ANNUAL REPORT FOR THE FISCAL YEAR ENDING DECEMBER 31, 2017
2018
As filed with the Securities and Exchange Commission on April 10, 201829, 2019
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 |
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| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2018
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
For the fiscal year ended December 31, 20172018
Commission filenumber 001-32305
Commission file number 001-32305
ITAÚ CORPBANCA
(Exact name of Registrant as specified in its charter)
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(Translation of Registrant’s name into English)
Republic of Chile
(Jurisdiction of incorporation or organization)
Rosario Norte 660
Las Condes
Santiago, Chile
(Address of principal executive offices)
Investor Relations, Telephone: +(562) 2660-2555, Facsimile: +(562) 2660-2476,
Address: Rosario Norte 660, Las Condes, Santiago, Chile
(Name, Telephone,E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class | Name of each exchange on which registered | |
American Depositary Shares representing common shares | New York Stock Exchange | |
Common shares, no par value* | New York Stock Exchange* |
* | Not for trading purposes, but only in connection with the registration of American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission. |
* Not for trading purposes, but only in connection with the registration of American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act.Act:
None
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(Title of Class) |
Securities registered for which there is a reporting obligation pursuant Section 15(d) of the Act.Act:
None
(Title of Class)
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Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
512,406,760,091 |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
x Yes o☒ No
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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.
o Yes x☐ No
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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.
x Yes o☒ No
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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 RegulationS-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).
o Yes x☐ No
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | Non-accelerated filer | Emerging growth company |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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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.
o ☐ Item 17 o☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).
o Yes x☐ No
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(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐
o Yes o No
INTRODUCTION
About This Report
We file our annual report on Form20-F and other information with the U.S. Securities and Exchange Commission.
We file reports, including annual reports on Form20-F, and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. The materials included in this Annual Report onForm 20-F may be downloaded at the SEC’s website: http://www.sec.gov. Any filings we make are also available to the public over the Internet at the SEC’s website at www.sec.gov and at our website at https://ir.itau.cl. (This URL is intended to be an inactive textual reference only. It is not intended to be an active hyperlink to our website. The information on our website, which might be accessible through a hyperlink resulting from this URL, is not and shall not be deemed to be incorporated into this Annual Report.)
The terms “Itaú Corpbanca,” “Itaú,” “the Bank,” “we,” “us” and “our” in this Annual Report refer to Itaú Corpbanca together with its subsidiaries unless otherwise specified.
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CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report onForm 20-F contains statements that constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements preceded by, followed by or that include “believes,” “expects,” “intends,” “plans,” “projects,” “estimates” or “anticipates” and similar expressions. These statements appear throughout this Annual Report, including, without limitation, under “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects,” are not based on historical facts but instead represent only our belief regarding future events, many of which, by their nature, are inherently uncertain and outside our control and include statements regarding our current intent, belief or expectations with respect to (1) our asset growth and financing plans, (2) trends affecting our financial condition or results of operations, (3) the impact of competition and regulations, (4) projected capital expenditures, and (5) liquidity. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those described in such forward-looking statements included in this Annual Report as a result of various factors (including, without limitation, the actions of competitors, future global economic conditions, market conditions, currency exchange rates and operating and financial risks), many of which are beyond our control. The occurrence of any such factors, not currently expected by us, would significantly alter the results set forth in these statements.
Factors that could cause actual results to differ materially and adversely include, but are not limited to:
·trends affecting our financial condition or results of operations;
·our dividend policy;
·changes in the participation of our shareholders or any other factor that may result in a change of control;
·the amount of our indebtedness;
·natural disasters;
·cyber-attacks, terrorism and other criminal activities;
·changes in general economic, business, regulatory, political or other conditions in the Republic of Chile, or Chile, or the Republic of Colombia, or Colombia, or changes in general economic or business conditions in Latin America or the global economy;
·changes in capital markets in general that may affect policies or attitudes towards lending to Chile or Colombia, Chilean or Colombian companies or securities issued by Chilean companies;
·the monetary and interest rate policies of the Central Bank of Chile (Banco Central de Chile), or the Central Bank of Colombia (Banco de la República de Colombia);
·inflation or deflation;
·unemployment;
·our counterparties’ failure to meet contractual obligations;
·unanticipated increases in financing and other costs or the inability to obtain additional debt or equity financing on attractive terms;
·unanticipated turbulence in interest rates;
·movements in currency exchange rates;
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movements in equity prices or other rates or prices;
·changes in Chilean, Colombian and foreign laws and regulations;
·changes in Chilean or Colombian tax rates or tax regimes;
·competition, changes in competition and pricing environments;
·concentration of financial exposure;
·our inability to hedge certain risks economically;
·the adequacy of our loss allowances, provisions or reserves;
·technological changes;
·changes in consumer spending and saving habits;
·successful implementation of new technologies;
·loss of market share;
·changes in, or failure to comply with, applicable banking, insurance, securities or other regulations;
·changes in accounting standards;
·difficulties in successfully integrating recent and future acquisitions into our operations;
·our ability to successfully complete the implementation of a new information technology core banking system in Colombia, as part of the integration process in Colombia;
·consequences of the mergerMerger of Banco Itaú Chile with and into Corpbanca on April 1, 2016 (the “Merger”) and the acquisition of the assets and liabilities of Itaú BBA Colombia S.A., Corporación Financiera (“Itaú BBA Colombia”) by us (the “Itaú Colombia Acquisition”);
·our ability to achieve revenue benefits and cost savings from the integration between former Corpbanca’s and former Banco Itaú Chile’s businesses and assets;
·our ability to address and forecast economic and social trends affecting our business, and to effectively implement the appropriate strategies; and
·the other factors identified or discussed under “Item 3. Key Information—D. Risk Factors” in this Annual Report.
You should not place undue reliance on such statements, which speak only as of the date that they were made. These cautionary statements should be considered in connection with any written or oral forward-looking statements that we may make in the future. We do not undertake any obligation to release publicly any revisions to such forward-looking statements after the date of this Annual Report to reflect later events or circumstances or to reflect the occurrence of unanticipated events.
Neither Itaú Corpbanca’s independent auditors, nor any other independent accountants, have complied with, examined, or performed any procedures with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, or disclaim any association with, the prospective financial information.
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ENFORCEMENT OF CIVIL LIABILITIES
We are a banking corporation organized under the laws of Chile. The majority of our directors or executive officers are not residents of the United States and a substantial portion of our assets and the assets of these persons are located outside the United States. As a result, it may not be possible for you to effect service of process within the United States upon us or such persons or to enforce against them or us in the United States or other foreign courts, judgments obtained in the United States predicated upon the civil liability provisions of the federal securities laws of the United States.
No treaty exists between the United States and Chile for the reciprocal enforcement of court judgments. Chilean courts, however, have enforced final judgments rendered in the United States, subject to the review in Chile of the United States judgment in order to ascertain whether certain basic principles of due process and public policy have been respected, without reviewing the merits of the subject matter of the case. If a United States court grants a final judgment in an action based on the civil liability provisions of the federal securities laws of the United States, enforceability of this 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 in force at that time, and consequently, subject to the satisfaction of certain factors. Currently, the most important of these factors are the absence of any conflict between the foreign judgment and Chilean laws (excluding for this purpose the laws of civil procedure) and public policies;
the absence of a conflicting judgment by a Chilean court relating to the same parties and arising from the same facts and circumstances; the absence of any further means for appeal or review of the judgment in the jurisdiction where judgment was rendered; the Chilean courts’ determination that the United States courts had jurisdiction; that service of process was appropriately served on the defendant and that the defendant was afforded a real opportunity to appear before the court and defend its case; and that enforcement would not violate Chilean public policy.
In general, the enforceability in Chile of final judgments of United States courts does not require retrial in Chile.
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS | 1 | ||||
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT FINANCIAL RISK |
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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
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ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
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ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
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ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
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PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
We are a Chilean bank and maintain our financial books and records in Chilean pesos and prepare our consolidated financial statements presented herewith in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB. As required by local regulations, our consolidated financial statements filed with the Chilean Superintendency of Banks and Financial Institutions (Superintendencia de Bancos e Instituciones Financieras), also referred to as the SBIF, and that are the basis for dividend distributions, have been prepared in accordance with Chilean accounting principles or Chilean Banking GAAP, issued by the SBIF. SBIF regulations provide that for those matters not specifically regulated by this agency, our financial statements prepared under Chilean Banking GAAP should follow the accounting principles established by IFRS. Unless otherwise indicated herein, as used hereafter IFRS refers to the standards issued by the IASB. Therefore, our consolidated financial statements filed herewith differ from the financial statements prepared in accordance with Chilean Banking GAAP. We have included herein certain information in Chilean Banking GAAP with respect to the Chilean financial system and the financial performance of the bank.Bank. These disclosures are not considerednon-GAAP measures as they are required for regulatory purposes in Chile.
