
    
Domestic banks   
Interbank loans23 14
Other domestic bank loans51 36
    
Foreign Interbank Loans   
Interbank loans – Foreign272,733 10,827
Provisions and impairment for foreign bank loans(4,135) (1,166)
    
Total268,672 9,711

b)The amount in each period for provisions and impairment of interbank loans is shown below:

 As of December 31,
 2016 2015
Domestic banks

Foreign

banks

Total Domestic banksForeign banksTotal
MCh$MCh$MCh$ MCh$MCh$MCh$
        
Balance as of January 1-1,1661,166 -11
Provisions established13,0513,052 1411,2161,357
Provisions released(1)(82)(83) (141)(51)(192)
Total-4,1354,135 -1,1661,166

F-60 

Table of Contents

NOTE 09 

NOTE 09

LOANS AND ACCOUNTSACCOUNT RECEIVABLE FROM CUSTOMERSAT AMORTISED COST – under IFRS 9

a)Loans and accounts receivable from customers

 

As of December 31, 2016 and 2015,2018 the composition of the loan portfolio is as follows:

 

As of December 31, 2016

Assets before allowances Allowances established 

Normal

portfolio

Impaired

portfolio

Total Individual allowancesGroup allowancesTotal 

Assets

net balance

MCh$ MCh$ MCh$

As of December 31, 2018

Assets before allowances ECL allowance 

Net

Assets

Stage 1Stage 2Stage 3TotalStage 1Stage 2Stage 3Total 
 
MCh$ MCh$MCh$ MCh$
            
Commercial loans          
Interbank loans15,093-15,093 10-10 15,083
Commercial loans 9,160,982692,6759,853,657 159,463148,703308,166 9,545,4919,684,451841,123608,19211,133,766 52,78241,954274,050368,786 10,764,980
Foreign trade loans 1,750,19679,7081,829,904 56,91990157,820 1,772,084

1,646,337

56,295

49,805

1,752,437 5,46673533,71639,917 

1,712,520

Checking accounts debtors166,07313,395179,468 2,7946,8549,648 169,820183,29016,45215,420215,162 2,10846711,20913,784 201,378
Factoring transactions291,1125,639296,751 4,7876205,407 291,344370,3916,0054,587380,983 829913,4334,353 376,630
Student loans64,3816,0499,48679,916 2,7052,1706,31511,190 68,726
Leasing transactions1,376,972108,1511,485,123 17,5935,54623,139 1,461,9841,225,755169,19648,7731,443,724 7,2369,03322,53138,800 1,404,924
Other loans and account receivable193,58928,973222,562 4,78020,48225,262 197,300123,1085,13536,820165,063 2,5941,19026,17829,962 135,101
Subtotal12,938,924928,54113,867,465 246,336183,106429,442 13,438,02313,312,8061,100,255773,08315,186,144 73,73055,640377,432506,802 14,679,342
           
Mortgage loans            
Loans with mortgage finance bonds31,3681,21132,579 -1616 32,56315,2611,24192417,426 2040117177 17,249
Endorsable mortgage mutual loans 115,4004,534119,934 -190190 119,744101,0743,4544,008108,536 87126592805 107,731
Other mortgage mutual loans 8,074,900391,9438,466,843 -56,80356,803 8,410,0409,142,627442,801439,59110,025,019 8,89914,93666,45390,288 9,934,731
Subtotal8,221,668397,6888,619,356 -57,009 8,562,3479,258,962447,496444,52310,150,981 9,00615,10267,16291,270 10,059,711
           
Consumer loans           
Installment consumer loans2,468,692253,6732,722,365 -249,545249,545 2,472,8202,693,260231,107265,3033,189,670 50,74848,622148,017247,387 2,942,283
Credit card balances1,418,40929,7091,448,118 -41,06341,063 1,407,0551,385,78314,97716,3921,417,152 15,0874,9618,74028,788 1,388,364
Leasing transactions5,062555,117 -7272 5,0453,974133504,157 8322127 4,030
Other consumer loans 266,0565,147271,203 -9,3399,339 261,864258,7232,8223,765265,310 4,9867672,2878,040 257,720
Subtotal4,158,219288,5844,446,803 -300,019 4,146,7844,341,740249,039285,5104,876,289 70,90454,372159,066284,342 4,591,947
          
Total25,318,8111,614,81326,933,624 246,336540,134786,470 

26,147,154

26,913,5081,796,7901,503,11630,213,414 153,640125,114603,660882,414 29,331,001
            

F-63

 

F-61 

Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 

 

NOTE 09

LOANS AND ACCOUNT RECEIVABLE AT AMORTISED COST, continued

a.Commercial loans

An analysis of changes in the gross carrying amount and the corresponding ECL allowance is, as follows:

 Stage1Stage2Stage3TOTAL
 IndividualCollectiveIndividualCollectiveIndividualCollective
Gross carrying amount at  January 1, 2018 8,899,468 3,338,916 630,515 208,018 372,744 350,74713,800,408
Transfers       
Transfers to stage 2(225,062)(53,020) 225,06253,020- --
Transfers to stage 3(16,654)(67,886)  - -16,65467,886  -
Transfers to stage 3- -(59,688)(40,853) 59,68840,853-
Transfers to stage 113,199 52,755(13,199)(52,755)  - -
Transfers to stage2-  - 4,45136,247(4,451)(36,247)-
Transfers to stage1- 718  -  -  (718)-
Net changes on financial assets1,497,618708,531138,43648,3234,24070,8482,467,996
Writte-off----(53,921)(74,430)(128,351)
Foreign Exchange adjustments(472,732)(363,045)(57,794)(19,528)(8,025)(32,785)(953,909)
At 31 December 20189,695,8373,616,969867,783232,472386,929386,15415,186,144

 Stage 1Stage 2Stage 3TOTAL
 IndividualCollectiveIndividualCollectiveIndividualCollective
ECL allowance at January 1, 201829,79750,01428,28223,041191,397160,182482,713
Transfers       
Transfers to stage 2(2,719)(1,525)8,0058,169--11,930
Transfers to stage 3(241)(2,697)--6,61229,83933,513
Transfers to stage 3--(5,541)(6,776)22,70517,47527,863
Transfers to stage 1167553(411)(3,402)- (3,093)
Transfers to stage2-  3301,854(1,704)(6,776)(6,296)
Transfers to stage1- 22---(72)(50)
Net changes of the exposure and modifications in the credit risk4,1053,7702,7402,8551,25129,25343,974
Writte-off--- (37,439)(58,510)(95,949)
Foreign Exchange adjustments(920)(6,696)(2,339)(1,167)15,2937,926 12,197
At 31 December 201830,18943,54131,06624,574198,115179,317506,802

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 

NOTE 09 

LOANS AND ACCOUNT RECEIVABLE AT AMORTISED COST, continued

b.Mortgage loans

An analysis of changes in the gross carrying amount and the corresponding ECL allowance is, as follows:

 Stage1Stage2Stage3TOTAL
 CollectiveCollectiveCollective
Gross carrying amount at  January 1, 20188,191,229469,349436,3179,096,895
Transfers    
Transfers to stage 2(87,473)  87,473--
Transfers to stage 3(64,949)-64,949-
Transfers to stage 3-(54,488)54,488-
Transfers to stage 1162,432(162,432)--
Transfers to stage2-79,159(79,159)-
Transfers to stage12,612-(2,612)-
Net changes on financial assets1,226,25934,65310,2151,271,127
Writte-off--(31,664)(31,664)
Foreign Exchange adjustments(171,148)(6,218)(8,011)(185,377)
At 31 December 20189,258,962447,496444,52310,150,981

 Stage 1Stage 2Stage 3TOTAL
 CollectiveCollectiveCollective 
ECL allowance at January 1, 2018 14,60220,22773,190108,019
Transfers     
Transfers to stage 2(516)3,846-3,330
Transfers to stage 3(383)- 9,0608,677
Transfers to stage 3-(2,518)8,0565,538
Transfers to stage 1 263(6,255)-(5,992)
Transfers to stage2-2,296(10,185)(7,889)
Transfers to stage191-(232)(141)
Net changes of the exposure and modifications in the credit risk1,601575(1,784)392
Writte-off-- (13,548)(13,548)
Foreign Exchange adjustments (6,652)(3,069)  2,605(7,116)
At 31 December 20189,006 15,10267,16291,270
      

F-65

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 

NOTE 09 

LOANS AND ACCOUNT RECEIVABLE AT AMORTISED, continued

c.Consumer loans

An analysis of changes in the gross carrying amount and the corresponding ECL allowance is, as follows:

 Stage1Stage2Stage3TOTAL
 CollectiveCollectiveCollective
Gross carrying amount at  January 1, 20183,978,393 257,580 321,7194,557,692
Transfers    
Transfers to stage 2(46,936)  46,936 -
Transfers to stage 3(33,161)  33,161-
Transfers to stage 3-(19,327)19,327-
Transfers to stage 129,777(29,777)--
Transfers to stage2-17,988  (17,988)-
Transfers to stage137-(37)-
Net changes on financial assets766,0691,06376,398843,530
Writte-off--(115,933)(115,933)
Foreign Exchange adjustments(352,439)(25,424)(31,137)(409,000)
At 31 December 2018 4,341,740 249,039 285,510 4,876,289

 Stage 1Stage 2Stage 3TOTAL
 CollectiveCollectiveCollective 
ECL allowance at January 1, 201872,71254,557170,090297,359
Transfers    
Transfers to stage 2(2,117)14,655 -12,538
Transfers to stage 3(1,431)-16,31114,880
Transfers to stage 3-(3,913)10,721 6,808
Transfers to stage 1 1,320(4,890)- (3,570)
Transfers to stage2-2,943(9,107)(6,164)
Transfers to stage1 6-(18)(12)
Net changes of the exposure and modifications in the credit risk3,782(8,572)42,19437,404
Writte-off--(64,506)(64,506)
Foreign Exchange adjustments(3,368)(408)(6,619)(10,395)
At 31 December 201870,90454,372159,066284,342
      

F-66

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016 

NOTE 10 

LOANS AND ACCOUNT RECEIVABLE AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME - under IFRS 9

The Bank has decided to classify a portfolio at fair value through other comprehensive income (FVOCI) related to loans and account receivable with its major customer, when they request a credit operation which exceeds single client exposure under the Bank’s credit risk policy. The risk committe approved the operation with the condition to sold a portion of the loan in the medium term, and meanwhile the Bank is looking for a buyer the portion is classified into this category.

Additionally, the Bank includes operations which are expecting to sell or maintain, depending if market conditions are favourable, these loans are classified into this category acording to management business model.

These portfolio is initially measured at amortised cost and afterward is adjusted at fair value, recognising the adjustment in other comprehensive income, while the Bank do not sell the loan. The portfolio is assessed for impairment loss under the new ECL model, same as loans at amortised cost.

An analysis of changes in the gross carrying amount and the corresponding ECL allowance is, as follows:

 Stage1Stage2Stage3TOTAL
 IndividualIndividualIndividual
Gross carrying amount at  January 1, 2018107,998--107,998
Transfers    
Transfers to stage 2(6,697)6,697--
Transfers to stage 3----
Transfers to stage 3----
Transfers to stage 1----
Transfers to stage2----
Transfers to stage1----
Net changes on financial assets(40,754)(1,821)-(42,575)
Writte-off----
Foreign Exchange adjustments3,19873-3,271
At 31 December 201863,7454,949-68, 694

 Stage 1Stage 2Stage 3TOTAL
 IndividualIndividualIndividual
ECL allowance at January 1, 201897--97
Transfers    
Transfers to stage 2(17)26-9
Transfers to stage 3----
Transfers to stage 3----
Transfers to stage 1----
Transfers to stage2----
Transfers to stage1----
Net changes of the exposure and modifications in the credit risk8(8)--
Writte-off----
Foreign Exchange adjustments----
At 31 December 20188818-106
      

F-67

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 11

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS continued

As of December 31, 2015

 

Assets before allowances Allowances established 

Normal 

portfolio

Impaired 

portfolio

Total Individual allowancesGroup allowancesTotal 

Assets

net balance

MCh$MCh$MCh$ MCh$MCh$MCh$ MCh$
          
Commercial loans         
Commercial loans  8,262,693722,7598,985,452 159,635145,830305,465 8,679,987
Foreign trade loans  2,077,59874,9722,152,570 65,6311,47367,104 2,085,466
Checking accounts debtors221,79612,927234,723 2,6657,2049,869 224,854
Factoring transactions270,2725,375275,647 5,1947615,955 269,692
Leasing transactions1,430,470103,7221,534,192 18,8106,62725,437 1,508,755
Other loans and account receivable121,64722,128143,775 4,57012,80117,371 126,404
Subtotal12,384,476941,88313,326,359 256,505174,696431,201 12,895,158
          
Mortgage loans         
Loans with mortgage finance bonds42,2631,76544,028 -336336 43,692
Endorsable mortgage mutual loans  131,1182,987134,105 -848848 133,257
Other mortgage mutual loans  7,243,322391,3957,634,717 -61,24361,243 7,573,474
Subtotal7,416,703396,1477,812,850 -62,42762,427 7,750,423
          
Consumer loans         
Installment consumer loans2,167,378302,2682,469,646 -215,914215,914 2,253,732
Credit card balances1,410,03624,5731,434,609 -43,15943,159 1,391,450
Leasing transactions5,383775,460 -7979 5,381
Other consumer loans  236,5644,392240,956 -8,3558,355 232,601
Subtotal3,819,361331,3104,150,671 -267,507267,507 3,883,164
          
Total23,620,5401,669,34025,289,880 256,505504,630761,135

24,528,745 

           

F-62 

Table of Contents

NOTE 09

and INTERBANK LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS, continued(under IAS 39)

 

b)a.Portfolio characteristics:Loans and account receivable from customers

As of December 31, 2017

 

Assets before allowances Allowances established 

Normal

portfolio

Impaired

portfolio

Total Individual allowancesGroup allowancesTotal 

Assets

net balance

MCh$MCh$MCh$ MCh$MCh$MCh$ MCh$
          
Commercial loans         
Commercial loans  9,244,460746,1969,990,656 133,254168,736301,990 9,688,666
Foreign trade loans  1,506,35968,1541,574,513 49,0261,44450,470 1,524,043
Checking accounts debtors179,98215,714195,696 2,72611,74014,466 181,230
Factoring transactions444,6445,246449,890 4,7881,2075,995 443,895
Student loans77,22611,06488,290 -5,9225,922 82,368
Leasing transactions1,335,653121,3511,457,004 17,52912,79330,322 1,426,682
Other loans and account receivable106,81545,778152,593 11,46717,23128,698 123,895
Subtotal12,895,1391,013,50313,908,642 218,790219,073437,863 13,470,779
          
Mortgage loans         
          
Loans with mortgage finance bonds22,6201,44024,060 -123123 23,937
Endorsable mortgage mutual loans  110,6594,419115,078 -594594 114,484
Other mortgage mutual loans  8,501,072456,6858,957,757 -68,34968,349 8,889,408
Subtotal8,634,351462,5449,096,895 -69,06669,066 9,027,829
          
Consumer loans         
Installment consumer loans2,613,041297,7012,910,742 -240,962240,962 2,669,780
Credit card balances1,341,09823,8821,364,980 -33,40133,401 1,331,579
Leasing transactions4,638774,715 -6262 4,653
Other consumer loans  271,7895,466277,255 -9,3319,331 267,924
Subtotal4,230,566327,1264,557,692 -283,756283,756 4,273,936
          
Total25,760,0561,803,17327,563,229 218,790571,895790,685 

26,772,544

           

b.Interbank loans

 

As of December 31, 2016 and 2015 the portfolio before allowances2017 balances of Interbank loans is as follows, by customer’s economic activity:follows:

 Domestic loans (*) Foreign interbank loans Total loans Distribution percentage
 As of December 31 As of December 31, As of December 31, As of December 31,
 20162015 20162015 20162015 20162015
 MCh$MCh$ MCh$MCh$ MCh$MCh$ %%
Commercial loans           
Manufacturing1,180,8861,171,830 -- 1,180,8861,171,830 4.344.63
Mining340,554510,467 -- 340,554510,467 1.252.02
Electricity, gas, and water442,936454,456 -- 442,936454,456 1.631.80
Agriculture and livestock1,096,6591,019,922 -- 1,096,6591,019,922 4.034.03
Forest96,80696,069 -- 96,80696,069 0.360.38
Fishing296,592344,496 -- 296,592344,496 1.091.36
Transport787,510876,329 -- 787,510876,329 2.893.46
Communications196,934160,135 -- 196,934160,135 0.720.63
Construction1,792,4851,462,535 -- 1,792,4851,462,535 6.595.78
Commerce3,120,4003,050,663 272,73310,827 3,393,1333,061,490 12.4712.10
Services482,900483,516 -- 482,900483,516 1.771.91
Other4,032,8773,695,991 -- 4,032,8773,695,991 14.8414.61
            
Subtotal13,867,53913,326,409 272,73310,827 14,140,27213,337,236 51.9852.71
            
Mortgage loans8,619,3567,812,850 -- 8,619,3567,812,850 31.6830.88
            
Consumer loans4,446,8034,150,671 -- 4,446,8034,150,671 16.3416.41
            
Total26,933,69825,289,930 272,73310,827 27,206,43125,300,757 100.00100.00

 

(*)MCh$
Domestic banksIncludes
Interbank loans-
Other domestic bank loans-
Foreign interbank loans
Interbank loans- foreign162,685
Provisions and impairment for Ch$74 million as of December 31, 2016 (Ch$50 million as of December 31, 2015), see Note 8.foreign bank loans(472)
Total162,213

F-63 

Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 09

11

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS and INTERBANK LOANS (under IAS 39), continued

 

c)     Impaired PortfolioThe provisions and impairment as od December 31, 2017 is shown below:

 

 Domestic banksForeign banksTotal
 MCh$MCh$MCh$
Balance as of January 1, 2017-4,1354,135
Provisions established25156307
Provisions released(251)(3,719)(3,970)
    
Total-472472

i)

c.Portfolio characteristics

As of December 31, 2016 and 2015,2017, the impaired portfolio before allowance by customer’s economic activity is as follows:

  

 

As of December 31, 

 2016 2015
 Commercial Mortgage Consumer Total Commercial Mortgage Consumer Total
 MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$
Individual impaired portfolio439,707 -  -  439,707 486,685 -  -  486,685
Non-performing loans (1) (collectively evaluated)316,838 147,572 99,721 564,131 346,868 183,133 113,467 643,468
Other impaired portfolio172,624 250,116 188,863 611,603 108,330 213,014 217,843 539,187
Total929,169 397,688 288,584 1,615,441 941,883 396,147 331,310 1,669,340
 Domestic loans Foreign interbank loans Total loans 

Distribution

percentage

 MCh$ MCh$ MCh$ %
Commercial loans       
Manufacturing1,218,232   1,218,232              4.39
Mining302,037 - 302,037              1.09
Electricity, gas, and water336,048 - 336,048              1.21
Agriculture and livestock1,114,597 - 1,114,597              4.02
Forest98,941 - 98,941              0.36
Fishing215,994 - 215,994             0.78
Transport697,948 - 697,948              2.52
Communications168,744 - 168,744              0.61
Construction1,977,417 - 1,977,417              7.13
Commerce3,131,870 162,685 3,294,555            11.88
Services467,747 - 467,747              1.69
Other4,179,067 - 4,179,067            15.07
   -    
Subtotal13,908,642 162,685 14,071,327 50.75
        
Mortgage loans9,096,895   9,096,895            32.81
   -    
Consumer loans4,557,692   4,557,692            16.43
   -    
Total27,563,229 162,685 27,725,914 100.00

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 11

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS and INTERBANK LOANS (under IAS 39), continued

d.Impaired Portfolio

i)As of December 31, 2017 the impaired portfolio is as follows:

 As of December 31,
 2017
 Commercial Mortgage Consumer Total
 MCh$ MCh$ MCh$ MCh$
Individual impaired portfolio427,890 - - 427,890
Non-performing loans (1) (collectively evaluated)368,522 161,768 103,171 633,461
Other impaired portfolio217,091 300,776 223,955 741,822
Total1,013,503 462,544 327,126 1,803,173

 

(1) Non-performing loans include the aggregate unpaid principal and accrued but unpaid interest on all loans with at least one installment at least 90 days past-due.

 

ii) The impaired portfolio with or without guarantee as of December 31, 2016 and 2015 is as follows:

ii)The impaired portfolio with or without guarantee as of December 31, 2017 is as follows:

 

As of December 31,

 As of December 31,
2016 20152017
Commercial Mortgage Consumer Total Commercial Mortgage Consumer TotalCommercial Mortgage Consumer Total
MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$MCh$ MCh$ MCh$ MCh$
Secured debt519,821 357,320 35,134 912,275 410,700 362,326 42,244 815,270582,557 413,716 34,260 1,030,533
Unsecured debt409,348 40,368 253,450 703,166 531,183 33,821 289,066 854,070430,946 48,828 292,866 772,640
Total929,169 397,688 288,584 1,615,441 941,883 396,147 331,310 1,669,3401,013,503 462,544 327,126 1,803,173
     

 

iii) The portfolio of non-performing loans with or without guarantee, as of December 31, 2016 and 2015 is as follows:

iii)The portfolio of non-performing loans with or without guarantee, as of December 31, 2017 is as follows:

 

As of December 31,

As of December 31,
2016 2015 2017
Commercial Mortgage Consumer Total Commercial Mortgage Consumer Total Commercial Mortgage Consumer Total
MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$ MCh$
Secured debt159,965 129,632 8,940 298,537 115,733 158,854 9,144 283,731 167,909 141,413 8,896 318,218
Unsecured debt156,873 17,940 90,781 265,594 231,135 24,279 104,323 359,737 200,613 20,355 94,275 315,243
Total316,838 147,572 99,721 564,131 346,868 183,133 113,467 643,468 368,522 161,768 103,171 633,461

 

iv)The portfolio of non-performing portfolio as of December 31, 2017 is as follows:

 

 As of December31, 
  2017
  CommercialMortgageConsumerTotal
  MM$MM$MM$MM$
Non-performing >90 days 362,968159,26592,541614,774
Non-performing <90 days 5,5542,50310,63018,687
Total 368,522161,768103,171633,461
       

F-64 F-70

Table of Contents

 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 09

11

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS and INTERBANK LOANS (under IAS 39), continued

 

d)e.Allowances

 

The changes in allowance balances during 20162018 and 20152017 are as follows:

 

Activity during 2016

Commercial

loans

Mortgage

loans

Consumer

loans

Total
 IndividualGroupGroupGroup
 MCh$MCh$MCh$MCh$MCh$
      
Balance as of January 1, 2016256,505174,696   62,427267,507761,135
Allowances established (1)61,002133,85550,892280,544526,293
Allowances released (2)(43,183)(14,432)(34,246)(30,790)(122,651)
Allowances released due to charge-off (3)(54,924)(104,868)(10,911)(207,604)(378,307)
Balances as of December 31, 2016219,400189,25168,162309,657786,470

Activity during 2015

Commercial

loans

Mortgage

loans

Consumer

loans

Total
Activity during 2017

Commercial

loans

Mortgage

loans

Consumer 

loans

Total
IndividualGroupGroupTotalIndividualGroupGroup
MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$
  
Balance as of January 1, 2015215,852165,697   48,744254,023684,316
Balance as of January 1, 2017246,336183,10657,009300,019786,470
Allowances established (1)124,968136,77834,373248,937545,05664,658148,68143,621252,038508,998
Allowances released (2)(46,614)(17,885)(7,205)(18,126)(89,830)(55,925)(20,491)(11,427)(46,089)(133,932)
Allowances released due to charge-off (3)(37,701)(109,894)(13,485)(217,327)(378,407)(36,279)(92,223)(20,137)(222,212)(370,851)
Balances as of December 31, 2015256,505174,69662,427267,507761,135
Balances as of December 31, 2017218,790219,07369,066283,756

790,685 

 

(1)Represents gross allowances made in respect of increased risk of loss during the period and loan growth.

(2)Represents the gross amount of loan loss allowances released during the year as a consequence of reduction in the level of risk existing in the loan portfolio, including as a result of improvement in the credit risk classification of borrowers and loans paid.

(3)Represents the gross amount of loan loss allowances removed due to charge-off.

 

F-65 

Table of Contents

NOTE 09

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS, continued

e)f.Recoveries by type of loan

 

 For the years ended December 31,
 2016 2015 2014
 MCh$ MCh$ MCh$
      
Commercial loans 27,185  26,032 16,947
Consumer loans 41,072  35,565 36,908
Residential mortgage loans 10,041  6,543 5,122
Total78,298 68,140 58,977

 For the years ended December 31,
  2017 2016
  MCh$ MCh$
     
Commercial loans  32,401  27,185
Consumer loans  39,972  41,072
Residential mortgage loans  10,942  10,041
Total 83,315 78,298
      

Recoveries of loans previously charged off are recognizedrecognised as income in the line item “Provision for loans losses”. We only recognizerecognise as a recovery interest and/or principal paid in cash in connection with a loan that has already been charged-off in its entirety.entirety, Such recoveries do not have an impact on our allowance for loan losses as these recoveries are for loans that have been already charged-off and recognizedrecognised as a loss in our income statementstatements and are no longer on-balance sheet.

 

f)g.Allowances established on customer and interbank loans

 

The following chart shows the balance of allowances established, associated with credits granted to customers and banks:

 

As of December 31,As of December 31,
2016 2015 2014 2017 2016
MCh$ MCh$ MCh$ MCh$ MCh$
  
Customers loans354,367 371,489 296,257 508,998 526,293
Interbank loans3,052 1,357 60 307 3,052
Total

357,419 

 

372,846

296,317 509,305         

529,345 


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

F-66 

Table of Contents

NOTE 09

11

LOANS AND ACCOUNTS RECEIVABLE FROM CUSTOMERS and INTERBANK LOANS (under IAS 39), continued

 

g)Portfolio by its impaired and non-impaired status.

h.Portfolio by its impaired and non-impaired status.

 

As of December 31, 2016As of December 31, 2017
Non-impairedImpairedPortfolio totalNon-impairedImpairedPortfolio total
CommercialMortgageConsumer

Total non

impaired

CommercialMortgageConsumer

Total

impaired

CommercialMortgageConsumer

Total

portfolio 

CommercialMortgageConsumer

Total non

impaired

CommercialMortgageConsumer

Total

impaired

CommercialMortgageConsumer

Total 

portfolio

MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$
  
Current portfolio12,765,9617,944,2603,957,56624,667,787463,176133,816100,670697,66213,229,1378,078,0764,058,23625,365,44912,737,5088,357,7334,012,48925,107,730449,895158,770110,184718,84913,187,4038,516,5034,122,67325,826,579
Overdue for 1-29 days97,30269,227113,031279,56035,77712,98432,53681,297133,07982,211145,567360,857103,908180,294132,136416,338110,83474,07246,283231,189214,742254,366178,419647,527
Overdue for 30-89 days75,033208,18187,622370,836118,461105,80470,920295,185193,494313,985158,542666,02153,72396,32485,941235,98889,80670,43778,118238,361143,529166,761164,059474,349
Overdue for 90 days or more--311,755145,08484,458541,297311,755145,08484,458541,297--362,968159,26592,541614,774362,968159,26592,541614,774
  
Total portfolio before allowances12,938,2968,221,6684,158,21925,318,183929,169397,688288,5841,615,44113,867,4658,619,3564,446,80326,933,62412,895,1398,634,3514,230,56625,760,0561,013,503462,544327,1261,803,17313,908,6429,096,8954,557,69227,563,229
  
Overdue loans (less than 90 days) presented as portfolio percentage1.33%3.37%4.83%2.57%16.60%29.87%35.85%23.31%2.35%4.60%6.84%3.81%1.22%3.20%5.15%2.53%19.80%31.24%38.03%26.04%2.58%4.63%7.51%4.07%
  
Overdue loans (90 days or more) presented as portfolio percentage.--33.55%36.48%29.27%33.51%2.25%1.68%1.90%2.01%
Overdue loans (90 days or more) presented as portfolio percentage,-35.81%34.43%28.29%34.09%2.61%1.75%2.03%2.23%

 

i.Reconciliation of overdue loans with non-performing loans.

 As of December 31, 2017
 Commercial Mortgage Consumer Total
 MCh$ MCh$ MCh$  
        
Overdue loans 362,968  159,265  92,541  614,774
Loans with not overdue but classified as non-performing loans 5,554  2,503  10,630  18,687

Total 

 368,522  161,768 103,171 633,461

 

F-67 

Table of Contents

NOTE 09

LOANSBanco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND ACCOUNTS RECEIVABLE FROM CUSTOMERS, continued

 As of December 31, 2015
 Non-impairedImpairedPortfolio total
 CommercialMortgageConsumer

Total non

impaired

CommercialMortgageConsumer

Total

impaired

CommercialMortgageConsumer

Total

portfolio

 MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$
             
Current portfolio12,207,9677,125,4043,617,67622,951,047441,308146,909134,700722,91712,649,2757,272,3133,752,37623,673,964
Overdue for 1-29 days98,69280,621120,912300,22561,62611,99045,280118,896160,31892,611166,192419,121
Overdue for 30-89 days77,817210,67880,773369,268108,74361,96259,754230,459186,560272,640140,527599,727
Overdue for 90 days or more----330,206175,28691,576597,068330,206175,28691,576597,068
             
Total portfolio before allowances12,384,4767,416,7033,819,36123,620,540941,883396,147331,3101,669,34013,326,3597,812,8504,150,67125,289,880
             
Overdue loans (less than 90 days) presented as portfolio percentage1.43%3.93%5.28%2.83%18.09%18.67%31.70%20.93%2.60%4.68%7.39%4.03%
             
Overdue loans (90 days or more) presented as portfolio percentage.----35.06%44.25%27.64%35.77%2.48%2.24%2.21%2.36%

F-68 

Table of Contents

NOTE 09

LOANS2017 AND ACCOUNTS RECEIVABLE FROM CUSTOMERS, continuedFOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

Reconciliation of overdue loans with non-performing loansNOTE 12

DEBT INSTRUMENTS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME

 

 As of December 31, 2016
 Commercial Mortgage Consumer Total
 MCh$ MCh$ MCh$  
        
Overdue loans 311,755  145,084  84,458  541,297
Loans with not overdue but classified as non-performing loans 5,083  2,488  15,263  22,834
Total 316,838  147,572  99,721 564,131
I.Debt instruments at fair value through other comprehensive income (FVOCI) - under IFRS 9

 

 As of December 31, 2015
 Commercial Mortgage Consumer Total
 MCh$ MCh$ MCh$  
        
Overdue loans 330,206  175,286  91,576  597,068
Loans with not overdue but classified as non-performing loans 16,662  7,847  21,891  46,400

Total

 346,868  183,133  113,467 643,468

As of December 31, 2018 detail of debt instruments is as follows:

 

F-69 

Table of Contents
 As of December 31,
 2018 2017
 MCh$ MCh$
Chilean central bank and government securities   
Chilean central bank bonds657,096 -
Chilean central bank notes56,719 -
Other Chilean central bank and government securities1,207,221 -
Subtotal1,921,036 -
of which sold under repurchase agreement16,109 -
Other Chilean securities   
Time deposits in Chilean financial institutions2,693 -
Mortgage finance bonds of Chilean financial institutions19,227 -
Other instruments issued in the country2,907 -
Subtotal24,827 -
of which sold under repurchase agreement32,436 -
Foreign financial securities   
Foreign Central Banks and Government securities280,622 -
Other foreign financial securities167,838 -
Subtotal448,460 -
of which sold under repurchase agreement- -
Total2,394,323 -

 

NOTE 10

AVAILABLE FOR SALE INVESTMENTSAs of December 31, 2018 “Chilean central bank and government securities” guarantee derivatives transactions through Comder Contraparte Central S.A. in the local market for Ch$48,081, while “Foreign financial securities” guarantee  derivatives transactions through London Clearing House (LCH) for Ch$58,892. Additionally, the Bank maintains guarantees with Euroclear for Ch$98,832 to comply with the initial margin required by European EMIR standard.

 

As of December 31, 20162018 fair value throgh OCI included a cumulative net unrealised income of Ch$6,424 million, recoded as “valuation adjustment” in OCI, of which Ch$5,114 million are attributable to shareholders and 2015, detailCh$1,310 million to non-controlling interest.

An analysis of instruments deemedchanges in the fair value and the corresponding ECL is as follows:

 Stage1Stage2Stage3TOTAL
 CollectiveCollectiveCollective
Gross carrying amount at  January 1, 20182,574,546--2,574,546
New assets purchased5,037,857--5,037,857
Transfers to stage 1----
Transfers to stage 2----
Transfers to stage 3----
Assets derecognised or matured (excluding write offs)(5,604,114)--(5,604,114)
Changes due to modifications not derecognised----
Writte-off----
Foreign Exchange adjustments386,034--386,034
At 31 December 20182,394,323--2,394,323

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 12

DEBT INSTRUMENTS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME, continued

 Stage1Stage2Stage3TOTAL
 CollectiveCollectiveCollective
ECL at  January 1, 2018324--324
New assets purchased634--634
Transfers to stage 1----
Transfers to stage 2----
Transfers to stage 3----
Assets derecognised or matured (excluding write offs)(705)--(705)
Changes due to modifications not derecognised----
Writte-off----
Foreign Exchange adjustments5--5
At 31 December 2018258--258

Gross profits and losses realized on the sale of available for sale investments as of December 31, 2018 is as follows:

 

 As of December 31,
 2016 2015
 MCh$ MCh$
    
Chilean central bank and government securities   
Chilean central bank bonds468,386 687,292
Chilean central bank notes                1,222,283 -
Other Chilean central bank and government securities52,805 145,603
Subtotal         1,743.474 832,895
Other Chilean securities   
Time deposits in Chilean financial institutions         893,000 712,859
Mortgage finance bonds of Chilean financial institutions          25,488 29,025
Subtotal         918,488 741,884
Foreign financial securities   
Foreign Central Banks and Government securities                 387,146  -
Other foreign financial securities         339,798 469,632
Subtotal         726,944 469,632
    
Total      3,388,906 2,044,411
MCh$
Sale of available for sale investments generating realized profits3,505,266
Realized profits5,286
Sale of available for sale investments generating realized losses709,371
Realized losses6,788

II.

Available for sale investments - under IAS 39

 As of December 31,
 2018 2017
 MCh$ MCh$
Chilean central bank and government securities   
Chilean central bank bonds-  816,331
Chilean central bank notes-  330,952   
Other Chilean central bank and government securities-  1,115,518
Subtotal-   2,262,801
Other Chilean securities   
Time deposits in Chilean financial institutions-  2,361
Mortgage finance bonds of Chilean financial institutions-  22,312
Other instruments issued in the country- 3,000
Subtotal- 27,673
Foreign financial securities   
Foreign Central Banks and Government securities-  132,822
Other foreign financial securities-  151,250
Subtotal-  284,072
Total- 2,574,546

 

As of December 31, 2016 and 2015,2017, the line itemChilean central bank and government securities item includes securities sold under repurchase agreements to clients and financial institutions for Ch$155,044 and241,995 million. Additionally, as of December 31, 2017 these instruments guarantee derivatives transactions through Comder Contraparte Central S,A, for Ch$72,901 million, respectively.42,910.

 

As of December 31, 2016 and 2015,2017, the line itemOther Chilean securities includes securities sold to customers and financial institutions under repurchase agreements totaling Ch$57,3931,156 million.

As of December 31, 2017, the line itemForeign financial securities item includes securities sold under repurchase agreements to clients and financial institutions for Ch$68,321 million, respectively.24,910 million. Additionally, this instruments guarantee derivatives transactions through London Clearing House (LCH) for Ch$48,106 million. In order to comply with the initial margin specified in the European EMIR standard, the Bank maintained securities in guaranteed with Euroclear for Ch$33,711 million.


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 12

DEBT INSTRUMENTS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME, continued

 

As of December 31, 20162017 available for sale investments included a cumulative net unrealized income of Ch$7,3751,855 million, recorded as a “Valuation adjustment” in Other comprehensiveother comprenhensive income, distributed between Ch$6,449459 million attributable to the equity holdersshareholders of the Bank and Ch$9261,396 million attributable to non-controlling interest.

As of December 31, 2015 available for sale investments included a cumulative net unrealized loss of Ch$7,093 million, recorded as a “Valuation adjustment” in Other comprehensive income, distributed between Ch$6,965 million attributable to the equity holders of the Bank and Ch$128 million attributable to non-controlling interest.

F-70 

Table of Contents

NOTE 10

AVAILABLE FOR SALE INVESTMENTS, continued

 

Gross profits and losses realized on the sale of available for sale investments as of December 31, 2016, 20152017 and 2014,2016, are as follows:

 

For the years ended December 31,
2016 2015 2014For the years ended December 31,
MCh$ MCh$ MCh$ 2017 2016
    MCh$ MCh$
Sale of available for sale investments generating realized profits6,522,549 2,627,490 2,064,836 6,469,344 6,522,549
Realized profits12,333 22,473 6,079 4,867 12,333
Sale of available for sale investments generating realized losses346,906 346,450 92,620 466,732 346,906
Realized losses132 72 64 3 132

 

The Bank evaluated those instruments with unrealized losses as of December 31, 20162017 and 20152016 and concluded they were not impaired. This review consisted of evaluating the economic reasons for any declines, the credit ratings of the securities’ issuers, and the Bank’s intention and ability to hold the securities until the unrealized loss is recovered. Based on this analysis, the Bank believes that there were no significant or prolonged declines nor changes in credit risk which would cause impairment in its investment portfolio, since most of the decline in fair value of these instruments was caused by market conditions which the Bank considers to be temporary. All of the instruments that have unrealized losses as of December 31, 20162017 and 2015,2016, were not in a continuous unrealized loss position for more than one year.