The selected consolidated financial information included herein as of December 31, 20162017 and 20172018 and for the years ended December 31, 2015, 2016, 2017 and 2017,2018 is derived from, and presented on the same basis as, our consolidated financial statements prepared under IFRS and should be read together with such consolidated financial statements.
Our financial statement data as of and for the years ended December 31, 2015 and 2016 are not comparable to the data as of and for the yearyears ended December 31, 2017 and 2018 because of the Merger, which was consummated on April 1, 2016. The Merger has been accounted for as a reverse acquisition, based on guidance in IFRS 3 “Business Combinations,” with Banco Itaú Chile (the legal acquiree) considered as the accounting acquirer and Corpbanca (the legal acquirer) considered as the accounting acquiree. Accordingly, the financial statements of Itaú Corpbanca for periods prior to the acquisition date of April 1, 2016 reflect the historical financial information of Banco Itaú Chile. Before the Merger, former Banco Itaú Chile (the legal acquiree) only produced financial statements pursuant to Chilean Banking GAAP, while former Corpbanca (the legal acquirer) from 2009 to 2015 issued financial statements according to Chilean Banking GAAP and according to IFRS.
Readers should exercise caution in determining trends based on prior annual reports. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—The Economy—Critical Accounting Policies and Estimates.”
Our auditors, PricewaterhouseCoopers Consultores Auditores SpA, or PwC, an independent registered public accounting firm, have audited our consolidated financial statements included in accordancethis Annual Report.
We have adopted IFRS 9 as issued by the IASB in July 2014 with a date of transition of January 1, 2018, which resulted in changes to our accounting policies. As per the permitted transitional provisions of IFRS as9, we elected not to revise comparative figures; accordingly, some IFRS 9 disclosures presented in our consolidated financial statements and this Annual Report with respect to certain financial assets are not comparable since their classification and measurement may differ between IFRS 9 and the prior standard of December 31, 2016IAS 39. Please see Note 1 (k) and 2017(u) and Note 2 “Accounting Changes” to our consolidated financial statements included in this Annual Report for a description of the years ended December 31, 2015, 2016 and 2017. See pages F-1 and F-2 of this report for further details on PwC’s opinions.new accounting policies.
Foreign Currency Markets
In this Annual Report, references to “$,” “US$,” “U.S. dollars” and “dollars” are to United States dollars, references to “Chilean pesos,” “Ch$” or “CLP” are to Chilean pesos, references to “UF” are toUnidades de Fomento and references to “Colombian pesos” or “COP$” are to Colombian pesos. The UF is an inflation-indexed, Chilean peso-denominated unit that is linked to and adjusted daily to reflect changes in the previous month’s Chilean Consumer Price Index (CPI) of the Chilean National Statistics Institute (Instituto Nacional de Estadísticas). As of December 31, 2017, one UF equaled US$43.61, Ch$26,798.14 and COP$130,213.11 and as of April 2, 2018, one UF equaled US$44.54,39.68, Ch$26,966.8927,565.79 and COP$124,578.69.128,896.15 and as of March 31, 2019, one UF equaled US$40.51, Ch$27,565.76 and COP$128,816.98. See “Item 5. Operating and Financial Review and Prospects.”
This Annual Report contains translations of certain Chilean peso amounts into U.S. dollars and Colombian pesos at specified rates solely for the convenience of the reader. These translations should not be construed as representations that such Chilean peso amounts actually represent such U.S. dollar or Colombian pesos amounts, were converted from U.S. dollars or Colombian pesos amounts at the rate indicated in preparing our consolidated financial statements or could be converted into U.S. dollars or Colombian pesos amounts at the rate indicated or any particular rate at all. Unless otherwise indicated, such U.S. dollar and Colombian pesos amounts have been translated from Chilean pesos based on our own exchange rate of Ch$614.48694.73 and COP$2,985.78,Ch$0.2139, respectively, per US$1.00 or COP$1.00, as the case may be, as of December 31, 2017.2018.
Specific Loan Information
Unless otherwise specified, all references in this Annual Report to total loans are to loans and financial leases before deduction for allowances for loan losses, and they do not include loans to banks or unfunded loan commitments. In addition, all market share data and financial indicators for the Chilean banking system when compared to Itaú Corpbanca’s financial information, presented in this Annual Report or incorporated by reference into this Annual Report are based on information published periodically by the SBIF, which is published under Chilean Banking GAAP and prepared on a consolidated basis.Non-performing loans include the principal and accrued interest on any loan with at least one installment more than 90 days overdue. Impaired loans include those loans on which there is objective evidence that customers will not meet some of their contractual payment obligations. At the end of each reporting period the Bank evaluates the impairment of the loan portfolio. For December 31, 2018 this has been assessed in accordance with IFRS 9 and for prior periods in accordance with IAS 39. Past due loans include all installments and lines of credit more than 90 days overdue, provided that the aggregate principal amount of such loans is not included. 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 a loan is calculated as the difference between the carrying amount of the loan and the present value of estimated future cash flows discounted at the effective interest rate. Individually significant loans are individually tested for impairment. The remaining financial loans are evaluated collectively in groups with similar credit risk 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 4. Information on the Company—Business Overview—Selected Statistical Information—Classification of Banks and Loan Portfolios; Allowances for Loan Losses.”
According toUnless an exception applies, under Decree with Force of Law No. 3 of 1997, as amended (including, without limitation, by Law No. 21,130), also called theLey General de Bancosor the Chilean General Banking Act, (1) a bank must have an effective net equity (patrimonio efectivoPatrimonio Efectivo) of at least 8% of its risk weighted assets, net of required allowance for loan losses, as calculated in accordance with Chilean Banking GAAP; and paid in(2) thepaid-in capital and reserves, or basic capital (capital básico), shall not be lower than (y) 4.5% of at leastits risk weighted assets and (z) 3% of its total assets, in both cases, net of required allowance for loan losses.
Note, however, that in any of the following events a higher effective net equity and/or a higher basic capital may be required:
(1) | If at the moment in which the incorporation deed of a bank is granted (or at the moment in which the authorization of existence of a branch of a foreign bank is granted), at least 50% of the minimumpaid-in capital and reserves, or basic capital (capital básico) (i.e., UF800,000 (Ch$22,052.6 million or US$31.7 million as of December 31, 2018)) has not been paid, the respective bank shall have an additional basic capital equal to 2% of its risk weighted assets, net of required allowances, above the general minimum basic capital of 4.5%plus any additional basic capital that may be applicable pursuant to number (2) below. The additional 2% requirement will be reduced to 1% once the bank’s paid basic capital reaches UF 600,000 (Ch$16,539.5 million or US$23.8 million as of December 31, 2018). |
(2) | Once the Chilean Commission for the Financial Market (Comisión para el Mercado Financiero or the “CMF”) replaces the SBIF (which is expected to occur on June 1, 2019), the following should occur: |
a. | Within 18 months from the date in which such replacement occurs, the CMF shall issue a regulation (with the affirmative consent of the Council of the Chilean Central Bank) setting forth (i) the standardized methodology for risk weighting the assets of a bank, and (ii) in the event of banks authorized to use their own methodologies, the requirements to use and implement them. Once such regulation becomes effective, a bank will be required to have an additional basic capital equal to 2.5% of its risk weighted assets, net of required allowances, above the minimum requirements. This additional requirement will come into effect progressively during a4-year term at a ratio of 0.625% per year, starting on the date in which the CMF issues the aforementioned regulation; |
b. | Within 18 months from the date in which such replacement occurs, the CMF shall issue a regulation setting forth the conditions that may trigger the imposition by the Chilean Central Bank of an additional basic capital requirement of up to 2.5% of a bank’s risk weighted assets, net of required allowances, above the minimum requirements. This additional requirement may be imposed by the Chilean Central Bank on a general basis applicable to all banking institutions, as a contra-cyclical measure; |
c. | Within 18 months from the date in which such replacement occurs, the CMF shall issue a regulation (with the affirmative consent of the Council of the Chilean Central Bank), which shall set forth the criteria for considering a bank or group of banks of systemic importance. Further, with the affirmative vote of the Chilean Central Bank, the CMF may determine, through a grounded resolution, that a bank is of systemic importance. In such event, the CMF will be entitled to impose, among others, one or more of the following conditions: (y) an increase between 1% and 3.5% to the basic capital over risk weighted assets, net of required allowances, above the aforementioned 8% minimum effective net equity (Patrimonio Efectivo) requirement and (z) an increase of up to 2% to the basic capital over total assets, net of required allowances, above the aforementioned 3% minimum basic capital requirement. The conditions imposed on a bank qualified of systemic importance may be terminated in the event the Council of the CMF determines that a bank no longer has systemic importance; and |
d. | If after a review process, to the judgment of the CMF, a bank presents risks not properly protected with the equity requirements mentioned above, the CMF may impose additional equity requirements. Such additional equity requirements may consist in an additional basic capital, or one or more of the instruments listed in numbers (ii), (iii) and (iv) of the following paragraph. In any event, the additional equity requirements shall not exceed 4% of its risk weighted assets, net of required allowances. For these purposes, the CMF shall issue a regulation which shall set forth the criteria applicable in these cases. |
For these purposes, the effective net equity of a bank is the sum of (1)(i) the bank’s basic capital, (2)(ii) bonds issued without a maturity date and preferred stock issued once the CMF issues a regulation authorizing their issuance. These instruments shall be valued at their issue price, for an amount up to one third of its basic capital, (iii) subordinated bonds issued by the bank valued at their issue price for an amount of up to 50% of its basic capital (provided that the value of the bonds shall decrease by 20% for each year that elapses during the period commencing six years prior to their maturity), (3)(iv) its voluntary allowances for loan losses, for an amount of up to 1.25% of its risk weighted assets to the extent voluntary allowances exceed those that banks are required to maintain by law or regulation. Note that the CMF shall issue a regulation (4)setting forth (i) the standardized methodology for risk weighting the assets of a bank, and (ii) in the event of banks authorized to use their own methodologies, the requirements to use and implement them. Once such regulations are issued, voluntary allowances shall be considered up to the following amounts (y) up to 1.25% of its credit risk weighted assets, if standard methodologies are applied, or (z) 0.625% in the eventnon-standard methodologies are applied, (v) minority interests of up to 20% of the basic capital (provided that if such minority interests exceed 20%, only 20% will be taken into account), minus (5)(vi) goodwill or premiums, paid balances and investments in companies that are not consolidated and (6)(vii) certain deductions to be made in accordance with provisions of chapter12-1 of the regulations of the SBIF (Recopilación Actualizada de Normas), or the Regulations of the SBIF.
Rounding and Other Matters
Certain figures included in this Annual Report and in our consolidated financial statements as of and for the years ended December 31, 2015, 2016, 2017 and 20172018 have been rounded for ease of presentation. Percentage figures included in this Annual Report have in all cases not been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this Annual Report may vary slightly from those obtained by performing the same calculations using the figures in our consolidated financial statements as of and for the years ended December 31, 2015, 2016, 2017 and 2017.2018. Certain other amounts that appear in this Annual Report may similarly not sum due to rounding.
Inflation figures relating to Chile are those reported by the Chilean National Statistics Institute (Instituto Nacional de Estadísticas) or INE, unless otherwise stated herein or required by the context. Inflation figures relating to Colombia are those reported by the Colombian National Administrative Department of Statistics (Departamento Administrativo Nacional de Estadística) or DANE, unless otherwise stated herein or required by the context. See “—“Item 3. Key Information—Presentation of Financial and Other Information—Exchange Rate Information” below.
In this Annual Report, all macroeconomic data related to the Chilean economy is based on information published by the Central Bank of Chile and all macroeconomic data related to the Colombian economy is based on information published by the Central Bank of Colombia.Colombia or DANE. All market share and other data related to the Chilean financial system is based on information published by the SBIF as well as other publicly available information and all market share and other data related to the Colombian financial system is based on information published by the Colombian Superintendency of Finance (Superintendencia Financiera de Colombia) as well as other publicly available information. The SBIF publishes the consolidated risk index (ratio of allowance for loans losses over total loans) of the Chilean financial system on a monthly basis. The Colombian Superintendency of Finance publishes every month the consolidated data required to calculate the risk index of the Colombian banking system (loan loss allowances and total loans).
EXCHANGE RATE INFORMATION
Exchange Rates
Chile has two currency markets, the Formal Exchange Market (Mercado Cambiario Formal) and the Informal Exchange Market (Mercado Cambiario Informal). The Formal Exchange Market is comprised of banks and other entities authorized by the Central Bank of Chile. 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 of Chile is empowered to require that certain purchases and sales of foreign currencies be carried out on the Formal Exchange Market. Both the Formal and Informal Exchange Markets are driven by free market forces. Current regulations require that the Central Bank of Chile be informed of certain transactions and that they be effected through the Formal Exchange Market.
The U.S. dollar observed exchange rate (dólar observado), or the Observed Exchange Rate, which is reported by the Central Bank of Chile and published daily in the Official Gazette (Diario Oficial) is the weighted average exchange rate of the previous business day’s transactions in the Formal Exchange Market. Nevertheless, the Central Bank of Chile may 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 of Chile is authorized to carry out its transactions at the Observed Exchange Rate, it often uses spot rates instead. Many other banks carry out foreign exchange transactions at spot rates as well.
The Informal Exchange Market reflects transactions carried out at an informal exchange rate. 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.
The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos.
As of December 31, 2017,2018, the Bank’s U.S. dollar exchange rate used by us was Ch$614.48694.73 per US$1.00 and the Bank’s Colombian peso exchange rate used by us was Ch$2,985.780.2139 per COP$1.00.
The following table sets forth the annual low, high, average and period-end Observed Exchange Rate for U.S. dollars for the periods set forth below, as reported by the Central Bank of Chile.
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| Daily Observed Exchange Rate (Ch$ per US$)(1) |
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| Low (2) |
| High (2) |
| Average (3) |
| Period-End (4) |
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
2013 |
| 466.50 |
| 533.95 |
| 495.00 |
| 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 |
|
2017 |
| 615.22 |
| 679.05 |
| 649.33 |
| 615.22 |
|
|
|
|
|
|
|
|
|
|
|
Quarterly period |
|
|
|
|
|
|
|
|
|
2016 1st Quarter |
| 671.97 |
| 730.31 |
| 702.07 |
| 675.10 |
|
2016 2nd Quarter |
| 657.90 |
| 696.96 |
| 677.69 |
| 661.49 |
|
2016 3rd Quarter |
| 645.22 |
| 680.28 |
| 661.65 |
| 659.08 |
|
2016 4th Quarter |
| 649.40 |
| 679.24 |
| 665.80 |
| 667.29 |
|
2017 1st Quarter |
| 638.35 |
| 673.36 |
| 655.58 |
| 662.66 |
|
2017 2nd Quarter |
| 647.47 |
| 679.05 |
| 664.68 |
| 663.21 |
|
2017 3rd Quarter |
| 615.58 |
| 666.61 |
| 643.23 |
| 636.85 |
|
2017 4th Quarter |
| 615.22 |
| 655.74 |
| 633.36 |
| 615.22 |
|
2018 1st Quarter |
| 588.28 |
| 614.75 |
| 602.08 |
| 605.26 |
|
|
|
|
|
|
|
|
|
|
|
Month ended |
|
|
|
|
|
|
|
|
|
September 2017 |
| 615.58 |
| 638.28 |
| 625.54 |
| 636.85 |
|
October 2017 |
| 619.68 |
| 640.52 |
| 629.55 |
| 636.49 |
|
November 2017 |
| 629.21 |
| 642.41 |
| 633.77 |
| 642.41 |
|
December 2017 |
| 615.22 |
| 655.74 |
| 636.92 |
| 615.22 |
|
January 2018 |
| 599.33 |
| 614.75 |
| 605.53 |
| 604.42 |
|
February 2018 |
| 588.28 |
| 603.25 |
| 596.84 |
| 589.15 |
|
March 2018 |
| 593.61 |
| 609.58 |
| 603.45 |
| 605.26 |
|
April 2018(5) |
| 603.39 |
| 603.39 |
| 603.39 |
| 603.39 |
|
(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 the exchange rates on the last day of each month during the period.
(4) Each annual period ends on December 31, and the respective period-end exchange rate is published by the Central Bank of Chile on the first business day following December 31. Each monthly period ends on the last calendar day of such month and the respective period-end exchange rate is published by the Central Bank of Chile on the first business day following the last calendar day of such month.
(5) The information for April 2018 is as of April 2, 2018.