F-71 

Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 1012

AVAILABLE FOR SALE INVESTMENTS,DEBT INSTRUMENTS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME, continued

 

The following charts show the available for sale investments cumulative unrealized profit and loss, as of December 31, 20162017:

 Less than 12 months More than 12 months Total
 Acquisition costFair value

Unrealized 

profit 

Unrealized loss Acquisition costFair value

Unrealized 

profit

Unrealized loss Acquisition costFair value

Unrealized

profit

Unrealized loss
 MCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$
               
Chilean central bank and government securities              
Chilean central bank Bonds816,164816,3315,513(5,346) ---- 816,164816,3315,513(5,346)
Chilean central bank notes330,923330,95230(1) ---- 330,923330,95230(1)
Other Chilean central bank and government securities1,117,4471,115,5182,960(4,888) ---- 1,117,4471,115,5182,960(4,888)
Subtotal2,264,5342,262,8018,503(10,235) ---- 2,264,5342,262,8018,503(10,235)
               
Other Chilean securities              
Time deposits in Chilean financial institutions2,3612,361-- ---- 2,3612,361--
Mortgage finance bonds of Chilean financial institutions21,86722,312445- ---- 21,86722,312445-
Chilean financial institution bonds---- ---- ----
Chilean corporate bonds---- ---- ----
Other Chilean securities2203,0002,780- ---- 2203,0002,780-
Subtotal24,44827,6733,225- ---- 24,44827,6733,225-
               
Foreign financial securities              
Foreign central banks and government securities133,301132,822847(1,326) ---- 133,301132,822847(1,326)
Other foreign financial securities150,408151,2501,097(256) ---- 150,408151,2501,097(256)
Subtotal283,709284,0721,944(1,582) ---- 283,709284,0721,944(1,582)
               
Total2,572,6912,574,54613,672(11,817) ---- 2,572,6912,574,54613,672(11,817)

Banco Santander Chile and 2015:Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

As of December 31, 2016:

 Less than 12 months More than 12 months Total
 Acquisition costFair value

Unrealized

profit

Unrealized loss Acquisition costFair value

Unrealized

profit

Unrealized loss Acquisition costFair value

Unrealized 

profit

Unrealized loss
 MCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$
               
Chilean central bank and government securities              
Chilean central bank Bonds461,793468,3866,612(19) ---- 461,793468,3866,612(19)
Chilean central bank Notes1,222,2631,222,28323(3) ---- 1,222,2631,222,28323(3)
Other Chilean central bank and government securities52,41152,805394- ---- 52,41152,805394-
Subtotal1,736,4671,743,4747,029(22) ---- 1,736,4671,743,4747,029(22)
               
Other Chilean securities              
Time deposits in Chilean financial institutions892,956893,000108(64) ---- 892,956893,000108(64)
Mortgage finance bonds of Chilean financial institutions25,02125,488469(2) ---- 25,02125,488469(2)
Chilean financial institution bonds---- ---- ----
Chilean corporate bonds---- ---- ----
Other Chilean securities---- ---- ----
Subtotal917,977918,488577(66) ---- 917,977918,488577(66)
               
Foreign financial securities              
Foreign central banks and government securities387,077387,14669- ---- 387,077387,14669-
Other foreign financial securities340,010339,798655(867) ---- 340,010339,798655(867)
Subtotal727,087726,944724(867) ---- 727,087726,944724(867)
               
Total3,381,5313,388,9068,330(955) ---- 3,381,5313,388,9068,330(955)

F-72 

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NOTE 10

AVAILABLE FOR SALE INVESTMENTS, continued

As of December 31, 2015:

 Less than 12 months More than 12 months Total
 Acquisition costFair value

Unrealized

profit

Unrealized loss Acquisition costFair value

Unrealized

profit

Unrealized loss Acquisition costFair value

Unrealized

profit

Unrealized loss
 MCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$
               
Chilean central bank and government securities              
Chilean central bank Bonds692,559687,292280(5,547) ---- 692,559687,292280(5,547)
Chilean central bank notes---- ---- ----
Other Chilean central bank and government securities145,778145,603541(716) ---- 145,778145,603541(716)
Subtotal838,337832,895821(6,263) ---- 838,337832,895821(6,263)
               
Other Chilean securities              
Time deposits in Chilean financial institutions713,172712,85944(357) ---- 713,172712,85944(357)
Mortgage finance bonds of Chilean financial institutions28,72629,025325(26) ---- 28,72629,025325(26)
Chilean financial institution bonds---- ---- ----
Chilean corporate bonds---- ---- ----
Other Chilean securities---- ---- ----
Subtotals741,898741,884369(383) ---- 741,898741,884369(383)
               
Foreign financial securities              
Foreign central banks and government securities---- ---- ----
Other foreign financial securities471,269469,6321,577(3,214) ---- 471,269469,6321,577(3,214)
Subtotal471,269469,6321,577(3,214) ---- 471,269469,6321,577(3,214)
               
Total2,051,5042,044,4112,767(9,860) ---- 2,051,5042,044,4112,767(9,860)

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NOTE 11

13

INVESTMENTS IN ASSOCIATES AND OTHER COMPANIES

 

a)Investments in associates and other, are shown in the following table:

 

     Investment
 

Ownership interest

As of December 31

Investment value

As of December 31,

 

Profit and loss

As of December 31,

 

2016

MCh$ 

2015

MCh$

2014

MCh$ 

2016

MCh$

2015 

MCh$

 

2016

MCh$

2015

MCh$ 

2014

MCh$

Company          
Redbanc S.A.33.4333.4333.43          2,1841,876 373         215         211
Transbank S.A. (1)25.0025.0025.00        12,510       10,201        1,3021,2561,022
Centro de Compensación Automatizado33.3333.3333.33 1,353        1,105           248212220
Sociedad Interbancaria de Depósito de Valores S.A.29.2929.2929.29            938            794           195213170
Cámara de Compensación de Alto Valor S.A. (2 & 3)14.9314.2314.14             866            768             98         127         107
Administrador Financiero del Transantiago S.A.20.0020.0020.00 2,7812,552           230         323         282
Sociedad Nexus S.A.12.9012.9012.90 1,4691,290           247        225        195
Servicios de Infraestructura de Mercado OTC S.A. (4)12,0711.1111.11 1,378        1,138 132(115)(172)
Subtotal    23,47919,724 2,825      2,456      2,035
Shares or rights in other companies (*)          
Bladex    136 136 26 25 20
Stock Exchanges                157 417 161 107 110
Others    8 32 ---
Total    23,78020,309 3,0122,5882,165
             

(*) Investments in associates and other companies do not have market prices.

     Investment
 

Ownership interest

As of December 31

 

Investment value

As of December 31,

 

Profit and loss 

As of December 31,

 

2018

%

2017

%

 

2016

%

 

2018

MCh$

2017

MCh$

 

 

2018

MCh$

 

2017

MCh$

 

2016

MCh$

Company          
Redbanc S.A.33.4333.4333.43 2,8222,537 285353373
Transbank S.A.25.0025.0025.00 17,65114,534 3,1182,0241,302
Centro de Compensación Automatizado33.3333.3333.33 1,8941,589 305236248
Sociedad Interbancaria de Depósito de Valores S.A.29.2929.2929.29 1,2331,087 223235195
Cámara de Compensación de Alto Valor S.A. (1,2,3)15.0015.0014.93 945909 5866 98
Administrador Financiero del Transantiago S.A.20.0020.0020.00 3,6803,098 582317230
Sociedad Nexus S.A.12.9012.9012.90 2,2791,911 368442 247
Servicios de Infraestructura de Mercado OTC S.A.(1&2)12.4812.4812.07 1,4911,489 57115132
Subtotal    31,99527,154 4,9963,7882,825
Shares or rights in other companies (*)          
Bladex    -136 192526
Stock Exchanges    -287 148150161
Others    88 (68)--
Total    32,00327,585 5,0953,9633,012

 

(1)A capital increase was agreed in the Transbank’s Extraordinary Shareholders’ Meeting held in April 2016. Banco Santander participated in proportion to its ownership share (25%).

(2)In October 2015, HSBC Bank Chile sold its participation in Sociedad Operadora de la Cámara de Compensación de Pagos de Alto Valor S.A to Banco Santander. This transaction increased the Bank’s participation to 14.23%. See Note 1.

(3)During the third quarter of 2016, a transaction took place through which Banco Penta ceded to Banco Santander a portion of its interest in the companies "Sociedad“Sociedad Operadora de la Cámara de Compensación de pagos de Alto Valor SA"SA” and "Servicios“ Servicios de Market InfrastructureInfraestructura de Mercado OTC SA "with whichS.A”, the Bank's participation hasBank’s share in those companies increased to 14.84% and 11.93% respectively.

 

(4)(2)During the last quarter of 2016, a transaction was carried out through which Banco Penta ceded to Banco Santander a portion of its interest in the companies "Sociedad“Sociedad Operadora de la Cámara de Compensación de pagos de Alto Valor SA"SA” and "Servicios de“ Market Infrastructureinfrastructure services OTC SA "with whichS.A”, the Bank'sBank’s share hasin those companies increased to 14.93% and 12.07% respectively.

 

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(3)In February 2017, Banco Paris sold to Banco Santander a portion of its interest in the companies “Sociedad Operadora de la Cámara de Compensación de pagos de Alto Valor SA”, the Bank’s share increased to 15.00%.

 

As described in Note 1 g), the Bank has irrevocably designated its shares in Bladex and Stock exchange at fair value through other comprehensive income (FVOCI) Related dividends are recognised in the income statements under "Income from investments in associates and other companies". The fair value of these equity investments is as follows:

December 31, 2018
MCh$
Bladex329
Stock exchange154
Total483



Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 1113

INVESTMENTS IN ASSOCIATES AND OTHER COMPANIES, continued

 

b)Summary of financial information of associates as of and for the years ended December 31, 2016, 20152018, 2017 and 2014.2016:

 

As of December 31,  
 2016 2015 2014
    Net income    Net income    Net income
AssetsLiabilitiesEquityAssetsLiabilitiesEquity AssetsLiabilitiesEquity
 MCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$
               
Centro de Compensación Automatizado5,5081,5233,241744 5,1481,8972,616635 3,7311,1171,953661
Redbanc S.A.19,92713,5055,3071,115 20,29614,8774,777642 19,21514,2464,336633
Transbank S.A.710,475660,95744,3095,209 601,627561,32535,2785,024 535,507501,33030,0884,089
Sociedad Interbancaria de Depósito de Valores S.A.3,2041032,435666 2,714582,093563 2,7153141,863538
Sociedad Nexus S.A.30,03819,2298,8981,911 23,15313,6827,7301,741 14,4386,1856,7451,508
Servicios de Infraestructura de Mercado OTC S.A.29,25818,2589,9061,094 17,6317,80010,869(1,038) 12,0011,09412,603(1,696)
Administrador Financiero del Transantiago S.A.54,253 40,345 12,758 1,150  42,518 29,760 11,145 1,613  70,30259,1579,7371,408
Cámara de Compensación de Alto Valor S.A.6,0996274,815657 5,7307754,066889 5,2786363,901741
Total858,762754,54791,66912,546 718,817630,17478,57410,069 663,187584,07971,2267,882
                                                                  As of December 31,  
 2018 2017 2016
    Net income    Net income    Net income
AssetsLiabilitiesEquityAssetsLiabilitiesEquity AssetsLiabilitiesEquity
 MCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$
               
Centro de Compensación Automatizado S,A,7,0731,4804,677916 6,8712,1743,989708 5,5081,5233,241744
Redbanc S,A,20,82512,4697,505851 21,23513,7516,4281,056 19,92713,5055,3071,115
Transbank S,A,904,558835,20056,88812,470 822,487765,68348,7098,095 710,475660,95744,3095,209
Sociedad Interbancaria de Depósito de Valores S,A,4,3922303,400762 3,720602,858802 3,2041032,435666
Sociedad Nexus S,A,3518143 32,66918,88810,3543,427 30,03819,2298,8981,911
Servicios de Infraestructura de Mercado OTC S,A,25,27313,31311,506454 17,9136,41410,963536 29,25818,2589,9061,094
Administrador Financiero del Transantiago S,A,55,81837,41915,4902,909 51,30435,81413,9071,583 54,25340,34512,7581,150
Cámara de Compensación de Alto Valor S,A,6,7286225,722384 6,3385005,399439 6,0996274,815657
Total1,024,702900,751105,20218,749 962,537843,284102,60716,646 858,762754,54791,66912,546

 

c) Restrictions over the ability of associated companies to transfer funds to investors.

 

There are no significant restrictions regarding the capacity of associates to transfer funds, whether in cash dividends, refund of loans, or advance payments to the Bank.

 

d) Activity with respect to investments in other companies during 2016, 20152018, 2017 and 20142016 is as follows:

 

 As of December 31,
 20162015 2014
 MCh$MCh$ MCh$
     
Opening balance as of January 1,20,30917,914 9,681
Acquisition of investments (*)1,123302 6,313
Sale of investments-- -
Participation in income3,0122,588 2,165
Dividends received(217)(278) (119)
Other equity adjustments(447)(217) (126)
     
Total23,78020,309 17,914

 As of December 31,
 2018           2017 2016
 MCh$          MCh$ MCh$
     
Opening balance as of January 1,27,58523,780 20,309
Acquisition of investments (*)-3 1,123
Sale of investments-- -
Participation in income5,0953,963 3,012
Dividends received(38)(116) (217)
Other equity adjustments(639)(45) (447)
     
Total32,00327,585 23,780
(*)See reference, (1) of part a) of this note.

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Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 12

14

INTANGIBLE ASSETS

 

a)   As of December 31, 2016 and 2015, the composition of intangible assets is as follows:

a.As of December 31, 2018 and 2017, the composition of intangible assets is as follows:

 

  As of December 31, 2016   As of December 31, 2018

Years of

useful

life

Average remaining useful life

Net opening balance as of

January 1, 2016

Gross balanceAccumulated amortizationNet balance

Years of

useful

life

Average remaining useful life

Net opening balance as of

January 1, 2018

Gross

balance

Accumulated amortizationNet balance
  MCh$  MCh$
        
Licenses322,06010,932(9,276)1,656311,20010,932(9,956)976
Software development3249,077286,781(230,352)56,4293262,019342,112(276,165)65,947
   
Total 51,137297,713(239,628)58,085 63,219353,044(286,121)66,923

 

  As of December 31, 2015   As of December 31, 2017

Years of

useful

life

Average remaining useful life

Net opening balance as of

January 1, 2015

Gross balanceAccumulated amortizationNet balance

Years of

useful

life

Average remaining useful life

Net opening balance as of

January 1, 2017

Gross

balance

Accumulated amortizationNet balance
  MCh$  MCh$
        
Licenses322,00610,932(8,872)2,060311,65610,932(9,732)1,200
Software development3238,977259,500(210,423)49,0773256,429314,115(252,096)62,019
   
Total 40,983270,432(219,295)51,137 58,085325,047(261,828)63,219

 

b)b.The changes in the value of intangible assets during the periods ended December 31, 20162018 and December 31, 20152017 is as follows:

 

b.1)b.1Gross balance

 

Gross balancesLicensesSoftware developmentTotalLicensesSoftware developmentTotal
MCh$MCh$
  
Balances as of January 1, 201610,932259,500270,432
Balances as of January 1, 201810,932314,115325,047
Acquisitions-27,281-29,56329,563
Disposals and impairment---
Other--(1,566)(1,566)
Balances as of December 31, 201610,932286,781297,713
Balances as of December 31, 201810,932342,112353,044
  
Balances as of January 1, 201510,441232,418242,859
Balances as of January 1, 201710,932286,781297,713
Acquisitions49127,08227,573-32,624
Disposals and impairment--(5,290)
Other--
Balances as of December 31, 201510,932259,500270,432
Balances as of December 31, 201710,932314,115325,047

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Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 1214

INTANGIBLE ASSETS, continued

 

b.2)b.2 Accumulated amortization

 


Accumulated amortization		LicensesSoftware developmentTotalLicensesSoftware developmentTotal
MCh$MCh$
  
Balances as of January 1, 2016(8,872)(210,423)(219,295)
Balances as of January 1, 2018(9,732)(252,096)(261,828)
Year’s amortization(404)(19,929)(20,333)(224)(24,069)(24,293)
Other changes---
Balances as of December 31, 2016(9,276)(230,352)(239,628)
Balances as of December 31, 2018(9,956)(276,165)(286,121)
   
Balances as of January 1, 2015(8,435)(193,441)(201,876)
Balances as of January 1, 2017(9,276)(230,352)(239,628)
Year’s amortization(437)(16,982)(17,419)(456)(21,744)(22,200)
Other changes---
Balances as of December 31, 2015(8,872)(210,423)(219,295)
Balances as of December 31, 2017(9,732)(252,096)(261,828)

 

c)c.The Bank has no restriction on intangible assets as of December 31, 20162018 and 2015.2017. Additionally, the intangibles assets have not been pledged as guarantee for fulfillment of financial liabilities.liabilities, Also, the Bank has no debt related to Intangible assets as of those dates.

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Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 13

15

PROPERTY, PLANT, AND EQUIPMENT

 

a)  As of December 31, 2016 and 2015, the composition of property, plant, and equipment balances are composed as follows:

  As of December 31, 2016
 

Net opening balance as of

January 1, 2016

Gross

balance

Accumulated depreciation

Net

balance

 MCh$MCh$MCh$MCh$
     
Land and buildings158,434264,016(94,207)169,809
Equipment59,908168,124(101,618)66,506
Ceded under operating leases4,2384,888(658)4,230
Other18,07955,973(39,139)16,834
Total240,659493,001(235,622)257,379

  As of December 31, 2015
 

Net opening balance as of

January 1, 2015

Gross

balance

Accumulated depreciation

Net

balance

 MCh$MCh$MCh$MCh$
     
Land and buildings142,596237,449(79,015)158,434
Equipment49,100137,621(77,713)59,908
Ceded under operating leases4,2504,888(650)4,238
Other15,61551,482(33,403)18,079
Total

211,561

431,440(190,781)240,659

b)a.As of December 31, 2018 and 2017, the composition of property, plant, and equipment balances are composed as follows:

  As of December 31, 2018
 

Net opening balance as of 

January 1, 2018 

Gross

balance

Accumulated depreciation

Net

balance

 MCh$MCh$MCh$MCh$
     
Land and buildings159,352309,385(132,428)176,957
Equipment63,516217,958(159,756)58,202
Ceded under operating leases4,2214,888(667)4,221
Other15,45867,197(52,991)14,206
Total242,547599,428(345,842)253,586

  As of December 31, 2017
 

Net opening balance as of

January 1, 2017

Gross

balance

Accumulated depreciation

Net 

balance

 MCh$MCh$MCh$MCh$
     
Land and buildings169,809274,079(114,727)159,352
Equipment66,506193,689(130,173)63,516
Ceded under operating leases4,2304,888(667)4,221
Other16,83460,822(45,364)15,458
Total257,379533,478(290,931)242,547
      
b.The changes in the value of property, plant, and equipment as of December 31, 20162018 and 20152017 is as follows:

 

b.1)b.1Gross balance

 

2016Land and buildingsEquipmentCeded under operating leasesOtherTotal
2018

Land and

buildings

Equipment

Ceded under operating

leases

OtherTotal
MCh$MCh$
    
Balances as of January 1, 2016237,449137,6214,88851,482431,440
Balances as of January 1, 2018274,079193,6894,88860,823533,479
Additions26,56730,965-4,82362,35535,36928,438-4,52268,329
Disposals-(228)-(332)(560)(63)(4,130)-(2,104)(6,297)
Impairment due to damage-(234)-(234)-(39)-(39)
Other--3,9563,956
Balances as of December 31, 2016264,016168,1244,88855,973493,001
Balances as of December 31, 2018309,385217,9584,88867,197599,428

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Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 1315

PROPERTY, PLANT, AND EQUIPMENT, continued

 

2015Land and buildingsEquipmentCeded under operating leasesOtherTotal
2017

Land and

buildings

Equipment

Ceded under operating

leases

OtherTotal
MCh$MCh$
    
Balances as of January 1, 2015209,668108,4164,88843,499366,471
Balances as of January 1, 2017264,016168,1244,88855,973493,001
Additions27,78129,282-8,04865,11127,59226,278-4,90258,772
Disposals-(56)-(65)(121)(17,529)(359)-(53)(17,941)
Impairment due to damage-(21)-(21)-(354)-(354)
Other---
Balances as of December 31, 2015237,449137,6214,88851,482431,440
Balances as of December 31, 2017274,079193,6894,88860,823533,478

 

b.2)b.2Accumulated depreciation

2018

Land and

buildings

Equipment

Ceded under operating

leases

OtherTotal
 MCh$MCh$MCh$MCh$MCh$
      
Balances as of January 1, 2018(114,727)(130,173)(667)(45,365)(290,932)
Depreciation charges in the period(17,704)(29,623)-(7,660)(54,987)
Sales and disposals in the period340-3477
Transfers---- 
Other---- 
Balances as of December 31, 2018(132,428)(159,756)(667)(52,991)(345,842)

2017

Land and

buildings

Equipment

Ceded under operating

leases

OtherTotal
 MCh$MCh$MCh$MCh$MCh$
      
Balances as of January 1, 2017(94,207)(101,618)(658)(39,139)(235,622)
Depreciation charges in the period(20,744)(28,593)(9)(6,277)(55,623)
Sales and disposals in the period22438-51313
Transfers-----
Other-----
Balances as of December 31, 2017(114,727)(130,173)(667)(45,365)(290,932)

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

2016Land and buildingsEquipmentCeded under operating leasesOtherTotal
 MCh$MCh$MCh$MCh$MCh$
      
Balances as of January 1, 2016(79,015)(77,713)(650)(33,403)(190,781)
Depreciation charges in the period(15,192)(23,976)(8)(5,849)(45,025)
Sales and disposals in the period-71-113184
Transfers-----
Other-----
Balances as of December 31, 2016(94,207)(101,618)(658)(39,139)(235,622)

2015Land and buildingsEquipmentCeded under operating leasesOtherTotal
 MCh$MCh$MCh$MCh$MCh$
      
Balances as of January 1, 2015(67,073)(59,316)(638)(27,883)(154,910)
Depreciation charges in the period(11,966)(18,417)(12)(5,800)(36,195)
Sales and disposals in the period2420-280324
Transfers-----
Other-----
Balances as of December 31, 2015(79,015)(77,713)(650)(33,403)(190,781)

NOTE 15

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Table of Contents

NOTE 13

PROPERTY, PLANT, AND EQUIPMENT, continued

 

c)  Operational leases – lessor

c.Operational leases – lessor

 

As of December 31, 20162018 and 2015,2017, the future minimum lease cash inflows under non-cancellable operating leases are as follows:

 

 As of December 31,
 2016 2015
 MCh$ MCh$
    
Due within 1 year              506 465
Due after 1 year but within 2 years1,029 1,057
Due after 2 years but within 3 years502 465
Due after 3 years but within 4 years473 462
Due after 4 years but within 5 years344 440
Due after 5 years2,067 2,322
    
Total4,921 5,211

 As of December 31,
 2018 2017
 MCh$ MCh$
    
Due within 1 year469 567
Due after 1 year but within 2 years882 749
Due after 2 years but within 3 years469 480
Due after 3 years but within 4 years460 348
Due after 4 years but within 5 years428 308
Due after 5 years2,242 1,792
    
Total4,950 4,244

 

d)d.Operational leases – lessee

 

Certain Bank’s premises and equipment are leased under various operating leases.leases, Future minimum rental payments under non-cancellable leases are as follows:

 

As of December 31,As of December 31,
2016 20152018 2017
MCh$ MCh$MCh$ MCh$
  
Due within 1 year26,455 22,30325,702 26,059
Due after 1 year but within 2 years24,903 20,86224,692 21,343
Due after 2 year but within 3 years20,582 19,49922,439 18,091
Due after 3 years but within 4 years17,321 17,21519,574 15,736
Due after 4 years but within 5 years14,569 14,15417,250 12,734
Due after 5 years53,694 55,56163,945 51,502
   
Total157,524 149,594173,602 145,465

 

e)e.As of December 31, 20162018 and 2015,2017, the Bank has no financial leases which cannot be unilaterally rescinded.

 

f)f.The Bank has no restriction on property, plant and equipment as of December 31, 20162018 and 2015.2017. Additionally, the property, plant and equipment have not been provided as guarantees of financial liabilities. The Bank has no debt in connection with property, plant and equipment.

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Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 14 16

CURRENT AND DEFERRED TAXES

 

a)   Current taxes

a)Current taxes

 

As of December 31, 20162018 and 2015,2017, the Bank recognizesrecognises taxes payable (recoverable), which is determined based on the currently applicable tax legislation. This amount is recorded net of recoverable taxes, and is shown as follows:

 

As of December 31, As of December 31, 
2016 2015         2018 2017
MCh$ MCh$        MCh$ MCh$
    
Summary of current tax liabilities (assets)     
Current tax (assets)- -- -
Current tax liabilities29,294 17,7968,093 6,435
     
Total tax payable (recoverable)29,294 17,7968,093 6,435
     
(Assets) liabilities current taxes detail (net)     
Income tax, tax rate(*)145,963 121,775196,527 145,112
Minus:     
Provisional monthly payments(113,700) (96,319)(186,060) (136,562)
Credit for training expenses (1,972) (1,851)(1,937) (1,768)
Land taxes leasing- (3,853)- -
Grant credits(1,079) (1,326)(1,320) (968)
Other82 (630)883 621
     
Total tax payable (recoverable)29,294 17,796
Total tax payable8,093 6,435
       

(*)The tax rate is 24.0%27,0% for 20162018 and 22.5%25,5% for 2015.2017,

 

b)       Effect on income

 

The effect of tax expense on income for the years ended December 31, 20162018, 2017 and 20152016 is comprised of the following items:

 

 As of December 31, As of December 31,
 2016 20152014             2018           2017              2016
 MCh$ MCh$            MCh$          MCh$             MCh$
        
Income tax expense        
Current tax 145,963 121,775122,150 196,527 145,112145,963
    
Credits (debits) for deferred taxes    
Origination and reversal of temporary differences (37,269) (45,672)(72,244) (25,517) (6,751)(37,269)
Valuation provision (56) 5,955-
Subtotals 108,694 76,10349,906 170,954 144,316108,694
Tax for rejected expenses (Article No.21) 336 340746
Tax for rejected expenses (Article No,21) 1,110 610336
Other 1 (48)398 (4,920) 1051
Net charges for income tax expense 109,031 76,39551,050 167,144 145,031109,031

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Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 1416

CURRENT AND DEFERRED TAXES, continued:continued

 

c)       Effective tax rate reconciliation

 

The reconciliation between the income tax rate and the effective rate applied in determining tax expenses as of December 31, 2016, 20152018, 2017 and 2014,2016, is as follows:

 

 For the year ended December 31, For the year ended December 31,
2016 2015 20142018 2017 2016

Tax

rate

 Amount 

Tax

rate

 Amount Tax   

Tax

rate

 Amount

Tax

rate 

 Amount Tax   
 rate Amount  rate Amount 
% MCh$ % MCh$ % MCh$ % MCh$ % MCh$ % MCh$ 
        
Tax calculated over profit before tax24.00 140,991 22.50 118,828 21.00 131,657 27.00 207,046 25.50 183,671 24.00 140,991 
Price level restatement for tax purposes(1)(5.49) (32,256) (5.42) (28,630) (6.18) (38,724) (5.15) (39,494) (3.03) (21,829) (5.49) (32,256) 
Single penalty tax (rejected expenses)0.06 336 0.06 340 0.12 746 0.14 1,110 0.08 610 0.06 336 
Effect of tax reform changes on deferred tax(2)0.01 86 (2.01) (10,600) (6.26) (39,262) 0.00 - (2.86) (20,600) 0.01 86 
Real estate taxes0.00 - (0.73) (3,853) (0.54) (3,357) 0.00 - 0.00 - 0.00 - 
Other(0.02) (126) 0.06 310 - (10) (0.20) (1,518) 0.44 3,179 (0.02) (126) 
Effective rates and expenses for income tax18.56 109,031 14.46 76,395 8.14 51,050 21.80 167,144 20.13 145,031 18.56 109,031 

(1) Price level restatement on tax purpose capital.

(2) In accordance with Chilean Law N°20,780 published in September 29, 2014 the income tax rate are 25.5% and 27% for 2017 and 2018 respectively.

 

d)       Effect of deferred taxes on comprehensive income

 

Below is a summary of the separate effect of deferred tax on other comprehensive income, showing the asset and liability balances, for the years ended December 31, 20162018 and 2015:2017:

 

As of December 31, As of December 31,
2016 2015               2018 2017
MCh$ MCh$              MCh$ MCh$
    
Deferred tax assetsDeferred tax assets Deferred tax assets  
Available for sale investments3,266 1,751Available for sale investments- 368
Cash flow hedges- (155)Debt instruments at FVOCI1,166 -
Total deferred tax assets recognized through other comprehensive income3,266 1,596
Cash flow hedges65 908
Total deferred tax assets recognised through other comprehensive incomeTotal deferred tax assets recognised through other comprehensive income1,231 1,276
     
Deferred tax liabilitiesDeferred tax liabilities Deferred tax liabilities   
Available for sale investments(5,036) (155)Available for sale investments- (841)
Cash flow hedges(549) (1,785)Debt instruments at FVOCI(2,976) -
Total deferred tax liabilities recognized through other comprehensive income(5,585) (1,940)
Cash flow hedges(2,711) -
Total deferred tax liabilities recognised through other comprehensive incomeTotal deferred tax liabilities recognised through other comprehensive income(5,687) (841)
     
Net deferred tax balances in equityNet deferred tax balances in equity(2,319) (344)Net deferred tax balances in equity(4,456) (435)
     
Deferred taxes in equity attributable to equity holders of the Bank(2,097) (373)
Deferred taxes in equity attributable to shareholders of the BankDeferred taxes in equity attributable to shareholders of the Bank(4,102) 791
Deferred tax in equity attributable to non-controlling interestsDeferred tax in equity attributable to non-controlling interests(222) 29Deferred tax in equity attributable to non-controlling interests(354) (356)

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Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 16

NOTE 14

CURRENT AND DEFERRED TAXES, continued

 

e)       Effect of deferred taxes on income

 

As of December 31, 20162018 and 2015,2017, the Bank has recorded effects for deferred taxes in the financial statements.statements:

 

Below are the effects of deferred taxes on assets, liabilities and income:

As of December 31,As of December 31,
2016 2015            2018         2017
MCh$ MCh$           MCh$        MCh$
Deferred tax assets    
Interests and adjustments9,473 10,9629,384 8,645
Non-recurring charge-offs9,891 7,83913,389 11,651
Assets received in lieu of payment2,999 1,686785 1,582
Property, plant and equipment4,570 5,408
Exchange rate adjustments1,675 882
Property, plant and equipment valuation6,138 4,410
Allowance for loan losses163,456 139,777184,488 160,359
Provision for expenses67,073 47,21863,134 73,518
Derivatives- 7,4813,924 5,249
Leased assets71,834 69,244107,897 98,090
Subsidiaries tax losses9,467 7,7055,314 5,277
Valuation of investments- 9,800
Other17,571 11,811
Prepaid expenses156 151
Total deferred tax assets

356,334 

 

318,931

396,284 369,814
    
Deferred tax liabilities    
Valuation of investments(1,802) -(42) (1,911)
Prepaid expenses(349) -
Depreciation- (355)- (532)
Valuation provision(5,989) (5,955)
Exchange rate adjustments(3,383) -
Other(299) (1,611)(20)  (432)
Total deferred tax liabilities(2,101) (1,966)(9,783) (8,830)

 

f)       Summary of deferred tax assets and liabilities

 

Below is a summary of the deferred taxes impact on equity and income.income,

 

As of December 31,As of December 31,
2016 2015       2018      2017
MCh$ MCh$       MCh$      MCh$
    
Deferred tax assets    
Recognized through other comprehensive income3,266 1,596
Recognized through profit or loss356,334 318,931
Recognised through other comprehensive income1,231 1,276
Recognised through profit or loss396,284 369,815
Total deferred tax assets359,600 320,527397,515 371,091
    
Deferred tax liabilities    
Recognized through other comprehensive income(5,585) (1,940)
Recognized through profit or loss(2.101) (1.966)
Recognised through other comprehensive income(5,687) (841)
Recognised through profit or loss(9,783) (8,822)
Total deferred tax liabilities(7.686) (3.906)(15,470) (9,663)

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

F-83 

Table of Contents

NOTE 15

17

OTHER ASSETS

 

Other assets item includes the following:

 

 As of December 31,  As of December 31,
 2016 2015            2018         2017
 MCh$ MCh$           MCh$         MCh$
         
Assets for leasing(1)Assets for leasing(1) 44,840 35,519Assets for leasing(1) 47,486 48,099
       
Assets received or awarded in lieu of paymentAssets received or awarded in lieu of payment  Assets received or awarded in lieu of payment    
Assets received in lieu of payment 26,598 15,892Assets received in lieu of payment 17,525 20,904
Assets awarded at judicial sale 26,895 14,938Assets awarded at judicial sale 21,524 24,800
Provision on assets received in lieu of payment or awarded (7,558) (5,873)Provision on assets received in lieu of payment or awarded (723) (1,440)
Subtotal 45,935 24,957Subtotal 38,326 44,264
        
Other assetsOther assets  Other assets    
Guarantee deposits (margin accounts)(2) 396,289 649,325Guarantee deposits (margin accounts)(2) 170,232 323,767
Gold investments 446 443Gold investments 522 478
VAT credit 8,941 9,468VAT credit 9,097 9,570
Income tax recoverable 22,244 35,925Income tax recoverable 1,756 1,381
Prepaid expenses 148,288              192,894Prepaid expenses 477,819 116,512
Assets recovered from leasing for sale 6,040 2,214Assets recovered from leasing for sale 6,848 4,235
Pension plan assets 1,637 1,875Valuation adjustments by macrohedge 9,414 160
Accounts and notes receivable 56,624 36,566Pension plan assets 846 921

Notes receivable through brokerage and simultaneous transactions 

 60,632 52,798Accounts and notes receivable 59,511 59,574
Other receivable assets 15,082 11,379

Notes receivable through brokerage and simultaneous transactions 

 71,382 68,272
Other assets(3) 40,274 46,811Other receivable assets 48,612 53,500
Subtotal 756,497 1,039,698Other assets(3) 49,365 33,677
   Subtotal 905,404 672,047
Total 847,272   1,100,174     
      Total 991,216 764,410
      

(1)Assets available to be granted under the financial leasing agreements.

(2)Guarantee deposits (margin accounts) correspond to collateralscollateral associated with derivative financial contracts to mitigate the counterparty credit risk and are mainly established in cash. These guarantees operate when mark to market of derivative financial instruments exceed the levels of threshold agreed in the contracts, which could result in the Bank deliverdelivering or receivereceiving collateral.

(3)Other assets mainly include settlement of derivatives and other financial transactions.