The following table sets forth the annual low, high, average and period-end exchange rate for U.S. dollars for the periods set forth below under our policy to calculate our own exchange rate:
|
| Bank’s Exchange Rate Ch$ per US$1 |
| ||||||
|
| Low (2) |
| High (2) |
| Average (3) |
| Period-End |
|
Year Ended December 31, |
|
|
|
|
|
|
|
|
|
2013 |
| 466.48 |
| 533.95 |
| 495.31 |
| 526.41 |
|
2014 |
| 605.46 |
| 621.56 |
| 612.85 |
| 605.46 |
|
2015 |
| 593.49 |
| 714.82 |
| 654.55 |
| 710.32 |
|
2016 |
| 643.04 |
| 731.70 |
| 677.15 |
| 669.81 |
|
2017 |
| 614.48 |
| 678.23 |
| 649.12 |
| 614.48 |
|
|
|
|
|
|
|
|
|
|
|
Quarterly period |
|
|
|
|
|
|
|
|
|
2016 1st Quarter |
| 667.08 |
| 731.70 |
| 701.17 |
| 667.08 |
|
2016 2nd Quarter |
| 658.95 |
| 695.94 |
| 677.29 |
| 659.55 |
|
2016 3rd Quarter |
| 643.04 |
| 692.91 |
| 662.75 |
| 658.20 |
|
2016 4th Quarter |
| 648.87 |
| 680.20 |
| 666.36 |
| 669.81 |
|
2017 1st Quarter |
| 637.03 |
| 673.91 |
| 655.53 |
| 662.26 |
|
2017 2nd Quarter |
| 645.88 |
| 678.23 |
| 664.68 |
| 663.97 |
|
2017 3rd Quarter |
| 615.78 |
| 667.07 |
| 642.65 |
| 639.14 |
|
2017 4th Quarter |
| 614.48 |
| 655.24 |
| 633.14 |
| 614.48 |
|
2018 1st Quarter |
| 587.93 |
| 610.47 |
| 601.93 |
| 604.18 |
|
|
|
|
|
|
|
|
|
|
|
Month ended |
|
|
|
|
|
|
|
|
|
September 2017 |
| 615.78 |
| 639.14 |
| 626.07 |
| 639.14 |
|
October 2017 |
| 619.19 |
| 639.49 |
| 629.68 |
| 636.19 |
|
November 2017 |
| 627.64 |
| 647.50 |
| 634.61 |
| 647.50 |
|
December 2017 |
| 614.48 |
| 655.24 |
| 635.16 |
| 614.48 |
|
January 2018 |
| 598.10 |
| 610.47 |
| 605.12 |
| 601.18 |
|
February 2018 |
| 587.93 |
| 603.30 |
| 596.22 |
| 594.62 |
|
March 2018 |
| 595.74 |
| 610.19 |
| 604.03 |
| 604.18 |
|
April 2018(4) |
| 605.52 |
| 605.52 |
| 605.52 |
| 605.52 |
|
(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 the exchange rates on the last day of each month during the period.
(4) The information for April 2018 is as of April 2, 2018.
Exchange Controls Considerations
Investments made in our common shares and our American Depositary Shares, or ADSs, are subject to the following requirements:
·any foreign investor acquiring common shares to be deposited into an ADS facility who brought funds into Chile for that purpose must bring those funds through an entity participating in the Formal Exchange Market;
·the entity participating in the Formal Exchange Market through which the funds are brought into Chile must report such investment to the Central Bank of Chile;
·all remittances of funds from Chile to the foreign investor upon the sale of common shares underlying ADSs, or from dividends or other distributions made in connection therewith must be made through the Formal Exchange Market; and
·
all remittances of funds made to the foreign investor must be reported to the Central Bank of Chile.
When funds are brought into Chile for a purpose other than to acquire common shares to convert them into ADSs and subsequently are used to acquire common shares to be deposited into the ADS facility, such investment must be reported to the Central Bank of Chile by the custodian within ten days following the end of each month within which the custodian is obligated to deliver periodic reports to the Central Bank of Chile.
All payments made within Chile in foreign currency in connection with ADSs through the Formal Exchange Market must be reported to the Central Bank of Chile by the entity participating in the transaction. In the event there are payments made outside of Chile, the foreign investor must provide the relevant information to the Central Bank of Chile directly or through an entity of the Formal Exchange Market within the first ten calendar days of the month following the date on which the payment was made.
We cannot assure you that additional Chilean restrictions applicable to the holders of the ADSs, the disposition of shares underlying ADSs or the conversion or repatriation of the proceeds from such disposition will not be imposed in the future, nor can we assess the duration or impact of such restriction if imposed.
This summary does not purport to be complete and is qualified by reference to Chapter XIV of the Central Bank Foreign Exchange Regulations, a copy of which is available in the original Spanish version at the Central Bank of Chile’s website at www.bcentral.cl.
A. SELECTED FINANCIAL DATA
The following tables present our selected financial data as of the dates and for the periods indicated. You should read the following information together with our consolidated financial statements, including the notes thereto, included in this Annual Report and the information set forth in “Item 5. Operating and Financial Review and Prospects.”
Interest income Interest expense Net interest income Net service fee income Trading and investment, foreign exchange gains and other operating income Operating income before provision for loan losses Provisions for loan losses Total operating income, net of provision for loan losses, interest and fees Total operating expenses Total net operating income before income taxes Income attributable to investment in other companies Income before income taxes Income taxes Income from continuing operations Income from discontinued operations Net income for the year For the fiscal years ended December 31, 2015 2016 2017 2018 2018(1) Ch$ Ch$ Ch$ Ch$ US$ (in millions of Ch$ and thousands of US$, except for
number of shares and per share data)(2) 501,982 1,509,203 1,646,329 1,739,317 2,503,587 (278,692 ) (870,028 ) (863,347 ) (851,654 ) (1,225,878 ) 223,290 639,175 782,982 887,663 1,277,709 71,088 150,796 177,571 186,129 267,916 50,040 83,551 95,965 181,446 261,175 344,418 873,522 1,056,518 1,255,238 1,806,800 (42,929 ) (245,990 ) (315,417 ) (279,798 ) (402,744 ) 301,489 627,532 741,101 975,440 1,404,056 (178,460 ) (616,627 ) (731,147 ) (741,527 ) (1,067,360 ) 123,029 10,905 9,954 233,913 336,696 — — — — — 123,029 10,905 9,954 233,913 336,696 (17,263 ) 3,568 52,871 (67,059 ) (96,525 ) 105,766 14,473 62,825 166,854 240,171 — (504 ) — — — 105,766 13,969 62,825 166,854 240,171
|
| For the fiscal years ended December 31, |
| ||||||
|
| 2015 |
| 2016 |
| 2017 |
| 2017(1) |
|
|
| Ch$ |
| Ch$ |
| Ch$ |
| US$ |
|
|
| (in millions of Ch$ and thousands of US$, except for |
| ||||||
|
|
|
|
|
|
|
|
|
|
Interest income |
| 501,982 |
| 1,509,203 |
| 1,646,329 |
| 2,679,223 |
|
Interest expense |
| (278,692 | ) | (870,028 | ) | (863,347 | ) | (1,405,004 | ) |
|
|
|
|
|
|
|
|
|
|
Net interest income |
| 223,290 |
| 639,175 |
| 782,982 |
| 1,274,219 |
|
|
|
|
|
|
|
|
|
|
|
Net service fee income |
| 71,088 |
| 150,796 |
| 177,571 |
| 288,978 |
|
Trading and investment, foreign exchange gains and other operating income |
| 50,040 |
| 83,551 |
| 95,965 |
| 156,173 |
|
|
|
|
|
|
|
|
|
|
|
Operating income before provision for loan losses |
| 344,418 |
| 873,522 |
| 1,056,518 |
| 1,719,369 |
|
|
|
|
|
|
|
|
|
|
|
Provisions for loan losses |
| (42,929 | ) | (245,990 | ) | (315,417 | ) | (513,307 | ) |
|
|
|
|
|
|
|
|
|
|
Total operating income, net of provision for loan losses, interest and fees |
| 301,489 |
| 627,532 |
| 741,101 |
| 1,206,062 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
| (178,460 | ) | (616,627 | ) | (731,147 | ) | (1,189,863 | ) |
|
|
|
|
|
|
|
|
|
|
Total net operating income before income taxes |
| 123,029 |
| 10,905 |
| 9,954 |
| 16,199 |
|
|
|
|
|
|
|
|
|
|
|
Income attributable to investment in other companies |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
| 123,029 |
| 10,905 |
| 9,954 |
| 16,199 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
| (17,263 | ) | 3,568 |
| 52,871 |
| 86,042 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
| 105,766 |
| 14,473 |
| 62,825 |
| 102,241 |
|
Income from discontinued operations |
| — |
| (504 | ) | — |
| — |
|
|
|
|
|
|
|
|
|
|
|
Net income for the year |
| 105,766 |
| 13,969 |
| 62,825 |
| 102,241 |
|
|
| For the fiscal years ended December 31, |
| ||||||
|
| 2015 |
| 2016 |
| 2017 |
| 2017(1) |
|
|
| Ch$ |
| Ch$ |
| Ch$ |
| US$ |
|
|
| (in millions of Ch$ and thousands of US$, except for |
| ||||||
|
|
|
|
|
|
|
|
|
|
Equity holders of the bank |
| 105,757 |
| 14,407 |
| 67,821 |
| 110,371 |
|
Non-controlling interest |
| 9 |
| (438 | ) | (4,996 | ) | (8,130 | ) |
|
|
|
|
|
|
|
|
|
|
Net income per common share (3) |
| 0.919 |
| 0.035 |
| 0.132 |
| 0.00022 |
|
Dividend per common share (4) |
| 18,448 |
| 36,387 |
| 0.00121 |
| 0.000002 |
|
Gross dividends per ADS (4) |
| n.a. |
| n.a. |
| 1.80814 |
| 0.00294 |
|
Shares of common stock outstanding |
| 115,039,690,651 |
| 512,406,760,091 |
| 512,406,760,091 |
|
|
|
For the fiscal years ended December 31, | ||||||||||||||||||||
2015 | 2016 | 2017 | 2018 | 2018(1) | ||||||||||||||||
Ch$ | Ch$ | Ch$ | Ch$ | US$ | ||||||||||||||||
(in millions of Ch$ and thousands of US$, except for number of shares and per share data)(2) | ||||||||||||||||||||
Equity holders of the Bank | 105,757 | 14,407 | 67,821 | 171,331 | 246,615 | |||||||||||||||
Non-controlling interest | 9 | (438 | ) | (4,996 | ) | (4,477 | ) | (6,444 | ) | |||||||||||
Net income per common share(3) | 0.919 | 0.035 | 0.132 | 0.334 | 0.00048 | |||||||||||||||
Dividend per common share(4) | 18,448 | 36,387 | 0.00121 | 0.045 | 0.000065 | |||||||||||||||
Gross dividends per ADS(4) | n.a. | n.a. | 1.80814 | 67.267 | 0.09682 | |||||||||||||||
Shares of common stock outstanding | 115,039,690,651 | 512,406,760,091 | 512,406,760,091 | 512,406,760,091 |
(1) Amounts stated in U.S. dollars as of December 31, 2017 and for the year ended December 31, 2017 have been translated from Chilean pesos at our exchange rate of Ch$614.48 per US$1.00 as of December 31, 2017.
(1) | Amounts stated in U.S. dollars as of December 31, 2018 and for the year ended December 31, 2018 have been translated from Chilean pesos at our exchange rate of Ch$694.73 per US$1.00 as of December 31, 2018. |
(2) | Amounts stated in millions of Chilean pesos and thousands of U.S. dollars except for net income per share, dividends per common share and dividend per ADS expressed in Chilean pesos and in U.S. dollars. |
(3) | Net income per common share has been calculated on the basis of net income attributable to the equity holders of the Bank divided by the weighted average number of shares outstanding for the period. For further information on basic earnings and diluted earnings please see Notes 1(ee) and 22(d) to our consolidated financial statements. |
(4) | Represents dividends or net dividends paid to common shareholders or to ADS holders in respect of net income earned in the prior fiscal year. |
(2) Amounts stated in millions of Chilean pesos and thousands of U.S. dollars except for net income per share, dividends per common share and dividend per ADS expressed in Chilean pesos and in U.S. dollars.
(3) Net income per common share has been calculated on the basis of net income attributable to the equity holders of the bank divided by the weighted average number of shares outstanding for the period. For further information on basic earnings and diluted earnings please see Notes 1(ee) and 22(d) to our consolidated financial statements.
(4) Represents dividends or net dividends paid to common shareholders or to ADS holders in respect of net income earned in the prior fiscal year.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
|
| As of December 31, |
| As of December 31, | |||||||||||||||||||||||||
|
| 2015 |
| 2016 |
| 2017 |
| 2017(1) |
| 2015 | 2016 | 2017 | 2018 | 2018(1) | |||||||||||||||
|
| Ch$ |
| Ch$ |
| Ch$ |
| US$ |
| Ch$ | Ch$ | Ch$ | Ch$ | US$ | |||||||||||||||
|
| (in millions of Ch$ and thousands of US$) |
| (in millions of Ch$ and thousands of US$) | |||||||||||||||||||||||||
Cash and deposits in banks |
| 477,809 |
| 1,487,137 |
| 964,030 |
| 1,568,855 |
| 477,809 | 1,487,137 | 964,030 | 987,680 | 1,421,675 | |||||||||||||||
Cash in the process of collection |
| 62,095 |
| 145,769 |
| 157,017 |
| 255,528 |
| 62,095 | 145,769 | 157,017 | 318,658 | 458,679 | |||||||||||||||
Financial instruments at fair value through profit or loss | — | — | — | 96,943 | 139,541 | ||||||||||||||||||||||||
Financial instruments at fair value through other comprehensive income | — | — | — | 2,657,154 | 3,824,729 | ||||||||||||||||||||||||
Interbank loans at amortized cost | — | — | — | 341,244 | 491,189 | ||||||||||||||||||||||||
Loans and accounts receivable from customers at amortized cost | — | — | — | 20,714,370 | 29,816,432 | ||||||||||||||||||||||||
Financial instruments at amortized cost | — | — | 198,923 | 286,331 | |||||||||||||||||||||||||
Trading portfolio financial assets |
| 17,765 |
| 632,557 |
| 415,061 |
| 675,467 |
| 17,765 | 632,557 | 415,061 | — | — | |||||||||||||||
Investments under agreements to resell |
| 10,293 |
| 170,242 |
| 28,524 |
| 46,420 |
| 10,293 | 170,242 | 28,524 | 109,467 | 157,568 | |||||||||||||||
Derivative financial instruments |
| 227,984 |
| 1,102,769 |
| 1,248,775 |
| 2,032,247 |
| 227,984 | 1,102,769 | 1,248,775 | 1,368,957 | 1,970,488 | |||||||||||||||
Loans and receivables from banks, net |
| 99,398 |
| 150,568 |
| 70,077 |
| 114,043 |
| 99,398 | 150,568 | 70,077 | — | — | |||||||||||||||
Loans and receivables from customers, net |
| 6,705,492 |
| 20,444,648 |
| 19,764,078 |
| 32,163,908 |
| 6,705,492 | 20,444,648 | 19,764,078 | — | — | |||||||||||||||
Financial investments available-for-sale |
| 514,985 |
| 2,074,077 |
| 2,663,478 |
| 4,334,523 |
| 514,985 | 2,074,077 | 2,663,478 | — | — | |||||||||||||||
Held to maturity investments |
| — |
| 226,433 |
| 202,030 |
| 328,782 |
| — | 226,433 | 202,030 | — | — | |||||||||||||||
Intangible assets |
| 51,809 |
| 1,614,475 |
| 1,562,654 |
| 2,543,051 |
| 51,809 | 1,614,475 | 1,562,654 | 1,570,964 | 2,261,258 | |||||||||||||||
Property, plant equipment, net |
| 33,970 |
| 121,043 |
| 130,579 |
| 212,503 |
| 33,970 | 121,043 | 130,579 | 95,564 | 137,556 | |||||||||||||||
Current income taxes |
| 8,275 |
| 164,296 |
| 238,452 |
| 388,055 |
| 8,275 | 164,296 | 238,452 | 123,129 | 177,233 | |||||||||||||||
Deferred income taxes |
| 13,930 |
| 110,765 |
| 140,685 |
| 228,950 |
| 13,930 | 110,765 | 140,685 | 178,686 | 257,202 | |||||||||||||||
Other assets |
| 135,742 |
| 427,394 |
| 429,025 |
| 698,192 |
| 135,742 | 427,394 | 429,025 | 501,797 | 722,291 | |||||||||||||||
Non-current assets held for sale |
| 1,785 |
| 37,164 |
| 18,308 |
| 29,794 |
| 1,785 | 37,164 | 18,308 | 59,802 | 86,079 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
TOTAL ASSETS |
| 8,361,332 |
| 28,909,337 |
| 28,032,773 |
| 45,620,318 |
| 8,361,332 | 28,909,337 | 28,032,773 | 29,323,338 | 42,208,251 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Checking accounts and demand deposits |
| 981,349 |
| 4,453,191 |
| 4,141,667 |
| 6,740,117 |
| 981,349 | 4,453,191 | 4,141,667 | 4,300,475 | 6,190,139 | |||||||||||||||
Transaction in the course of payment |
| 26,377 |
| 67,413 |
| 109,496 |
| 178,193 |
| 26,377 | 67,413 | 109,496 | 247,165 | 355,771 | |||||||||||||||
Obligations under repurchase agreements |
| 43,727 |
| 373,879 |
| 420,920 |
| 685,002 |
| 43,727 | 373,879 | 420,920 | 1,015,614 | 1,461,883 | |||||||||||||||
Time deposits and saving accounts |
| 3,952,573 |
| 11,581,710 |
| 10,065,243 |
| 16,380,099 |
| 3,952,573 | 11,581,710 | 10,065,243 | 10,121,111 | 14,568,409 | |||||||||||||||
Derivative financial instruments |
| 253,183 |
| 907,334 |
| 1,095,154 |
| 1,782,245 |
| 253,183 | 907,334 | 1,095,154 | 1,112,806 | 1,601,782 | |||||||||||||||
Borrowings from financial institutions |
| 658,600 |
| 2,179,870 |
| 2,196,130 |
| 3,573,965 |
| 658,600 | 2,179,870 | 2,196,130 | 2,327,723 | 3,350,543 | |||||||||||||||
Debt issued |
| 1,504,335 |
| 5,460,253 |
| 5,950,038 |
| 9,683,046 |
| 1,504,335 | 5,460,253 | 5,950,038 | 6,010,124 | 8,651,021 | |||||||||||||||
Other financial obligations |
| 20,733 |
| 25,563 |
| 17,066 |
| 27,773 |
| 20,733 | 25,563 | 17,066 | 12,400 | 17,849 | |||||||||||||||
Current income tax provision |
| 543 |
| 1,886 |
| 624 |
| 1,015 |
| 543 | 1,886 | 624 | 1,191 | 1,714 | |||||||||||||||
Deferred income taxes |
| 67 |
| 57,636 |
| 26,354 |
| 42,888 |
| 67 | 57,636 | 26,354 | 471 | 678 | |||||||||||||||
Provisions |
| 75,924 |
| 100,048 |
| 117,889 |
| 191,852 |
| 75,924 | 100,048 | 117,889 | 214,903 | 309,333 | |||||||||||||||
Other liabilities |
| 52,480 |
| 269,810 |
| 463,435 |
| 754,191 |