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Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 16

18

TIME DEPOSITS AND OTHER TIME LIABILITIES

 

As of December 31, 20162018 and 2015,2017, the composition of the line item time deposits and other liabilities is as follows:

 

 As of December 31, As of December 31,
 2016 2015     2018           2017
 MCh$ MCh$    MCh$           MCh$
        
Deposits and other demand liabilities    Deposits and other demand liabilities  
Checking accounts 6,144,688 5,875,992 6,794,132 6,272,656
Other deposits and demand accounts 564,966 577,077 709,711 590,221
Other demand liabilities 829,661 903,052 1,237,574 905,289
      
Total 7,539,315                   7,356,121 8,741,417 7,768,166
      
Time deposits and other time liabilities   Time deposits and other time liabilities  
Time deposits 13,031,319 12,065,697 12,944,846 11,792,466
Time savings account 116,451 113,562 118,587 116,179
Other time liabilities 3,939 3,508 4,386 5,300
       
Total 13,151,709 12,182,767 13,067,819 11,913,945

F-85 

Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 17 19

INTERBANK BORROWINGS

 

As of December 31, 20162018 and 20152017 the line item Interbank borrowings is as follows:

 

 As of December 31,
 2016 2015
 MCh$ MCh$
Loans from financial institutions and the Central Bank of Chile   
Other obligations with Central Bank of Chile7 4
Subtotal7 4
Loans from domestic financial institutions365,436 -
Loans from foreign financial institutions   
Mizuho Corporate Bank411,753 260,042
Sumitomo Mitsui Banking Corporation233,060 169,906
Bank of America213,200 70,890
Citibank N.A. - New York183,193 272,572
Wells Fargo Bank N.A. – New York113,631 106,328
Standard Chartered Bank - New York99,943 141,738
The Bank of New York Mellon82,594 52,393
The Bank of Nova Scotia39,967 60,206
Barclays Bank PLC London33,279 35,391
HSBC Bank Plc Ny33,214 -
NTT Docomo Inc.33,149 35,133
Zurcher Kantonal Bank20,021 21,257
European Investment Bank13,980 14,808
Banco Santander – Hong Kong6,165 5,106
Banque Bruxelles Lambert S.A.5,797 -
Banque Cantonale Vaudoise5,714 -
Banco Santander – Brasil S.A.5,175 7,619
Standard Chartered Bank1,931 1,464
China Construcción Bank1,044 585
Hong Kong and Shanghai Banking889 -
Bank of Tokio Mitsubishi430 474
Thai Military Bank Public Comp425 -
Bank of Communications393 -
Shinhan Bank354 200
Denizbank A.S.347 -
Agricultural Bank of China327 -
Banco Santander – Madrid322 112
Kookmin Bank317 -
Bank of China311 1,174
Banca Monte dei Paschi di Siena309 123
Unicrédito Italiano - New York302 863
Keb Hana Bank301 -
State Bank of India289 -
Taipei Bank260 214
ING Bank N.V. - Vienna228 303
First Union National Bank226 290
Westpac Banking Corporation226 -
BNP Paribas S.A.218 435
Shanghai Pudong Development205 167
Bank of Montreal201 -
Bank of Taiwan183 28
Citibank N.A. Turkiye Merkez S.158 -
Woori Bank153 75
Banque Generale Du Luxembourg138 -
Cassa Di Risparmio Di Parma E132 -
Oriental Bank Of Commerce132 -
Kotak Mahindra Bank Limited129 -
Banco Do Brasil S.A.          120 -
Banco Bradesco S.A.113 177
Habib Bank Limited            105 37
Caixabank S.A.                93 -
Canara Bank                   91 -
Hua Nan Commercial Bank Ltd.83 130
Development Bank Of Singapore80 -
Casa Di Risparmo De Padova E.R.76 85
Hanvit Bank76 61
HSBC France (formerly Hsbc Ccf)74 -
Yapi Ve Kredi Bankasi A.S.    73 -
Banco General S A             62 -
Banco De Crédito Del Perú58 67
Banco Popular Espanol S.A.   56 59
Bank Of East Asia, Limited, The54 -

 As of December 31,
 2018 2017
 MCh$ MCh$
Loans from financial institutions and the Central Bank of Chile   
Other obligations with Central Bank of Chile- 5
Subtotal- 5
Loans from domestic financial institutions- 480
Loans from foreign financial institutions   
Bank of America N,A, Us Foreig338,906 228,309
Sumitomo Mitsui Banking Corporation278,761 259,199
Citibank N,A,241,041 191,494
Mizuho Bank Ltd Ny223,829 215,967
Wells Fargo Bank N,A,216,749 235,058
The Bank of Nova Scotia163,927 86,419
The Bank of New York Mellon69,921 30,839
Corporacion Andina De Fomento52,371 -
Standard Chartered Bank50,960 225,966
Barclays Bank PLC London34,965 30,886
Hsbc Bank Plc Ny34,936 30,875
Wachovia Bank, NA33,499 -
Banco Santander Brasil S,A,8,040 5,225
Bank of China7,777 831
Banco Santander Hong Kong6,047 8,341
Deutsche Bank A,G,5,558 157
Bnp Paribas, Hong Kong Branch3,554 -
Keb Hana Bank2,318 396
Rabobank, Hong Kong Branch1,548 -
Hong Kong and Shanghai Banking1,300 222
Banco Santander Central Hispano1,295 312
Unicredito Italiano SPA1,117 264
Bank of Tokio Mitsubishi1,032 453
Banco Bilbao Vizcaya Argentaria888 -
Standard Chartered Bank Malays843 -
Dexia Bank SA789 -
Banque Bruxelles Lambert S,A,509 -
Hsbc Bank USA394 38
Shinhan Bank380 394
United Bank of India378 -
Woori Bank356 105
State Bank of India331 110
Banca Commerciale Italiana S,P,288 31
Canara Bank237 224
Shanghai Pudong Development Ba237 -
Banco de Galicia Y Buenos Aires231 -
Bank of East Asia, Limited205 241
First Union National Bank201 35
Industrial Bank of Korea195 -
Banca Monte dei Paschi di Siena179 162
Metropolitan Bank Limited170 87
Hua Nan Commercial Bank Ltd,164 349
Credit Lyonnais139 -
Bank of Shanghai134 -
Bank of Taiwan127 136
Agricultural Bank of China106 295
Akbank T,A,S,106 -
Credit Agricole106 -
Banco Bradesco S,A,           89 -
Oriental Bank of Commerce87 -
Kookmin Bank78 201
Banca Nazionale Del Lavoro S,P77 -
Hsbc Bank Middle East77 -
International Commercial Bank70 221
Taiwan Cooperative Bank66 159
Banca Lombarda E Piemontese S,60 -
Hanvit Bank58 55
Bank of India51 -
Caixabank S,A,44 -
Fortis Bank S,A,/N,V, Brussels42 15
Subtotal1,787,943 1,554,071
    

F-86 

Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 1719

INTERBANK BORROWINGS, continued

 As of December 31,
 2018 2017
 MCh$ MCh$
Loans from foreign financial institutions, continuación   
Banco de la Republica Oriental41 -
Bank of Baroda37 -
China Construcción Bank35 90
Banco Internacional S,A,      33 -
Joint Stock Commercial Bank Fo,33 -
Shanghai Commercial and Saving33 -
Banistmo S,A,32 -
Banca Popolare Dell’Emilia Rom31 53
Bank of Montreal31 30
Raiffeisen Bank Polska S,A,31 -
Casa Di Risparmo De Padova E,R,30 56
Industrial and Commercial Bank30 119
Hdfc Bank Limited28 -
Bankinter S,A,24 -
Kbc Bank Nv23 -
Banco Bpm SPA21 -
Cassa Di Risparmio In Bologna21 -
Banco De Sabadell S,A,        20 -
Banco Commerzbank             19 -
Taiwan Business Bank19 19
Cajas Rurales Unidas18 -
Chang Hwa Commercial Bank Ltd,18 14
U,S, Bank (Formerly First Bank18 -
United World Chinese Commercia15 -
Banco Itau S,A,14 -
Mega International Commercial9 -
Banca Popolare Di Milano S,C,A6 -
Hang Seng Bank (China) Limited6 -
Sumitono Mitsui4 -
Development Bank of Singapore3 -
Abanca Corporacion Bancaria SA- 60
Australia And New Zealand Bank- 62
Banca Delle Marche SPA- 76
Banco Bradesco S,A,- 50
Banco Caixa Geral,- 33
Banco Commerzbank- 145
Banco de Occidente- 282
Banco De Sabadell S,A,- 10
Banco Do Brasil S,A,- 268
Banco Internacional S,A,- 33
Banco Popolare Soc Coop,- 6
Banco Popular Espanol S,A,- 19
Bancolombia S,A,- 94
Bank Austria A,G,- 2,317
Bank of Communications- 93
Bank of Nova Scotia- 112
Banque Generale Du Luxembourg- 207
Cassa Di Risparmio Di Parma E- 93
Citic Industrial Bank- 39
Corporación Andina De Fomento- 31,075
European Investment Bank- 12,629
Habib Bank Limited- 34
Hang Seng Bank Ltd,- 39
Hsbc Bank PLC- 30,838
Icici Bank Limited- 8
J,P, Morgan Chase Bank N,A,- 154
Kasikornbank Public Company Li,- 25
Liu Chong Hing Bank Limited- 21
Mizuho Corporate Bank- 331
Punjab National Bank- 47
Shanghai Pudong Development- 714
Societe Generale- 56
Thai Military Bank Public Comp,- 377
The Toronto-Dominion Bank- 62,743
Yapi Ve Kredi Bankasi A,S,- 155
Zhejiang Commercial Bank Ltd,- 175
Subtotal683 143,801
Total1,788,626 1,698,357

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 19

INTERBANK BORROWINGS, continued

 

 As of December 31
 2016 2015
 MCh$ MCh$
Loans from foreign financial institutions   
J.P. Morgan Chase Bank N.A. - New York49 80
Banco Commerzbank             47 -
Hsbc Bank Canada              47 -
Finans Bank A.S.46 101
Bangkok Bank Public Company Li42 -
United Bank Of India          39 -
Banco Bolivariano C.A.        38 -
Banco Bilbao Vizcaya Argentaria34 144
Hsbc Bank Brasil S.A.  - Banco34 -
Banca Delle Marche Spa        31 -
Banca Popolare Di Vicenza Scpa31 68
Bancolombia S.A.              31 -
Bayerische Hypo- Und Vereinsba27 -
Banca Popolare Dell'Emilia Rom26 -
Metropolitan Bank Limited     26 -
Banco Itau25 -
Icici Bank Limited            25 -
China Merchants Bank          22 -
Australia And New Zealand Bank21 -
Banca Lombarda E Piemontese S.21 -
Hsbc Bank Middle East         21 -
Cassa Di Risparmio In Bologna20 -
Export-Import Bank Of Thailand20 -
Chang Hwa Commercial Bank Ltd.17 28
Fifth Third Bank15 123
Bank Of China Guangdong Branch14 -
Hdfc Bank Limited             13 -
Fortis Bank S.A./N.V. Brussels12 -
Union Bank Of India           10 -
Intesa Sanpaolo Spa           7 -
Deutsche Bank Sociedad Anonima6 -
Banco Popolare Soc Coop       5 -
Industrial Bank Of Korea      5 -
Banca Commerciale Italiana S.P.- 280
Banca Nazionale Del Lavoro S.P.- 30
Banco De Occidente- 162
Banco De Sabadell S.A.- 147
Banco Del Pichincha- 124
Banco Do Brasil S.A. – London- 496
Banco Espirito Santo S.A.- 142
Banco Interamericano De Finanzas- 21
Banco Itau - Paraguay S.A.      - 135
Banco Surinvest S.A.- 96
Bank Mandiri (Persero)- 60
BBVA Banco Francés S.A.- 21
Caixa D'Estalvis i Pensions- 243
China Guangfa Bank Co. Ltd.- 103
Citibank El Cairo- 57
Citic Industrial Bank- 71
Commerzbank A.G. - Frankfurt- 175
Corporación Andina De Fomento- 14,162
Danske Bank- 113
Deutsche Bank A.G.- New York- 573
Hang Seng Bank Ltd.- 26
Kasikorn Bank Public Co. Ltd.- 79
Kfw Ipex Bank Gmbh- -
Korea Exchange Bank- 83
Nordea Bank Danmark- 34
Punjab National Bank- 26
State Bank Of India- 25
Taiwan Business Bank- 64
The Toronto Dominion Bank – Toronto- 21
Turk Ekonomi Bank A.S.- 29
U.S. Bank- 37
Wachovia Bank N.A.- Miami- 26,668
Otros4,169 2,211
    
Subtotal1,550,925 1,307,570
Total1,916,368 1,307,574
       

F-87 

Tablea)       Obligations with Central Bank of Contents

Chile

NOTE 17

INTERBANK BORROWINGS, continued

a)Obligations with Central Bank of Chile

 

Debts to the Central Bank of Chile include credit lines for renegotiation of loans and other borrowings. These credit lines were provided by the Central Bank of Chile for renegotiation of loans due to the need to refinance debt as a result of the economic recession and crisis of the banking system in the early 1980s.

 

The outstanding amounts owed to the Central Bank of Chile under these credit lines are as follows:

 

 As of December 31,
 2016 2015
 MCh$ MCh$
    
Totals Line of credit for renegotiation with Central Bank of Chile7 4
    
 As of December 31,
 2018 2017
 MCh$ MCh$
    
Totals Line of credit for renegotiation with Central Bank of Chile- 5
    

 

b)Loans from domestic financial institutions

b)       Loans from domestic financial institutions

 

These obligations’ maturities are as follows:

 

 As of December 31,
 2016 2015
 MCh$ MCh$
    
Due within 1 year365,436 -
Due within 1 and 2 year- -
Due within 2 and 3 year- -
Due within 3 and 4 year- -
Due after 5 years- -
    
Total loans from domestic financial institutions365.436 .

c)Foreign obligations

 As of December 31,
 2016 2015
 MCh$ MCh$
    
Due within 1 year525,521 868,593
Due within 1 and 2 year725,315 352,345
Due within 2 and 3 year186,352 35,390
Due within 3 and 4 year80,473 35,133
Due after 5 years33,264 16,109
    
Total loans from foreign financial institutions1,550,925 1,307,570

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Table of Contents
 As of December 31,
 2018 2017
 MCh$ MCh$
    
Due within 1 year- 480
Due within 1 and 2 year- -
Due within 2 and 3 year- -
Due within 3 and 4 year- -
Due after 5 years- -
    
Total loans from domestic financial institutions- 480

 

NOTE 18c)       Foreign obligations

 As of December 31,
             2018           2017
            MCh$           MCh$
    
Due within 1 year1,648,955 1,477,318
Due within 1 and 2 year139,671 185,519
Due within 2 and 3 year- 35,035
Due within 3 and 4 year- -
Due after 5 years- -
Total loans from foreign financial institutions1,788,626 1,697,872

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 20

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES

 

As of December 31, 20162018 and 2015,2017, composition of this item is as follows:

 

As of December 31,As of December 31,
2016 2015           2018 2017
MCh$ MCh$          MCh$ MCh$
      
Other financial liabilities      
Obligations to public sector61,490 63,92132,449 59,470
Other domestic obligations175,028 152,247175,210 175,389
Foreign obligations3,498 4,3597,741 7,171
Subtotals240,016 220,527215,400 242,030
Issued debt instruments     
Mortgage finance bonds46,251 62,85825,490 34,479
Senior bonds6,416,274 5,041,6367,198,865 6,186,760
Mortgage bond104,182 107,58294,921 99,222
Subordinated bonds759,665 745,019795,957 773,192
Subtotals7,326,372 5,957,0958,115,233 7,093,653
     
Total7,566,388 6,177,6228,330,633 

7,335,683

 

 

Debts classified as current are either demand obligations or will mature in one year or less.less, All other debts are classified as non-current.non-current, The Bank’s debts, both current and non-current, are summarized below:

 

As of December 31, 2016As of December 31, 2018
Current Non-currentTotalCurrentNon-currentTotal
MCh$ MCh$MCh$
  
Mortgage finance bonds11,236 35,01546,2516,83018,66025,490
Senior bonds1,135,713 5,280,5616,416,274844,8986,353,9677,198,865
Mortgage bond4,318 99,864104,1824,83390,08894,921
Subordinated bonds4 759,661759,6651795,956795,957
Issued debt instruments             1,151,271 6,175,1017,326,372856,5627,258,6718,115,233
  
Other financial liabilities158,488 81,528240,016205,8719,529215,400
  
Total1,309,759 6,256,6297,566,3881,062,4337,268,2008,330,633

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Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 1820

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

As of December 31, 2015As of December 31, 2017
Current Non-currentTotalCurrentNon-currentTotal
MCh$ MCh$MCh$
  
Mortgage finance bonds5,544 57,31462,8588,69125,78834,479
Senior bonds796,012 4,245,6245,041,636337,1665,849,5946,186,760
Mortgage bond4,063 103,519107,5824,54194,68199,222
Subordinated bonds6,583 738,436745,0193773,189773,192
Issued debt instruments812,202 5,144,8935,957,095350,4016,743,2527,093,653
  
Other financial liabilities136,172 84,355220,527212,82529,205242,030
  
Total948,374 5,229,2486,177,622563,2266,772,4577,335,683

 

a)Mortgage finance bonds

a)       Mortgage finance bonds

 

These bonds are used to finance mortgage loans.loans, Their principal amounts are amortizedamortised on a quarterly basis. The range of maturities of these bonds is between five and twenty years. Loans are indexed to UF and create a yearly interest yield of 5.53%5.43% as of December 31, 2016 (5.95%2018 (5.39% as of December 31, 2015)2017).

 

As of December 31,As of December 31,
2016 2015       2018      2017
MCh$ MCh$      MCh$     MCh$
      
Due within 1 year11,236 5,5446,830 8,691
Due after 1 year but within 2 years8,673 6,2375,946 6,744
Due after 2 year but within 3 years6,928 8,0005,034 6,096
Due after 3 year but within 4 years6,246 5,2113,997 5,155
Due after 4 year but within 5 years5,278 5,0052,480 4,101
Due after 5 years7,890 32,8611,203 3,692
Total mortgage bonds46,251 62,85825,490 34,479

 

b)Senior bonds

b)       Senior bonds

 

The following table shows senior bonds by currency:

 

As of December 31,As of December 31,
2016 2015               2018          2017
MCh$ MCh$              MCh$         MCh$
      
Santander bonds in UF3,588,373 2,179,6434,095,741 3,542,006
Santander bonds in USD909,354 1,625,1501,094,267 1,045,465
Santander bonds in CHF568,549 535,448386,979 268,281
Santander bonds in Ch$1,037,515 475,0751,291,900 1,135,527
Santander bonds in AUD60,890 62,06624,954 14,534
Current bonds in JPY179,426 164,254191,598 126,059
Santander bonds in EUR72,167 -113,426 54,888
Total senior bonds6,416,274 5,041,6367,198,865 6,186,760

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Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 1820

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

i.Placement of senior bonds:

i, Placement of senior bonds:

 

In 2016,2018, the Bank issued bonds for UF 62,000,000;23,000,000; CLP 590,000,000,000;225,000,000,000; USD 70,000,000; EUR 66,000,000; AUD 20,000,000; CHF 115,000,000 and JPY 3,000,000,000; USD 215,000,000; EUR 104,000,000; and CHF 125,000,0007,000,000,000 detailed as follows:

 

SeriesCurrencyAmountTermIssuance rateSeries approval dateSeries maximum amountMaturity dateCurrencyAmountTermIssuance rate

Series approval

date

Series maximum amountMaturity date
R1UF15,000,0005.52.50%09-01-201515,000,00003-01-2021
R2UF10,000,0007.52.60%09-01-201510,000,00003-01-2023
R3UF10,000,00010.53.00%09-01-201510,000,00003-01-2026
R5UF7,000,0007.02.55%09-01-20157,000,00012-01-2022
R6UF7,000,0009.02.65%12-01-20157,000,00012-01-2024
P9UF3,000,00010.52.60%03-01-20155,000,00009-01-2025
T2UF5,000,0004.52.25%02-01-20165,000,00008-01-2020
T5UF5,000,0006.02.40%02-01-20165,000,00002-01-2022
T1UF                       4,000,0002,02.20%01-02-2016                      7,000,00001-02-2020
T4UF                      4,000,0003,02.35%01-02-2016                      8,000,00001-08-2021
T11UF                       5,000,0007,02.65%01-02-2016                      5,000,00001-02-2025
T12UF                       5,000,0007,02.70%01-02-2016                      5,000,00001-08-2025
T15UF                       5,000,00011,03.00%01-02-2016                      5,000,00001-08-2028
TotalUF62,000,000  UF23,000,000            30,000,000 
R4CLP100,000,000,0005.55.50%09-01-2015100,000,000,00003-01-2021
P4CLP50,000,000,0005.04.80%03-01-2015150,000,000,00003-01-2020
SDCLP140,000,000,0005.05.50%06-01-2014200,000,000,00006-01-2019
SCCLP200,000,000,00010.05.95%06-01-2014200,000,000,00006-01-2024
P3CLP50,000,000,0007.05.50%01-01-201550,000,000,00001-01-2022
P1CLP50,000,000,00010.05.80%01-01-201550,000,000,00001-01-2025
P5CLP               75,000,000,0004,05.30%05-03-2015             150,000,000,00001-03-2022
U4CLP               75,000,000,0003,4ICP + 1.00% yearly10-01-2017              75,000,000,00010-01-2022
U3CLP               75,000,000,0002,7ICP + 1.00% yearly11-06-2018              75,000,000,00011-06-2021
TotalCLP590,000,000,000  CLP225,000,000,000   300,000,000,000 
JPY3,000,000,0005.00.115%06-22-20163,000,000,00006-29-2021
TotalJPY3,000,000,000  
DNUSD10,000,0005.0

Libor-USD

3M+1.05%

06-02-201610,000,00006-09-2021
DNUSD10,000,0005.0

Libor-USD

3M+1.22%

06-08-201610,000,00006-17-2021
DNUSD10,000,0005.0

Libor-USD

3M+1.20%

08-01-201610,000,00008-16-2021USD50,000,00010,04.17%10-10-201850,000,00010-10-2028
DNUSD185,000,0005.0

Libor-USD

3M+1.20%

11-10-2016185,000,00011-28-2021USD20,000,0002,00.036916-11-201820,000,00016-11-2020
TotalUSD215,000,000  USD70,000,000  70,000,000 
EUREUR54,000,00012.01.307%08-05-201654,000,00008-17-2028EUR                     26,000,0007,01.00% yearly04-05-2018                     26,000,00028-05-2025
EUREUR20,000,0008.00.80%08-04-201620,000,00008-19-2024EUR                     40,000,00012,01.78% yearly08-06-2018                     40,000,00015-06-2030
EUR30,000,0003.00.25%12-09-201630,000,00012-20-2019
TotalEUR                     66,000,000                       66,000,000 
AUDAUD                     20,000,0005,03.56%13-11-2018                     20,000,00013-11-2023
TotalEUR104,000,000  AUD                     20,000,000                      20,000,000 
CHFCHF  125,000,0008.5 0.35%11-14-2016 125,000,00005-30-2025CHF                   115,000,0005,30.441%21-09-2018                   115,000,00021-12-2023
TotalCHF125,000,000 CHF                   115,000,000                     115,000,000 
JPYJPY                 4,000,000,00010,60.65% anual13-07-2018                4,000,000,00013-01-2029
JPYJPY                 3,000,000,0005 años56%30-10-2018                3,000,000,00030-10-2023
TotalJPY                 7,000,000,000                 7,000,000,000 

 

During 2018, the Bank performed a partial repurchase of the following bonds:

DateTypeCurrencyAmount
04-01-2018SeniorCLP                    12,890,000,000
04-01-2018SeniorCLP                      4,600,000,000
22-01-2018SeniorUF                                 24,000
05-04-2018SeniorUF                                484,000  
06-04-2018SeniorUF                               184,000  
23-04-2018SeniorUF                              216,000  
24-04-2018SeniorUF                                  4,000  
25-04-2018SeniorUF                              262,000  
10-05-2018SeniorUF                             800,000  
07-06-2018SeniorUSD                            3,090,000
11-12-2018SeniorUSD                         250,000,000

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Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 1820

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

In 2017, the Bank issued bonds for UF 10,000,000; CLP 160,000,000,000; USD 770,000,000 and AUD 30,000,000; detailed as follows:

SeriesCurrencyAmountTermIssuance rateSeries approval dateSeries maximum amountMaturity date
T9UF5,000,00072.60%01-02-20165,000,00001-03-2024
T13UF5,000,00092.75%01-02-20165,000,00001-03-2026
Total UF 10,000,000   10,000,000 
SDCLP60,000,000,00055.50%01-06-2014200,000,000,00001-12-2019
T16CLP100,000,000,00065.20%01-02-2016100,000,000,00001-12-2021
Total CLP 160,000,000,000   300,000,000,000 
DNUSD100,000,0003Libor-USD 3M+0.80%20-07-2017100,000,00027-07-2020
DNUSD50,000,0003Libor-USD 3M+0.80%21-07-201750,000,00027-07-2020
DNUSD50,000,0003Libor-USD 3M+0.80%24-07-201750,000,00027-07-2020
DNUSD10,000,0004Libor-USD 3M+0.80%23-08-201710,000,00023-11-2021
DNUSD10,000,0004Libor-USD 3M+0.83&23-08-201710,000,00023-11-2021
DNUSD50,000,0003Libor-USD 3M+0.83%14-09-201750,000,00015-09-2020
DNUSD500,000,0003Libor-USD 3M+0.75%12-12-2017500,000,00015-12-2020
Total DN 770,000,000   770,000,000 
AUDAUD30,000,000103.96%05-12-201730,000,00012-12-2027
Total 30,000,000   30,000,000 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 20

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

During 2016,2017, the Bank performed a partial repurchase of the following bond:

 

DateTypeAmount
01-13-2016 SeniorUSD         600,000
01-27-2016 SeniorUSD         960,000
03-08-2016 SeniorUSD   418,853,000
03-08-2016 SeniorUSD   140,104,000
05-10-2016 SeniorUSD     10,000,000
11-29-2016 SeniorUSD       6,895,000

In 2015, the Bank issued bonds for UF 22,000,000; CLP 200,000,000,000; CHF 150,000,000; and JPY 1,200,000,000 detailed as follows:

SeriesCurrencyAmount
Term06-03-2017Issuance rateSeniorSeries approval dateUSDSeries maximum amountMaturity date6,900,000
SG Series12-05-2017SeniorUF3,000,00012 years3.30% per annum simple11-01-2014UF 3,000,00011-01-20251,000,000
SF Series16-05-2017SeniorUF3,000,0005 years3.00% per annum simple11-01-2014UF 3,000,00004-01-2020690,000
SB Series17-05-2017SeniorUF2,000,0005 years2.65% per annum simple07-01-2014UF 2,000,00007-01-201915,000
BSTDP6 Series26-06-2017SeniorUF3,000,0005 years2.25% per annum simple03-01-2015UF 3,000,00003-01-2020340,000
BSTDP7 Series01-06-2017SeniorUF3,000,0008 years2.40% per annum simple03-01-2015UF 3,000,00009-01-2022590,000
BSTDP8 Series02-06-2017SeniorUF3,000,0006 years2.25% per annum simple03-01-2015UF 3,000,00009-01-2020300,000
BSTDP9 Series05-06-2017SeniorUF2,000,0006 years2.60% per annum simple03-01-2015UF 5,000,00009-01-2025130,000
BSTDSA0714 Series19-06-2017SeniorUF3,000,00010 years3.00% per annum simple07-01-2014UF 5,000,00007-01-2024265,000
UF Total10-07-2017UFSenior22,000,000UF770,000
BSTDP2 Series21-07-2017SeniorUF10,000
28-08-2017SeniorUF200,000
28-08-2017SeniorUF200,000
29-08-2017SeniorUF2,000
29-08-2017SeniorUF270,000
03-11-2017SeniorUF14,000
29-11-2017SeniorUF400,000
06-12-2017SeniorUF20,000
12-12-2017SeniorCLP100,000,000,0005 years5.20% per annum simple01-01-2015CLP 100,000,000,00003-01-2020
BSTDP4 SeriesCLP100,000,000,0005 years4.80% per annum simple03-01-2015CLP 150,000,000,00003-01-2020
CLP TotalCLP200,000,000,000
CHF fixed rate bondCHF150,000,0007 years0.38%  quarterly05-19-2015CHF 150,000,00005-19-2022
CHF TotalCHF150,000,000
JPY Current BondJPY1,200,000,0005 years0.42% biannually12-17-2015JPY 1,200,000,00017-12-2020
JPY TotalJPY1,200,000,00010,990,000,000

 

During 2015, the Bank repurchasedii.        The maturities of senior bonds for USD 19, 000,000.are as follows:

 As of December 31,
     2018       2017
   MCh$      MCh$
    
Due within 1 year844,898 337,166
Due after 1 year but within 2 years1,331,255 866,936
Due after 2 year but within 3 years1,073,847 832,978
Due after 3 year but within 4 years1,104,547 1,177,081
Due after 4 year but within 5 years421,918 902,647
Due after 5 years2,422,400 2,069,952
Total senior bonds7,198,865 6,186,760

 

ii.c)Nominal bonds to be placed:

Asof December 31, 2016, there are no outstanding amounts of bonds, not previously authorized, to be placed.

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NOTE 18

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

iii.The maturities of senior bonds are as follows:

 As of December 31,
 20162015
MCh$MCh$
Due within 1 year1,135,713 796,012
Due after 1 year but within 2 years321,509 1,147,138
Due after 2 year but within 3 years816,919 415,914
Due after 3 year but within 4 years663,289 682,494
Due after 4 year but within 5 years754,768 466,700
Due after 5 years2,724,076 1,533,378
Total senior bonds6,416,274 5,041,636

c)Mortgage bonds

 

Detail of mortgage bonds per currency is as follows:

 

As of December 31,As of December 31,
2016 2015   2018      2017
MCh$ MCh$    MCh$      MCh$
      
Mortgage bonds in UF104,182 107,58294,921 99,222
Total mortgage bonds104,182 107,58294,921 99,222

 

i.Allocation of mortgage bonds

i.       Allocation of mortgage bonds

 

During 20162018 and 2015,2017, the Bank has not placed any mortgage bonds.


ii.The maturities of Mortgage bond are as follows:

 As of December 31,
 2016 2015
 MCh$ MCh$
    
Due within 1 year4,318 4,063
Due after 1 year but within 2 years6,932 6,522
Due after 2 year but within 3 years7,156 6,733
Due after 3 year but within 4 years7,386 6,951
Due after 4 year but within 5 years7,626 7,175
Due after 5 years70,764 76,138
Total Mortgage bonds104,182 107,582

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

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NOTE 20

NOTE 18

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

 

d)ii.SubordinatedThe maturities of Mortgage bonds are as follows:

 As of December 31,
        2018       2017
      MCh$      MCh$
    
Due within 1 year4,833 4,541
Due after 1 year but within 2 years7,758 7,291
Due after 2 year but within 3 years8,008 7,526
Due after 3 year but within 4 years8,267 7,769
Due after 4 year but within 5 years8,534 8,019
Due after 5 years57,521 64,076
Total Mortgage bonds94,921 99,222

d)       Subordinated bonds

 

Detail of the subordinated bonds per currency is as follows:

 

As of December 31,As of December 31,
2016 2015        2018      2017
MCh$ MCh$      MCh$    MCh$
      
Subordinated bonds denominated in CLP4 61 3
Subordinated bonds denominated in UF759,661 745,013795,956 773,189
Total subordinated bonds759,665 745,019795,957773,192

 

i.Allocation of subordinated bonds

i. Allocation of subordinated bonds

 

During 20162018 and 2015,2017, the Bank has not placed any subordinated bonds.

The maturities of subordinated bonds, are as follows:

 

As of December 31,As of December 31,
2016 2015        2018       2017
MCh$ MCh$       MCh$     MCh$
      
Due within 1 year  1 3
Due after 1 year but within 2 years4 6,583- -
Due after 2 year but within 3 years- -- -
Due after 3 year but within 4 years- -- -
Due after 4 year but within 5 years- -- -
Due after 5 years759,661 738,436795,956 773,189
Total subordinated bonds759,665 745,019795,957 773,192

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

e)Other financial liabilities

NOTE 20

ISSUED DEBT INSTRUMENTS AND OTHER FINANCIAL LIABILITIES, continued

e)       Other financial liabilities

 

The composition of other financial obligations, by maturity, is detailed below:

 

 As of December 31,
 2016 2015
MCh$ MCh$
    
Non-current portion:   
Due after 1 year but within 2 years33,777 3,497
Due after 2 year but within 3 years24,863 20,240
Due after 3 year but within 4 years5,794 16,063
Due after 4 year but within 5 years1,973 28,227
Due after 5 years15,121 16,328
Non-current portion subtotal81,528 84,355
    
Current portion:   
Amounts due to credit card operators151,620 129,358
Acceptance of letters of credit2,069 3,176
Other long-term financial obligations, short-term portion4,799 3,638
Current portion subtotal158,488 136,172
    
Total other financial liabilities               240,016 220,527

 As of December 31,
          2018   2017
         MCh$   MCh$
    
Non-current portion:   
Due after 1 year but within 2 years9,221 23,401
Due after 2 year but within 3 years40 4,181
Due after 3 year but within 4 years44 194
Due after 4 year but within 5 years48 210
Due after 5 years176 1,219
Non-current portion subtotal9,529 29,205
    
Current portion:   
Amounts due to credit card operators172,425 173,271
Acceptance of letters of credit2,894 2,780
Other long-term financial obligations, short-term portion30,552 36,774
Current portion subtotal205,871 212,825
    
Total other financial liabilities215,400  242,030

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Table of Contents
 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 19

21 

MATURITY OF FINANCIAL ASSETS AND LIABILITIES

 

As of December 31, 20162018 and 2015,2017, the detail of the maturities of assets and liabilities is as follows:

 

As of December 31, 2016Demand

Up to

1 month

Between 1 and

3 months 

Between 3 and

12 months

Subtotal

up to 1 year 

Between 1 and

3 years

Between 3 and

5 years

More than

5 years

 

Subtotal

More than 1 year

Total
As of December 31, 2018Demand

Up to 

1 month 

Between 1 and 

3 months 

Between 3 and 

12 months 

Subtotal 

up to 1 year 

Between 1 and 3 years 

Between 3 and 5 years 

More than
5 years 

Subtotal 

More than 1 year 

Total
MCh$MCh$MCh$
   
Financial assets   
Cash and deposits in banks2,279,389-2,279,389-2,279,3892,065,411-2,065,411--2,065,411
Cash items in process of collection495,283-495,283-495,283353,757-353,757--353,757
Trading investments-52,44313,252118,845184,54075,378106,80830,261212,447396,987
Financial assets held for trading-1,064-11,64212,70616,33120,08027,92464,33577,041
Investments under resale agreements-6,736-6,736-6,736----
Financial derivative contracts-82,243120,653292,801495,697531,094357,8331,116,1582,005,0852,500,782-111,268128,024543,722783,014723,622552,1331,041,8662,317,6213,100,635
Interbank loans (*)-12,859135,756124,143272,75844-549272,807
Loans and accounts receivables from customers (**)717,3062,393,2162,108,0014,488,9939,707,5164,937,2712,909,1409,379,69717,226,10826,933,624
Available for sale investments-1,581,682250,222314,8422,146,74637,974379,976824,2101,242,1603,388,906
Loans and accounts receivables at amortised cost (*)238,2123,295,0032,323,4424,880,72610,737,3835,474,2893,236,34910,765,39319,476,03130,213,414
Loans and account receivable at fvoci (**)-25,29425,2944,949-38,45143,40068,694
Debt instruments at fvoci-2,391,329-12,391,33086-2,9072,9932,394,323
Equity instruments at fvoci---483483
Guarantee deposits (margin accounts)396,289-396,289-396,289170,232-170,232--170,232
Total financial assets3,888,2674,129,1792,627,8845,339,62415,984,9545,581,7613,753,75711,350,33120,685,84936,670,8032,827,6125,798,6642,451,4665,461,38516,539,1276,219,2773,808,56211,877,02421,904,86338,443,990
       
Financial liabilities       
Deposits and other demand liabilities7,539,315-7,539,315-7,539,3158,741,417-8,741,417--8,741,417
Cash items in process of being cleared288,473-288,473-288,473163,043-163,043--163,043
Obligations under repurchase agreements-212,437-212,437-212,437-48,545-48,545--48,545
Time deposits and other time liabilities121,5276,105,7674,193,9062,537,29912,958,499118,10113,91361,196193,21013,151,709122,9745,248,4184,108,5563,326,19912,806,147191,5476,13763,988261,67213,067,819
Financial derivative contracts-92,335122,565263,893478,793494,539346,948971,8811,813,3682,292,161-131,378120,361349,551601,290495,789471,185949,4641,916,4382,517,728
Interbank borrowings4,557373,423115,7691,154,0631,647,812233,54235,014-268,5561,916,36839,37816,310404,5751,188,6921,648,955139,671-139,6711,788,626
Issued debt instruments-43,141185,425922,7051,151,2711,168,1171,444,5933,562,3916,175,1017,326,372-71,46539,267745,830856,5622,431,8491,549,7433,277,0797,258,6708,115,233
Other financial liabilities153,0491,4611,1612,817158,48858,6417,76615,12181,528240,016179,6819342,41222,844205,8719,261921769,529215,400
Guarantees received (margin accounts)480,926-480,926-480,926540,091-540,091--540,091
Total financial liabilities8,587,8476,828,5644,618,8264,880,77724,916,0142,072,9401,848,2344,610,5898,531,76333,447,7779,786,5845,517,0504,675,1715,633,11625,611,9213,268,1172,027,1574,290,7079,585,98135,197,902

(*)Loans and accounts receivables at amortised cost are presented on a gross basis. The amount of allowance is Ch$882,414 million.
(**)Loans and accounts receivables at fvoci are presented on a gross basis. The amount of allowance is Ch$106 milion.

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 21

MATURITY OF FINANCIAL ASSETS AND LIABILITIES, continued

As of December 31, 2017Demand

Up to 

1 month 

Between 1 and 

3 months 

Between 3 and 

12 months 

Subtotal 

up to 1 year 

Between 1 and 3 years

Between 3 and

5 years

More than
5 years

Subtotal

More than 1 year

Total
 MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$
           
Financial assets          
Cash and deposits in banks1,452,922---1,452,922----1,452,922
Cash items in process of collection668,145---668,145----668,145
Trading investments-72,9834,02468,277145,284110,82490,507139,121340,452485,736
Investments under resale agreements----------
Financial derivative contracts-135,780198,876410,415745,071385,428371,090737,0581,493,5762,238,647
Interbank loans (*)-6,064152,9113,710162,685----162,685
Loans and accounts receivables from customers (**)769,8232,206,7342,288,3724,348,9759,613,9045,187,5012,938,3269,823,49817,949,32527,563,229
Available for sale investments-58,85011,788102,600173,238556,289975,372869,6472,401,3082,574,546
Guarantee deposits (margin accounts)323,767---323,767----323,767
Total financial assets3,214,6572,480,4112,655,9714,933,97713,285,0166,240,0424,375,29511,569,32422,184,66135,469,677
           
Financial liabilities          
Deposits and other demand liabilities7,768,166---7,768,166----7,768,166
Cash items in process of being cleared486,726---486,726----486,726
Obligations under repurchase agreements-268,061--268,061----268,061
Time deposits and other time liabilities121,4795,120,1714,201,2712,299,01811,741,939106,8332,81162,362172,00611,913,945
Financial derivative contracts-144,410196,444356,288697,142378,582358,358705,4061,442,3462,139,488
Interbank borrowings4,13046,013397,4191,030,2411,477,803220,554--220,5541,698,357
Issued debt instruments-21,04355,119274,239350,4011,727,5712,104,7712,910,9106,743,2527,093,653
Other financial liabilities177,6637012,58331,879212,82627,5814041,21929,204242,030
Guarantees received (margin accounts)408,313---408,313----408,313
Total financial liabilities8,966,4775,600,3994,852,8363,991,66523,411,3772,461,1212,466,3443,679,8978,607,36232,018,739

 

(*)Interbank loans are presented on a gross basis.basis, The amount of allowance is Ch$4,135 million.472 million,

(**)Loans and accounts receivables from customers are presented on a gross basis.basis, Provisions amounts according to type of loan are detailed as follows: Commercial loans Ch$429,442 437,863 million, Mortgage loans Ch$57,009 69,066 million, and Consumer loans Ch$300,019 million. 283,756 million,

F-95 

Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 19

MATURITY OF FINANCIAL ASSETS AND LIABILITIES, continued:

As of December 31, 2015Demand

Up to

1 month

Between 1 and

3 months

Between 3 and 

12 months

Subtotal 

up to 1 year

Between 1 and

3 years

Between 3 and

5 years 

More than

5 years

Subtotal

More than 1 year

Total
 MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$
           
Financial assets          
Cash and deposits in banks1,677,076387,730- - 2,064,806--- - 2,064,806
Cash items in process of collection724,521- - - 724,521--- - 724,521
Trading investments- 126,24821,364264147,87615,62372,11288,660176,395324,271
Investments under resale agreements- 2,463- - 2,463--- - 2,463
Financial derivative contracts- 158,843213,335407,854780,032798,557393,3091,234,0282,425,8943,205,926
Interbank loans (*)9,371- 1,506- 10,877--- - 10,877
Loans and accounts receivables from customers (**)664,1642,401,9952,178,4244,027,9909,272,5734,746,8762,751,9268,518,50516,017,30725,289,880
Available for sale investments- 480,80172,217243,241796,25948,651469,004730,4971,248,1522,044,411
Guarantee deposits (margin accounts)649,325- - - 649,325--- - 649,325
Total financial assets3,724,4573,558,0802,486,8464,679,34914,448,7325,609,7073,686,35110,571,69019,867,74834,316,480
           
Financial liabilities          
Deposits and other demand liabilities7,356,121- - - 7,356,121---  - 7,356,121
Cash items in process of being cleared462,157- - - 462,157--- -462,157
Obligations under repurchase agreements- 143,689- - 143,689--- - 143,689
Time deposits and other time liabilities114,3415,707,9403,210,9472,853,76111,886,989231,2727,66156,845295,77812,182,767
Financial derivative contracts- 126,643190,409380,158697,210679,133337,5981,148,6652,165,3962,862,606
Interbank borrowings27,3237,946148,509684,819868,597388,62650,351- 438,9771,307,574
Issued debt instruments1,953440,500155,821213,928812,2021,590,5461,173,5362,380,8115,144,8935,957,095
Other financial liabilities129,3583,1425583,114136,17223,73744,29016,32884,355220,527
Guarantees received (margin accounts)819,331- - - 819,331--- - 819,331
Total financial liabilities8,910,5846,429,8603,706,2444,135,78023,182,4682,913,3141,613,4363,602,6498,129,39931,311,867

(*)Interbank loans are presented on a gross basis. The amount of allowance is Ch$1,166 million.