| 52,480 | 269,810 | 463,435 | 521,795 | 751,076 | |||||||||||||||
Liabilities directly associated with non-current assets held for sale |
| — |
| 7,032 |
| — |
| — |
| — | 7,032 | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
TOTAL LIABILITIES |
| 7,569,891 |
| 25,485,625 |
| 24,604,016 |
| 40,040,385 |
| 7,569,891 | 25,485,625 | 24,604,016 | 25,885,778 | 37,260,198 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Equity attributable to equity holders of the bank |
| 791,382 |
| 3,184,743 |
| 3,211,477 |
| 5,226,333 |
| ||||||||||||||||||||
Equity attributable to equity holders of the Bank | 791,382 | 3,184,743 | 3,211,477 | 3,219,478 | 4,634,143 | ||||||||||||||||||||||||
Non-controlling interest |
| 59 |
| 238,969 |
| 217,280 |
| 353,600 |
| 59 | 238,969 | 217,280 | 218,082 | 313,909 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
TOTAL EQUITY |
| 791,441 |
| 3,423,712 |
| 3,428,757 |
| 5,579,933 |
| 791,441 | 3,423,712 | 3,428,757 | 3,437,560 | 4,948,052 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
TOTAL LIABILITIES AND EQUITY |
| 8,361,332 |
| 28,909,337 |
| 28,032,773 |
| 45,620,318 |
| 8,361,332 | 28,909,337 | 28,032,773 | 29,323,338 | 42,208,251 | |||||||||||||||
|
|
|
|
|
(1) Amounts stated in U.S. dollars as of December 31, 2017 and for the year ended December 31, 2017 have been translated from Chilean pesos at our exchange rate of Ch$614.48 per US$1.00 as of December 31, 2017.
CONSOLIDATED RATIOS
|
| As of and for the Year Ended December 31, |
| ||||
|
| 2015 |
| 2016 |
| 2017 |
|
Profitability and Performance |
|
|
|
|
|
|
|
Net interest margin(1) |
| 3.0% |
| 3.0% |
| 3.2% |
|
Return on average total assets (2) |
| 1.3% |
| 0.1% |
| 0.2% |
|
Return on average equity (3) |
| 13.9% |
| 0.5% |
| 1.8% |
|
Efficiency ratio (consolidated) (4) |
| 49.6% |
| 68.0% |
| 67.3% |
|
Dividend payout ratio (5) |
| 50.0% |
| 30.0% |
| 40.0% |
|
|
|
|
|
|
|
|
|
Capital |
|
|
|
|
|
|
|
Average equity as a percentage of average total assets |
| 9.4% |
| 11.3% |
| 11.9% |
|
Shareholders’ equity as a percentage of total liabilities |
| 10.5% |
| 12.5% |
| 13.1% |
|
|
|
|
|
|
|
|
|
Asset Quality |
|
|
|
|
|
|
|
Allowances for loan losses as a percentage of non-performing loans (6) |
| 104.9% |
| 158.6% |
| 133.9% |
|
Non-performing loans as a percentage of total loans (6) |
| 1.3% |
| 1.7% |
| 2.3% |
|
Allowances for loan losses as a percentage of total loans (Risk Index) |
| 1.4% |
| 2.7% |
| 3.0% |
|
Past due loans as a percentage of total loans (7) |
| 0.8% |
| 0.5% |
| 0.6% |
|
|
|
|
|
|
|
|
|
Other Data |
|
|
|
|
|
|
|
Inflation rate |
| 4.4% |
| 2.7% |
| 2.3% |
|
Revaluation (devaluation) rate (Ch$/US$) (foreign exchange rate) |
| 17.3% |
| (5.7)% |
| (8.3)% |
|
Number of employees |
| 2,549 |
| 9,659 |
| 9,492 |
|
Number of branches and offices |
| 97 |
| 398 |
| 375 |
|
(1) | Amounts stated in U.S. dollars as of December 31, 2018 and for the year ended December 31, 2018 have been translated from Chilean pesos at our exchange rate of Ch$694.73 per US$1.00 as of December 31, 2018. |
CONSOLIDATED RATIOS
As of and for the Year Ended December 31, | ||||||||||||||||
2015 | 2016 | 2017 | 2018 | |||||||||||||
Profitability and Performance | ||||||||||||||||
Net interest margin(1) | 3.0 | % | 3.0 | % | 3.2 | % | 3.5 | % | ||||||||
Return on average total assets(2) | 1.3 | % | 0.1 | % | 0.2 | % | 0.6 | % | ||||||||
Return on average equity(3) | 13.9 | % | 0.5 | % | 1.8 | % | 4.8 | % | ||||||||
Efficiency ratio (consolidated)(4) | 49.6 | % | 68.0 | % | 67.3 | % | 67.7 | % | ||||||||
Dividend payout ratio(5) | 31.0 | % | 50.0 | % | 30.0 | % | 40.0 | % | ||||||||
Capital | ||||||||||||||||
Average equity as a percentage of average total assets | 9.4 | % | 11.3 | % | 11.9 | % | 11.9 | % | ||||||||
Shareholders’ equity as a percentage of total liabilities | 10.5 | % | 12.5 | % | 13.1 | % | 12.4 | % | ||||||||
Asset Quality | ||||||||||||||||
Allowances for loan losses as a percentage ofnon-performing loans(6)(7) | 104.9 | % | 158.6 | % | 133.9 | % | 169.6 | % | ||||||||
Non-performing loans as a percentage of total loans(6) | 1.3 | % | 1.7 | % | 2.3 | % | 2.1 | % | ||||||||
Allowances for loan losses as a percentage of total loans (Risk Index)(7) | 1.4 | % | 2.7 | % | 3.0 | % | 3.6 | % | ||||||||
Past due loans as a percentage of total loans(8) | 0.8 | % | 0.5 | % | 0.6 | % | 0.8 | % | ||||||||
Other Data | ||||||||||||||||
Inflation rate | 4.4 | % | 2.7 | % | 2.3 | % | 2.6 | % | ||||||||
Revaluation (devaluation) rate (Ch$/US$) (foreign exchange rate) | 17.3 | % | (5.7 | )% | (8.3 | )% | 13.1 | % | ||||||||
Number of employees | 2,549 | 9,659 | 9,492 | 9,179 | ||||||||||||
Number of branches and offices | 97 | 398 | 375 | 363 |
(1) Net interest margin is defined as net interest income divided by average interest-earning assets.
(1) | Net interest margin is defined as net interest income divided by average interest-earning assets. |
(2) | Return on average total assets is defined as net income divided by average total assets. |
(3) | Return on average equity is defined as net income divided by average shareholders’ equity. |
(4) | Efficiency ratio (consolidated) is defined as total operating expenses as a percentage of operating income consisting of aggregate of net interest income, net service fee income, net gains frommake-to-market and trading exchange differences (net) and other operating income (net). |
(5) | Dividend payout ratio represents dividends divided by net income paid in each period. |
(6) | Non-performing loans include the principal and interest on any loan with one installment more than 90 days overdue. Total loans in 2018 corresponds to loans at amortized cost. Our loan portfolio classified as stage 3, under IFRS 9, was Ch$884,977 million as of December 31, 2018, with an ECL coverage of 3.6%. |
(7) | Allowance for loan losses as of December 31, 2018 corresponds to allowances for loans and accounts receivable from customers at amortized cost according to IFRS 9. Prior periods are in accordance with IAS 39. |
(8) | Past due loans include all installments and lines of credit more than 90 days overdue and does not include the aggregate principal amount of such loans. |
(2) Return on average total assets is defined as net income divided by average total assets.
(3) Return on average equity is defined as net income divided by average shareholders’ equity.
(4) Efficiency ratio (consolidated) is defined as total operating expenses as a percentage of operating income consisting of aggregate of net interest income, net service fee income, net gains from make-to-market and trading exchange differences (net) and other operating income (net).
(5) Dividend payout ratio represents dividends divided by net income paid in each period.