(**)Loans and accounts receivables from customers are presented on a gross basis. Provisions amounts according to type of loan are detailed as follows: Commercial loans Ch$431,201 million, Mortgage loans Ch$62,427 million, and Consumer loans Ch$267,507 million.

F-96 

Table of Contents

NOTE 2022 

PROVISIONS AND CONTINGENT PROVISIONS

 

a)As of December 31, 20162018 and 2015,2017, the composition is as follows:

 

   As of December 31,   As of December 31,
2016 201520182017
MCh$ MCh$MCh$MCh$
     
Provisions for personnel salaries and expenses72,592 64,86193,37997,576
Provisions for mandatory dividends142,815 134,539178,600168,840
Provisions for contingent loan risk11,399 10,750
Provisions for contingencies associated with administrative claims and leasing contracts65,404 64,848
Provisions for contingent loan risk*23,7099,480
Other620599
Total292,210 274,998305,271303,798

* Under IFRS 9 disclosure requeriments

 

b)Below is the activity regarding provisions during the years ended December 31, 20162018 and 2015.2017

 

Personnel salaries

and expenses

 Mandatory dividendsContingent loans ContingenciesTotal

Personnel salaries 

and expenses 

Mandatory DividendContingencies
MCh$MCh$MCh$
   
Balances as of January 1, 201664,861134,53910,75064,848274,998
Balances as of January 1, 201897,576168,84027,303
Provisions established80,298142,8159,78985,492318,39480,912178,60019,447
Application of provisions(72,567)(134,539)-(135)(207,241)(72,975)-(4,431)
Provisions released-(9,140)(84,801)(93,941)(3,195)(168,840)(33,356)
Reclassifications----
Other--(8,939)--
   
Balances as of December 31, 201672,592142,81511,39965,404292,210
Balances as of December 31, 2018 93,379178,6008,963
   
Balances as of January 1, 201546,759170,97312,67955,559285,970
Balances as of January 1, 201772,592142,81565,404
Provisions established75,491134,5395,409147,693363,132106,687168,8408,645
Application of provisions(56,878)(170,973)-(150,681)(378,532)(81,703)(142,815)(389)
Provisions released-(7,338)12,2774,939-(46,357)
Reclassifications----
Other(511)-(511)--
   
Balances as of December 31, 201564,861134,53910,75064,848274,998
Balances as of December 31, 201797,576168,84027,303

 

c)Provisions for personnel salaries and expenses:expenses includes:

 

As of December 31,As of December 31,
2016 201520182017
MCh$ MCh$MCh$MCh$
     
Provision for seniority compensation10,376 11,5509,53117,874
Provision for stock-based personnel benefits- ---
Provision for performance bonds38,510 31,52859,63353,947
Provision for vacations21,800 21,05322,79223,039
Provision for other personnel benefits1,906 7301,4232,716
Total72,592 64,86193,37997,576

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 22 

F-97 PROVISIONS AND CONTINGENT PROVISIONS, continued

Table of Contents

d)Provisions for contingent loan risk

 

Provision for contingent loan arise from contingent liabilities and loan commitments. Provisions for ECL risks in respect of contingent loan are included in ECL allowance in the income statements for the year.

The Bank has apply the new model for ECL under IFRS to contingent loans.

An analysis of changes in the corresponding ECL allowance is, as follows:

 Stage 1Stage 2Stage 3TOTAL
 IndividualCollectiveIndividualCollectiveIndividualCollective
ECL allowance at January 1, 20181,02816,2612191872,8843,18223,761
Transfer       
Transfers to stage 2(30)-65---35
Transfers to stage 3(1)---328-327
Transfers to stage 3--(11)-567-556
Transfers to stage 11-(7)---(6)
Transfers to stage2-------
Transfers to stage1----(1)-(1)
Net changes on financial assets1156833(37)54(77)741
Writte-off-------
Foreign Exchange adjustments(32)(1,874)(10)2224166(1,704)
At 31 December 20181,08115,0702591723,8563,27123,709

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 2123

OTHER LIABILITIES

 

The other liabilities line item is as follows:

 

 As of December 31, As of December 31,
 2016 2015 2018 2017
 MCh$ MCh$ MCh$ MCh$
        
Accounts and notes payable 154,159 129,547 163,216 196,965
Unearned income 509 514 673 601
Valuation adjustments by macrohedges 7,039 -
Guarantees received (margin accounts)(1) 480,926 819,331 540,091 408,313
Notes payable through brokerage and simultaneous transactions 27,745 20,764 50,807 17,799
Other payable obligations(2) 80,100 40,828 94,779 58,921
Withheld VAT 1,964 1,656 1,990 1,887
Other liabilities(3) 50,382 33,229 41,812 60,877
   
Total 795,785 1,045,869 900,407 745,363

 

(1)Guarantee deposits (margin accounts) are collateralscorrespond to collateral associated to derivative financial contracts to mitigate the counterparty credit risk and are mainly established in cash. These guarantees operate when mark to market of derivative financial instruments exceed the levels of threshold agreed in the contracts, which could result in the Bank deliverdelivering or receivereceiving collateral.

(2)Other payable obligations mainly relates to settlement of derivatives and other financial transactions derived from the operation of the Bank.

(3)Other liabilities: mainly include reimbursement of insurance commissions.

 

F-103

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 22

24

CONTINGENCIES AND COMMITMENTS

 

a)Lawsuits and legal procedures

 

As of the issuance date of these financial statements, the Bank and its affiliates were subject to certain legal actions in the normal course of their business. As of December 31, 2016,2018, the BanksBank and its subsidiaries have provisions for this item of Ch$1,194923 million and Ch$480 million, respectively (Ch$1,8031,214 million and Ch$1180 million as of December 31, 2015)2017) which is included in “Provisions” in the Consolidated StatementStatements of Financial Position as provisions for contingencies.

 

b)Contingent loans

 

The following table shows the Bank’s contractual obligations to issue loans:

 

 As of December 31,
 2016 2015
 MCh$ MCh$
    
Letters of credit issued158,800 179,042
Foreign letters of credit confirmed57,686 70,434
Guarantees1,752,610 1,684,847
Personal guarantees125,050 163,955
Subtotal2,094,146 2,098,278
Available on demand credit lines7,548,820 6,806,745
Other irrevocable credit commitments260,266 82,328
Total9,903,232 8,987,351

F-98 

Table of Contents

NOTE 22

CONTINGENCIES AND COMMITMENTS, continued

 As of December 31,
 2018 2017
 MCh$ MCh$
    
Letters of credit issued223,420 201,699
Foreign letters of credit confirmed57,038 75,499
Performance guarantee1,954,205 1,823,793
Personal guarantees133,623 81,577
Total contingent liabilities2,368,286 2,182,568
Available on demand credit lines8,997,650 8,135,489
Other irrevocable credit commitments327,297 260,691
Total loan commit ment9,324,947 8,396,180
Total11,693,233 10,578,748

 

c)Held securities

 

The Bank holds securities in the normal course of its business as follows:

 

As of December 31,As of December 31,
2016 20152018 2017
MCh$ MCh$MCh$ MCh$
    
Third party operations    
Collections163,303 162,61999,784 175,200
Assets from third parties managed by the Bank and its affiliates 1,586,405 1,507,3591,630,431 1,660,804
Subtotal1,749,708 1,669,9781,730,215 1,836,004
Custody of securities      
Securities held in custody390,155 321,74111,160,488 383,002
Securities held in custody deposited in other entity687,610 561,612861,405 760,083
Issued securities held in custody18,768,572 18,246,38612,335,871 22,046,701
Subtotal19,846,337 19,129,73924,357,764 23,189,786
Total21,596,045 20,799,71726,087,979 25,025,790

 

During 2016,2018, the Bank classified the portfolios managed by private banking in “Assets from third parties managed by the Bank and its affiliates” (memo account). At the end of December 2016,2018, the balance for this was Ch$1,586,370 1,630,396 million (Ch$1,507,305 1,660,768 million at December 31, 2015)2017).

 

d)Guarantees

 

Banco Santander Chile has comprehensive officer fidelity insurance policy, No. 4356192,4668409, with the Chilena Consolidada de Seguros insurance company, for USD 5,000,000,50,000,000 which jointly covers both the Bank and its affiliates for the period from July 1, 20162018 to June 30, 2017.2019.

 

e)Contingent loans and liabilities

 

To satisfy its clients’ needs, the Bank took on several contingent loans and liabilities that are not be recognizedrecognised in the Consolidated Financial StatementStatements of Financial Position; these contain loan risks and they are, therefore, part of the Bank`s global risk.

 

F-99 F-104

Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 2325

EQUITY

 

a)Capital

 

As of December 31, 20162018 and 20152017 the Bank had 188,446,126,794 shares outstanding, all of which are subscribed for and paid in full, amounting to Ch$891,303 million.million, All shares have the same rights, and have no preferences or restrictions.restrictions,

 

The activity with respect to shares during 2016, 20152018, 2017 and 20142016 was as follows:

 

SHARES

As of December 31,

SHARES

As of December 31,

2016 2015 20142018 2017 2016
         
Issued as of January 1188,446,126,794 188,446,126,794 188,446,126,794188,446,126,794 188,446,126,794 188,446,126,794
Issuance of paid shares- - -- - -
Issuance of outstanding shares- - -- - -
Stock options exercised- - -- - -
Issued as of December 31,188,446,126,794 188,446,126,794 188,446,126,794188,446,126,794 188,446,126,794 188,446,126,794

 

As of December 31, 2016, 20152018, 2017 and 20142016 the Bank does not have any of its own shares in treasury, nor do any of the consolidated companies.

 

As of December 31, 20162018 the shareholder composition was as follows:

 

Corporate Name or Shareholder's NameSharesADRs (*)Total

% of

equity holding 

Corporate Name or Shareholder’s NameSharesADRs (*)Total

% of

equity holding

    
Santander Chile Holding S.A.66,822,519,695-66,822,519,69535.4666,822,519,695-66,822,519,69535.46
Teatinos Siglo XXI Inversiones Limitada59,770,481,573-59,770,481,57331.7259,770,481,573-59,770,481,57331.72
The Bank New York Mellon-34,800,933,67134,800,933,67118.47-26,486,000,07114.05
Banks on behalf of third parties12,257,100,312-12,257,100,3126.5015,451,106,985 -15,451,106,9858.20
Pension funds (AFP) on behalf of third parties6,990,857,997-6,990,857,9973.719,033,172,896 -9,033,172,8964.79
Stock brokers on behalf of third parties3,071,882,351-3,071,882,3511.634,773,558,507 -4,773,558,5072.53
Other minority holders4,732,351,195-4,732,351,1952.516,109,287,067 -6,109,287,0673.25
Total153,645,193,12334,800,933,671188,446,126,794100.00161,960,126,72326,486,000,071188,446,126,974100.00
(*)American Depository Receipts (ADR) are certificates issued by a U.S. commercial bank to be traded on the U.S. securities markets.

 

F-100 

Table of Contents

NOTE 23

EQUITY, continued

As of December 31, 20152017 the shareholder composition was as follows:

 

Corporate Name or Shareholder's NameSharesADRs (*)Total

% of

equity holding 

Corporate Name or Shareholder’s NameSharesADRs (*)Total

% of

equity holding

    
Santander Chile Holding S.A.66,822,519,695-66,822,519,69535.4666,822,519,695-66,822,519,69535.46
Teatinos Siglo XXI Inversiones Limitada59,770,481,573-59,770,481,57331.7259,770,481,573-59,770,481,57331.72
The Bank New York Mellon (1)-32,516,063,67132,516,063,67117.25-31,238,866,07116.58
Banks on behalf of third parties11,878,070,560-11,878,070,5606.3013,892,691,988-13,892,691,9887.37
Pension funds (AFP) on behalf of third parties8,887,560,424-8,887,560,4244.726,896,552,755-6,896,552,755 3.66
Stock brokers on behalf of third parties3,460,285,074-3,460,285,0741.843,762,310,365-3,762,310,3652.00
Other minority holders5,111,145,797-5,111,145,7972.716,062,704,347-6,062,704,3473.21
Total155,930,063,12332,516,063,671188,446,126,794100.00157,207,260,72331,238,866,071188,446,126,794100.00
(*)American Depository Receipts (ADR) are certificates issued by a U.S. commercial bank to be traded on the U.S. securities markets.

 

(1) As of August 4, 2015, F-105

Banco Santander Chile signed a contract which appoints The Bank of New York Mellon asand Subsidiaries

Notes to the commercial bank authorized to trade ADRs, replacing J.P. Morgan Chase Bank NA.Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 25

EQUITY, continued

 

As of December 31, 20142016 the shareholder composition was as follows:

 

Corporate Name or Shareholder's NameSharesADRs (*)Total

% of

 

equity holding

 

Corporate Name or Shareholder’s NameSharesADRs (*)Total

% of

equity holding

    
Santander Chile Holding S.A.66,822,519,695-66,822,519,69535.4666,822,519,695-66,822,519,69535.46
Teatinos Siglo XXI Inversiones Limitada59,770,481,573-59,770,481,57331.7259,770,481,573-59,770,481,57331.72
J.P. Morgan Chase Bank-31,370,004,47131,370,004,47116.65
The Bank New York Mellon-34,800,933,67134,800,933,67118.47
Banks on behalf of third parties10,949,884,423-10,949,884,4235.8112,257,100,312-12,257,100,3126.50
Pension funds (AFP) on behalf of third parties10,082,508,540-10,082,508,5405.356,990,857,997-6,990,857,9973.71
Stock brokers on behalf of third parties3,071,882,351-3,071,882,3511.63
Other minority holders9,450,728,092-9,450,728,0925.014,732,351,195-4,732,351,1952.51
Total157,076,122,32331,370,004,471188,446,126,794100.00153,645,193,12334,800,933,671188,446,126,794100.00
(*)American Depository Receipts (ADR) are certificates issued by a U.S. commercial bank to be traded on the U.S. securities markets.

 

b)Reserves

 

In April 2016,2018, due to the Shareholders’ Meeting, the Bank agreed to capitalized 25% of retained earnings from 20152017 as reserves; which equals Ch$112,219 141,204 million (Ch$220,132 141,706 million in 2015)2017).

 

c)Dividends

 

The distribution of dividends is detailed in the Consolidated StatementStatements of Changes in Equity.

 

F-101 

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NOTE 23

EQUITY, continued

d)As of December 31, 2018, 2017 and 2016 the basic and diluted earnings per share were as follows:

 

As of December 31,As of December 31,
2016 2015 20142018 2017 2016
MCh$ MCh$ MCh$MCh$ MCh$ MCh$
         
a) Basic earnings per share         
Total attributable to the equity holders of the Bank476,067 448,466 569,910
Total attributable to the shareholders of the Bank595,333 562,801 476,067
Weighted average number of outstanding shares188,446,126,794 188,446,126,794 188,446,126,794188,446,126,794 188,446,126,794 188,446,126,794
Basic earnings per share (in Ch$)2,526 2,380 3.0243.159 2.987 2.526
         
b) Diluted earnings per share476,067 448,466 569,910     
Total attributable to the equity holders of the Bank188,446,126,794 188,446,126,794 188,446,126,794
Total attributable to the shareholders of the Bank595,333 562,801 476,067
Weighted average number of outstanding shares- - -188,446,126,794 188,446,126,794 188,446,126,794
Adjusted number of shares188,446,126,794 188,446,126,794 188,446,126,794188,446,126,794 188,446,126,794 188,446,126,794
Diluted earnings per share (in Ch$)2,526 2,380 3.0243.159 2.987 2.526

 

As of December 31, 2016, 20152018, 2017 and 20142016 the Bank does not own instruments with dilutive effects.

 

F-102 F-106

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NOTE 23Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

EQUITY, continuedAS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

e) Other comprehensive income from available for sale investments and cash flow hedges:NOTE 25

EQUITY, continued

 

  For the years ended December 31,
  2016 2015 2014
  MCh$ MCh$ MCh$
       
Available for sale investments      
As of January 1, (7,093) 21,684 840
Gain (losses) on the re-measurement of available for sale investments, before tax 2,267 (51,178) 14,829
Reclassification from other comprehensive income to income for the year 12,201 22,401 6,015
Subtotals 14,468 (28,777) 20,844
Total 7,375 (7,093) 21,684
       
Cash flow hedges      
As of January 1, 8,626 10,725 (8,257)
Gains (losses) on the re-measurement of cash flow hedges, before tax (6,261) (2,105) 18,552
Reclassification adjustments on cash flow hedges, before tax (77) 6 430
Amounts removed from equity and included in carrying amount of non-financial asset (liability) which acquisition or incurrence was hedged as a highly probable transaction - - -
Subtotals (6,338) (2,099) 18,982
Total 2,288 8,626 10,725
       
Other comprehensive income, before taxes 9,663 1,533 32,409
       
Income tax related to other comprehensive income components      
Income tax relating to available for sale investments (1,770) 1,596 (4,554)
Income tax relating to cash flow hedges (549) (1,940) (2,252)
Total (2,319) (344) (6,806)
       
Other comprehensive income, net of tax 7,344 1,189 25,603
Attributable to:      
Equity holders of the Bank 6,640 1,288 25,600
Non-controlling interest 704 (99) 3
e)Other comprehensive income from available for sale investments and cash flow hedges:

  For the years ended December 31,
  2018 2017 2016
  MCh$ MCh$ MCh$
       
Debt instruments at FVOCI      
As of January 1, 1,855 - -
Gain (losses) on the re-measurement of debt instruments at FVOCI, before tax 6,328 - -
Recycling from other comprehensive income to income for the year (1,502) - -
Available for sale investments      
As of January 1, - 7,375 (7,093)
Gain (losses) on the re-measurement of available for sale investments, before tax - (10,384) 2,267
Recycling from other comprehensive income to income for the year - 4,864 12,201
Subtotals 4,826 (5,520) 14,468
Total 6,681 1,855 7,375
       
Cash flow hedges      
As of January 1, (3,562) 2,288 8,626
Gains (losses) on the re-measurement of cash flow hedges, before tax 14,048 (5,850) (6,261)
Recycling adjustments on cash flow hedges, before tax (683) - (77)
Amounts removed from equity and included in carrying amount of non-financial asset (liability) which acquisition or incurrence was hedged as a highly probable transaction - - -
Subtotals 13,365 (5,850) (6,338)
Total 9,803 (3,562) 2,288
       
Other comprehensive income, before taxes 16,484 (1,707) 9,663
       
Income tax related to other comprehensive income components      
Income tax relating to debt instruments at FVOCI (1,810) - -
Income tax relating to available for sale investments - (473) (1,770)
Income tax relating to cash flow hedges (2,646) 908 (549)
Total (4,456) 435 (2,319)
       
Other comprehensive income, net of tax 12,028 (1,272) 7,344
Attributable to:      
Shareholders of the Bank 11,072 (2,312) 6,640
Non-controlling interest 956 1,040 704

 

The Bank expects that the results included in "Other“Other comprehensive income"income” will be reclassified to profit or loss when the specific conditions have been met.

 

F-103 F-107

Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 24

26

NON-CONTROLLING INTEREST

 

a)The non-controlling interest included in the equity and the income from the subsidiaries is summarized as follows:

 

    Other comprehensive income
As of December 31, 2016Non-controllingEquityIncomeAvailable for sale investmentsDeferred taxTotal other comprehensive incomeComprehensive income
 %MCh$MCh$ MCh$ MCh$ MCh$ MCh$
        
Subsidiaries:       
Santander Agente de Valores Limitada0.97492116---116
Santander S.A. Sociedad Securitizadora0.362-   ----
Santander Corredores de Bolsa Limitada (1)49.4119,9661,1301,054(252)8021,932
Santander Corredora de Seguros Limitada0.251647---7
Subtotal 20,6241,2531,054(252)802                2.055
        
Entities controlled through other considerations:       
Bansa Santander S.A.100.006,533529---529

Santander Gestión de Recaudación y Cobranzas Limitada

100.002,184583---583
Multinegocios S.A. (2)100.00------
Servicios Administrativos y Financieros Limitada. (2)100.00------
Multiservicios de Negocios Limitada. (2)100.00------
Subtotal 8,7171,112---1,112
        
Total 29,3412,3651,054(252)8023,167

(1)Ex Santander S.A. Corredores de Bolsa, See Note 1.

(2)As of June 30, 2015, these entities have stopped rendering sales services for the Bank and therefore they have been excluded from the consolidation perimeter. See Note 1.

    Other comprehensive income
As of December 31, 2018Non-controllingEquityIncomeDebt instruments at FVOCIDeferred taxTotal other comprehensive incomeComprehensive income
 %MCh$MCh$ MCh$ MCh$ MCh$ MCh$
        
Subsidiaries:       
Santander Agente de Valores Limitada0.9748899---99
Santander S.A. Sociedad Securitizadora0.362-----
Santander Corredores de Bolsa Limitada49.0021,673755(84)2(82)673
Santander Corredora de Seguros Limitada0.241724(2)-(2)2
Subtotal 22,335858(86)2(84)774
        
Entities controlled through other considerations:       
Bansa Santander S.A.(1)100.0020,0512,650---2,650
Santander Gestión de Recaudación y Cobranzas Limitada100.003,777852---852
Subtotal 23,8283,502---3,502
        
Total 46,1634,360(86)2(84)4,276

 

F-104 F-108

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Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 24

26

NON-CONTROLLING INTEREST, continued

 

    Other comprehensive income
As of December 31, 2017Non-controllingEquityIncomeAvailable for sale investmentsDeferred taxTotal other comprehensive incomeComprehensive income
 %MCh$MCh$ MCh$ MCh$ MCh$ MCh$
        
Subsidiaries:       
Santander Agente de Valores Limitada0.97389132---132
Santander S.A. Sociedad Securitizadora0.361-----
Santander Corredores de Bolsa Limitada(1)49.0021,000702470(134)3361,038
Santander Corredora de Seguros Limitada0.251674---4
                                        Subtotal 21,557838470(134)3361,174
Entities controlled through other considerations:       
Bansa Santander S.A.100.0017,40110,869---10,869

Santander Gestión de Recaudación y

Cobranzas Limitada

100.002,925741---741
Subtotal 20,32611,610---11,610
        
Total 41,88312,448470(134)33612,784

(1)     In September 2017, Bansa Santander S.A. celebrated a legal cession of rights,which generated an income of Ch$20,663 million before tax (Ch$15,197 million net of taxes).

    Other comprehensive income
As of December 31, 2015Non-controllingEquityIncomeAvailable for sale investmentsDeferred taxTotal other comprehensive incomeComprehensive income
 %MCh$MCh$ MCh$ MCh$ MCh$ MCh$
        
Subsidiaries:       
Santander Agente de Valores Limitada0.9765298(4)1(3)95
Santander S.A. Sociedad Securitizadora0.362-----
Santander Corredores de Bolsa Limitada (1)49.4121,765816(128)29(99)717
Santander Corredora de Seguros Limitada0.25156 (5)---(5)
                                        Subtotal 22,575909(132)30(102)807

Entities controlled through other considerations:

 

       
Bansa Santander S.A.1006,004334---334

Santander Gestión de Recaudación y Cobranzas Limitada

 

1001,602564---564
Multinegocios S.A. (2)100-310---310
Servicios Administrativos y Financieros Limitada. (2)100-550---550
Multiservicios de Negocios Limitada. (2)100-596---                         596
Subtotal 7,6062.354---                2,354
        
Total 30,1813.263(132)30(102)3,161

F-109

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 26

NON-CONTROLLING INTEREST, continued

    Other comprehensive income
As of December 31, 2016Non-controllingEquityIncomeAvailable for sale investmentsDeferred taxTotal other comprehensive incomeComprehensive income
 %MCh$MCh$ MCh$ MCh$ MCh$ MCh$
        
Subsidiaries:       
Santander Agente de Valores Limitada0.97492116---116
Santander S.A. Sociedad Securitizadora0.362-----
Santander Corredores de Bolsa Limitada49.4119,9661,1301,054(251)8031,933
Santander Corredora de Seguros Limitada0.251647---7
Subtotals 20,6241,2531,054(251)803                2,056
        
Entities controlled through other considerations:       
Bansa Santander S.A.100.006,533529---529

Santander Gestión de Recaudación y

Cobranzas Limitada(1)

100.002,184583---583
Multinegocios S.A.100.00------
Servicios Administrativos y Financieros Limitada100.00------
Multiservicios de Negocios Limitada100.00------
Subtotals 8,7171,112---1,112
        
Total 24,3412,3651,054(251)8033,168

(1) Ex Santander S.A. Corredores de Bolsa, See Note 1.Note1.


Banco Santander Chile and Subsidiaries

(2) As of June 30, 2015, these entities have stopped rendering sales services forNotes to the Bank and therefore they have been excluded from the consolidation perimeter. See Note 1.Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

F-105 

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NOTE 24

NON-CONTROLLING INTEREST, continued

    Other comprehensive income
As of December 31, 2014Non-controllingEquityIncomeAvailable for sale investmentsDeferred taxTotal other comprehensive incomeComprehensive income
 %MCh$MCh$ MCh$ MCh$ MCh$ MCh$
        
Subsidiaries:       
Santander Agente de Valores Limitada0.9755887---87
Santander S.A. Sociedad Securitizadora0.362-----
Santander S.A. Corredores de Bolsa49.4120,9281,239(34)7(27)1,212
Santander Corredora de Seguros Limitada0.25154(4)---(4)
Subtotals 21,6421,322(34)7(27)1,295
        
Entities controlled through other considerations:       
Bansa Santander S.A.100.005,6712,236---2,236

Santander Gestión de Recaudación y Cobranzas Limitada (1)

100.001,0371,531---1,531
Multinegocios S.A.100.00730253---253
Servicios Administrativos y Financieros Limitada100.002,001315---315
Servicios de Cobranzas Fiscalex Limitada (1)100.00------
Multiservicios de Negocios Limitada100.002,002323---323
Subtotals 11,4414,658---4,658
        
Total 33,0835,980(34)7(27)5,953

(1)On August 01, 2014 the company Servicios de Cobranza Fiscalex Limitada was acquired by Santander Gestión de Recaudación y Cobranza Limitada.

F-106 

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NOTE 24

26

NON-CONTROLLING INTERESTS, continued

 

b)The overview of the financial information of the subsidiaries included in the consolidation of the Bank that possess non-controlling interests is as follows, which does not include consolidation or conforming accounting policy adjustments:

 

As of December 31,As of December 31,
2016 2015 20142018 2017 2016
 

Net

income

  Net income  Net   

Net

income

    Net income  Net
AssetsLiabilitiesCapital AssetsLiabilitiesCapital AssetsLiabilitiesCapitalincomeAssetsLiabilitiesCapital AssetsLiabilitiesCapital AssetsLiabilitiesCapitalincome
MCh$ MCh$ MCh$MCh$ MCh$ MCh$
Santander Corredora de Seguros Limitada75,00010,06562,2762,659 72,86010,58860,7651,507 70,6029,06863,078(1,544)77,7649,59566,3741,795 76,1779,80364,9371,437 75,00010,06562,2762,659
Santander Corredores de Bolsa Limitada86,47345,724

38,356

 

2,393 71,11826,76342,6181,737 74,40831,79040,1712,447102,22857,99942,6911,538 88,71145,85541,4241,432 86,47345,724

38,356

 

2,393
Santander Agente de Valores Limitada54,4863,66638,85111,969 131,30564,04957,5549,702 339,787282,23348,5568,99850,5527140,17710,304 44,9104,73226,56913,609 54,4863,66638,85111,969
Santander S.A. Sociedad Securitizadora50977512(80) 56653561(48) 62261640(79)70466728(90) 40050432(82) 50977512(80)
Santander Gestión de Recaudación y Cobranzas Ltda.8,5476,3631,602582 6,1944,5921,038564 4,9173,8804585796,9323,1552,925852 10,8267,9012,184741 8,5476,3631,602582
Multinegocios S.A. (management of sales force) (1)- - 1,9591,229477253
Servicios Administrativos y Financieros Limitada (management of sales force) (1)- - 2,9569551,686315
Servicio de Cobranza Fixcalex Ltda.- - -
Multiservicios de Negocios Limitada (call center) (1)- - 3,4011,3991,679323
Bansa Santander S.A.31,30124,7686,004529 31,63125,6275,670334 31,06225,3913,4352,23620,43738617,4012,650 25,5358,1346,53310,868 31,30124,7686,004529
Total256,31690,663147,60118,052 313,674131,672168,20613,796 529,714356,006160,18013,528258,61771,272170,29617,049 246,55976,475142,07928,005 256,31690,663147,60118,052

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

(1) As of June 30, 2015, these entities have stopped rendering sales services for the Bank and therefore they have been excluded from the consolidation perimeter. See Note 1.

F-107 

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NOTE 2527

INTEREST INCOME

 

This item refers to interest earned in the period from the financial assets whose return, whether implicitly or explicitly, is determined by applying the effective interest rate method, regardless of the value at fair value, as well as the effect of hedge accounting (see c).

 

a)For the years ended December 31, 2016, 20152018, 2017 and 20142016 the income from interest, was attributable to the following items:

 

 For the years ended December 31,
 2016  2015 2014
 InterestInflation adjustmentsPrepaid feesTotal InterestInflation adjustmentsPrepaid feesTotal InterestInflation adjustmentsPrepaid feesTotal
ItemsMCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$
               
Resale agreements1,488--1,488 1,075--1,075 1,223--1,223
Interbank loans295--295 375--375 139--139
Commercial loans742,432130,9047,659880,995 687,464168,7528,494864,710 706,190208,4277,883922,500
Mortgage loans304,116228,0817,012539,209 259,941286,43723,191569,569 245,980328,21218,230592,422
Consumer loans604,1526604,318609,130 586,3853,4183,706593,509 603,8045,1083,205612,117
Investment instruments75,8082,916-78,724 60,0047,616-67,620 61,77425,461-87,235
Other interest income11,1362,445 -13,581 10,1115,831 -15,942 10,5843,218-13,802
               
Interest income less income from hedge accounting1,739,427365,00618,9892,123,422 1,605,355472,05435,3912,112,800 1,629,694570,42629,3182,229,438

F-108 

Table of Contents

NOTE 25

INTEREST INCOME, continued

 For the years ended December 31,
 2018  2017 2016
 InterestInflation adjustmentsPrepaid feesTotal InterestInflation adjustmentsPrepaid feesTotal InterestInflation adjustmentsPrepaid feesTotal
ItemsMCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$
               
Resale agreements903--903 939--939 1,488--1,488
Interbank loans897--897 969--969 295--295
Commercial loans771,405153,85111,008936,264 752,01385,38910,525847,927 742,432130,9047,659880,995
Mortgage loans330,055266,691909597,655 320,041149,303414469,758 304,116228,0817,012539,209
Consumer loans579,9294396,166586,534 612,9323634,738618,033 604,1526604,318609,130
Investment instruments75,42324,790-100,213 74,0005,797-79,797 75,8082,916-78,724
Other interest income16,6444,013-20,657 12,1721,538-13,710 11,1362,445 -13,581
               
Interest income not including income from hedge accounting1,775,256449,78418,0832,243,123 1,773,066242,39015,6772,031,133 1,739,427365,00618,9892,123,422

 

b)For the years ended December 31, 2016, 20152018, 2017 and 2014,2016, the expense from interest expense, excluding expense from hedge accounting, is as follows:

 

 For the years ended December 31,
 2016 2015 2014
 InterestInflation adjustmentsTotal InterestInflation adjustmentsTotal InterestInflation adjustments Total
ItemsMCh$MCh$MCh$ MCh$MCh$MCh$ MCh$MCh$ MCh$
             
Demand deposits(16,003) (1,043)(17,046)  (13,875) (1,343) (15,218)  (6,189)(1,909) (8,098)
Repurchase agreements(2,822)-(2,822) (6,893)- (6,893) (7,052)- (7,052)
Time deposits and liabilities(399,720)(38,946)(438,666) (346,174)(47,370)(393,544) (334,841)(74,384) (409,225)
Interbank loans(19,803)-(19,803) (14,998)(2)(15,000) (19,015)(9) (19,024)
Issued debt instruments(197,973)(105,452)(303,425) (183,561)(113,029)(296,590) (175,886)(137,460) (313,346)
Other financial liabilities(3,008)(781)(3,789) (3,070)(1,180)(4,250) (3,131)(1,729) (4,860)
Other interest expense(5,211)(8,874)(14,085) (3,456)(14,776)(18,232) (2,636)(17,839) (20,475)
             
Interest expense not including expenses from hedge accounting(644,540)(155,096)(799,636) (572,027)(177,700)(749,727) (548,750)(233,330) (782,080)

c)For the years ended December 31, 2016, 2015 and 2014, the income and expense from interest is as follows:

 For the years ended December 31,
 2016 2015 2014
ItemsMCh$ MCh$ MCh$
      
Interest income less income from hedge accounting2,123,422 2,112,800 2,229,438
Interest expense less expense from hedge accounting(799,636) (749,727) (782,080)
      
Net Interest income (expense) from hedge accounting1,323,786 1,363,073 1,447,358
      
Hedge accounting (net)(42,420) (107,867) (130,254)
      
Total net interest income1,281,366 1,255,206 1,317,104
 For the years ended December 31,
 2018 2017 2016
 InterestInflation adjustmentsTotal InterestInflation adjustmentsTotal InterestInflation adjustmentsTotal
ItemsMCh$MCh$MCh$ MCh$MCh$MCh$ MCh$MCh$MCh$
            
Demand deposits(14,914)(1,371)(16,285) (13,851)(695)(14,546) (16,003)(1,043)(17,046)
Repurchase agreements(6,439)-(6,439) (6,514)-(6,514) (2,822)-(2,822)
Time deposits and liabilities(317,061)(35,284)(352,345) (341,821)(20,509)(362,330) (399,720)(38,946)(438,666)
Interbank loans(39,971)-(39,971) (26,805)-(26,805) (19,803)-(19,803)
Issued debt instruments(241,455)(133,227)(374,682) (220,027)(76,170)(296,197) (197,973)(105,452)(303,425)
Other financial liabilities(2,698) (110)(2,808) (2,946)(303)(3,249) (3,008)(781)(3,789)
Other interest expense(6,929)(10,497)(17,426) (5,236)(4,973)(10,209) (5,211)(8,874)(14,085)
Interest expense not including expenses from hedge accounting(629,467)(180,489)(809,956) (617,200)(102,650)(719,850) (644,540)(155,096)(799,636)

F-109 


Table of Contents
 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 27

INTEREST INCOME, continued

c)       For the years ended December 31, 2018, 2017 and 2016, the income and expense from interest is as follows:

 For the years ended December 31,
 2018 2017 2016
ItemsMCh$ MCh$ MCh$
      
Interest income not including income from hedge accounting2,243,123 2,031,133 2,123,422
Interest expense not including expense from hedge accounting(809,956) (719,850) (799,636)
      
Net Interest income (expense) from hedge accounting1,433,167 1,311,283 1,323,786
      
Hedge accounting (net)(18,799) 15,408 (42,420)
      
Total net interest income1,414,368 1,326,691 1,281,366

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 26

28

FEES AND COMMISSIONS

 

This item includes the amount of fees earned and paid during the year, except for those which are an integral part of the financial instrument’s effective interest rate:

 

For the years ended December 31,  For the years ended December 31,  
2016 2015 20142018 2017 2016
MCh$ MCh$ MCh$MCh$ MCh$ MCh$
    
Fee and commission income    
Fees and commissions for lines of credits and overdrafts5,754 6,597 7,0156,624 7,413 5,754
Fees and commissions for guarantees and letters of credit35,911 35,276 32,40333,654 33,882 35,911
Fees and commissions for card services195,566 175,262 147,256218,903 201,791 195,566
Fees and commissions for management of accounts31,540 30,291 29,03133,865 31,901 31,540
Fees and commissions for collections and payments31,376 30,399 35,35540,077 44,312 31,376
Fees and commissions for intermediation and management of securities9,304 10,000 9,28610,147 10,090 9,304
Insurance brokerage fees40,882 39,252 34,69539,949 36,430 40,882
Office banking14,145 15,224 17,60215,921 15,669 14,145
Fees for other services rendered38,038 35,978 30,798 45,633 43,123 38,038
Other fees earned28,668  24,621 23,288 39,690 30,947 28,668
Total431,184  402,900 366,729 484,463 455,558 431,184

 

For the years ended December 31,  For the years ended December 31,  
2016 2015 20142018 2017 2016
MCh$ MCh$ MCh$MCh$ MCh$ MCh$
  
Fee and commission expense  
Compensation for card operation(143,509) (129,196) (104,095)(163,794) (149,809) (143,509)
Fees and commissions for securities transactions(946) (1,315) (979)(936) (858) (946)
Office banking(14,671) (15,320) (16,602)(4,096) (15,283) (14,671)
Other fees(17,634) (19,442) (17,770)(24,752) (10,545) (17,634)
Total(176,760) (165,273) (139,446)(193,578) (176,495) (176,760)
     
Net fees and commissions income254,424 237,627 227,283290,885 279,063 254,424

 

The fees earned in transactions with letters of credit are presented in the Consolidated StatementStatements of Income in the line item “Interest income”.,


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

F-110 NOTE 28

Table of Contents

FEES AND COMMISSIONS, continued

 


The income and expenses for the commissions of the business segments are presented below and the calendar for the recognition of income from ordinary activities is opened.

 

Segments

 Revenue recognition calendar for ordinary activities

As of December 31, 2018

 

Individuals and PYMEsCompanies and InstitutionsGlobal Corporate BankingOthers

Total

 Transferred over timeTransferred at a point in timeAccrual model
 MCh$MCh$MCh$MCh$MCh$ MCh$MCh$MCh$
          

Commission income

         
Commissions for lines of credit and overdrafts5,901271453(1)6,624 6,624--
Commissions for guarantees and letters of credit11,09916,2586,2395833,654 33,654--
Commissions for card services211,6156,1931,03659218,903 34,856184,047-
Commissions for account management30,3862,678799233,865 33,865--
Commissions for collections, collections and payments66,7801,693458(28,854)40,077 -15,71924,358
Commissions for intermediation and management of values4,0501347,221(1,258)10,147 -10,147-
Remuneration for insurance commercialization---39,94939,949 --39,949
Office banking11,4203,893608-15,921 -15,921-
Other remuneration for services rendered40,9013,8338198045,633 -45,633-
Other commissions earned6,9089,74323,320(281)39,690 -39,690-
Total389,06044,69640,9539,754484,463 108,999311,15764,307
          

Commission expenses

         
Remuneration for card operation(159,817)(3,186)(134)(657)(163,794) -(163,794)-
Commissions per transaction with securities(169)(3)(419)(345)(936) -(936)-
Office banking(2,374)(985)(722)(15)(4,096) -(4,096)-
Other commissions(6,168)(3,776)(4,614)(10,194)(24,752) -(24,752)-
Total(168,528)(7,950)(5,889)(11,211)(193,578) -(193,578)-
Total Net commission income and expenses220,53236,74635,064(1,457)290,885 108,999117,57964,307

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 27

29

NET INCOME (EXPENSE) FROM FINANCIAL OPERATIONS

 

ForIn accordance with the years ended December 31, 2016, 2015IFRS 9 and 2014,IFRS 7 disclosure , the detail of income (expense) from financial operations is as follows:

 

 For the years ended December 31,
 2016 2015 2014
 MCh$ MCh$ MCh$
      
Income (expense)  from financial operations     
Trading derivatives(395,209) (503,981) (224,015)
Trading investments18,229 21,505 45,952
Sale of loans and accounts receivables from customers     
     Current portfolio1,469 921 1,261
     Charged-off portfolio2,720 (58) 4,809
Available for sale investments14,598 23,655 6,934
Repurchase of issued bonds(8,630) (14) 5,198
Other income (expense) from financial operations(211) 75 214
Total income (expense)(367,034) (457,897) (159,647)
For the years ended December 31,
2018
MCh$
Net gains on trading derivatives38,217
Net gains on financial assets at fair value through profit or loss9,393
Net gains on derecognition of financial assets measured at amortised cost8,479
Sale of loans and accounts receivables from customers
     Current portfolio(309)
     Charged-off portfolio709
Repurchase of issued bonds (*)(840)
Other income (expense) from financial operations(2,475)
Total income (expense)53,174
(*)The Bank repurchased its own bonds, see Note 5 for details.

 

 

The disclosure for the years December 31, 2017 and 2016, the detail of income (expense) from financial operations is as follows:

 For the years ended December 31,
  2017 2016
  MCh$ MCh$
     
Income (expense)  from financial operations    
Trading derivatives (18,974) (395,209)
Trading investments 10,008 18,229
Sale of loans and accounts receivables from customers    
     Current portfolio 3,020 1,469
     Charged-off portfolio 3,020 2,720
Available for sale investments 8,956 14,598
Repurchase of issued bonds (*) (742) (8,630)
Other income (expense) from financial operations (2,492) (211)
Total income (expense) 2,796 (367,034)

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 28

30

NET FOREIGN EXCHANGE GAIN (LOSS)

 

Net foreign exchange income includes the income earned from foreign currency trading, differences arising from converting monetary items in a foreign currency to the functional currency, and those generated by non-monetary assets in a foreign currency at the time of their sale.

 

For the years ended December 31, 2016, 20152018, 2017 and 20142016 net foreign exchange income is as follows:

 

 For the years ended December 31, For the years ended December 31,
2016 20152014            2018          2017       2016
MCh$ MCh$ MCh$           MCh$         MCh$      MCh$
    
Net foreign exchange gain (loss)    
Net profit (loss) from currency exchange differences116,117 (197,875) (370,282)(212,618) 113,115 116,117
Hedging derivatives399,875 777,254 621,767252,275 22,933 399,875
Income from assets indexed to foreign currency(8,745) 25,421 22,40412,251 (9,190) (8,745)
Income from liabilities indexed to foreign currency145 (1,404) (1,677)- 98 145
Total507,392 603,396 272,21251,908 126,956 507,392

F-111 


Table of Contents
 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 2931

PROVISIONS FOR LOAN LOSSESEXPECTED CREDIT LOSSESS ALLOWANCE

 

a)I.For the years ended December 31, 2016, 2015 and 2014 activity for provisionsExpected credit losses (ECL) allowance – under IFRS 9

As of December 31, 2018, under the new credit risk model established by IFRS 9 the ECL allowance by stage recorded at income statements is as follows:

For the year ended December 31, 2018Stage1Stage2Stage3TOTAL
 IndividualCollectiveIndividualCollectiveIndividualCollective
 MCh$MCh$MCh$MCh$MCh$MCh$MCh$
Commercial loans795,652(2,891)(1,533)(96,131)(47,959)(142,782)
Mortgage loans-5,583-5,161-3,37514,119
Consumer loans-1,861-192-(191,304)(189,251)
Contingent loans(90)1,21411(68)(225)(834)9
Loans and account receivable at FVOCI363-68---431
Debt at FVOCI-66----66
Total35314,376(2,811)3,752(96,356)(236,722)(317,408)
II.Provision for loan losses is as follows:– under IAS 39

 

Loans and accounts receivable from customers 

 Total Loans and accounts receivable from customers Total

For the year ended December 31, 2016

Interbank 

loans 

Individual 

Commercial

loans

Mortgage 

loans

Group

Consumer 

loans 

Group

Contingent 

loans 

IndividualGroupIndividualGroup
For the year ended December 31, 2017

Interbank

loans

Individual

Commercial

loans

Mortgage

loans

Consumer

loans

Contingent

loans

Total
IndividualGroupGroupGroupIndividualGroup
MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$
Charged-off individually significant loans-(11,222)-(11,222)-(15,699)---(15,699)
Provisions established(3,052)(61,002)(133,855)(50,892)(280,544)(11,986)(2,909)(544,240)(307)(64,658)(148,681)(43,621)(252,038)(3,117)(4,224)(516,646)
Total provisions and charge-offs(3,052)(72,224)(133,855)(50,892)(280,544)(11,986)(2,909)(555.462)(307)(80,357)(148,681)(43,621)(252,038)(3,117)(4,224)(532,345)
Provisions released8343,18314,43234,24630,7906,9635,384135,0813,97055,92520,49111,42746,0897,0011,660146,563
Recovery of loans previously charged off-11.14216,04310,04141,072--78,298 -11,11421,49910,94239,972--83,527
Net charge to income(2,969)17,899(103,380)(6,605)(208,682)(5,023)2,475(342,083)3,663(13,318)(106,691)

(21,252)

(165,977)

3,884

(2,564)

(302,255)

 

Loans and accounts receivable from customers 

 Total Loans and accounts receivable from customers Total

For the year ended December 31, 2015

Interbank 

loans

Individual

Commercial

loans

Mortgage 

loans

Group

Consumer

loans

Group

Contingent

loans

IndividualGroupIndividualGroup
For the year ended December 31, 2016

Interbank

loans

Individual

Commercial

loans

Mortgage

loans

Consumer

loans

Contingent

loans

Total
IndividualGroupGroupGroupIndividualGroup
MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$
Charged-off individually significant loans-(12,955)-(12,955)-(11,222)----(11,222)
Provisions established(1,357)(124,968)(136,778)(34,373)(248,937)(2,808)(2,601)(551,822)(3,052)(61,002)(133,855)(50,892)(280,544)(11,986)(2,909)(544,240)
Total provisions and charge-offs(1,357)(137,923)(136,778)(34,373)(248,937)(2,808)(2,601)(564.777)(3,052)(72,224)(133,855)(50,892)(280,544)(11,986)(2,909)(555,462)
Provisions released19246,61417,8857,20518,1265,0422,29697,3608343,18314,43234,24630,7906,9635,384135,081
Recovery of loans previously charged off-8.97817,0546,54335,565--68,140-11,14216,04310,04141,072--78,298
Net charge to income(1,165)(82,331)(101,839)(20,625)(195,246)2,234(305)(399.277)(2,969)(17,899)(103,380)(6,605)(208,682)(5,023)2,475(342,083)
       

 Loans and accounts receivable from customersTotal

For the year ended December 31, 2014

 

Interbank

loans 

Individual

Commercial

loans

Mortgage  

loans

Group

Consumer

loans

Group

Contingent 

loans

IndividualGroupIndividualGroup
 MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$
Charged-off individually significant loans-   (10,811)---- (10,811)
Provisions established(60)(52,240)(174,244)(24,907)(218,941)(8,305)(3,641)(482,338)
Total provisions and charge-offs(60)(63,051)(174,244)(24,907)(218,941)(8,305)(3,641)(493,149)
Provisions released55415,9037,1276,56138,2754,4316,41879,269
Recovery of loans previously charged off-   5,30211,6455,12236,908--58,977
Net charge to income494(41,846)(155,472)(13,224)(143,758)(3,874)2,777(354,903)

b)The detail of Charge-off of individually significant loans, is as follows:

 

b)The detail of Charge-off of individually significant loans, is as follows:

  For the years ended December 31,
  20162015 2014
  MCh$MCh$ MCh$
      
Charge-off of loans 47,60550,656               37,673
Provision applied (36,383)(37,701) (26,862)
Net charge offs of individually significant loans 11,22212,955 10,811

  For the years ended December 31,
  2017 2016
  MCh$ MCh$
     
Charge-off of loans  51,978 47,605
Provision applied (36,279) (36,383)
Net charge offs of individually significant loans   15,699 11,222

F-112 


Table of Contents
 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 30

32

PERSONNEL SALARIES AND EXPENSES

 

For the years ended December 31, 2016, 20152018, 2017 and 2014,2016, the composition of personnel salaries and expenses is as follows:

 

 For the years ended December 31,
 2016 2015 2014
 MCh$ MCh$ MCh$
      
Personnel compensation249,703 233,707 213,364
Bonuses or gratifications77,649 78,260 77,145
Stock-based benefits331 66 329
Seniority compensation:26,263 34,012 10,551
Pension plans(150) 431 1,395
Training expenses2,835 3,186 2,477
Day care and kindergarten3,072 2,992 2,485
Health funds4,777 4,474 4,082
Welfare funds806 754 533
Other personnel expenses29,847 29,181 26,527
Total395,133 387,063 338,888

 For the years ended December 31,
 2018 2017 2016
 MCh$ MCh$ MCh$
      
Personnel compensation259,354 250,962 249,703
Bonuses or gratifications72,728 75,181 77,649
Stock-based benefits(337) 2,752 331
Seniority compensation21,869 26,120 26,263
Pension plans1,069 2,039 (150)
Training expenses3,782 2,867 2,835
Day care and kindergarten2,778 2,505 3,072
Health funds- 4,748 4,777
Welfare funds6,040 896 806
Other personnel expenses30,281 28,897 29,847
Total397,564 396,967 395,133

F-113 


Table of Contents
 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 3133

ADMINISTRATIVE EXPENSES

 

For the years ended December 31, 2016, 20152018, 2017 and 2014,2016, the composition of the item is as follows:

 

 For the years ended December 31,
 2018 2017 2016
 MCh$ MCh$ MCh$
      
General administrative expenses145,241 139,418 138,974
Maintenance and repair of property, plant and equipment20,962 21,359 19,901
Office lease29,761 26,136 28,098
Equipment lease55 96 280
Insurance payments3,439 3,354 3,842
Office supplies5,070 6,862 5,747
IT and communication expenses44,209 39,103 37,351
Heating, and other utilities4,849 5,468 4,863
Security and valuables transport services12,168 12,181 14,793
Representation and personnel travel expenses3,444 4,262 5,440
Judicial and notarial expenses1,148 974 952
Fees for technical reports and auditing10,020 9,379 7,631
Other general administrative expenses10,116 10,244 10,076
Outsourced services65,358 57,400 55,757
Data processing32,360 34,880 36,068
Products sale  - -
Archive services3,401 3,324 4,427
Valuation services3,167 2,419 3,489
Outsourcing9,936 6,878 5,404
Other16,494 9,899 6,369
Board expenses1,297 1,290 1,371
Marketing expenses19,286 18,877 17,844
Taxes, payroll taxes, and contributions13,907 13,118 12,467
Real estate taxes1,730 1,443 1,435
Patents1,896 1,646 1,618
Other taxes7 24 93
Contributions to SBIF10,274 10,005 9,321
Total245,089 230,103 226,413
      

F-120

 For the years ended December 31,
 2016 2015 2014
 MCh$ MCh$ MCh$
      
General administrative expenses138,974 127,826 125,271 
Maintenance and repair of property, plant and equipment19,901 20,002 17,498
Office lease28,098 27,472 28,348
Equipment lease280 134 94
Insurance payments3,842 3,656 3,302
Office supplies5,747 6,232 4,567
IT and communication expenses37,351 28,420 29,379
Heating, and other utilities4,863 4,764 4,131
Security and valuables transport services14,793 15,393 17,089
Representation and personnel travel expenses5,440 4,590 4,173
Judicial and notarial expenses952 2,103 2,192
Fees for technical reports and auditing7,631 7,301 6,891
Other general administrative expenses10,076 7,759 7,607
Outsourced services55,757 60,913 51,504 
Data processing36,068 39,286 32,253
Products sale- 226 1,502
Archive services4,427 1,047 3,305
Valuation services3,489 2,969 2,119
Outsourcing5,404 7,275 5,608 
Other6,369 10,110 6,717
Board expenses1,371 1,465 1,314 
Marketing expenses17,844 18,483 16,419 
Taxes, payroll taxes, and contributions12,467 11,844 10,641 
Real estate taxes1,435 1,813 1,415
Patents1,618 1,589 1,525
Other taxes93 3 15
Contributions to SBIF9,321 8,439 7,686
Total226,413  220,531  205,149 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

F-114 

Table of Contents

NOTE 32

34

DEPRECIATION, AMORTIZATION, AND IMPAIRMENT

 

Depreciation, amortization and impairment charges for the years ended December 31, 2016, 20152018, 2017 and 2014,2016, are detailed below:

 

For the years ended December 31,  For the years ended December 31,  
2016 2015 20142018 2017 2016
MCh$ MCh$ MCh$MCh$ MCh$ MCh$
  
Depreciation and amortization  
Depreciation of property, plant, and equipment(45,025) (36,195) (27,571)(54,987) (55,623) (45,025)
Amortization of Intangible assets(20,334) (17,419) (16,601)(24,293) (22,200) (20,334)
Total depreciation and amortization(65,359) (53,614) (44,172)(79,280) (77,823) (65,359)
Impairment of property, plant, and equipment(234) (21) (108)(39) (354) (234)
Impairment of intangibles- - (36,556)-  (5,290) -
Total(65,593) (53,635) (80,836)(79,319) (83,467) (65,593)

 

As of December 31, 2016,2018, the equipment impairment totaled Ch$234 million to (Ch$2139 million(Ch$354 million as of December 31, 20152017 and Ch$108234 million as of December 31, 2014)2016), million, mainly due to damages to ATMs.

 


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 33

35

OTHER OPERATING INCOME AND EXPENSES

 

a)Other operating income is comprised of the following components:

 

 For the years ended December 31,For the years ended December 31,
 2016 2015 2014            2018               2017        2016
 MCh$ MCh$ MCh$            MCh$               MCh$        MCh$
       
Income from assets received in lieu of payment    7,106 3,330 1,663
Income from sale of assets received in lieu of payment 1,663 2,455 2,811
Recovery of charge-offs and income from assets received in lieu of payment - - -
Subtotal 1,663 2,455 2,811
Income from sale of investments in other companies   - - -
Gain on sale of investments in other companies - 617 -
Subtotal - 617 -
Release of contingencies provisions(1)12,020 29,903 -
Other income   4,003 28,783 4,764
Leases 519 708 805222 264 519
Income from sale of property, plant and equipment 2,017 381 687
Income from sale of property, plant and equipment(2)2,490 23,229 2,017
Recovery of provisions for contingencies - - 315- - -
Compensation from insurance companies due to damages 1,530 435 661144 1,237 1,530
Other 698 1,843 1,2661,147 4,053 698
Subtotal 4,764 3,367 3,734
       
Total 6,427 6,439 6,54523,129 62,016 6,427

F-115 

Table of Contents

(1)In accordance with IAS 37, the Bank recorded contingencies provisions, which during 2018 were favorable to the Bank.

 

NOTE 33(2)Corresponds to legal cession of rights made by Bansa Santander S,A, which result in an income of Ch$2,122 million, as

OTHER OPERATING INCOME AND EXPENSES, continuedstated in Note N°26.

 

b)Other operating expenses are detailed as follows:

 

For the years ended December 31,For the years ended December 31,
2016 2015 20142018 2017 2016
MCh$ MCh$ MCh$MCh$ MCh$ MCh$
Allowances and expenses for assets received in lieu of payment    2,537 5,591 11,416
Provision on assets received in lieu of payment9,246 7,803 1,577816 3,912 9,246
Expenses for maintenance of assets received in lieu of payment2,170 2,397 2,4891,721 1,679 2,170
Subtotal11,416 10,200 4,066
  
Credit card expenses3,636 4,624 2,6383,151 3,070 3,636
  
Customer services3,734 3,919 9,9403,635 2,563 3,734
  
Other expenses  23,019 57,189 50,116
Operating charge-offs6,146 5,359 6,153798 1,607 6,146
Life insurance and general product insurance policies18,393 11,225 8,9199,964 23,475 18,393
Additional tax on expenses paid overseas142 2,651 3,055- - 142
Provisions for contingencies4,238 15,230 13,08021 - 4,238
Expense for adopting chip technology on cards- - 2,400
Retail association payment898 912 -
Other21,197 5,521 8,69511,338 31,195 21,197
Subtotal50,116 39,986 42,302
    
Total68,902 58,729 58,94632,342 68,413 68,902

F-116 

Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 34

36

TRANSACTIONS WITH RELATED PARTIES

 

In addition to Affiliatesaffiliates and associated entities, the Bank’s “related parties” include its “key personnel” from the executive staff (members of the Bank’s Board of Directors and Managers of Banco Santander Chile and its affiliates, together with their close relatives), as well as the entities over which the key personnel could exercise significant influence or control.control,

 

The Bank also considers the companies that are part of the Santander Group worldwide as related parties, given that all of them have a common parent, i.e.i,e,, Banco Santander S.A.S,A, (located in Spain).,

 

Transactions between the Bank and its related parties are specified below.below, To facilitate comprehension, we have divided the information into four categories:

 

Santander Group Companies

 

This category includes all the companies that are controlled by the Santander Group around the world, and hence, it also includes the companies over which the Bank exercises any degree of control (Affiliates(affiliates and special-purpose entities).,

 

Associated companies

 

This category includes the entities over which the Bank, in accordance with section b) of Note 1 to these Financial Statements, exercises a significant degree of influence and which generally belong to the group of entities known as “business support companies.companies,”

 

Key personnel

 

This category includes members of the Bank’s Board of Directors and managers of Banco Santander Chile and its affiliates, together with their close relatives.relatives,

 

Other

 

This category encompasses the related parties that are not included in the groups identified above and which are, in general, entities over which the key personnel could exercise significant influence or control.control,

 

The terms for transactions with related parties are equivalent to those which prevail in transactions made under market conditions or to which the corresponding considerations in kind have been attributed.attributed,


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

F-117 

Table of Contents

NOTE 36

NOTE 34

TRANSACTIONS WITH RELATED PARTIES, continued

 

a)Loans to related parties:

a)       Loans to related parties:

Below are loans and accounts receivable as well as contingent loans that correspond to related entities:

 

As of December 31,As of December 31,
2016 2015 20142018 2017 2016

Companies

of the Group

Associated

companies

Key

personnel 

Other 

Companies

of the Group 

Associated 

companies

Key

personnel

Other 

Companies

of the Group

Associated 

companies 

Key

personnel

Other

Companies
of the
Group 

Associated
companies

Key
personnel

Other 

Companies
of the
Group 

Associated
companies

Key
personnel

Other 

Companies
of the
Group 

Associated
companies

Key

personnel

Other
MCh$ MCh$ MCh$MCh$ MCh$ MCh$
        
Loans and accounts receivable:    
Commercial loans 81,6875334,5957,100 77,3885655,8411,963 51,6479,6144,3488,743122,2894594,299233 80,0767713,9477,793 81,6875334,5957,100
Mortgage loans-- 18,046 -  -- 20,559 -  -19,941--18,814- -18,796- -18,046-
Consumer loans-- 3,783-  -- 2,274-  -2,798--5,335- -4,310- -3,783-
Loans and accounts receivable:81,68753326,4247,100 77,38856528,6741,963 51,6479,61427,0878,743122,28945928,448233 80,07677127,0537,793 81,68753326,4247,100
        
Allowance for loan losses(209)(35)(87)(34) (213)(190)(62)(20) (139)(10)(46)(18)(308)(9)(116)(5) (209)(9)(177)(18) (209)(35)(87)(34)
Net loans81,47849826,3377,066 77,17537528,6121,943 51,5089,60427,0418,725121,98145028,332228 79,86776226,8767,775 81,47849826,3377,066
        
Guarantees434,141- 23,6365,486 499,803- 25,4931,632 409,339-23,8961,289442,854-22,8937,171 361,452-23,8687,164 434,141-23,6365,486
        
Contingent loans:        
Personal guarantees - -  -  - - - -
Letters of credit27,268-  29,275-  16,000-115,392-2,06044 19,251-33 27,268-
Guarantees437,101- - 510,309- 2 432,802-762445,064-3,364- 377,578- 437,101-
Contingent loans:464,369- - - 539,584- 2 448,802-773450,456-5,42444 396,829-33 464,369-
        
Allowance for contingent loans(5)-  (11)-  (12)-(1)-(18)- (4)-1 (5)-
        
Net contingent loans464,364- - - 539,573- 2 448,790-773450,455-5,40644 396,825-34 464,364-

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Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 3436

TRANSACTIONS WITH RELATED PARTIES, continued

 

Loan activity to related parties during 2016, 20152018, 2017 and 20142016 is shown below:

 

As of December 31,  
As of December 31,  2018 2017 2016
2016 2015 2014Companies of the GroupAssociated companiesKey Personnel

Other

 Companies of the GroupAssociated companiesKey Personnel

Other

 

 Companies of the GroupAssociated companiesKey Personnel

Other

 

Companies of the GroupAssociated companiesKey PersonnelOther Companies of the GroupAssociated companiesKey PersonnelOtherCompanies of the GroupAssociated companiesKey PersonnelOther 
MCh$ MCh$ MCh$MCh$ MCh$ MCh$
    
Opening balances as of January 1,616,96856528,6751,966 500,4499,61427,0879,516 250,29361821,64461,130476,90677127,0517,826 546,05853226,4237,100 616,96856528,6751,966
Loans granted122,7292038,5806,808 276,38378,9914,113 338,7849,10811,65117,585200,6573916,574773 78,2143187,7771,050 122,7292038,5806,808
Loans payments(193,189)(236)(10,832)(1,674) (159,864)(9,056)(7,403)(11,663) (88,628)(112)(6,208)(69,199)(104,818)(351)(9,754)(700) (147,366)(79)(7,149)(324) (193,189)(236)(10,832)(1,674)
        
Total546,50853226,4237,100 616,96856528,6751,966 500,4499,61427,0879,516572,74545933,8717,899 476,90677127,0517,826 546,50853226,4237,100

F-119 Banco Santander Chile and Subsidiaries

Table of Contents

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 3436

TRANSACTIONS WITH RELATED PARTIES, continued

b)       Assets and liabilities with related parties

 As of December 31,  
 2018 2017 2016
 Companies of the GroupAssociated companiesKey personnelOther 

Companies
of the Group 

Associated companies

Key
personnel

Other 

Companies

of the
Group 

Associated companies

Key 

personnel

Other
 MCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$
               
Assets              
Cash and deposits in banks189,803--- 74,949--- 187,701---
Trading investments---- ---- ----

Obligations under repurchase agreements

Loans

---- ---- ----
Financial derivative contracts748,632105,358-9 545,02886,011-- 742,85133,433--
Available for sale investments---- ---- ----
Other assets38,96051,842-- 8,480118,136-- 4,71167,454--
               
Liabilities              
Deposits and other demand liabilities27,515(21,577)2,493(480) 24,77625,8052,470221 6,9887,1412,883630

Obligations under repurchase agreements

 

Loans

 

6,501-32968 50,945--- 56,167---
Time deposits and other time liabilities2,585,337-3,189(838) 785,98827,9683,7033,504 1,545,8356,2192,5252,205
Financial derivative contracts770,624112,523-- 418,647142,750-7,190 954,57554,691--
Interbank borrowing---- ---- 6,165---
Issued debt instruments335,443--- 482,626--- 484,548---
Other financial liabilities6,807--- 4,919--- 8,970---
Other liabilities60,88489,817-- 164,30358,168-- 44644,329--

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 36

TRANSACTIONS WITH RELATED PARTIES, continued

 

b)c)Assets and liabilities with related parties

 As of December 31,  
 2016 2015 2014
 Companies of the GroupAssociated companiesKey personnelOther 

Companies

of the Group 

Associated companies

Key

personnel 

Other 

Companies

of the Group  

Associated companies

Key

personnel 

Other
 MCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$ MCh$MCh$MCh$MCh$
               
Assets              
Cash and deposits in banks187,701--- 23,578--- 193,377---
Trading investments---- ---- ----

Obligations under repurchase agreements Loans

---- ---- ----
Financial derivative contracts742,85133,433-- 771,77424,773-- 995,468---
Available for sale investments---- ---- ----
Other assets4,71167,454-- 3,21819,101-- 2,776---
               
Liabilities              
Deposits and other demand liabilities6,9887,1412,883630 9,9878,5352,4541,373 5,0611,1682,4034,602

Obligations under repurchase agreements Loans

56,167--- 12,006--- 47,010---
Time deposits and other time liabilities1,545,7716212,3651,984 1,360,5722342,728898 269,3812,32081,07981,079
Financial derivative contracts954,57554,691-- 1,323,99623,326-- 1,395,507---
Issued debt instruments484,548--- 398,565--- 336,323---
Other financial liabilities8,970--- 2,409--- 846---
Other liabilities44644,329-- 37619,541-- 771---

F-120 

Table of Contents

NOTE 34

TRANSACTIONS WITH RELATED PARTIES, continued

c)Income (expense) recorded due to transactions with related parties

 

For the years ended December 31,For the years ended December 31,
2016 2015 20142018 2017 2016
Companies of the GroupAssociated CompaniesKey personnelOther Companies of the GroupAssociated companiesKey personnelOther Companies of the GroupAssociated CompaniesKey personnelOtherCompanies of the GroupAssociated CompaniesKey personnelOther Companies of the GroupAssociated companiesKey personnelOther Companies of the GroupAssociated CompaniesKey personnelOther
MCh$MCh$ MCh$MCh$ MCh$MCh$MCh$MCh$ MCh$MCh$ MCh$MCh$
        
Income (expense) recorded           
Interest income and inflation-indexation adjustments(39,279)40 1,164115 (10,986) - 1,664116 (11,130)251,963(2,509)(53,256)(156)1,252508 (43,892)-1,051- (39,279)401,164115
Fee and commission income and expenses38,1674520420 35,9557720839 30,5918423016791,1787,82630522 72,27315,4042241 56,95222,32220420
Net income (expense) from financial operations and net foreign exchange gain (loss) (*)(343,963)(48,373) (88)2 (321,985)(16,845) 156 (315,918)-20(10,051)(566,677)65,72727(12) 363,108(48,453)(3)19 (343,963)(48,373)(88)2
Other operating income and expenses931(2,239)  -  955(1,027)  - -  1,158-421,388- 21,670(1,454)-- 931(2,239)-
Key personnel compensation and expenses -- (37,328)-   - - (39,323)-  -(31,361)--(11,761)- -(43,037)- -(37,328)-
Administrative and other expenses(35,554)(43,115)-  (30,591)(41,691)- -  (30,342)(33,961)-(43,035)(50,764)- (48,246)(47,220)-- (35,554)(43,115)-
          
Total(379,698)(93,642)(36,048)137 (326,652)(59,486)(37,436)161 (325,641)(33,852)(29,148)(12,393)(571,748)24,021(10,177)518 364,913(81,723)(41,765)20 (360,913)(71,365)(36,048)137

 

(*) Primarily relates to derivative contracts used to financially cover exchange risk of assets and liabilities that cover positions of the Bank and its subsidiaries.subsidiaries,


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

F-121 

Table of Contents

NOTE 36

NOTE 34

TRANSACTIONS WITH RELATED PARTIES, continued

 

d)Payments to Board members and key management personnel

 

The compensation received by key management personnel, including Board members and all the executives holding manager positions shown in the “Personnel salaries and expenses” and/or “Administrative expenses” items of the Consolidated StatementStatements of Income, corresponds to the following categories:

 

For the years ended December 31,For the years ended December 31,
2016 2015 20142018 2017 2016
MCh$ MCh$ MCh$MCh$ MCh$ MCh$
    
Personnel compensation17,493 18,605 17,410 12,878 16,863 17,493
Board members’ salaries and expenses1,269 1,374 1,235 913 1,199 1,269
Bonuses or gratifications14,404 12,861 12,358 11,920 16,057 14,404
Compensation in stock331 66 310 146 1,923 331
Training expenses161 122 78 163 68 161
Seniority compensation2,619 4,154 234 1,133 3,842 2,619
Health funds285 314 288 215 273 285
Other personnel expenses916 1,396 504 681 773 916
Pension plans (*)(150) 431 1,395 872 2,039 (150)
Total37,328 39,323 33,812 28,921 43,037 37,328

 

(*)Some of the executives that qualified for this benefit left the Group for different reasons, without complying with the requirements to usereceive the benefit, therefore the obligation amount decreased, which generated the reversal of provisions.provisions,

 

e)Composition of key personnel

 

As of December 31, 2016, 20152018, 2017 and 2014,2016, the composition of the Bank’stheBank’s key personnel is as follows:

 

PositionNo. of executivesNo, of executives
As of December 31,As of December 31,
201620152014201820172016
    
Director1312131113
Division manager171618121317
Department manager767990
Manager615354108109137
  
Total key personnel167160175131133167

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Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 3537

PENSION PLANS

 

The Bank has an additional benefit available to its principal executives, consisting of a pension plan. The purpose of the pension plan is to endow the executives with funds for a better supplementary pension upon their retirement.

 

For this purpose, the Bank will match the voluntary contributions made by the beneficiaries for their future pensions with an equivalent contribution. The executives will be entitled to receive this benefit only when they fulfill the following conditions:

 

a.Aimed at the Bank’s management.management

b.The general requisite to apply for this benefit is that the employee must be carrying out his/her duties when turning 60 years old.old

c.The Bank will create a pension fund, with life insurance, for each beneficiary in the plan.plan, Periodic contributions into this fund are made by the manager and matched by the Bank.Bank

d.The Bank will be responsible for granting the benefits directly.directly

 

If the working relationship between the manager and the respective company ends, before s/he fulfills the abovementioned requirements, s/he will have no rights under this benefit plan.

 

In the event of the executive’s death or total or partial disability, s/he will be entitled to receive this benefit.

 

The Bank will make contributions to this benefit plan on the basis of mixed collective insurance policies whose beneficiary is the Bank. The life insurance company with whom such policies are executed is not an entity linked or related to the Bank or any other Santander Group company.

 

Plan Assets owned by the Bank at the end of 20162018 totaled Ch$6,6126,804 million (Ch$6,9457,919 million in 2015)2017).

 

The amount of the defined benefit plans has been quantified by the Bank, based on the following criteria:

 

Calculation method:

 

Use of the projected unit credit method which considers each working year as generating an additional amount of rights over benefits and values each unit separately. It is calculated based primarily on fund contributions, as well as other factors such as the legal annual pension limit, seniority, age and yearly income for each unit valued individually.

 

Assets related to the pension fund contributed by the Bank into the Seguros Euroamérica insurance company with respect to defined benefit plans are presented as net of associated commitments.

 

Actuarial hypothesis assumptions:

 

Actuarial assumptions with respect to demographic and financial variables are non-biased and mutually compatible with each other. The most significant actuarial hypotheses considered in the calculations were:

 

Plans

post-employment

 

Plans

post-employment

Plans 

post-employment

 

Plans

post-

employment

2016 20152018 2017
  
Mortality chartRV-2014/CB-2014 RV-2009RV-2014 RV-2014
Termination of contract rates5.0% 5.0%5,0% 5,0%
Impairment chartPDT 1985 PDT 1985PDT 1985 PDT 1985

F-123 

Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 3537

PENSION PLANS, continued

 

Activity for post-employment benefits is as follows:

 

As of December 31,As of December 31,
2016 20152018 2017
MCh$ MCh$MCh$ MCh$
Plan assets6,612 6,9456,804 7,919
Commitments for defined-benefit plans      
For active personnel(4,975) (5,070)(5,958) (6,998)
Incurred by inactive personnel- -- -
Minus:      
Unrealized actuarial (gain) losses- -- -
Balances at year end1,637 1,875846 921

 

Year’s cash flow for post-employment benefits is as follows:

 

For the years ended December 31,For the years ended December 31,
2016 2015 20142018 2017 2016
MCh$ MCh$ MCh$MCh$ MCh$ MCh$
        
a) Fair value of plan assets        
Opening balance6,945 6,495 5,1717,919 6,612 6,945
Expected yield of insurance contracts335 432 446353 307 335
Employer contributions886 18 878836 1,931 886
Actuarial (gain) losses- - -- - -
Premiums paid- - -- - -
Benefits paid(1,554) - -(2,304) (931) (1,554)
Fair value of plan assets at year end6,612 6,945 6,4956,804 7,919 6,612
b) Present value of obligations          
Present value of obligations opening balance(5,070) (4,639) (3,244)(6,998) (4,975) (5,070)
Net incorporation of Group companies- - -- - -
Service cost150 (431) (1,395)(1,069) (2,039) 150
Interest cost- - -- - -
Curtailment/settlement effect- - -- - -
Benefits paid- - -- - -
Past service cost- - -- - -
Actuarial (gain) losses- - -- - -
Other(55) - -2,109 16 (55)
Present value of obligations at year end(4,975) (5,070) (4,639)(5,958) (6,998) (4,975)
Net balance at year end1,637 1,875 1,856846 921 1,637

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Table of Contents
 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 3537

PENSION PLANS, continued

 

Plan expected profit:

 

As of December 31,As of December 31,
2016 2015 20142018 2017 2016
    
Type of expected yield from the plan’s assetsUF + 2.50% annual UF + 2.50% annual UF + 2.50% annualUF + 2.50% annual UF + 2.50% annual UF + 2.50% annual
Type of yield expected from the reimbursement rightsUF + 2.50% annual UF + 2.50% annual UF + 2.50% annualUF + 2.50% annual UF + 2.50% annual UF + 2.50% annual

 

Plan associated expenses:

 

For the years ended December 31,For the years ended December 31,
2016 2015 20142018 2017 2016
MCh$ MCh$ MCh$MCh$ MCh$ MCh$
    
Current period service expenses(150) 431 1,3951,069 2,039 (150)
Interest cost- - -- - -
Expected yield from plan’s assets(335) (432) (446)(353) (307) (335)
Expected yield of insurance contracts linked to the Plan:     -    
Extraordinary allocations- - -- - -
Actuarial (gain)/ losses recorded in the period- - -- - -
Past service cost- - -- - -
Other- - -- - -
Total(485) (1) 949716 1,732 (485)

F-125 F-131

Table of Contents

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 36

38

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

 

Fair value is 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.date, The measurement of fair value assumes the sale transaction of an asset or the transference of the liability happens within the main asset or liability market, or the most advantageous market for the asset or liability.

 

For financial instruments with no available market prices, fair values have been estimated by using recent transactions in analogous instruments, and in the absence thereof, the present values or other valuation techniques based on mathematical valuation models sufficiently accepted by the international financial community.community, In the use of these models, consideration is given to the specific particularities of the asset or liability to be valued, and especially to the different kinds of risks associated with the asset or liability.

 

These techniques are significantly influenced by the assumptions used, including the discount rate, the estimates of future cash flows and prepayment expectations.expectations, Hence, the fair value estimated for an asset or liability may not coincide exactly with the price at which that asset or liability could be delivered or settled on the date of its valuation, and may not be justified in comparison with independent markets.

 

Except as detailed in the following table, the management considerconsiders that the carrying amounts of financial assets and financial liabilities recognised in the consolidated financial statements approximate their fair values.