(6) Non-performing loans include the principal and interest on any loan with one installment more than 90 days overdue.
(7) Past due loans include all installments and lines of credit more than 90 days overdue and does not include the aggregate principal amount of such loans.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
We wish to caution readers that the following important factors, and those important factors described in other reports submitted to, or filed with the Securities and Exchange Commission, or the SEC, among other factors, could affect our actual results and could cause our actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. In particular, as we are anon-U.S. company, there are risks associated with investing in our ADSs that are not typical for investments in the shares of U.S. companies. Prior to making an investment decision, you should carefully consider all of the information contained in this document, including the following factors.
Risks Associated with our Business
The growth and composition of our loan portfolio may expose us to increased loan losses.
In 20172018, our aggregate gross loan portfolio decreasedincreased by 3.0%5.4% due to weakseveral positive factors in the business environment, particularly better economic activityconditions in both Chile and Colombia, in additionthe countries where we operate. Our loan portfolio performed well throughout 2018, particularly with respect to consumer loans, which have shown a devaluationconsistent improved performance since the second quarter of 7.8% of the Colombian peso against the Chilean peso.2017. This trend is a key indicator that we are making progress towards balancing our loan portfolio. Our business strategy is to grow profitably while increasing the size of our loan portfolio.
portfolio size.
Through the further expansion of our loan portfolio in retail segments, we are seeking to decrease our corporate segment concentration and, as a result, balance our loan portfolio and strengthen our retail operation (particularly in the consumer segment), which may expose us to a higher level of loan losses and require us to establish higher levels of provisions for loan losses.
As of December 31, 2017,2018, commercial loans represented 67.3%66.9% of our total loan portfolio compared to 69.7%67.3% as of December 31, 2016.2017. As of December 31, 2017,2018, mortgage loans represented 20.4%20.7% of our total loan portfolio compared to 18.5%20.4% as of December 31, 20162017 and consumer loans represented 12.3%12.4% of our total loan portfolio compared to 11.8%12.3% as of December 31, 2016.
2017.
Although the consumer loans portfolio represents the single highest level of risk in our loan portfolio, the most material loan losses experienced during 2016 and 2017 came from our largest wholesale clients. As of December 31, 2017,2018, the risk index (ratio of allowance for loans losses over total loans) of the consumer segment was 5.4%8.1% while other business units of our loan portfolio, such as mortgage loans and commercial loans, had lower risk indexes of 0.8%1.5% and 3.3%,3.4% respectively.
Our consumer loan portfolio may experience loan losses due to the absence of collateral in respect of unsecured loans, insufficient collateral in collateralized loans, and risks relating to the circumstances of individual borrowers, including unemployment or incapacitation of our consumer borrowers.
We believe our total allowances for loan losses is adequate as of the date hereof to cover all known losses in our total loan portfolio. The growth of our loan portfolio may expose us to a higher level of loan losses and require us to establish proportionately higher levels of provisions for loan losses, which would offset the increased income that we can expect to receive as our loan portfolio grows.
Our loan portfolio may not continue to grow at the same or similar rate.
Past performance of our loan portfolio may not be indicative of future performance. Our loan portfolio may not continue to grow at the same or similar rates as the growth rate that we historically experienced, particularly in light of the growth in recent years attributable to the acquisitions in Colombia of Banco Santander Colombia S.A., now Itaú Corpbanca Colombia S.A. (“Itaú Corpbanca Colombia”), in May 2012 (the “Santander Colombia Acquisition”), Helm Bank in August 2013 (the “Helm Bank Acquisition”) and the Merger in Chile in April 2016. Additionally, changes in the Chilean or Colombian economies, a slowdown in the growth of customer demand, an increase in market competition or changes in governmental regulations could also adversely affect the rate of growth of our loan portfolio and our risk index.
Our allowances for loan losses may not be adequate to cover the future actual losses to our loan portfolio.
As of December 31, 2017,2018, our allowance for loan losses was Ch$618,527768,120 million (excluding allowances for loan losses on loans and receivable to banks) and the risk index (or allowances for loan losses to total loans) was 3.0%3.6%. The amount of allowance for
loan losses is based on our current assessment and expectations concerning various factors affecting the quality of our loan portfolio. These factors include, among others, our customers’ financial condition, repayment abilities and repayment intentions, the realizable value of any collateral, the prospects for support from any guarantor, Chilean and Colombian economies, government macroeconomic policies, interest rates and the legal and regulatory environment. 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 require recalibration, which may lead to increased provision for loan losses. If our assessment of, and expectations concerning, the above mentioned factors differ from actual developments, if the quality of our loan portfolio deteriorates or if the future actual losses exceed our estimates, our provisions may not be adequate to cover actual losses and we may need to make additional reserves, which may materially and adversely affect our results of operations and financial condition.
If we are unable to maintain the quality of our loan portfolio, our financial condition and results of operations may be materially and adversely affected.
As of December 31, 2017,2018, ournon-performing loans were Ch$462,015452,947 million, which resulted in anon-performing to total loans ratio of 2.3%2.1% as of December 31, 2017.2018. Further, our loan portfolio classified as stage 3, under IFRS 9, was Ch$884,977 million with an ECL coverage of 3.6% as of December 31, 2018. We seek to continue to improve our credit risk management policies and procedures. However, we cannot assure you that our credit risk management policies, procedures and systems are free from any deficiency. Failure of credit risk management policies may result in an increase in the level ofnon-performing loans and adversely affect the quality of our loan portfolio. In addition, the quality of our loan portfolio may also deteriorate due to various other reasons, including factors beyond our control, such as the macroeconomic factors affecting the Chilean or Colombian economies. If such deterioration were to occur, it could materially and adversely affect our financial conditions and results of operations.
Additionally, due to limitations in the availability of information and the developing information infrastructure in Chile and Colombia, our assessment of the credit risks 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 collect complete or accurate information reflecting the actual behavior of customers or that their credit risk can be assessed correctly.
Furthermore, a substantial number of our customers consist of individuals andsmall-to-medium-sized enterprises, or SMEs. Our business results relating to our lower-income individual and SME customers are, however, more likely to be adversely affected by downturns in the Chilean and Colombian economies, including increases in unemployment, than our business from large corporations and high-income individuals. For example, unemployment directly affects the capacity of individuals to obtain and repay consumer loans. Consequently, this could materially and adversely affect the liquidity, business and financial condition of our customers, which may in turn cause us to experience higher levels of past due loans, and result in higher allowances for loan losses, which could in turn materially affect our asset quality, results of operations and financial conditions.
The value of any 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.
From time to time, we require our borrowers to collateralize their loans with guarantees, pledges of particular assets or other security. The value of any collateral securing our loan portfolio may significantly fluctuate or decline due to factors beyond our control. Such factors include market factors, environmental risks, natural disasters, macroeconomic factors and political events affecting the Chilean or Colombian economies. Any decline in the value of the collateral securing our loans may result in a reduction in the recovery from collateral realization and may have an adverse impact on our results of operations and financial condition.
In addition, we may face difficulties in perfecting our liens and enforcing our rights as a secured creditor. In particular, timing delays and procedural problems in enforcing against collateral and local protectionism in the markets in which we operate may make foreclosures on collateral and enforcement of judgments difficult, and may result in losses that could materially and adversely affect our results of operations and financial condition.
We may be unable to meet requirements relating to capital and liquidity adequacy.
Unless an exception applies, Chilean banks are required by the Chilean General Banking Act (as amended) to maintain (1) a regulatory capital of at least 8% of risk-weighted assets, net of required allowance for loan losses and deductions, as calculated in accordance with Chilean Bank GAAP, and a (2) basic capital not lower than (y) 4.5% of at leastits risk weighted assets and (z) 3% of its total assets, in both cases, net of required allowance for loan losses.