 

Determination of fair value of financial instruments

 

Below is a comparison between the value at which the Bank’s financial assets and liabilities are recorded and their fair value as of December 31, 20162018 and 2015:2017:

 

As of December 31,As of December 31,
2016 20152018 2017
Book value Fair value Book value Fair valueBook value Fair value Book value Fair value
MCh$ MCh$ MCh$ MCh$MCh$ MCh$ MCh$ MCh$
          
Assets          
Trading investments396,987 396,987 324,271 324,271
Trading investment- - 485,736 485,736
Loans and account receivable from customers and interbank loans, net- - 26,934,757 28,518,929
Available for sale investment- - 2,574,546 2,574,546
Financial derivative contracts2,500,782 2,500,782 3,205,926 3,205,9263,100,635 3,100,635 2,238,647 2,238,647
Loans and accounts receivable from customers and interbank loans, net26,415,826 29,976,931 24,538,456 26,676,836
Available for sale investments3,388,906 3,388,906 2,044,411 2,044,411
Financial assets held for trading77,041 77,041 - -
Loans and accounts receivable at amortised cost, net29,331,001 30,575,611 - -
Loans and accounts receivable at fvoci, net68,588 68,588 - -
Debt instrument at FVOCI2,394,323 2,394,323 - -
Guarantee deposits (margin accounts)396,289 396,289 649,325 649,325170,232 170,232 323,767 323,767
   
Liabilities   
Deposits and interbank borrowings22,607,392 22,833,009 20,846,462 21,167,07723,597,863 23,770,106 21,380,468 20,887,959
Financial derivative contracts2,292,161 2,292,161 2,862,606 2,862,6062,517,728 2,517,728 2,139,488 2,139,488
Issued debt instruments and other financial liabilities7,566,388 8,180,322 6,177,622 6,556,1208,330,633 8,605,135 7,335,683 7,487,591
Guarantees received (margin accounts)480,926 480,926 819,331 819,331371,512 371,512 408,313 408,313

 

The fair value approximates the carrying amount of the following line items due to their short-term nature: cash and deposits-banks, cash items in process of collection and investments under resale or repurchase agreements.

 

In addition, the fair value estimates presented above do not attempt to estimate the value of the Bank’s profits generated by its business activity, nor its future activities, and accordingly, they do not represent the Bank’s value as a going concern. Below is a detail of the methods used to estimate the financial instruments’ fair value.

 

a)Financial assets held for trading and Debt instruments at FVOCI / Trading investmentsinvestment and available for sale investment instruments

 

The estimated fair value of these financial instruments was established using market values or estimates from an available dealer, or quoted market prices of similar financial instruments. Investments are evaluated at recorded value since they are considered as having a fair value not significantly different from their recorded value. To estimate the fair value of debt investments or representative values in these lines of businesses, we take into consideration additional variables and elements, as long as they apply, including the estimate of prepayment rates and credit risk of issuers.

F-126 


Table of Contents
 

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 3638

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

 

b)Loans and accounts receivable at amortised cost / Loans and account receivable from customers and interbank loans

 

Fair value of commercial, mortgage and consumer loans and credit cards is measured through a discounted cash flow (DCF) analysis.analysis, To do so, we use current market interest rates considering product, term, amount and similar loan quality.quality, Fair value of loans with 90 days or more of delinquency are measured by means of the market value of the associated guarantee, minus the rate and term of expected payment.payment, For variable rate loans whose interest rates change frequently (monthly or quarterly) and that are not subjected to any significant credit risk change, the estimated fair value is based on their book value.

 

c)Deposits

 

Disclosed fair value of deposits that do not bear interest and saving accounts is the amount payable at the reporting date and, therefore, equals the recorded amount.amount, Fair value of time deposits is calculated through a discounted cash flow calculation that applies current interest rates from a monthly calendar of scheduled maturities in the market.

 

d)Short and long term issued debt instruments

 

The fair value of these financial instruments is calculated by using a discounted cash flow analysis based on the current incremental lending rates for similar types of loans having similar maturities.

 

e)Financial derivative contracts

 

The estimated fair value of financial derivative contracts is calculated using the prices quoted on the market for financial instruments having similar characteristics.

 

The fair value of interest rate swaps represents the estimated amount that the Bank determines as exit price in accordance with IFRS 13.

 

If there are no quoted prices from the market (either direct or indirect) for any derivative instrument, the respective fair value estimates have been calculated by using models and valuation techniques such as Black-Scholes, Hull, and Monte Carlo simulations, taking into consideration the relevant inputs/outputs such as volatility of options, observable correlations between underlying assets, counterparty credit risk, implicit price volatility, the velocity with which the volatility reverts to its average value, and the straight-line relationship (correlation) between the value of a market variable and its volatility, among others.

 

Measurement of fair value and hierarchy

 

IFRS 13 - Fair Value Measurement, provides a hierarchy of reasonable values which separates the inputs and/or valuation technique assumptions used to measure the fair value of financial instruments.instruments, The hierarchy reflects the significance of the inputs used in making the measurement.measurement, The three levels of the hierarchy of fair values are the following:

 

•● Level 1: the inputs are quoted prices (unadjusted) on active markets for identical assets and liabilities that the Bank can access on the measurement date.date

 

•● Level 2: inputs other than the quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.indirectly

 

•● Level 3: inputs are unobservable inputs for the asset or liability i.e.i,e, they are not based on observable market data.

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NOTE 36

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continueddata

 

The hierarchy level within which the fair value measurement is categorized in its entirety is determined based on the lowest level of input that is significant to the fair value measurement in its entirety.

 

The best evidence of a financial instrument’s fair value at the initial time is the transaction price.

 

In cases where quoted market prices cannot be observed, Management makes its best estimate of the price that the market would set using its own internal models which in most cases use data based on observable market parameters as a significant input (Level 2) and, in very specific cases, significant inputs not observable in market data (Level 3)., Various techniques are employed to make these estimates, including the extrapolation of observable market data.


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 38

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

 

Financial instruments at fair value and determined by quotations published in active markets (Level 1) include:

 

-Chilean Government and Department of Treasury bonds

-U.S. Treasury Bonds

 

Instruments which cannot be 100% observable in the market are valued according to other inputs observable in the market (Level 2).

 

The following financial instruments are classified under Level 2:

 

Type of

financial instrument

Model

used in valuation

Description of  unobservable inputs
ž● Mortgage and private bondsPresent Value of Cash Flows Model

Internal Rates of Return (“IRRs”) are provided by RiskAmerica, according to the following criterion:

If, at the valuation day, there are one or more valid transactions at the Santiago Stock Exchange for a given mnemonic,nemotechnic, the reported rate is the weighted average amount of the observed rates.

rates,

In the case there are no valid transactions for a given mnemonic on the valuation day, the reported rate is the IRR base from a reference structure, plus a spread model based on historical spread for the same item or similar ones.

ones,

ž
● Time depositsPresent Value of Cash Flows Model

IRRs are provided by RiskAmerica, according to the following criterion:

If, at the valuation day, there are one or more valid transactions at the Santiago Stock Exchange for a given mnemonic, the reported rate is the weighted average amount of the observed rates.

rates,

In the case there are no valid transactions for a given mnemonic on the valuation day, the reported rate is the IRR base from a reference structure, plus a spread model based on issuer curves.

curves,

ž
● Constant Maturity Swaps (CMS), FX and Inflation Forward (Fwd) , Cross Currency Swaps (CCS), Interest Rate Swap (IRS)Present Value of Cash Flows Model

IRRs are provided by ICAP, GFI, Tradition, and Bloomberg according to this criterion:

With published market prices, a valuation curve is created by the bootstrapping method and is then used to value different derivative instruments.

instruments,

ž
● FX OptionsBlack-Scholes

Formula adjusted by the volatility simile (implicit volatility)., Prices (volatility) are provided by BGC Partners, according to this criterion:

With published market prices, a volatility parameter is created by interpolation and then these volatilities are used to value options.options,

 

In limited occasions significant inputs not observable in market data are used (Level 3)., To carry out this estimate, several techniques are used, including extrapolation of observable market data or a mix of observable data.


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Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 3638

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

 

The following financial instruments are classified under Level 3:

 

Type of

financial instrument

Model

used in valuation

Description of no observable inputs
ž● Caps/ Floors/ SwaptionsBlack Normal Model for Cap/Floors and SwaptionsThere is no observable input of implicit volatility.volatility,
ž● UF optionsBlack – ScholesThere is no observable input of implicit volatility.volatility,
ž● Cross currency swap with windowHull-WhiteHybrid HW model for rates and Brownian motion for FX There is no observable input of implicit volatility.volatility,
ž● CCS (special contracts)Implicit Forward Rate Agreement (FRA)Start Fwd unsupported by MUREX (platform) due to the UF forward estimate.estimate,
ž● Cross currency swap, Interest rate swap, Call money swap in Tasa Activa Bancaria (Active Bank Rate) TAB,Present Value of Cash Flows ModelValidation obtained by using the interest curve and interpolating flow maturities, but TAB is not a directly observable variable and is not correlated to any market input.input,
ž● Bonds (in our case, low liquidity bonds)Present Value of Cash Flows ModelValued by using similar instrument prices plus a charge-off rate by liquidity.liquidity,

 

The Bank does not believe that any change in unobservable inputs with respect to level 3 instruments would result in a significantly different fair value measurement.

 

The following table presents the assets and liabilities that are measured at fair value on a recurrent basis, as of December 31, 2016 and 2015:basis:

 

Fair value measurementFair value measurement
As of December 31,2016 Level 1 Level 2 Level 32018 Level 1 Level 2 Level 3
MCh$ MCh$ MCh$ MCh$MCh$ MCh$ MCh$ MCh$
              
Assets          
Trading investments396,987 396,011 976 -
Available for sale investments3,388,906 2,471,439 916,808 659
Financial assets held for trading77,041 71,158 5,883 -
Debt instruments at FVOCI 2,394,323 2,368,768 24,920 635
Derivatives2,500,782 - 2,461,407 39,3753,100,635 - 3,089,077 11,558
Guarantee deposits (margin accounts)396,289 396,289 - -170,232 - 170,232 -
Total6,682,964 3,263,739 3,379,191 40,0345,742,231 2,439,926 3,290,112 12,193
          
          
Liabilities          
Derivatives2,292,161 - 2,292,118 432,517,728 - 2,516,933 795
Guarantees received (margin accounts)480,926 480,926 - -371,512 - 371,512 -
Total2,773,087 480,926 2,292,118 432,889,240 - 2,888,445 795
          

Fair value measurementFair value measurement
As of December 31,2015 Level 1 Level 2 Level 32017 Level 1 Level 2 Level 3
MCh$ MCh$ MCh$ MCh$MCh$ MCh$ MCh$ MCh$
              
Assets              
Trading investments324,271 283,236 41,035 -485,736 481,642 4,094 -
Available for sale investments2,044,411 1,287,589 756,056 7662,574,546 2,549,226 24,674 646
Derivatives3,205,926 - 3,166,779 39,1472,238,647 - 2,216,306 22,341
Guarantee deposits (margin accounts)649,325 649,325 - -323,767 323,767 - -
Total6,223,933 2,220,150 3,963,870 39,9135,622,696 3,354,635 2,245,074 22,987
          
          
Liabilities          
Derivatives2,862,606 - 2,862,606 -2,139,488 - 2,139,481 7
Guarantees received (margin accounts)819,331 819,331 - -408,313 408,313 -  -
Total3,681,937 819,331 2,862,606 -2,547,801 408,313 2,139,481 7
    

F-135

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

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NOTE 38

NOTE 36 

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

 

The following table presents assets or liabilities which are not measured at fair value in the statementstatements of financial position but for which the fair value is disclosed, as of December 31, 2016 and 2015:disclosed:

 

Fair value measurementFair value measurement
As of December 31,2016 Level 1 Level 2 Level 32018 Level 1 Level 2 Level 3
MCh$ MCh$ MCh$ MCh$MCh$ MCh$ MCh$ MCh$
Assets          
Loans and accounts receivable from customers and interbank loans, net29,976,931 - - 29,976,931
Loans and accounts receivable at amortised cost, net30,575,611 - - 30,575,611
Total29,976,931 - - 29,976,93130,575,611 - - 30,575,611
Liabilities          
Deposits and interbank borrowings22,833,009 - 22,833,009 -23,770,106 - 23,770,106 -
Issued debt instruments and other financial liabilities8,180,322 - 8,180,322 -8,605,135 - 8,605,135 -
Total31,013,331 - 31,013,331 -32,375,241 - 32,375,241 -
     

 

 

    
Fair value measurementFair value measurement
As of December 31,2015 Level 1 Level 2 Level 32017 Level 1 Level 2 Level 3
MCh$ MCh$ MCh$ MCh$MCh$ MCh$ MCh$ MCh$
            
Assets          
Loans and accounts receivable from customers and interbank loans, net26,676,836 - - 26,676,83628,518,929 - - 28,518,929
Total26,676,836 - - 26,676,83628,518,929 - - 28,518,929
Liabilities          
Deposits and interbank borrowings21,167,077 - 21,167,077 -20,887,959 - 20,887,959 -
Issued debt instruments and other financial liabilities6,556,120 - 6,556,120 -7,487,591 - 7,487,591 -
Total27,723,197 - 27,723,197 -28,375,550 - 28,375,550 -
     

The fair values of others assets and other liabilities approximate their carrying values.

 

The methods and assumptions to estimate the fair value are defined below:

 

- Loans and amounts due from credit institutions and from customers – Fair value are estimated for groups of loans with similar characteristics.characteristics, The fair value was measured by discounting estimated cash flow using the interest rate of new contracts.contracts, That is, the future cash flow of the current loan portfolio is estimated using the contractual rates, and then the new loans spread over the risk free interest rate are incorporated to the risk free yield curve in order to calculate the loan portfolio fair value.value, In terms of behavior assumptions, it is important to underline that a prepayment rate is applied to the loan portfolio, thus a more realistic future cash flow is achieved.

 

- Deposits and interbank borrowings – The fair value of deposits was calculated by discounting the difference between the cash flows on a contractual basis and current market rates for instruments with similar maturities.maturities, For variable-rate deposits, the carrying amount was considered to approximate fair value.

 

- Issued debt instruments and other financial liabilities – The fair value of long-term loans were estimated by cash flow discounted at the interest rate offered on the market with similar terms and maturities.

 

The valuation techniques used to estimate each level are defined in note 1.h.i)Note 1.j)

 

There were no transfer between levels 1 and 2 for the year ended December 31, 20162018 and 2015.2017.


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

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NOTE 38

NOTE 36

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

 

The table below shows the effect, at December 31, 2016,2018 and 2017, on the fair value of the main financial instruments classified as Level 3 of a reasonable change in the assumptions used in the valuation.valuation, This effect was determined by a sensitivity analysis under a 1bp scenario, detailed in the following table:

 

Instrument Level 3Valuation techniqueMain unobservable inputs

Impacts

(in MCh$) 

Sens. -1bp

Unfavourable scenario

Impacts 

(in MCh$) 

Sens. +1bp Favourable scenario

DerivativesPresent Value methodCurves on TAB indices (1)(12.30)12.30
Available for sale investmentsInternal rate of return methodBR UF (2)--
As of December 31, 2018
Instrument Level 3Valuation techniqueMain unobservable inputs

Impacts

(in MCh$)

Sens, -1bp

Unfavorable

scenario

Impacts

(in MCh$)

Sens, +1bp Favorable scenario

DerivativesPresent Value methodCurves on TAB (1)(2.3)2.3
Debt instruments at FVOCIInternal rate of return methodBR UF (2)--
     
As of December 31, 2017
Instrument Level 3Valuation techniqueMain unobservable inputs

Impacts

(in MCh$)

Sens, -1bp

Unfavorable

scenario

Impacts

(in MCh$)

Sens, +1bp Favorable scenario

DerivativesPresent Value methodCurves on TAB (1)(1.3)1.3
Available for sale investmentsInternal rate of return methodBR UF (2)--

 

(1)TAB: “Tasa Activa Bancaria” (Active Bank Rate)., Average interest rates on 30, 90, 180 and 360 day deposits published by the Chilean Association of Banks and Financial Institutions (ABIF) in nominal currency (Chilean peso) and in real terms, adjusted for inflation (in Chilean unit of account (Unidad de Fomento - UF)).

(2)BR: “Bonos de Reconocimiento” (Recognition Bonds)., The Recognition Bond is an instrument of money provided by the State of Chile to workers who joined the new pension system, which began operating since 1981.

 

The following table presents the Bank’s activity for assets and liabilities measured at fair value on a recurrent basis using unobserved significant entriesinputs (Level 3) as of December 31, 20162018 and 2015:2017:

 

 Assets Liabilities
 MCh$ MCh$
    
As of January 1, 201639,913 -
    
Total realized and unrealized profits (losses)   
Included in statement of income39,376 43
Included in other comprehensive income(108) -
Purchases, issuances, and loans (net)- -
    
As of December 31, 201679,181 43
    
Total profits or losses included in comprehensive income for 2016 that are attributable to change in unrealized profit (losses) related to assets or liabilities as of December 31, 201539,268 43
    
 Assets Liabilities
 MCh$ MCh$
    
As of January 1, 201822,987 7
    
Total realized and unrealized profits (losses)   
Included in statements of income(10,769) (802)
Included in other comprehensive income25 -
Purchases, issuances, and loans (net)- -
    
As of December 31, 201812,193 -
    
Total profits or losses included in comprehensive income for 2018 that are attributable to change in unrealized profit (losses) related to assets or liabilities as of December 31, 2017(10,794) (802)
    
 Assets Liabilities
 MCh$ MCh$
    
As of January 1, 201740,034 43
    
Total realized and unrealized profits (losses)   
Included in statements of income(17,035) (36)
Included in other comprehensive income(12) -
Purchases, issuances, and loans (net)- -
    
As of December 31, 201722,987 7
    
Total profits or losses included in comprehensive income for 2017 that are attributable to change in unrealized profit (losses) related to assets or liabilities as of December 31, 2016(17,047) (36)
    


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

AssetsLiabilities
MCh$MCh$
As of January 1, 201543,665-
Total realized and unrealized profits (losses)
Included in statement of income(3,634)-
Included in other comprehensive income(118)-
Purchases, issuances, and loans (net)--
As of December 31, 201539,913-
Total profits or losses included in comprehensive income for 2015 that are attributable to change in unrealized profit (losses) related to assets or liabilities as of December 31, 2014(3,752)-

NOTE 38

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

The realized and unrealized profits (losses) included in comprehensive income for 20162018 and 2015,2017, in the assets and liabilities measured at fair value on a recurrent basis through unobservable market data (Level 3) are recorded in the StatementStatements of Comprehensive Income.

 

The potential effect as of December 31, 20162018 and 20152017 on the valuation of assets and liabilities valued at fair value on a recurrent basis through unobservable significant entriesinputs (level 3), generated by changes in the principal assumptions if other reasonably possible assumptions that are less or more favorable were used, is not considered by the Bank to be significant.

 

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NOTE 36

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

The following tables show the financial instruments subject to compensation in accordance with IAS 32, for 20162018 and 2015:2017:

 

 As of December 2018   
 Linked financial instruments, compensated in balance  
Financial instrumentsGross amountsCompensated in balanceNet amount presented in balance Remains of unrelated and / or unencumbered financial instruments

Amount in Statements of Financial Position

 AssetsCh$ MillionCh$ MillionCh$ Million Ch$ Million 
Financial derivative contracts   1,947,726           -          1,947,726  1,152,909 3,100,635
Investments under resale agreements                 -                -             -     -    -   
Loans and accounts receivable at amortised cost, net                 -       -          -    29,331,53929,331,539
Total   1,947,726        -         1,947,726  30,484,448 32,432,174
 Liabilities      
Financial derivative contracts      1,735,555       -        1,735,555         782,173   2,517,728
Investments under resale agreements       48,545        -        48,545       -      48,545
Deposits and interbank borrowings                     -          -           -              23,597,862          23,597,862
Total 1,784,100 -    1,784,100  24,380,035 26,164,135
 As of December 2017  
       
 Linked financial instruments, compensated in balance  
Financial instrumentsGross amountsCompensated in balanceNet amount presented in balance Remains of unrelated and / or unencumbered financial instruments

Amount in Statements of Financial Position

 

 AssetsCh$ MillionCh$ MillionCh$ Million Ch$ Million 
Financial derivative contracts2,029,657-2,029,657 208,9902,238,647
Obligations under repurchase agreements--- --
Loans and accounts receivable from customers, and Interbank loans, net---   26,934,75726,934,757
Total2,029,657-2,029,657         27,143,747      29,173,404
 Liabilities      
Financial derivative contracts1,927,654-1,927,654 211,8342,139,488
Investments under resale agreements268,061-268,061 -268,061
Deposits and interbank borrowings--- 21,380,46721,380,467
Total2,195,715-2,195,715         21,592,301      23,788,016

As of December 2016

 Linked financial instruments, compensated in balance   
Financial instrumentsGross amountsCompensated in balanceNet amount presented in balance Remains of unrelated and / or unencumbered financial instruments

Amount in Statements of Financial Position

 

 AssetsCh$ MillionCh$ MillionCh$ Million Ch$ Million 
Financial derivative contracts2,237,731-2,237,731 

263,051

2,500,782

Investments under resale agreements6,736-6,736 

- 

6,736

Loans and accounts receivable from customers, and Interbank loans, net--- 

26,415,826

26,415,826

Total

2,244,467-2,244,467 

26,678,877

28,923,344

Liabilities      
Financial derivative contracts2,100,955-2,100,955 

191,206

2,292,161

Investments under resale agreements212,437-212,437 

-

212,437

Deposits and interbank borrowings--- 

22,607,392

22,607,392

Total

2,313,392-2,313,392 

22,798,598

25,111,990

 

As of December 2016 
 Linked financial instruments, compensated in balance   
Financial instrumentsGross amountsCompensated in balanceNet amount presented in balance Remains of unrelated and / or unencumbered financial instruments

Amount in Statements of Financial Position

 

 AssetsCh$ MillionCh$ MillionCh$ Million Ch$ Million 
Financial derivative contracts3,011,322-3,011,322 

194,604

3,205,926

Obligations under repurchase agreements2,463-2,463 

-

2,463

Loans and accounts receivable from customers, and Interbank loans, net--- 

24,538,456

24,538,456

Total

3,013,785-3,013,785 

24,733,060

27,746,845

Liabilities      
Financial derivative contracts2,718,401-2,718,401 

144,205

2,862,606

Investments under resale agreements143,689-143,689 

-

143,689

Deposits and interbank borrowings--- 

20,846,462

20,846,462

Total2,862,090-2,862,090 20,990,66723,852,757

 

F-132 Banco Santander Chile and Subsidiaries

Table of Contents

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 36

38

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES, continued

 

The Bank, in order to reduce its credit exposure in its financial derivative operations, has entered into collateral contracts with its counterparties, in which it establishes the terms and conditions under which they operate.operate, In terms collateral (received/delivered) operates when the net of the fair value of the financial instruments held exceed the thresholds defined in the respective contracts.contracts,

 

As of December 31, 2016As of December 31, 2015As of December 31, 2018As of December 31, 2017
Financial derivative contracts AssetsLiabilities AssetsLiabilitiesAssetsLiability AssetsLiability
MM$ MM$MM$ MM$
          

Financial derivative contracts with collateral agreement threshold equal to zero

2,134,9171,986,345 2,613,2172,410,6962,639,8352,133,149 1,898,2201,773,471
   

Financial derivative contracts with non-zero threshold collateral agreement

233,945238,450 388,677311,056344,520262,683 221,030316,840
   
Financial derivative contracts without collateral agreement131,92067,366 204,032140,854116,280121,896 119,39749,177
Total2,500,7822,292,161 3,205,9262,862,6063,100,6352,517,728 2,238,6472,139,488


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements 

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

F-133 

Table of Contents

NOTE 3739

RISK MANAGEMENT

 

Introduction and general description

 

The Bank, due to its activities with financial instruments is exposed to several types of risks. The main risks related to financial instruments that apply to the Bank are as follows:

 

-Market risk: rises from holding financial instruments whose value may be affected by fluctuations in market conditions, generally including the following types of risk:

 

a.Foreign exchange risk: this arises as a consequence of exchange rate fluctuations among currencies.currencies,

b.Interest rate risk: this arises as a consequence of fluctuations in market interest rates.rates,

c.Price risk: this arises as a consequence of changes in market prices, either due to factors specific to the instrument itself or due to factors that affect all the instruments negotiated in the market.market,

d.Inflation risk: this arises as a consequence of changes in Chile’s inflation rate, whose effect would be mainly applicable to financial instruments denominated in UFs.UFs,

 

-Credit risk: this is the risk that one of the parties to a financial instrument fails to meet its contractual obligations for reasons of insolvency or inability of the individuals or legal entities in question to continue as a going concern, causing a financial loss to the other party.

 

-Liquidity risk: is the possibility that an entity may be unable to meet its payment commitments, or that in order to meet them, it may have to raise funds with onerous terms or risk damage to its image and reputation.

 

-Capital risk: this is the risk that the Bank may have an insufficient amount and/or quality of capital to meet the minimum regulatory requirement to operate as a bank, respond to market expectations regarding its creditworthiness, and support its business growth and any strategic possibilities that might arise, in accordance with its strategic plan.

 

This note includes information on the Bank’s exposure to these risks and on its objectives, policies, and processes involved in their measurement and management.

 

Risk management structure

 

The Board is responsible for the establishment and monitoring of the Bank’s risk management structure, for which purpose it has an on-line corporate governance system which incorporates international recommendations and trends, adapted to Chilean regulatory conditions and given it the ability to apply the most advanced practices in the markets in which the Bank operates.

 

The effectiveness with which we are able to manage the balance between risk and reward is a significant factor in our ability to generate long term, stable earnings growth.growth, Toward that end, our Board and senior management places great emphasis on risk management.

 

A.Integral Risk Committee

A.       Integral Risk Committee

 

The Integral Risk Committee of the Board is responsible for reviewing and monitoring all risks that may affect us, including reputation risk, allowing for an integral risk management. This committee serves as the governing body through which the Board supervises risk in general.general, It also evaluates the reasonability of the systems for measurement and control of risks.

 

·●Credit risk

·●Market risk

·●Operational risk

·●Solvency risk (BIS)

·●Legal risks

·●Compliance risks

·●Reputational risks

 

This Committee includes the Vice Chairman of the Board and five Board members. This committee also includes the CEO, the Director of Risk and other senior level executives from the commercial side of our business.


Banco Santander Chile and Subsidiaries

F-134 Notes to the Consolidated Financial Statements 

Table of Contents

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 3739

RISK MANAGEMENT, continued

 

B.Audit Committee

B. Audit Committee

 

The Audit Committee (Comité de Directores y Auditoría) is comprised of three members of the Board of Directors. The Committee Secretary is the alternate director Juan Pedro Santa María. The General Counsel is the Committee Secretary. The Chief Executive Officer, General Auditor and other persons from the Bank can be invited to the meetings if necessary and are present on specific matters. This Committee’s primary responsibility is to support the Board of Directors in the continuous improvement of our system of internal controls, which includes reviewing the work of both the external auditors and the Internal Audit Department. The committee is also responsible for analyzing observations made by regulatory entities of the Chilean financial system about us and for recommending measures to be taken by our management in response. This committee also performs functions of a remuneration committee as established in Chilean Law, and reviews annually the salary and bonus programs for the executive officers of the Bank. The external auditors are recommended by this committee to our Board of Directors and appointed by our shareholders at the annual shareholders’ meeting.

 

C.Asset and Liability Committee

C. Asset and Liability Committee

 

The ALCO includes the Chairman of the Board and five additional members of the Board, the Chief Executive Officer, the Corporate Financial Controller, the Manager of the Financial Management Division, the Manager of Market Risk, the Manager of the Treasury Division, and other senior members of management. The ALCO meets monthly. All limits reviewed by the ALCO are measured and prepared by the Market Risk Department. The non-Board members of the ALCO meet weekly to review liquidity, funding, capital and market risk related matters.

 

The main functions of the ALCO are:

 

·●Making the most important decisions regarding our exposure to inflation, interest rate risk, funding, capital and liquidity levels.levels, The main limits set and monitored by the ALCO (and measured by the Market Risk Department) are:

 

·●Review of the Bank’s inflation gap.gap

 

·●Review of the evolution of the most relevant local and international markets and monetary policies.policies

 

D.Market Committee

D. Market Committee

 

The Market Committee includes the Vice-Chairman of the Board, three additional members of the Board, the Chief Executive Officer, the Manager of Global Banking and Markets, the Manager of the Treasury Division, the Manager of the Financial Management Division, the Manager of Market Risk, the Financial Controller and other senior members of management.

 

The Market Committee is responsible for:

 

·●Establishing a strategy for the Bank’s trading investment portfolio.portfolio

 

·●Establishing the Bank’s policies, procedures and limits with respect to its trading portfolio.portfolio, The Bank’s Market Risk Department measures all risks and limits and reports these to the Market Committee.Committee

 

·●Reviewing the net foreign exchange exposure and limit

 

·●Reviewing the evolution of the most relevant local and international markets and monetary policies.policies

 

E.Risk Department

E. Risk Department

 

All issues regarding risk in the Bank are the responsibility of the Bank’s Risk Department. The Risk Department reports to the CEO but has full independence, and no risk decisions can be made without its approval.


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements 

F-135 AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

Table of Contents

 

NOTE 37

39 

RISK MANAGEMENT, continued

 

Credit risk

 

Credit risk is the risk that one of the parties to a financial instrument fails to meet its contractual obligations for reasons of insolvency or inability of the individuals or legal entities in question to continue as a going concern, causing a financial loss to the other party. The Bank consolidates all elements and components of credit risk exposure to manage credit risk (e.g.(e,g, individual delinquency risk, inherent risk of a business line or segment, and/or geographical risk).

In Note 9 and Note 11, we present our net exposure to credit risk at December 31, 2018 and 2017.

 

Credit Risk Governance

 

The Risk Division, our credit analysis and risk management group, is largely independent of our Commercial Division. Risk evaluation teams interact regularly with our clients. For larger transactions, risk teams in our headquarters work directly with clients when evaluating credit risks and preparing credit applications. Various credit approval committees, all of which include Risk Division and Commercial Division personnel, must verify that the appropriate qualitative and quantitative parameters are met by each applicant. Each committee’s powers are defined by our Board of Directors.

 

Santander-Chile’s governance rules have established the existence of the Integral Risk Committee. This committee is responsible for revising and following all risks that may affect us, including reputational risk, allowing for an integral risk management. This committee serves as the governing body through which the Board supervises all risk functions. It also evaluates the reasonability of the systems for measurement and control of risks. This Committee includes the Vice Chairman of the Board and five Board members.

 

The Board has delegated the duty of credit risk management to the Integral Risk Committee, as well as to the Bank’s risk departments, whose roles are summarized below:

 

·●Formulation of credit policies, by consulting with the business units, meeting requirements of guarantees, credit evaluation, risk rating and submission of reports, documentation and legal procedures inVerify compliance with the regulatory, legal and internal requirementsstrategic objectives of the Bank.group, depending on both assumed and potential risk, and alerting management to such risks.

●Propose the primary metrics for risk appetite framework.

●Review the level of compliance with regulatory provisions and recommendations issued by the Local and External Supervisors, ensuring their implementation on the stipulated dates.

●Analyze with a comprehensive vision, the map of recommendations and incidents formulated by the different control instances (SBIF, DAI and External Audit) in order to identify the main risks involved.

●Review the risk benchmark analysis, and from its results, identify and propose “best practices” or corrective / preventive actions, ensuring their proper implementation.

●Review the adequate management of risks by the management areas, formulating where appropriate, the mitigation actions in accordance with the policies approved by the Board.

●Monitoring, analysis and control of the limits defined in the Risk Framework (basic and complementary metrics) and the key credit risk indicators of each zone, segment or product, identifying possible sources of concern.

●Analyze the relevant aspects of the risk (exogenous variables), which could eventually materialize in possible losses for the business (emerging risks).

●Analyze and propose eventual changes in the policies and procedures used by the Bank for the administration, control and management of risks, when inconsistencies or vulnerabilities are verified.

●Encourage compliance by the Bank with the best corporate governance practices in risk management. Pre-review the documents of type 0 and 1 (Frames and Models) that were defined in the Approval Hierarchy model, which must then be approved in the Directory.

●Perform, according to the calendar proposed by the Risk Department or on request, the sectoral analyzes considered relevant.

●Review of risks in terms of Risk Compliance and Reputational Risk

●Any other task that the Board deems necessary.

 

·Establish the structure to approve and renew credit requests. The Bank structures credit risks by assigning limits to the concentration of that risk in terms of individual debtors, debtor groups, industry segment and country. Approval levels are assigned to the correspondent officials of the business unit (commercial, consumer, SMEs) to be exercised by that level of management. In addition, those limits are revised constantly. Teams in charge of risk evaluation at the branch level interact on a regular basis with customers; however, for larger credit requests, the risk team from the head office and the Executive Risk Committee works directly with customers to assess credit risks and prepare risk requests.

 

·Limit concentrations of exposure to customers or counterparties in geographic areas or industries (for accounts receivable or loans), and by issuer, credit rating, and liquidity.

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements 

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

·Develop and maintain the Bank’s credit risk classifications for the purpose of classifying risks according to the degree of exposure to financial loss that is exhibited by the respective financial instruments, with the aim of focusing risk management specifically on the associated risks.

NOTE 39 

·Revise and evaluate credit risk. Management’s risk divisions are largely independent of the Bank’s commercial division and evaluate all credit risks in excess of the specified limits prior to loan approvals for customers or prior to the acquisition of specific investments. Credit renewal and reviews are subject to similar processes.

RISK MANAGEMENT, continued

 

The following diagram illustrates the governance of our credit risk division including the committees with approval power:

 

F-136  

Table

Role of ContentsSantander Spain’s Global Risk Department: Credit Risk

In matters regarding Credit Risk, Santander Spain’s Global Risk Department has the following role:

●All credit risks greater than U.S.$40 million (U.S.$60 million for financial institutions), after being approved locally, are reviewed by Santander Spain. This additional review ensures that no global exposure limit is being breached.

●In standardized risks, the consumer and mortgage scoring models are developed locally but are reviewed and approved by Santander Spain’s Global Risk Department.

●For each scoring model, a monthly Risk Report is prepared, which is reviewed locally and is also sent to Santander Spain’s Global Risk Department. This report includes the evolution of basic credit risk parameters such as loan amounts, non-performance, charge-offs and provisions.

●Monthly, the Controller of the Risk Department sends a report to Santander Spain’s Global Risk Department covering all the main indicators regarding credit risk and the evolution of credit risk as compared to the budgeted levels.

Impaiment assessment (policy applicable from January 1, 2018)

In accordance with the requirements of IFRS 9 the Bank has developed a new credit risk model, applicable from January 1, 2018.

a.Definition of default and cure

The Bank considers a financial instrument defaulted and therefore Stage 3 for ECL calculations in all cases when the borrower becomes 90 days past due on its contractual payments.

As a part of a qualitative assessment of whether a customer is in default, the Bank also considers a variety of instances that may indicate unlikeliness to pay. Such events include:

●Internal rating of the borrower indicating default or near-default

●The borrower requesting emergency funding from the Bank


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements 

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 3739 

RISK MANAGEMENT, continued

●The borrower having past due liabilities to public creditors or employees

●The borrower is deceased

●A material decrease in the underlying collateral value where the recovery of the loan is expected from the sale of the collateral

●A material decrease in the borrower’s turnover or the loss of a major customer

●A covenant breach not waived by the Bank

●The debtor (or any legal entity within the debtor’s group) filing for bankruptcy application/protection

●Debtor’s listed debt or equity suspended at the primary exchange because of rumours or facts about financial difficulties

It is the Bank’s policy to consider a financial instrument as ‘cured’ and therefore re-classified out of Stage 3 when none of the default criteria have been present for at least twelve consecutive months (and 24 months for special vigilance operations). The decision whether to classify an asset as Stage 2 or Stage 1 once cured depends on the updated credit grade, at the time of the cure, and whether this indicates there has been a significant increase in credit risk compared to initial recognition.

b.Internal rating and PD estimation

The Bank’s Credit Risk Department operates its internal rating models. The models incorporate both qualitative and quantitative information and, in addition to information specific to the borrower utilise supplemental external information that could affect the borrower’s behaviour. The internal credit grades are assigned based on the internal scoring policy. PDs are then adjusted for IFRS 9 ECL calculations to incorporate forward looking information and the IFRS 9 Stage classification of the exposure.

The following table shows quality assets and its related provision, based on our internal scoring policy as of December 31, 2018:

  Individually assessed

Commercial

Portfolio

Stage 1Stage 2Stage 3

Total

 Individual

Percentage Stage 1Stage 2Stage 3Total ECL AllowancePercentage
MCh$MCh$MCh$MCh$% MCh$MCh$MCh$MCh$%
            
A129,998--29,9980.10% 2--20.00%
A21,074,789--1,074,7893.56% 525--5250.06%
A32,699,684309-2,699,9938.94% 2,526--2,5740.29%
A43,200,60816,546-3,217,15410.65% 8,865323-9,2061.04%
A51,755,25926,141-1,781,4005.90% 11,296453-11,1921.33%
A6935,49945,671-981,1703.25% 6,9752,213-9,1881.04%
B1-494,915187495,1021.64% -14,1077914,2321.61%
B2-81,95515682,1110.27% -2,786662,8520.32%
B3-67,08961467,7030.22% -3,8412334,0740.46%
B4-47,65345,48093,1330.31% -2,48819,68822,1762.51%
C1-46,383108,325154,7080.51% -2,54848,14750,6955.75%
C2-15,67839,24654,9240.18% -1,26118,17119,6722.20%
C3-19,65526,20445,8590.15% -73310,80311,2971.31%
C4-3,56032,44536,0050.12% -24617,07717,3231.96%
C5-70364,76265,4650.22% -3240,54140,5734.60%
C6-1,52569,51071,0350.22% -3543,31043,7894.91%
Subtotal9,695,837867,783386,92910,950,54936.24% 30,18931,066198,115259,37029.39%
            
 

Collectively assessed

 Stage 1Stage 2Stage 3Total GroupPercentage Stage 1Stage 2Stage 3Total ECL AllowancePercentage
MCh$MCh$MCh$MCh$% MCh$MCh$MCh$MCh$%
Commercial3,616,969232,472386,1544,235,59514.02% 43,54124,754179,317247,43228.04%
Mortgage4,341,470249,039285,5104,876,28916.14% 70,90454,372159,066284,34232.23%
Consumer9,258,962447,496444,52310,150,98133.60% 9,00615,10267,16291,27010.34%
Subtotal17,217,671929,0071,116,18719,262,86563.76% 123,45194,048405,545623,04470.61%
Total26,913,5081,796,7901,503,11630,213,414100.00% 153,640124,114603,660882,414100.00%


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements 

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 39 

RISK MANAGEMENT, continued

 

In relation to the credit quality of the investment portfolio, local regulations specify that banks are able to hold only local and foreign fixed–income securities except in certain cases, Additionally, Banco Santander Chile has internal policies to ensure that only securities approved by the Market Risk department, which are stated in the documents “APS” – Products and underlying Approval, are acquired, The Credit Risk Department sets the exposure limits to those approved APS’s , The APS is updated on daily basis.

 

Credit Approval: Loans approvedAs of December 31, 2018, 99% our total investment portfolio correspond to securities issued by the Chilean Central Bank and US treasury notes.

c.Exposure at default

The exposure at default (EAD) represents the gross carrying amount of the financial instruments subject to the impairment calculation, addressing both the client’s ability to increase its exposure while approaching default and potential early repayments too.

To calculate the EAD for a Stage 1 loan, the Bank assesses the possible default events within 12 months for the calculation of the 12mECL. However, if a Stage 1 loan that is expected to default in the 12 months from the balance sheet date and is also expected to cure and subsequently default again, then all linked default events are taken into account. For Stage 2, Stage 3 the exposure at default is considered for events over the lifetime of the instruments.

d.Loss given default

The credit risk assessment is based on a standardised LGD assessment framework that results in a certain LGD rate. These LGD rates take into account the expected EAD in comparison to the amount expected to be recovered or realised from any collateral held.

The Bank segments its retail lending products into smaller homogeneous portfolios (evaluated collective), based on key characteristics that are relevant to the estimation of future cash flows. The applied data is based on historically collected loss data and involves a wider set of transaction characteristics (e.g., product type, wider range of collateral types) as well as borrower characteristics.

Further recent data and forward-looking economic scenarios are used in order to determine the IFRS 9 LGD rate for each group of financial instruments. Under IFRS 9, LGD rates are estimated for the Stage 1, Stage 2, Stage 3 IFRS 9 segment of each asset class. The inputs for these LGD rates are estimated and, where possible, calibrated through back testing against recent recoveries. These are repeated for each economic scenario as appropriate.

e.Significant increase in credit risk (SICR)

The Bank continuously monitors all assets subject to ECLs. In order to determine whether an instrument or a portfolio of instruments is subject to 12 month ECL or Lifetime ECL, the Bank assesses whether there has been a significant increase in credit risk since initial recognition.

The Bank also applies a secondary qualitative method for triggering a significant increase in credit risk for an asset, such as moving a customer/facility to the watch list (Special vigilance). The Bank may also consider that events explained in letter a) above are a significant increase in credit risk as opposed to a default. Regardless of the change in credit grades, if contractual payments are more than 30 days past due, the credit risk is deemed to have increased significantly since initial recognition.

When estimating ECLs on a collective basis for a group of similar assets, the Bank applies the same principles for assessing whether there has been a significant increase in credit risk since initial recognition.

Quantitative criteria for SICR Stage 2:

The quantitative criteria is used to identify where an exposure has increased in credit risk and it is applied based on whether an increase in the lifetime PD since the recognition date exceeds the threshold set in absolute terms. The following formula is used to determine such threshold: 

Threshold = Lifetime PD (at reporting date) – Lifetime PD (at origination)


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements 

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 39 

RISK MANAGEMENT, continued

Collectively assessedIndividually assessed
MortgagesOther loans

Revolving

(Credit cards)

Collectively assessed SMEIndividually assessed SMEMiddle marketCorporate and Investment Banking
45%42%42%42%60%50%Santander Group criteria

There is also a relative threshold of 100% of all portfolios with the exception of the Corporate and Investment Banking Portfolio.

Qualitative criteria for SICR Stage 2:

The qualitative criteria is based on the existence of evidence that leads to an automatic classification of financial instruments in stage 2, mainly 30 days overdue and restructured. Thresholds of SICR are calibrated based on the average ECL of exposures that are 30 days overdue or with a level of credit risk considered to be “significant”.

Collectively assessedIndividually assessed
MortgagesOther loans

Revolving

(Credit cards)

Collectively

assessed SME

Individually

assessed SME

Middle market

Corporate and

Investment

Banking

Irregular portfolio > 30 daysIrregular portfolio > 30 daysIrregular portfolio > 30 daysIrregular portfolio > 30 daysIrregular portfolio > 30 daysIrregular portfolio > 30 daysIrregular portfolio > 30 days
Restructured marked for monitoringRestructured marked for monitoringRestructured marked for monitoringRestructured marked for monitoringRestructured marked for monitoringRestructured marked for monitoringRestructured marked for monitoring
Clients that are considered to be substandard or in incompliance (pre-legal action)Clients that are considered to be substandard or in incompliance (pre-legal action)Clients that are considered to be substandard or in incompliance (pre-legal action)

These thresholds are defined by the Model Committee and the Integral Risk Committee, and are evaluated annually with updates made depending on impacts and definitions of the risk models associated to each portfolio.

f.Grouping financial assets measured on a collective basis

The Bank calculates ECLs either on a collective or an individual basis.

The evaluates on individual basis commercial loans that are greater than Ch$400 million (US$240,000), while smaller commercial loans, mortgage loans and consumer loans are grouped into homogeneous portfolios, based on a combination of internal and external characteristics.

g.Modified loans

When loan measured at amortised cost has been renegotiated or modified but not derecognised, the Bank must recognise the resulting gains or losses as the difference between the carrying amount of the original loans, and modified contractual cash flows discounted using the EIR before modification.

If the modification does not result in derecognition, then the subsequent assessment of whether there is a significant increase in credit risk is made comparing the risk at the reporting date based on the modified contractual term and the risk at initial recognition based on the original, unmodified contractual term.

If the modification results in dereconition, then the modified asset is considered to be a new asset. Accordingly, the date of modification is treated as the date of initial recogition for the purposes of the impairment requerments.


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements 

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 39 

RISK MANAGEMENT, continued

  As of December 31, 2018 
  Stage 1  Stage 2  Stage 3  Total 
  MCh$  MCh$  MCh$  MCh$ 
Gross carrying amount  26,913,508   1,796,790   1,503,116   30,213,414 
Modified loans  -   582,513   815,094   1,397,607 
%  -   32.42%  54.23%  4.63%
                 
                 
ECL allowance  153,640   125,114   603,660   882,414 
Modified loans  -   44,099   323,802   367,901 
%  -   35.25%  53.64%  41.69%

h.Analysis of risk concentration

The following table shows the risk concentration by industry, and by stage before ECL allowance:

As of December 31, 2018

Loans and account receivable at amortised cost
Stage 1Stage 2Stage 3Total
MCh$MCh$MCh$MCh$
Commercial loans    
Manufacturing  992,786  92,931  54,048 1,139,765
Mining  182,342  21,821   4,585  208,748
Electricity, gas, and water  384,288  22,365   2,279  408,932
Agriculture and livestock  934,199 166,271 100,781 1,201,251
Forest  120,371   9,402  14,115  143,888
Fishing  238,348  11,104   3,569  253,021
Transport  716,493  55,011  37,802  809,306
Communications  178,215  30,407   7,222  215,844
Construction(a)  723,600  88,691  93,747  906,038
Commerce 2,950,517 189,623 199,924 3,340,064
Services 1,771,595  81,159  12,915 1,865,669
Other 4,120,052 331,470 242,096

4,693,618

     
Subtotal13,312,8061,100,255773,08315,186,144
     
Mortgage loans9,258,962447,496444,52310,150,981
     
Consumer loans4,341,740249,039285,5104,876,289
     
Total26,913,5081,796,7901,503,11630,213,414

(a)In 2018 we improved the classification of our construction loans, reassigning loans for real state rental investment companies to services.


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements 

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 39 

RISK MANAGEMENT, continued

i.Macro economical forward looking information and scenarios

The annual growth forecasts for the most relevant macroeconomic variables for each of our scenarios are as follows:

 Average estimates 2019 - 2020
 Unfavorable scenario 2Unfavorable scenario 1Base scenarioFavorable scenario 1Favorable scenario 2
Official interest rate1.78%2.82%3.91%4.99%6.03%
Unemployment rate8.47%7.53%6.55%6.10%5.57%
Housing Price growth0.89%1.06%1.50%2.68%4.49%
GDP growth1.40%2.22%2.99%3.87%4.68%
Consumer Price Index1.14%1.98%2.83%3.75%4.59%

The highest probability of occurrence is associated to the base scenario, while the extreme scenarios have a lower probability than the more moderate scenarios.

The methodology used for the generation of the local scenarios is based on the Methodology Framework of the Corporate Research Service and is applied to the loan portfolio with the exception of loans from the Corporate and Investment Banking segment which uses global scenarios as defined by the Santander Group. The probabilities for the scenarios must total 100% and be symmetrical.

Local scenario Global scenario
 Probability weighting  Probability weighting
Favorable scenario 25% Favorable scenario 120%
Favorable scenario 120% Base scenario60%
Base scenario50% Unfavorable scenario 120%
Unfavorable scenario 120%   
Unfavorable scenario 25%   

The ECL allowance sensibility to future macro economic conditions is as follows:

December 31, 2018Ch$
Reported ECL allowance882,414
Gross carrying amount30,282,022
Reported ECL Coverage2.91%
ECL amount by scenarios
Favorable scenarios 2745,089
Favorable scenarios 1815,113
Base scenarios879,358
Unfavorable scenarios 2949,329
Unfavorable scenarios 2970,563
Coverage ratio by scenarios
Favorable scenarios 22.46%
Favorable scenarios 12.69%
Base scenarios2.90%
Unfavorable scenarios 23.13%
Unfavorable scenarios 23.21%


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements 

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 39 

RISK MANAGEMENT, continued

j.Collateral and other credit enhancement

The amount and type of collateral required depends on an individual basis

In preparing a credit proposal for a corporate client whose loans are approved on an individual basis, Santander-Chile’s personnel verifies such parameters as debt servicing capacity (typically including projected cash flows), the company’s financial history and projections for the economic sector in which it operates. The Risk Division is closely involved in this process, and prepares the credit application for the client. All proposals contain an analysisassessment of the client’s strengths and weaknesses, a rating and a recommendation. Credit limits are determined not on the basis of outstanding balances of individual clients, but on the direct and indirect credit risk of entire financial groups. For example, a corporation will be evaluated together with its subsidiariesthe counterparty. Guidelines are in place covering the acceptability and affiliates.

Credit Approval: Loans approved on a group basisvaluation of each type of collateral.

 

The majoritymain types of loanscollateral obtained are, as follows:

●For securities lending and reverse repurchase transactions, cash or securities

●For corporate and small business lending, charges over real estate properties, inventory and trade receivables and, in special circumstances, government guarantees

●For retail lending, mortgages over residential properties

The following table show the maximum exposure to individuals and small and mid-sized companies are approvedcredit risk by the Standardized Risk Area through an automated credit scoring system. This system is decentralized, automated and based on multiple parameters, including demographic and information regarding credit behavior from external sourcesclass of financial asset, associated collateral and the SBIF.net exposure to credit risk:

December 31, 2018

Maximum

exposure to

credit risk

Collateral

(*)

Net exposure

Associated

ECL

 MCh$MCh$MCh$MCh$
Commercial loans15,254,7527,369,2917,885,461506,802
Mortgage loans10,150,9819,699,324451,65791,270
Consumer Loans4,876,289754,9204,121,369284,342
Total30,282,02217,823,53512,458,487882,414

According to the Bank’s policy when an asset (real state) is repossessed are transferred to aseets held for sale at their fair value less cost to sell as non-financial assets at the repossession date.

 

Loans analyzed on an individual basisImpaiment assessment (under IAS 39)

a.Loans analyzed on an individual basis

 

For loans that are greater than Ch$150400 million (US$225,000)570,000), the Bank uses internal models to assign a risk category level to each borrower and its respective loans. We consider the following risk factors: industry or sector of the borrower, the borrower’s competitive position in its markets, owners or managers of the borrower, the borrower’s financial situation, the borrower’s payment capacity and the borrower’s payment behavior to calculate the estimated incurred loan loss. Through these categories, we differentiate the normal loan portfolio from the impaired one.

 

These are our categories:

 

1.Debtors may be classified in risk categories A1, A2, A3 or B (A is applicable if they are current on their payment obligations and show no sign of deterioration in their credit quality and B is different from the A categories by a certain history of late payments)., The A categories are distinguished by different PNPs (as defined below).,

F-137 

Table of Contents

NOTE 37

RISK MANAGEMENT, continued

 

2.Debtors classified as C1, C2, C3, C4, D1 or D2 include debtors whose loans with us have been charged off or administered by our Recovery Unit, or classifiedidentified asPrecontenciosos (PRECO or deteriorated). impaired by an internal risk committee.,

 

For loans classified as A1, A2, A3 and B, we assign a specific provision level on an individual basis to each borrower and, therefore, the amount of loan loss allowance is determined on a case by case basis.basis,

 

Estimated Incurred Loan Loss = Loan Loss Allowance

 

The estimated incurred loss is obtained by multiplying all risk factors defined in the following equation:

 

EIL= EXP x PNP x SEV


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements 

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 39 

RISK MANAGEMENT, continued

 

·●EIL = Estimated Incurred Loan Loss. The estimated incurred loan loss is how much could be lost in the event a debtor does not perform the obligations under the loan.

·●EXP = Exposure. This corresponds to the value of commercial loans.

·●PNP = Probability of Non-Performance. This variable, expressed as a percentage, indicates the probability that a debtor will default.default, This percentage is associated with the internal rating that we give to each debtor, which is determined by analyzing such parameters as debt servicing capacity.

·●SEV = Severity. This is the effective loss rate given default for debtors in the same segment, which is determined statistically based on the historical effective losses for us for each segment.

 

Every year, models together with PNP and SEV assumptions, are tested by the Bank’s Credit Risk Department, to ensure that they are appropriate at each reporting date so as to make sure any difference between the estimated incurred losses and real losses is reduced.

 

These tests focus on the validation of the sufficiency of the Bank’s allowances, and consist of comparisons between actual write-offs to allowances established by the model, and the coverage of the total allowance to actual write-offs in the most current periods. Individual loan classification and improvements to any customer classification are also presented for approval to our Risk Committee.

 

In accordance with such policy, every year we update appraisals of fair value of collateral before the end of the 24 month period for certain customers and such updated appraisals are considered in the calculation of the allowance for loan losses. The number of updated appraisals performed in 2013 was 113, in 2014 was 98, in 2015 was 43, in 2016 was 142 and 20162017 it was 142,140, and such updated appraisals were performed mainly because of changes in customer conditions (renegotiation deterioration of financial situation increase in credit line).

 

For loans classified in the C and D categories, loan loss allowances are based mainly on the fair value of the collateral, adjusted for an estimate cost to sell, that each of these loans have. Allowance percentage for each category is then based on the fair value of the collateral, or the expected future cash flow from the loan for each individually evaluated non-performing loans.

 

Loans analyzed on a group basis

b.Loans analyzed on a group basis

 

The Bank uses the concept of estimated incurred loss to quantify the allowances levels over loan analyzed on a group basis. Incurred loss is the expected provision expense that will appear one year away from the balance date of the transaction’s credit risk, considering the counterpart risk and the collateral associated to each transaction.

 

Following the Bank’s definition, the Bank uses group evaluation to approach transactions that have similar credit risk features, which indicate the debtor’s payment capacity of the entire debt, capital and interests, pursuant to the contract’s terms. In addition, this allows us to assess a high number of transactions with low individual amounts, whether they belong to individuals or small sized companies. Therefore, debtors and loans with similar features are grouped together and each group has a risk level assigned to it. These models are meant to be used mainly to analyze loans granted to individuals (including consumer loans, credit lines, mortgage loans and commercial loans) and commercial loans to SMEs.

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NOTE 37

RISK MANAGEMENT, continued

 

Allowances are established using these models, taking into account the historical impairment and other known circumstances at the time of evaluation. After this, a historical loss rate is assigned to each portfolio profile constituting each segment. The method for assigning a profile is established based on a statistical building method, establishing a relation through a logistic regression various variables, such as payment behavior in the Bank, payment behavior outside the Bank, various socio-demographic data, among others, and a response variable that determines a client’s risk level, which in this case is 90 days of non-performance. Afterwards, common profiles are established related to a logical order and with differentiate default rates, applying the real historical loss the Bank has had with that portfolio.

 

Our models for loans analyzed on a group basis (consumer loans, residential mortgage loans and small-and-mid-sized commercial loans) are monitored on a monthly basis with respect to predictability and stability, using indices that seek to capture the underlying need to update the models for current loss trends. Therefore, the periods of historical net charge-offs used in the allowance model may be more than a year old as we only update the historical net charge-offs only when our assessment of predictability and stability indicators determine it is necessary.

 

The different risk categories are constructed and updated periodically based on the payment behavior of the client’s profile to which they belong, as well as his or her socio-demographic characteristics. Therefore, when a customer has past due balance or has missed some payments, the outcome is that the customer will move to a different segment with a higher loss rate, therefore capturing current trends for each risk profile.

 


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements 

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 39 

RISK MANAGEMENT, continued

Once the customers have been classified, the loan loss allowance is the product of three factors: Exposure (EXP), Probability of Non-Performance (PNP) and Severity (SEV).

 

EXP = Exposure. This corresponds to the value of commercial loans.loans

 

PNP = Probability of Non-Performing. This variable, expressed as a percentage, indicates the probability that a debtor will default. This percentage is associated with the internal score that we give to each debtor, which is determined by analyzing such parameters as debt servicing capacity (including, usually, projected cash flows), the company’s financial history, the solvency and capacity of shareholders and management, and projections for the economic sector in which it operates. The internal rating can be different from ratings obtained from external third parties.parties.

 

SEV = Severity. This is the effective loss rate given default for debtors in the same segment, which is determined statistically based on the historical effective losses for us for each segment.segment.

 

Every year, models together with PNP and SEV assumptions, are tested by the Bank’s Credit Risk Department, to ensure that they are appropriate at each reporting date so as to make sure any difference between the estimated incurred losses and real losses is reduced.

 

Allowances for consumer loans

 

The estimated incurred loss rates for consumer loans correspond to charge-offs net of recoveries. The methodology establishes the period in which the estimated incurred loss for each risk profile emerges. Once the loss has been considered to have been incurred, the estimated incurred loss rates are applied to the corresponding risk profile to obtain the net charge-off level associated with this period. The loss rates applied to each risk profile are based only on the historical net charge-off data for that specific profile within one of the four groups of consumer loans. No other statistical or other information other than net charge-offs is used to determine the loss rates.

 

The following diagrams set forth the allowances required by our current models for consumer loans:

 

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NOTE 37

RISK MANAGEMENT, continued

Santander:

BankLoan type       Allowance Level(1) (Loss rate)
ConsumerPerforming 

New clients

 

Existing clients

 

Banefe

 

 
 0.53% -19.75%0.05%-11.92%0.13%-18.67% 
       
Renegotiated consumer loans which were less than 90 days past due at the time of renegotiation (2) 3.66%-30.40%10.19%-43.71% 
       
Renegotiated consumer loans which were more than 90 days past due at the time of renegotiation (2) 41.50%-100%51.11%-100% 
       
Non-performingDays Past DueNew ClientsExisting ClientsPreviously Renegotiated BankPreviously Renegotiated Banefe
90-12031.78%31.78%41.50%51.11%
120-15051.17%51.17%60.15%66.65%
150-18059.98%59.98%68.86%78.50%
>180 Charged-off
            

 

BankLoan typeAllowance Level(1) (Loss rate)
       
ConsumerPerformingNew clientsExisting clients  
0.33% -19.40%0.08%-15.55%  
      
Renegotiated consumer loans which were less than 90 days past due at the time of renegotiation (2)6.49%-32.09%  
      
Renegotiated consumer loans which were more than 90 days past due at the time of renegotiation (2)44.05%-100%  
      
Non-performingDays Past DueNew ClientsExisting ClientsPreviously Renegotiated
90-12035.93%35.93%44.05%
120-15044.11%44.11%50.38%
150-18052.77%52.77%57.48%
>180Charged-off

_______________

1.Percentage of loans outstanding

2.This category relates only to loans which were renegotiated and were less than 90 days past due at the time of renegotiation, migrating from such category as they reached 90 days past due since renegotiation.

Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements 

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 39 

RISK MANAGEMENT, continued

 

There are two renegotiated categories in our consumer loan portfolio:

 

1.Renegotiated Consumer which were less than 90 days past due at the time of renegotiation. The allowance for loan loss percentages (or loss rates) are assigned based on eight different risk profiles which are determined based on demographic and payment behavior variables.

 

2.Renegotiated Consumer which were more than 90 days past due at the time of renegotiation. The loss rates are assigned based on four different risk profiles which are determined based on the number of days overdue at the time of renegotiation:

 

Profile1: 180 or more days past due

Profile 1: 180 or more days past due

Profile2: between 150 and 180 days past due

Profile 2: between 150 and 180 days past due

Profile3: between 120 and 150 days past due

Profile 3: between 120 and 150 days past due

Profile4: between 90 and 120 days past due

Profile 4: between 90 and 120 days past due

 

Small- and mid-sized commercial loans

 

To determine the estimated incurred loss for individuals (natural persons), small- and mid-sized commercial loans collectively evaluated for impairment, we mainly analyze the payment behavior of clients, particularly the payment behavior of clients with payments that are 90 days or more past-due, clients with other weaknesses, such as early non-performance (i.e., payments that are past-due, though by less than 90 days), clients with modified loans and clients with renegotiated loans, as well as success in recovery against these clients. We also consider whether the loan has underlying mortgage collateral.

 

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NOTE 37

RISK MANAGEMENT, continued

The risk categories are such that when a customer has a past-due balance or has missed some payments, the outcome is that the customer will move to a different risk category with a higher loss rate, therefore capturing current trends of the customer and, in the aggregate, current trends in the market.


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements 

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 39 

RISK MANAGEMENT, continued

 

In order to calculate the estimated incurred loan loss for all commercial loans collectively evaluated for impairment, the Bank sub-divided the portfolio in the following way:

 

Loan typeLoan typeAllowance Level(1) (Loss rate) Loan typeAllowance Level(1) (Loss rate) 
Commercial loans analyzed on a group basisPerforming

Commercial

loan to individuals

w/o

mortgage collateral

Commercial

loan to

individuals

with mortgage

collateral

Small

Enterprise

Mid-sized  

Enterprise

  PerformingCommercial loan to individuals w/o mortgage collateralCommercial loan to individuals with mortgage collateralSmall EnterpriseMid-sized  Enterprise  
3.72% -46.76%0.02%-7.89%0.20%-21.82%0.11%-16.92  0.87% -15.70%0.03%-3.98%0.21%-14.39%0.14%-7.31  
        
Renegotiated commercial loans which were less than 90 days past due at the time of renegotiation (2)5.22%-19.54%  Renegotiated commercial loans which were less than 90 days past due at the time of renegotiation (2)

loan w/o mortgage collateral

2.93%-20.65%

loan with mortgage collateral

1.17%-8.25%

         
Renegotiated commercial loans which were more than 90 days past due at the time of renegotiation (2)Days Past Due when renegotiatedCommercial loan to individuals w/o mortgage collateralCommercial loan to individuals with mortgage collateralSmall EnterpriseMid-sized  Enterprise Renegotiated commercial loans which were more than 90 days past due at the time of renegotiation (2)Days Past Due when renegotiatedCommercial loan to individuals w/o mortgage collateralCommercial loan to individuals with mortgage collateralSmall EnterpriseMid-sized  Enterprise 
90-17950.76%16.29%30.07%24.32% 90-17941.69%12.15%30.95%18.93% 
180-35951.89%23.90%44.00%37.64% 180-35967.31%23.42%64.47%51.86% 
360-71956.04%31.46%50.27%47.09% 360-71975.69%34.65%70.15%63.12% 
>72057.54%36.69%53.86%52.63% >72083.82%46.25%74.53%72.87% 
      
Non-performing consumerDays Past DueCommercial loan to individuals w/o mortgage collateralCommercial loan to individuals with mortgage collateralSmall Enterprise

Mid-sized  

Enterprise

Previously renegotiatedNon-performing consumerDays Past DueCommercial loan to individuals w/o mortgage collateralCommercial loan to individuals with mortgage collateralSmall EnterpriseMid-sized  EnterprisePreviously renegotiated
90-17950.76%16.29%30.07%24.32%24.32%90-17941.69%12.15%30.95%18.93%18.93%
180-35951.89%23.90%44.00%37.64%37.64%180-35967.31%23.42%64.47%51.86%51.86%
360-71956.04%31.46%50.27%47.09%47.09%360-71975.69%34.65%70.15%63.12%63.12%
>72057.54%36.69%53.86%52.63%52.63%>72083.82%46.25%74.53%72.87%72.87%
        

_______________

(1)Percentage of loans outstanding

(2)This category relates only to loans which were renegotiated and were less than 90 days past due at the time of renegotiation, migrating from such category as they reached 90 days past due since renegotiation.

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Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements 

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 37

39 

RISK MANAGEMENT, continued

 

Allowances for residential mortgage loans

 

The provision methodology for residential mortgage loans takes into consideration different factors in order to group customers with less the 90 days past due into seven different risk profiles. Factors considered, in the first place, are whether the customer is a new customer or with prior history with the Bank.Bank, For each of these main categories additional factors are considered in order to develop risk profiles within each risk category, including payment behavior, non-performance less than 90 days, collateral levels, renegotiation history with the Bank, and historical amounts of net charge-offs, among others. The explanation for the initial segregation into three categories, existing, new customer, is as follows: an existing customer is a customer for which there is a broader level of information and history of payment behavior with the Bank, while for a new customer the Bank has no history of payment behavior and only information from the banking system and credit bureaus is available. The risk categories are such that when a customer’s payment behavior deteriorates, the outcome is that the customer will move to a different risk category with a higher loss rate, therefore capturing the current status of the customer.

 

Previous to 2016, mortgage loans with more than 90 days past due balances are assigned a loss rate of 11.01%. In 2016, mortgage loans more than 90 days past due balances are assigned a loss rate depending on the loan to value. We determined that 90 days is appropriate, since our historical analysis of customer’s behavior has shown that after 90 days, customers are likely to default on their obligations, and that, over succeeding periods, the loss incurred does not increase given the high fair value of collateral percentage to loan amount required under our credit policies for this type of loan. Also, we note that the Chilean economy’s stability over the last few years has not resulted in other than insignificant fluctuations in collateral fair values on residential mortgage loan properties.

 

The following table sets forth the required loan loss allowance for residential mortgage loans:

 

BankLoan typeAllowance Level(1) (Loss rate)
       

Residential

mortgage

PerformingBank (excl.(excl Select) Santander Select  
0.00%-8.30%-5.18% 0.00%-4.90%-3.88%  
      

Renegotiated mortgage loans which

were less than 90 days past due at the

time of renegotiation (2)

0.32%-12.06%0.16%-8.37%  
      

Renegotiated mortgage loans which

were more than 90 days past due at the

time of renegotiation (2)

5.72%-20.81%5.58%-26.25%  
      
Non-performing mortgageLoan to Value    
0-605.72%5.58%   
60-808.31%8.48%   
80-9011.60%11.93%   
>9020.81%16.25%   

 

1.Percentage of loans outstanding

2.This category relates only to loans which were renegotiated and were less than 90 days past due at the time of renegotiation, migrating from such category as they reached 90 days past due since renegotiation.


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Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements 

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 37

39 

RISK MANAGEMENT, continued

 

The following table shows quality assets and its related provision, based on our internal scoring policy as of December 31, 2016 and 2015:

c.Portfolio characteristics:

 

 As of December 31,
Category2016 2015

Commercial

 Portfolio 

Individual Percentage Allowance Percentage Individual Percentage Allowance Percentage
MCh$ % MCh$ % MCh$ % MCh$ %
                
A11,599,311 5.88% 923 0.12% 2,073,792 8.20% 1,210 0.17%
A26,437,930 23.67% 23,757 3.00% 5,898,065 23.32% 17,353 2.28%
A32,030,867 7.46% 29,668 3.75% 1,599,234 6.32% 25,145 3.30%
B538,909 1.98% 40,545 5.13% 504,937 1.99% 37,157 4.87%
C1121,893 0.45% 2,176 0.28% 81,767 0.32% 1,635 0.21%
C251,034 0.19% 4,555 0.58% 48,569 0.19% 4,857 0.64%
C349,901 0.18% 11,136 1.41% 37,663 0.15% 9,416 1.24%
C464,118 0.24% 22,894 2.90% 69,952 0.28% 27,981 3.67%
D173,462 0.27% 42,625 5.39% 76,157 0.30% 49,503 6.49%
D289,857 0.33% 72,192 9.13% 92,682 0.36% 83,414 10.94%
Subtotal11,057,282 40.65% 250,471 31.69% 10,482,818 41.43% 257,671 33.81%
                
 Group Percentage Allowance Percentage Group Percentage Allowance Percentage
MCh$ % MCh$ % MCh$ % MCh$ %
Commercial               
Normal portfolio2,741,858 10.08% 58,453 7.39% 2,483,258 9.81% 50,559 6.63%
Impaired portfolio 341,132 1.25% 124,653 15.76%  371,160 1.47% 124,137 16.28%
Subtotal3,082,990 11.33% 183,106 23.15% 2,854,418 11.28% 174,696 22.91%
Mortgage               
Normal portfolio8,221,666 30.22%  23,699 3.00% 7,416,703 29.31%  19,133 2.51%
Impaired portfolio 397,688 1.46% 33,310 4.21%  396,147 1.57% 43,294 5.68%
Subtotal8,619,354 31.68% 57,009 7.21% 7,812,850 30.88% 62,427 8.19%
Consumer               
Normal portfolio4,158,221 15.28%  147,979 18.72% 3,819,361 15.10%  118,006 15.48%
Impaired portfolio 288,584 1.06% 152,040 19.23%  331,310 1.31% 149,501 19.61%
Subtotal4,446,805 16.34% 300,019 37.95% 4,150,671 16.41% 267,507 35.09%
Total27,206,431 100.00% 790,605 100.00% 25,300,757 100.00% 762,301 100.00%

 As of December 31,
Category2017

Commercial

Portfolio

Individual Percentage Allowance Percentage
MCh$ % MCh$ %
        
A11,051,072 3.79% 827 0.10%
A25,957,305 21.49% 18,514 2.34%
A32,176,779 7.85% 27,894 3.53%
B539,074 1.94% 32,089 4.06%
C1145,033 0.52% 2,604 0.33%
C256,871 0.21% 5,104 0.65%
C339,825 0.14% 8,935 1.13%
C453,261 0.19% 19,120 2.42%
D171,896 0.26% 41,941 5.30%
    D277,048 0.28% 62,234 7.87%
Subtotal10,168,164 36.67% 219,262 27.73%
        
 Group Percentage Allowance Percentage
MCh$ % MCh$ %
Commercial       
Normal portfolio3,488,633 12.58% 58,728 7.42%
Impaired portfolio414,530 1.50% 160,345 20.27%
Subtotal3,903,163 14.08% 219,073 27.69%
Mortgage       
Normal portfolio8,634,351 31.14% 20,174 2.55%
Impaired portfolio462,544 1.67% 48,892 6.17%
Subtotal9,096,895 32.81% 69,066 8.72%
Consumer       
Normal portfolio4,230,567 15.26% 114,099 14.42%
Impaired portfolio327,125 1.18% 169,657 21.44%
Subtotal4,557,692 16.44% 283,756 35.86%
Total27,725,914 100.00% 791,157 100.00%

 

See Note 29 for more detail of the Bank’s impaired loans and the associated allowances. Also, see Note 19 for a detail of the maturity of the Bank’s financial assets.

Credit quality

d.Credit quality

 

The Bank determines the credit quality of financial assets using internal credit ratings.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.

 

See credit quality of loans above.

 

In relation to the credit quality of the investment portfolio, local regulations specify that banks are able to hold only local and foreign fixed–income securities except in certain cases. Additionally, Banco Santander Chile has internal policies to ensure that only securities approved by the Market Risk department, which are stated in the documents “APS” – Products and underlying Approval, are acquired. The Credit Risk Department sets the exposure limits to those approved APSs .APS’s. The APS is updated on daily basis.

 

As of December 31, 2016, 75.74%2017, 76% of our total investment portfolio correspond to securities issued by the Chilean Central Bank and US treasury notes.


Banco Santander Chile and Subsidiaries

Notes to the Consolidated Financial Statements 

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

F-143 

Table of Contents

NOTE 37

39 

RISK MANAGEMENT, continued

 

Maximum exposure to credit risk

 

Financial assets and off-balance sheet commitments

 

For financial assets recognised in the Consolidated StatementStatements of Financial Position, maximum credit risk exposure equals their carrying value. Below is the distribution by financial asset and off-balance sheet commitments of the Bank’s maximum exposure to credit risk as of December 31, 20162018 and 2015,2017, without deduction of collateral, security interests or credit improvements received:

 

 As of December 31, As of December 31,
 2016 2015 2018 2017
 Amount of exposure Amount of exposure Amount of exposure Amount of exposure
NoteMCh$ MCh$NoteMCh$ MCh$
    
Deposits in banks41,709,071 1,432,37151,240,578 839,561
Cash items in process of collection4495,283 724,5215353,757 668,145
Trading investments5396,987 324,271
Investments under resale agreements66,736 2,4637- -
Financial derivative contracts72,500,782 3,205,92683,100,635 2,238,647

Loans and accounts receivable from customers and interbank loans, net

8 and 926,415,826 24,538,456
Available for sale investments103,388,906 2,044,411
Trading investment - 485,736
Loans and account receivable from customers and interbank loans, net - 26,934,757
Available for sale investment - 2,574,546
Financial assets held for trading677,041 -
Loans and account receivable at amortised cost / Loans and account receivable at FVOCI9 and 1029,399,589 -
Debt instrument at fair value through other comprehensive income122,394,323 -
        
Off-balance commitments:        
Letters of credit issued 158,800 178,461 223,420 201,699
Foreign letters of credit confirmed 57,686 70,417 57,038 75,499
Guarantees 1,752,610 1,673,580
Performance guarantees 1,954,205 1,823,793
Available credit lines 7,548,820 6,806,745 8,997,650 8,135,489
Personal guarantees 125,050 163,395 133,623 81,577
Other irrevocable credit commitments 260,266 82,161 327,297 260,691
Total 44,816,823 41,247,178 48,345,002 44,320,140

 

Foreign derivative contracts

 

As of December 31, 2016,2018, the Bank’s foreign exposure -including counterparty risk in the derivative instruments’ portfolio- was USD 3,1212,090 million or 5.86%40.27% of assets. In the table below, exposure to derivative instruments is calculated by using the equivalent credit risk; which equals the replacement carrying amount plus the maximum potential value, considering the cash collateral that minimizes exposure.

 

Below, there are additional details regarding our exposure to Colombia and Italy, since they arefor those countries classified above 1 and where the below represents our majority of exposure to categories other than 1.1, Below we detail as of December 31, 2016,2018, considering fair value of derivative instruments.

 

CountryClassification

Derivative Instruments

(adjusted to market)

USD MCh$

Deposits

USD MCh$

Loans

USD MCh$

Financial investments

USD MCh$

Total

Exposure 

USD MCh$ 

Colombia20.820.000.190.001.01
Italy20.008.770.000.008.77
China20.000.00348.990.00348.99
México20.000.090.320.000.41
Panamá20.690.000.000.000.69
Perú22.820.000.000.002.82
Uruguay20.000.000.680.000.68
Other31.320.000.000.001.32
Total 5.658.86350.180.00364.69

CountryClassification

Derivative Instruments

(adjusted to market)

 USD MCh$

Deposits

 USD MCh$

Loans

 USD MCh$

Financial investments

USD MCh$

Total

 Exposure

 USD MCh$

Bolivia30.000.000.060.000.06
China20.000.00243.950.00243.95
Italy20.002.380.780.003.16
México20.000.010.000.000.01
Panamá20.630.000.000.000.63
Perú23.380.000.000.003.38
Thailand                                                   20.000.000.310.000.31
Turkey30.000.009.490.009.49
Total 4.012.39254.590.00260.99

The total amount of this exposure to derivative instruments must be compensated daily with collateral and, therefore, the net credit exposure is USD 0.00.0.

 


Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

F-144 AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

Table of Contents

 

NOTE 37 39

RISK MANAGEMENT, continued

 

Our exposure to Spain within the group is as follows:

 

CounterpartCountryClassification

Derivative instruments (market adjusted)

MUSD 

Deposits

MUSD

Loans

MUSD

Financial

Investments

MUSD

Exposure

Exposure

MUSD

CountryClassification

Derivative instruments (market adjusted)

MUSD

Deposits

MUSD

Loans

MUSD

Financial

Investments

MUSD

Exposure

Exposure

MUSD

Banco Santander España (*)Spain10.00280.92-280.92Spain19.74118.26-128.00

 

Security interests and credit improvements

 

The maximum exposure to credit risk is reduced in some cases by security interests, credit improvements, and other actions which mitigate the Bank’s exposure. Based on the foregoing, the creation of security interests are a necessary but not a sufficient condition for granting a loan; accordingly, the Bank’s acceptance of risks requires the verification of other variables and parameters, such as the ability to pay or generate funds in order to mitigate the risk being taken on.

 

The procedures used for the valuation of security interests utilize the prevailing market practices, which provide for the use of appraisals for mortgage securities, market prices for stock securities, fair value of the participating interest for investment funds, etc. All security interests received must be instrumented properly and registered on the relevant register, as well as have the approval of legal divisions of the Bank.

 

The risk management model includes assessing the existence of adequate and sufficient guarantees that allow recovering the credit when the debtor’s circumstances prevent them from fulfilling their obligations.

 

The Bank has classification tools that allow it to group the credit quality of transactions or customers. Additionally, the Bank has historical databases that keep this internally generated information to study how this probability varies. Classification tools vary according to the analyzed customer (commercial, consumer, SMEs, etc.etc,).

 

Below is the detail of security interests, collateral, or credit improvements provided to the Bank as of December 31, 20162018 and 2015.2017,

 

As of December 31,As of December 31,
2016 20152018 2017
MCh$ MCh$MCh$ MCh$
Non-impaired financial assets:  
Properties/mortgages17,560,550 16,849,29622,047,354 19,508,151
Investments and others2,326,396 2,287,1282,200,776 2,108,962
Impaired financial assets:      
Properties/ mortgages186,297 265,052119,181 152,252
Investments and others2,064 4,268865 1,087
Total20,075,307 19,405,74424,368,176 21,770,452

 

Credit risk mitigation techniques

 

The Bank applies various methods of reducing credit risk, depending on the type of customer and product. As we shall see, some of these methods are specific to a particular type of transaction (e.g.(e,g, real estate guarantees) while others apply to groups of transactions (e.g.(e,g, netting and collateral arrangements).

F-145 


Table of Contents
 

Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 37

39

RISK MANAGEMENT, continued

 

Collateral

 

Banco Santander controls the credit risk through the use of collateral in its operations. Each business unit is responsible for credit risk management and formalizes the use of collateral in its lending policies.

 

Banco Santander uses guarantees in order to increase their resilience in the subject to credit risk operations. The guarantees can be used fiduciary, real, legal structures with power mitigation and compensation agreements. The Bank periodically reviews its policy guarantees by technical parameters, normative and also its historical basis, to determine whether the guarantee is legally valid and enforceable.

 

Credit limits are continually monitored and changed in customer behavior function. Thus, the potential loss values represent a fraction of the amount available.

 

Collateral refers to the assets pledged by the customer or a third party to secure the performance of an obligation. Collateral may be:

·●Financial: cash, security deposits, gold, etc.

·●Non-financial: property (both residential and commercial), other movable property, etc.

 

One very important example of financial collateral is the collateral agreement. Collateral agreements comprise a set of highly liquid instruments with a certain economic value that are deposited or transferred by a counterparty in favor of another party in order to guarantee or reduce any counterparty credit risk that might arise from the portfolios of derivative transactions between the parties in which there is exposure to risk.

 

Collateral agreements vary in nature but, whichever the specific form of collateralisation may be, the ultimate aim, as with the netting technique, is to reduce counterparty risk.

 

Transactions subject to a collateral agreement are assessed periodically (normally on a daily basis). The agreed-upon parameters defined in the agreement are applied to the net balance arising from these assessments, from which the collateral amount (normally cash or securities) payable to or receivable from the counterparty is obtained.

 

For real estate collateral periodic re-appraisal processes are in place, based on the actual market values for the different types of real estate, which meet all the requirements established by the regulator.

 

Specifically, mortgage loans are secured by a real property mortgage, and threshold mitigate counterparty credit risk of derivative instruments.instruments, (See note 9 c) ii) and iii), for a detail of the impaired portfolio and non-performing loans with or without guarantee).

 

Net exposure to credit risk

The following chart shows the net exposure to the credit risk as of December 31, 2016.

As of December 31, 2016

Maximum exposure to credit risk

MCh$

Loans covered by  

Net exposure

MCh$

Mortgage guarantee

MCh$

Other

MCh$

     
Commercial loans13,867,4652,032,6005,000,8756,833,990
Mortgage loans8,619,3568,063,225-556,131
Consumer loans4,446,803--4,446,803
Total26,933,62410,095,8255,000,87511,836,924

Personal guarantees and credit derivatives

 

Personal guarantees are guarantees that make a third party liable for another party’s obligations to the Bank. They include, for example, security deposits and standby letters of credit. Only guarantees provided by third parties that meet the minimum requirements established by the supervisor can be recognizedrecognised for capital calculation purposes.

 

Credit derivatives are financial instruments whose main purpose is to hedge credit risk by buying protection from a third party, whereby the Bank transfers the risk of the issuer of the underlying instrument. Credit derivatives are OTC instruments, i.e. they are not traded in organized markets.

 

Credit derivative hedges, mainly credit default swaps, are entered into with leading financial institutions.


Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

F-146 

Table of Contents

 

NOTE 37

39

RISK MANAGEMENT, continued

 

Assets Received in Lieu of Payment

 

Assets received or awarded in lieu of payment of loans and accounts receivable from clients are recognizedrecognised at their fair value (as determined by an independent appraisal). The excess of the outstanding loan balance over the fair value is charged to net income for the period, under “Provision for loan losses”. Any excess of the fair value over the outstanding loan balance, less costs to sell of the collateral, is returned to the client. These assets are subsequently adjusted to their net realizable value less cost to sale (assuming a forced sale).

 

At December 31, 2016,2018, assets received or awarded in lieu of payment amounted to Ch$45,93538,326 million (gross amount: Ch$53,49339,049 million ; allowance: Ch$7,558723 million).

 

At December 31, 2015,2017, assets received or awarded in lieu of payment amounted to Ch$24,95744,624 million (gross amount: Ch$30,83045,704 million ; allowance: Ch$5,8731,440 million).

 

Liquidity risk

 

Liquidity risk is the risk that the Bank may have difficulty meeting the obligations associated with its financial obligations.

 

Liquidity risk management

 

The Bank is exposed on a daily basis to requirements for cash funds from various banking activities, such as wires from checking accounts, fixed-term deposit payments, guarantee payments, disbursements on derivatives transactions, etc. As typical in the banking industry, the Bank does not hold cash funds to cover the balance of all the positions, as experience shows that only a minimum level of these funds will be withdrawn, which can be accurately predicted with a high degree of certainty.

 

The Bank’s approach to liquidity management is to ensure-- whenever possible--to have enough liquidity on hand to fulfill its obligations at maturity, in both normal and stressed conditions, without entering into unacceptable debts or risking the Bank’s reputation. The Board establishes limits on the minimal part of available funds close to maturity to fulfill said payments as well as over a minimum level of interbank operations and other loan facilities that should be available to cover transfers at unexpected demand levels. This is constantly reviewed. Additionally, the Bank must comply with the regulation limits established by the SBIF for maturity mismatches.

 

These limits affect the mismatches of future flows of income and expenditures of the Bank on an individual basis. They are:

 

i.mismatches of up to 30 days for all currencies, up to the amount of basic capital;capital

ii.mismatches of up to 30 days for foreign currencies, up to the amount of basic capital; andcapital

iii.mismatches of up to 90 days for all currencies, twice the basic capital.capital

 

The Bank’s treasury department (“Treasury”) receives information from all business units about the liquidity profile of its financial assets and liabilities in addition to details from other future cash flows that arise from future business transactions. Based on this information,information. Treasury keeps a short-term liquid assets portfolio, mainly composed of liquid investments, interbank loans, and advanced payments, to guarantee that the Bank has enough liquidity.liquidity, Liquidity needs of business units are fulfilled through short-term transfers from Treasury to cover any short-term variation and long-term financing to address all structural liquidity requirements.

 

The Bank monitors its liquidity position daily to establish future flows of inflow and outflow. At each month'smonth’s closing, stress tests are carried out in which a variety of scenarios are used, from normal market conditions to those that contain significant fluctuations. Liquidity policy and procedures are subjected to review and approval of the Bank’s Board. There are periodic reports which detail the Bank’s, and its subsidiaries’, liquidity position, including any exceptions and adopted correcting measures, which are also reviewed periodically by the ALCO.

 

The Bank relies on customer (retail) and institutional deposits, obligations to banks, debt instruments, and time deposits as its main sources of funding. Although most obligations to banks, debt instruments and time deposits have maturities of more than one year, customer (retail) and institutional deposits tend to have shorter maturities and a large proportion of them are payable within 90 days. The short-term nature of these deposits increases the Bank’s liquidity risk, and hence, the Bank actively manages this risk through continual supervision of the market trends and price management.


Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

F-147 AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

Table of Contents

 

NOTE 37

39

RISK MANAGEMENT, continued

 

Liquidity management seeks to ensure that, even under adverse conditions, we have access to the funds necessary to cover client needs, maturing liabilities and capital requirements. Liquidity risk arises in the general funding for our financing, trading and investment activities. It includes the risk of unexpected increases in the cost of funding the portfolio of assets at appropriate maturities and rates, the risk of being unable to liquidate a position in a timely manner at a reasonable price and the risk that we will be required to repay liabilities earlier than anticipated.

 

The following table sets forth the balance of our liquidity portfolio managed by our Financial Management Division in the manner in which it is presented to the Asset and Liability Committee (ALCO) and the Board. The ALCO has determined that our liquidity portfolio must be comprised of cash plus assets that can be readily convertible into cash either through the Chilean Central Bank window, overnight deposits or instruments or the local secondary market. The management of the Bank’s liquidity portfolio is performed by the Financial Management Division under rules determined by the ALCO.

 

As of December 31,As of December 31,
2016201520182017
MCh$MCh$
Financial investments for trading396,987324,27177,041485,736
Available for sale investments3,388,9062,044,4112,394,3232,574,546
Encumbered assets (net) (1) (205,703) (77,647)(48,843)(268,330)
Net cash (2) 16,259 (315,415)149,321(37,628)
Net Interbank deposits (3)1,335,0171,683,208967,095768,595
Total liquidity portfolio4,931,4663,658,8283,585,9373,522,919

(1) Assets encumbered through repurchase agreements are deduced from liquidity portfolio
(2) Cash minus reserve requeriments. As is presented in Note 4 the reserve requeriments are established by the monthly average reserves that the bank must maintain in accordance with regulation governing minimum reserves
(3) Includes overnight deposits in Central Bank, domestic banks and foreign banks.

Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

(1) Assets encumbered through repurchase agreements are deducted from the liquidity portfolio.

(2) Cash minus reserve requirements. As is presented in Note 4 the reserve requirements are established by the monthly average reserves that the Bank must maintain in accordance with regulation governing minimum reserves.

(3) Includes overnight deposits in Central Bank, domestic banks and foreign banks.

F-148 

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NOTE 37

39

RISK MANAGEMENT, continued

 

Exposure to liquidity risk

 

A similar, yet not identical, measure isthe calculation used to measure the Bank´s liquidity limit as established by the SBIF. The Bank determines a mismatch percentage for purposes of calculating such liquidity limit which is calculated by dividing its benefits (assets) by its obligations (liabilities) according to maturity based on estimated repricing. The mismatch amount permitted for the 30 day and under period is 1 times [regulatory]regulatory capital and for the 90 day and under period – 2 times [regulatory]regulatory capital.

 

The following table displays the actual derived percentages as calculated per above:

 

As of December 31,
2016 2015As of December 31,
%

2018

%

 

2017

%

30 days(15.00) 38.00(20) (48)
30 days foreign currency21.00) -- (22)
90 days(37.00 44.00(37) (51)

 

Below, is the breakdown by maturity, of the liability balances of the BankBa as of December 31, 20162018 and 2015:2017:

 

 DemandUp to 1 monthBetween 1 and 3 monthsBetween 3 and 12 monthsSubtotal up to 1 yearBetween 1 and 3 yearsBetween 3 and 5 yearsMore than 5 yearsSubtotal after 1 yearTotal
As of December 31, 2016MM$MM$MM$MM$MM$MM$MM$MM$MM$MM$
Obligations under repurchase agreements

- 

212,437 

- 

- 

212,437 

- 

- 

- 

- 

212,437

Checking accounts, time deposits and other time liabilities

7,949,315 

6,105,767 

4,193,906 

2,537,299 

 20,786,287

118,101 

13,913 

61,196 

193,210

20,979,497

Financial derivatives contracts- 92,335 122,565 263,893 478,793494,539346,948 971,8811,813,368 2,292,161
Interbank borrowings 4,557 373,423 115,769 1,154,063 1,647,812 233,542 35,014- 268,556 1,916,368
Issue debt instruments - 43,141 185,425 922,705 1,151,2711,168,1171,444,593 3,562,3916,175,101 7,326,372
Other financial liabilities 153,049 1,461 1,1612,817 158,488 58,641 7,766 15,121 81,528240,016
Subtotal8,106,9216,828,5644,618,8264,880,77724,435,0882,072,9401,848,2344,610,5898,531,76332,966,851
Contractual interest payments 2,273 56,121 170,861 537,941 767,1961,762,884-987,3702,750,254 3,517,450
Total8,109,1946,884,6854,789,6875,418,71825,202,2843,835,8241,848,2345,597,959 11,282,01736,484,301

F-149 

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NOTE 37

RISK MANAGEMENT, continued

 DemandUp to 1 monthBetween 1 and 3 monthsBetween 3 and 12 monthsSubtotal up to 1 yearBetween 1 and 3 yearsBetween 3 and 5 yearsMore than 5 yearsSubtotal after 1 yearTotal
As of December 31, 2018MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$MCh$
Obligations under repurchase agreements-       48,545               -               -         48,545 -   -   -                   -            48,545
Checking accounts, time deposits and other time liabilities   9,027,434  5,248,418   4,108,556   3,326,199  21,710,607     191,547         6,137       63,988      261,672  21,972,279
Financial derivatives contracts               -     131,378      120,361      349,551       601,290     495,789     471,185     949,464   1,916,438    2,517,728
Interbank borrowings    39,378 16,310404,5751,188,692 1,648,955  139,671 -    -139,671  1,788,626
Issue debt instruments-  71,46539,267745,830856,562 2,431,8491,549,743 3,277,079 7,258,671   8,115,233
Other financial liabilities  179,681 9342,41222,844205,871 9,261 92176 9,529  215,400
Subtotal9,246,493 5,517,0504,675,1715,633,116 25,071,8303,268,1172,027,1574,290,7079,585,981 34,657,811
Contractual interest payments4,91882,292158,760812,9201,058,8901,156,2621,110,9181,537,3853,804,565 4,863,456
Total9,251,4115,599,342 4,833,931 6,446,03626,130,7204,424,3793,138,0755,828,09213,390,546 39,521,267

 

As of December 31, 2018, the scheduled maturities of other commercial commitments, including accrued interest, were as follows:

Other Commercial CommitmentsUp to 1 month
MCh$		Between 1 and 3 months
MCh$		Between 3 and 12 months
MCh$		Between 1 and 5 years
MCh$		More than 5 years
MCh$		Total
MCh$
Performance guarantee663,642188,147905,554163,50633,3561.954,205
Confirmed foreign letters of credit3,8429,12833,17710,891-57,038
Letters of credit issued12,469110,97054,01545,93729223,420
Pledges and other commercial commitments22,12863,23041,6376,628-133,623
Total other commercial commitments702,081371,4751,034,383226,96233,3852,638,286

Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 39

RISK MANAGEMENT, continued

 DemandUp to 1 monthBetween 1 and 3 monthsBetween 3 and 12 monthsSubtotal up to 1 yearBetween 1 and 3 yearsBetween 3 and 5 yearsMore than 5 yearsSubtotal after 1 yearTotal
As of December 31, 2017MM$MM$MM$MM$MM$MM$MM$MM$MM$MM$
Obligations under repurchase agreements-268,061--268,061----268,061
Checking accounts, time deposits and other time liabilities8,376,3715,120,1714,201,2712,299,01819,996,831106,8332,81162,362172,00620,168,837
Financial derivatives contracts-144,410196,444356,288697,142378,582358,358705,4061,442,3462,139,488
Interbank borrowings4,13046,013397,4191,030,2411,477,803220,554--220,5541,698,357
Issue debt instruments-21,04355,119274,239350,4011,727,5712,104,7712,910,9106,743,2527,093,653
Other financial liabilities177,6637012,58331,879212,82627,5814041,21929,204242,030
Subtotal8,558,1645,600,3994,852,8363,991,66523,003,0642,461,1212,466,3443,679,8978,607,36231,610,426
Contractual interest payments4,40345,465117,779462,579630,226808,502776,7961,147,5532,732,8513,363,077
Total8,562,5675,645,8644,970,6154,454,24423,633,2903,269,6233,243,1404,827,45011,340,21334,973,503

As of December 31, 2017, the scheduled maturities of other commercial commitments, including accrued interest, were as follows:

 

Other Commercial CommitmentsUp to 1 monthBetween 1 and 3 monthsBetween 3 and 12 monthsBetween 1 and 5 yearsMore than 5 yearsTotal
(in millions of Ch$)
Performance guarantee514,510244,543835,030208,47921,2311,823,793
Confirmed foreign letters of credit16,68133,51321,2774,028-75,499
Letters of credit issued12,367115,72043,02930,55429201,699
Pledges and other commercial commitments16,02813,38247,2884,880-81,578
Total other commercial commitments559,586407,158946,624247,94121,2602,182,569
        

Other Commercial CommitmentsUp to 1 monthBetween 1 and 3 monthsBetween 3 and 12 monthsBetween 1 and 5 yearsMore than 5 yearsTotal
(in millions of Ch$)
Guarantees79,457175,437739,170592,017151,4351,737,516
Confirmed foreign letters of credit12,2478,1258,50528,809-57,686
Letters of credit issued36,66282,34239,76827-158,799
Pledges and other commercial commitments9,91611,59139,81163,731-125,049
Total other commercial commitments138,282277,495827,254684,584151,4352,079,050

 DemandUp to 1 monthBetween 1 and 3 monthsBetween 3 and 12 monthsSubtotal up to 1 yearBetween 1 and 3 yearsBetween 3 and 5 yearsMore than 5 yearsSubtotal after 1 yearTotal
As of December 31, 2015MM$MM$MM$MM$MM$MM$MM$MM$MM$MM$
Obligations under repurchase agreements- 143,689- - 143,689- --143,689
Checking accounts, time deposits and other time liabilities 7,932,619

5,707,940 

3,210,947 

2,853,761 

19,705,267 

231,272 

7,661

56,845 

295,778

20,001,045

Financial derivatives contracts- 126,643 190,409 380,158 697,210679,133337,598 1,148,6652,165,396 2,862,606
Interbank borrowings 27,323 7,946 148,509 684,819 868,597 388,62650,351- 438,977 1,307,574
Issue debt instruments 1,953 440,500 155,821 213,928 812,2021,590,5461,173,536 2,380,8115,144,893 5,957,095
Other financial liabilities 129,358 3,142 5583,114 136,172 23,73744,290 16,328 84,355220,527
Subtotal8,091,2536,429,8603,706,2444,135,780 22,363,1372,913,3141,613,436 3,602,6498,129,39930,492,536
Contractual interest payments 2,075 66,964 141,529 553,736 764,3041,814,540-905,4602,720,000 3,484,304
Total8,093,3286,496,8243,847,7734,689,51623,127,4414,727,854

1,613,436

4,508,109 10,849,39933,976,840

As of December 31, 2015, the scheduled maturities of other commercial commitments, including accrued interest, were as follows:

Other Commercial CommitmentsUp to 1 monthBetween 1 and 3 monthsBetween 3 and 12 monthsBetween 1 and 5 yearsMore than 5 yearsTotal
(in millions of Ch$)
Guarantees89,430142,285714,747709,84428,5411,684,847
Confirmed foreign letters of credit16,52212,5046,53534,872-70,433
Letters of credit issued39,552100,40737,7531,330-179,042
Pledges and other commercial commitments11,93511,17958,62982,212-163,955
Total other commercial commitments157,439266,375817,664828,25828,5412,098,277

F-150 

Table of Contents

NOTE 37

RISK MANAGEMENT, continued

Market risk

 

Market risk arises as a consequence of the market activity, by means of financial instruments whose value can be affected by market variations, reflected in different assets and financial risk factors. The risk can be diminished by means of hedging through other products (assets/liabilities or derivative instruments) or terminating the open transaction/position. The objective of market risk management is to manage and control market risk exposure within acceptable parameters.

 

There are four major risk factors that affect the market prices: type of interest, type of exchange, price, and inflation.inflation, In addition and for certain positions, it is necessary to consider other risks as well, such as spread risk, base risk, commodity risk, volatility or correlation risk.

 

Market risk management

 

The Bank’s internal management measure market risk based mainly on the procedures and standards of Banco Santander Spain, which are in turn based on an analysis of three principal components:

 

-trading portfolio;portfolio

-domestic financial management portfolio;portfolio

-foreign financial management portfolio.portfolio

 

The trading portfolio is comprised mainly of investments, valued at fair value, and free of any restriction on their immediate sale, which are often bought and sold by the Bank with the intent of selling them in the short term in order to benefit from short-term price fluctuations. The financial management portfolios include all the financial investments not considered a part of trading portfolio.


Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 39

RISK MANAGEMENT, continued

 

The ALCO has the general responsibility for the market risk. The Bank’s risk/finance department is responsible for formulating detailed management policies and applying them to the Bank’s operations, in conformity with the guidelines adopted by the ALCO and the Global Risk Department of Banco Santander Spain.

 

The department’s functions in connection with trading portfolio include the following:

 

i.apply the “Value at Risk” (VaR) techniques to measure interest rate risk;risk

ii.adjust the trading portfolios to market and measure the daily income and loss from commercial activities;activities

iii.compare the real VaR with the established limits;limits

iv.establish procedures to prevent losses in excess of predetermined limits; andlimits

v.furnish information on the trading activities to the ALCO, other members of the Bank’s management, and the Global Risk Department of Banco Santander Spain.Spain

F-151 

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NOTE 37

RISK MANAGEMENT, continued

 

The department’s functions in connection with financial management portfolios include the following:

 

i.perform sensitivity simulations (as explained below) to measure interest rate risk for activities denominated in local currency and the potential losses forecasted by these simulations; andsimulations

ii.provide daily reports thereon to the ALCO, other members of the Bank’s management, and the Global Risk Department of Banco Santander Spain.Spain

 

Market risk - trading portfolio

 

The Bank applies VaR methods to measure the market risk of its trading portfolio. The Bank has a consolidated commercial position that is made up of fixed income investments, foreign exchange trading, and a minimum position of investments in equity shares. This portfolio is mostly made of Chilean Central Bank bonds, mortgage bonds and corporate bonds issued locally at low risk.risk, At the closing date, the trading portfolio did not show investments in another portfolio.

 

For the Bank, the VaR estimate is done through the historical simulation method which consists of observing the behavior of profit and loss that might have taken place with the current portfolio if the market conditions at a given time had been present and, based on that information, infer maximum losses with a determined confidence level. This method has the advantage of reflecting precisely the historical distribution of market values and not requiring any distribution assumption for a specific probability. All VaR measures are designed to establish the distribution function for the value change in a given portfolio and, once this distribution is known, to calculate the percentile related to the necessary confidence level, which will match the risk value in relation to of those parameters.parameters, As calculated by the Bank, the VaR is an estimate of the maximum expected loss of market value of a given portfolio in one day, with 99.00% confidence. It is the maximum loss in one day the Bank could expect in a given portfolio with a confidence level of 99.00%. In other words, it is the loss the Bank would have to deal only 1.0% of the time.time, VaR provides a single estimation of the market risk that cannot be compared with other market risks.risks, Returns are calculated using a time window of 2 years or, at least, 520 data points gathered since the reference date in the past to calculate VaR.

 

The Bank does not calculate three separate VaRs. Only one VaR is calculated for the entire trading portfolio which, in addition, is separated into risk types. The VaR program carries out a historical simulation and calculates a profit (ganancia or “G”) and loss (pérdida or “P”) G&P StatementStatements for 520 data points (days) for each risk factor (fixed income, currency, and variable income). Each risk factor’s G&P is added and a consolidated VaR is calculated with 520 data points or days. In addition, the VaR is calculated for each risk factor based on the individual G&P calculated for each. Additionally, a weighted VaR is calculated following the above mentioned method but giving a larger weight to the 30 most recent data points. The highest VaR is reported.reported, In 20152017 and 2014,2016, we were still using the same VaR model and the methodology has not changed.

 

The Bank uses VaR estimates to issue a warning in case the statistically estimated losses for the trading portfolio exceed the cautionary levels.

 

Limitations of the VaR model

 

When applying a calculation methodology, no assumptions are made regarding the probability distribution of the changes in the risk factors; the historically observed changes are used for the risk factors on which each position in the portfolio will be valued.


Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

NOTE 39

RISK MANAGEMENT, continued

 

It is necessary to define a valuation function fj(xi) for each instrument, j, preferably the same one used to calculate the market value and income of the daily position. This valuation function will be applied in each scenario to generate simulated prices for all the instruments in each scenario.

 

In addition, the VaR methodology should be interpreted taking into consideration the following limitations:

 

-Changes in market rates and prices may not be independent and identically distributed random variables, and may not have a normal distribution. In particular, the assumption of normal distribution may underestimate the probability of extreme market movements;

 

-The historical data used by the Bank may not provide the best estimate of the joint distribution of changes in the risk factors in the future, and any modification of the data may be inadequate. In particular, the use of historical data may fail to capture the risk of potential extreme and adverse market fluctuations, regardless of the time period used;

 

F-152 

Table of Contents

NOTE 37

RISK MANAGEMENT, continued

-A 1-day time horizon may not fully capture the market risk positions which cannot be liquidated or covered in a single day. It would not be possible to liquidate or cover all the positions in a single day;

 

-The VaR is calculated at the close of business, but trading positions may change substantially in the course of the trading day;

 

-The use of a 99% level of confidence does not take account of, or make any statement about, the losses that could occur outside of that degree of confidence; and

 

-A model such as the VaR does not capture all the complex effects of the risk factors over the value of the positions or portfolios, and accordingly, it could underestimate potential losses.

 

At no time in 20162018 and 20152017 did the Bank exceed the VaR limits in connection with the three components which comprise the trading portfolio: fixed-income investments, variable-income investments and foreign currency investments.

 

The Bank carries outback-testings on a daily basis and, generally, discovers that trading losses exceed the estimated VaR approximately one out of hundred business days. Also, a maximum VaR limit was established that can be applied over the trading portfolio. Both in 20162018 and 2015,2017, the Bank has kept within the maximum limit it established for the VaR; even when the real VaR exceeded estimations.

 

High, low and average levels for each component and year were as follows:

 

VaR

2016 

USDMM

 

2015

USDMM

2018

USDMM

 

2017

USDMM

Consolidated:  
High3.95 3.615.23 5.71
Low1.08 0.621.21 1.56
Average2.25 1.382.01 3.01
      
Fixed-income investments:      
High2.71 3.132.54 5.51
Low0.55 0.611.19 1.15
Average1.33 1.231.71 2.36
      
Variable-income investments      
High0.03 0.190.01 0.01
Low0.00 0.000.00 0.00
Average0.00 0.000.00 0.00
      
Foreign currency investments      
High3.83 3.434.29 4.21
Low0.61 0.040.09 0.53
Average1.91 0.641.14 1.71

Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 39

RISK MANAGEMENT, continued

Market risk - local and foreign financial management

 

The Bank’s financial management portfolio includes most of the Bank’s non-trading assets and liabilities, including the credit/loan portfolio. For these portfolios, investment and financing decisions are strongly influenced by the Bank’s commercial strategies.

 

The Bank uses a sensitivity analysis to measure market risk for domestic and foreign currencies (not included in the trading portfolio). The Bank carries out a simulation of scenarios that will be calculated as the difference between current flows in the chosen scenario (curve with a parallel movement of 100 basis points (“bp”) in all its sections) and its value in the base scenario (current market). All positions in domestic currency indexed to inflation (UF) are adjusted by a sensitivity factor of 0.57 which represents a change in the curve of 57bp in all real rates and 100 bp in nominal rates. The same scenario is carried out for net positions in foreign currency and interest rates in USD. In addition, the Bank has established limits regarding maximum loss this kind of movement in interest rates can have over capital and net financial income budgeted for the year.

 

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NOTE 37

RISK MANAGEMENT, continued

To establish the consolidated limit, we add the foreign currency limit to the domestic currency limit and multiple by 2 the sum of the multiplication of them together both for net financial loss limit as well as for the capital and reserves loss limit, using the following formula:

 

Consolidatedlimit = square root of a2 + b2 + 2ab

Consolidated limit = square root of a2 + b2 + 2ab

a:domestic currency limit

a: domestic currency limit

b:foreign currency limit

b: foreign currency limit 

Since we assume the correlation is 0; 2ab = 0. 2ab = 0.

Since we assume the correlation is 0; 2ab = 0 2ab = 0

 

Limitations of the sensitivity models

 

The most important assumption is using an exchange rate of 100 bp based on yield curve (57 bp for real rates). The Bank uses a 100 bp exchange since sudden changes of this magnitude are considered realistic. Santander Spain Global Risk Department has also established comparable limits by country, so as to compare, control and consolidate market risk by country in a realistic and orderly fashion.

 

In addition, the sensitivity simulation methodology should be interpreted taking into consideration the following limitations:

 

-The simulation of scenarios assumes that the volumes remain consistent in the Bank’s Consolidated Statements of Financial Position and are always renewed at maturity, thereby omitting the fact that certain credit risk and prepayment considerations may affect the maturity of certain positions.

 

-This model assumes an identical change along the entire length of the yield curve and does not take into account the different movements for different maturities.maturities,

 

-The model does not take into account the volume sensitivity which results from interest rate changes.

 

-The limits to losses of budgeted financial income are calculated based on the financial income foreseen for the year, which may not be actually earned, meaning that the real percentage of financial income at risk may be higher than the expected one.

Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 39

RISK MANAGEMENT, continued

Market risk – Financial management portfolio – December 31, 20162018 and 20152017

 

 2016 2015
Effect on financial incomeEffect on capital Effect on financial incomeEffect on capital
      
Financial management portfolio – local currency (MCh$)     
Loss limit48,000175,000 32,500150,000
High30,853146,208 29,721103,091
Low21,978108,249 13,88272,104
Average26,119120,159 22,69588,394
Financial management portfolio – foreign currency (Th$US)     
Loss limit3075 3070
High1435 915
Low613 -5
Average1026 212
Financial management portfolio – consolidated (in MCh$)     
Loss limit48,000175,000 34,500150,000
High31,764145,566 29,232102,002
Low23,088107,959 14,12970,741
Average27,390119,632 22,39087,095

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 2018 2017
Effect on financial incomeEffect on capital Effect on financial incomeEffect on capital
Financial management portfolio – local currency (MCh$)     
Loss limit48,000192,001 48,000175,000
High43,742189,725 (37,148)(141,287)
Low27,854170,450 (22,958)(112,818)
Average37,569180,972 (29,110)(128,506)
Financial management portfolio – foreign currency (Th$US)     
Loss limit3075 3075
High1238 1642
Low4(10) 415
Average922 1023
Financial management portfolio – consolidated (in MCh$)     
Loss limit48,000192,002 48,000175,000
High45,492192,848 (38,249)(142,442)
Low29,167168,766 (23,571)(112,277)
Average38,908182,557 (29,948)(128,360)

 

NOTE 37

RISK MANAGEMENT, continued

Capital risk

 

The Group defines capital risk as the risk that the Group or any of its companies may have an insufficient amount and/or quality of capital to: meet the minimum regulatory requirements in order to operate as a bank; respond to market expectations regarding its creditworthiness; and support its business growth and any strategic possibilities that might arise, in accordance with its strategic plan.

 

The objectives in this connection include most notably:

To meet the internal capital and capital adequacy targets

To meet the regulatory requirements

To align the Bank’s strategic plan with the capital expectations of external agents (rating agencies, shareholders and investors, customers, supervisors, etc.etc,)

To support the growth of the businesses and any strategic opportunities that may arise

 

The Group has a capital adequacy position that surpasses the levels required by regulations.

 

Capital management seeks to optimize value creation at the Bank an at its different business segment. The Bank continuously evaluates it risk-return ratios through its basic capital, effective net equity, economic capital and return on equity. With regard to capital adequacy, the Banks conducts its internal process based on the SBIF standards which are based on Basel Capital Accord (Basel I). Economic capital is the capital required to support all the risk of the business activity with a given solvency level.

 

Capital is managed according to the risk environment, the economic performance of Chile and the business cycle. Board may modify our current equity policies to address changes in the mentioned risk environment.

 

Minimum Capital

 

Under the General Banking Law, a bank is required to have a minimum of UF800,000 (approximately Ch$21,07821,438 million or U.S.$31.634,7 million as of December 31, 2016)2018) of paid-in capital and reserves, calculated in accordance with Chilean GAAP.


Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

NOTE 39

RISK MANAGEMENT, continued

Capital adequacy requirement

 

Chilean banks are required by the General Banking Law to maintain regulatory capital of at least 8% of risk-weighted assets, net of required loan loss allowance and deductions, and paid-in capital and reserves (“basic capital”) of at least 3% of total assets, net of required loan loss allowances.allowances, Regulatory capital and basic capital are calculated based on the consolidated financial statements prepared in accordance with the Compendium of Accounting Standards issued by the SBIF the Chilean regulatory agency. As we are the result of the merger between two predecessors with a relevant market share in the Chilean market, we are currently required to maintain a minimum regulatory capital to risk-weighted assets ratio of 11%. As of December 31, 2016,2017, the ratio of our regulatory capital to risk-weighted assets, net of loan loss allowance and deductions, was 13.4%13.91% and our core capital ratio was 10.5%10.99%.

 

Regulatory capital is defined as the aggregate of:

 

·●a bank’s paid-in capital and reserves, excluding capital attributable to subsidiaries and foreign branches or capital básico;basic capital;

 

·●its subordinated bonds, valued at their placement price (but decreasing by 20.0% for each year during the period commencing six years prior to maturity), for an amount up to 50.0% of its basic capital; and

 

·●its voluntary allowances for loan losses for an amount of up to 1.25% of risk weighted-assets.

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NOTE 37

RISK MANAGEMENT, continued

 

The levels of basic capital and effective net equity at the close of each period are as follows:

 

  Ratio  Ratio
As of December 31, As of December 31,As of December 31, As of December 31,
2016 2015 2016 20152018 2017 2018 2017
MCh$ MCh$ % %MCh$ MCh$ % %
Basic capital2,868,706 2,734,699 7.22 7.313,239,546 3,066,180 7.72 7.92
Regulatory capital3,657,707 3,538,216 13.43 13.374,101,664 3,881,252 13.40 13.91

 

Risk Concentration

 

The Bank operates mainly in Chile, thus most of its financial instruments are concentrated in that country. See Note 9 of the financial statements for a detail of the39, credit risk to see concentration of the Bank’s loans and accounts receivable by industry.industry above.


Banco Santander Chile and Subsidiaries 

Notes to the Consolidated Financial Statements

AS OF DECEMBER 31, 2018 AND 2017 AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016

 

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NOTE 3840

SUBSEQUENT EVENTS

 

On January 4, 2017,12, 2019, the law that modernizes banking legislation was published in the official gazette, a regulation that was approved by Congress on October 3, 2018. The new law adopts the highest international standards in banking regulation and supervision, strengthening international competitiveness and contributing to Chile’s financial stability.

On January 24, 2019, the Bank placed a Senior Bond placement corresponding to its "T-9"“T-14” line for an amount of 5,000,0003,000,000 UF.

 

On January 5, 2017, the Bank made an assignment of credits punished to Private Investment Funds Portfolio Thirteen. The total number of loans granted amounted to 244 credits, representing eighty-two clients, totaling $3,886,015,860 pesos, as the sum of the unpaid balance of the capital of each loan. The price of the assignment was $777,203,172 pesos, which generated an effect in result for this same amount.

At the Extraordinary Shareholders' Meeting held on January 9, 2017, the following matters were approved in relation to the modification of corporate name, reduction of directors, updating of established capital stock, deletion of transitional clauses, adoption of agreements modification Statutes, and empowerment:

i.Modify the name or corporate name of the Bank, only in the sense of eliminating the possibility of using the names Banco Santander Santiago or Santander Santiago;

ii.Decrease the number of directors from 11 to 9 members, with the two alternate directors remaining; And consequently modify other related statutory clauses; And incorporate into the Bylaws a Transitory Provision, without being an integral part thereof, in the sense that the current directors-in-office continue in their positions up to the date of the next Ordinary Shareholders' Meeting;

iii.Update the capital stock to the amount of $891,302,881,691, which includes amount of $215,394,964,605, corresponding to the revaluation of the bank's capital stock, accumulated from January 1, 2002 to December 31 of the year 2008, the latter date from which the Generally Accepted Accounting Principles, which were replaced by the new Compendium of Accounting Standards established by the Superintendency of Banks and Financial Institutions in 2009, ceased to apply to the accounting of the bank, whose principles and standards, as of that year, do not establish adjustments due to inflation; and to agree on the elimination of the Second Transitory Article of the Bylaws, which relates to the composition of capital stock, which has produced all its effects and is not necessary to be maintained in the bylaws. The number of shares in which the capital stock is divided does not suffer alteration.

iv.Suppress the First Transitory Clause of the Bylaws, which relates to the effects of the merger by absorption of the former Banco Santander with Banco Santiago, now Banco Santander - Chile;

v.Modify other aspects of the By-Laws in order to bring them into line with current legal regulations, including the deletion of "General" or "General" Articles in various Articles, as they are now simply Ordinary or Extraordinary Shareholder Meetings; Modify the statutory provision on loss, theft, theft or destruction of stock certificates; To amend Article Twenty-Four concerning the operation of the Board of Directors and to amend the final paragraph of Article Forty-sixth, concerning the quorum to adopt agreements for the non-distribution of dividends at shareholders' meetings, adapting it to article 79 of Law No. 18.0456, which Is fully applicable to banks.

vi.Considering the amendments to the previous paragraphs, an updated consolidated text of the Bank's Articles of Association was approved.

vii.Provision of powers that are necessary to comply and carry out the agreements that were adopted at that meeting.

On January 13, 2017,30, 2019, the Bank placed a Senior Bond placement corresponding to its "T-13"“T-18” line for 2,000,000 UF.

On February 1, 2019, the Bank placed a Senior Bond for an amount 30,000,000 EUR.

On February 1, 2019, the Bank placed a Senior Bond corresponding to its “T-7” line for 2,000,000 UF.

On March 03, 2019, the Bank have received a letter of resignation from Mr Andreu Plaza López from the Board of Directors of Banco Santander-Chile.

On March 7, 2019, the Bank placed a Senior Bond corresponding to its ”U-9” line for 75,000,000 CLP.

On March 12, 2019, the Bank placed a Senior Bond for an amount of 5,000,000 UF.150,000,000 CHF.

 

The Consolidated Financial Statements of Banco Santander Chile as of and for the period ended December 31, 2016, were approved by the Directors and Audit Committee on March 16, 2017.

BetweenThere are no other subsequent events to be disclosed that occurred between January 1, 20172019 and the date on whichof authorization of these Consolidated Financial Statements were issued (March 24, 2017), no other events have occurred which could significantly affect their interpretation.22, 2019). 

 

   

FELIPE CONTRERAS FAJARDO

Chief Accounting Officer

 

CLAUDIO MELANDRI HINOJOSAMIGUEL MATA HUERTA

Chief Executive Officer


 

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