Note, however, that in any of the following events a higher effective net equity and/or a higher basic capital may be required:
(1) | If at the moment in which the incorporation deed of a bank is granted (or at the moment in which the authorization of existence of a branch of a foreign bank is granted), at least 50% of the minimumpaid-in capital and reserves, or basic capital (capital básico) (i.e., UF800,000 (Ch$22,052.6 million or US$31.7 million as of December 31, 2018)) has not been paid, the respective bank shall have an additional basic capital equal to 2% of its risk weighted assets, net of required allowances, above the general minimum basic capital of 4.5%plus any additional basic capital that may be applicable pursuant to number (2) below. The additional 2% requirement will be reduced to 1% once the bank’s paid basic capital reaches UF 600,000 (Ch$16,539.5 million or US$23.8 million as of December 31, 2018). |
(2) | Once the CMF replaces the SBIF, the following should occur: |
a. | Within 18 months from the date in which such replacement occurs, the CMF shall issue a regulation (with the affirmative consent of the Council of the Chilean Central Bank) setting forth (i) the standardized methodology for risk weighting the assets of a bank, and (ii) in the event of banks authorized to use their own methodologies, the requirements to use and implement them. Once such regulation becomes effective, a bank will be required to have an additional basic capital equal to 2.5% of its risk weighted assets, net of required allowances, above the minimum requirements. This additional requirement will come into effect progressively during a4-year term at a ratio of 0.625% per year, starting on the date in which the CMF issues the aforementioned regulation; |
b. | Within 18 months from the date in which such replacement occurs, the CMF shall issue a regulation setting forth the conditions that may trigger the imposition by the Chilean Central Bank of an additional basic capital requirement up to 2.5% of a bank’s risk weighted assets, net of required allowances, above the minimum requirements. This additional requirement may be imposed by the Chilean Central Bank on a general basis applicable to all banking institutions, as a contra-cyclical measure; |
c. | Within 18 months from the date in which such replacement occurs, the CMF shall issue a regulation (with the affirmative consent of the Council of the Chilean Central Bank), which shall set forth the criteria for considering a bank or group of banks of systemic importance. Further, with the affirmative vote of the Chilean Central Bank, the CMF may determine, through a grounded resolution, that a bank is of systemic importance. In such event, the CMF will be entitled to impose, among others, one or more of the following conditions: (y) an increase between 1% and 3.5% to the basic capital over risk weighted assets, net of required allowances, above the aforementioned 8% minimum effective net equity (Patrimonio Efectivo) requirement and (z) an increase of up to 2% to the basic capital over total assets, net of required allowances, above the aforementioned 3% minimum basic capital requirement. The conditions imposed on a bank qualified of systemic importance, may be terminated in the event the Council of the CMF determines that a bank no longer has systemic importance; and |
d. | If after a review process, to the judgment of the CMF, a bank presents risks not properly protected with the equity requirements mentioned above, the CMF may impose additional equity requirements. In any event, the additional equity requirements shall not exceed 4% of its risk weighted assets, net of required allowances. For these purposes, the CMF shall issue a regulation which shall set forth the criteria applicable in these cases. |
Due to the Merger and considering that the market participation of the merged bank was higher than 15% and below 20%, the SBIF considered the bankBank to behave a systemically important bankmaterial market share and therefore imposed a larger regulatory minimum capital of 10% on the bankBank instead of the previous 8%. For the purposes of maintaining a high solvency classification from the SBIF and continued compliance with the SBIF’s capital requirements on us, our intention is to have the highest classification from the SBIF. As of December 31, 2017,2018, our regulatory capital to risk weighted assets ratio was 14.7%14.65% according to the rules issued by the SBIF, which implement the Basel I capital requirements standards in Chile.
In line with the pending adoption of Basel III regulations in Chile, the SBIF has proposed an increase to the minimum effective BIS capital adequacy ratio from the current 8% to 10.5%, not including the cyclical buffer requirements and those for the designated Systemically Important Financial Institutions (“SIFI”). However, given that this regulation is not yet applicable, it is not possible to determine a precise new capital position. In this way, the bank contemplates periodic reviews in order to volatility in the projections.
Considering the above, Itaú Corpbanca expects to target a capital ratio based on the greater of 1.2 times the minimum regulatory capital requirement or the average regulatory capital ratio of the three largest private banks in Chile and Colombia. As of December 31, 2017, according to public information published by the SBIF, the average regulatory capital ratio of the three largest private banks in Chile was 13.9%. See “Item 4—Information on the Company—B. Business Overview— Capital Adequacy Requirements” for more information on capital adequacy requirements in Chile.
Additionally, Colombian financial institutions are subject to capital adequacy requirements that are based on applicable Basel Committee standards. TheCurrent regulations establish four categories of assets, which are each assigned different risk weights, and require that a credit institution’s Technical Capital (as defined below) be at least 9% of that institution’s total risk-weighted assets, and that its ordinary basic capital be at least 4.5% of that institution’s total risk-weighted assets. Technical Capital for the purposes of the Colombian regulations consists of the sum of tier one capital (ordinary basic capital), additional tier one capital (additional basic capital) and tier two capital (additional capital). As of December 31, 2017,2018, the consolidated ratio for our Colombian operations (calculated according to the Colombian Superintendency of Finance definitions for “Total Solvency” (“(Solvencia Total”)) was 12.7%14.61%. See “Item 4—4. Information on the Company—B. Business Overview— Capital Adequacy Requirements” for more information on capital adequacy requirements in Colombia.
Furthermore, the Colombian government recently issued Decree No. 1477 of 2018 which provides for complementary ratio mechanisms such as (i) an additional primary solvency ratio (Relación de Solvencia Básica Adicional), (ii) a leverage ratio (Relación de Apalancamiento) and (iii) buffers (Colchones). These new complementary ratio mechanisms are in process of implementation in Colombia to adopt the recommendations set forth by Basel III. However, financial institutions shall comply with Decree No. 1477 of 2018 no later than February 6, 2020, except with respect to the matters regarding the additional primary solvency ratio and the buffers, which will have a gradual implementation for a four year term, starting after February 6, 2020. See “Item 4. Information on the Company—Colombian Banking Regulation and Supervision – Capital Adequacy Requirements Amendment.”
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;
·the failure to increase our capital correspondingly;
·losses resulting from a deterioration in our asset quality;
·declines in the value of our available-for-sale investment portfolio;financial instruments at fair value through other comprehensive income;
·goodwill and minority interest;
·changes in accounting rules;
·changes in the guidelines regarding the calculation of the capital adequacy ratios of banks in the countries we operate; and
·fluctuations in exchange rates that could impact our loan portfolio, valuation adjustments due to the translation effects in equity or hedging strategies.
Although we have historically complied with our capital maintenance obligations in the jurisdictions where we operate, there can be no assurance that we will continue to do so in the future. We may 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. If we fail to meet the capital adequacy requirements, we may be required to take corrective actions or subject to sanctions in the jurisdictions where we operate. These measures or sanctions could materially and adversely affect our business reputation, financial condition and results of operations.
In 2015, the SBIF and the Central Bank published new liquidity standards and ratios to be implemented and calculated by all banks. The first stage of these new liquidity requirements, which is currently being implemented, is intended to improve the information—in quantity and quality—about the actual situation of banks without imposing specific limits, except liquidity mismatches for30-day and90-day periods, for which thresholds with respect to banks’ capital, are already in place. As of December 31, 2017,2018, the liquidity coverage ratio (LCR) for our Chilean operations was 161.4%130%. Since we have no certainty regarding the limits to be imposed by the regulator to the banking industry and Itaú Corpbanca in particular, we cannot assure you that new liquidity requirements will not have a material impact on our financial condition or results of operations in the future. See “Item 4—Information on the Company—B. Business Overview— Reserve Requirements” for more information on liquidity requirements in Chile.
Liquidity adequacy requirements for Colombian financial institutions (as set forth in Resolución Externa No. 5 de 2008, as amended, issued by the board of directors of the Central Bank of Colombia) include 11% on demand and savings deposits, with the exception of time certificates of deposit under 18 months, in which case the percentage is 4.5% or 0% when they exceed that term. As of December 31, 2017,2018, the LCR for our Colombian operations (calculated according to the Colombian Superintendency of Finance) was 444% (121.4%253.82% (108% under our internal models based on Basel III standards). Although we have historically complied with our required liquidity ratios, there can be no assurance that we will continue to do so in the future. See “Item 4—Information on the Company—B. Business Overview— Reserve Requirements” for more information on liquidity requirements in Colombia.
We are dependent on key personnel.
Our development, operation and growth depends significantly upon the efforts and experience of our board of directors, senior management and other key executives. The loss of key personnel for any reason, including retirement or our inability to timely attract and retain qualified management personnel to replace them, could have a material adverse effect on our business, financial condition and results of operations.
We are subject to market risk.
We are directly and indirectly affected by changes in local and global economic conditions as both domestic and international idiosyncratic factors and market conditions. Marketstructures have an impact in our activities. As a bank with regional exposure, market risk, or the risk of losses in positions arising from movements in market prices, is inherent in the products and instruments associated with our operations, including loans, deposits, securities, bonds, long-term debt, short-term borrowings, proprietary trading in assets and liabilities and derivatives. ChangesMoreover, as we operate in financially integrated economies, changes in market conditions that may affect our financial condition and results of operations include fluctuations in interest and currency exchange rates, securities prices, and changes in the implied volatility of interest rates and foreign exchange rates, among others.
Our results of operations are affected by interest rate volatility and inflation rate volatility.
Our results of operations depend to a great extent on our net interest income. In 2015, 2016, 2017 and 2017,2018, our ratio of net interest income to total operating income before provision for loan losses was 64.8%73.2%, 73.2%74.1% and 74.1%70.7%, respectively. Changes in market interest rates in Chile or Colombia could affect the interest rates earned on our interest-earning assets differently from the interest rates paid on our interest-bearing liabilities leading to a reduction in our net interest income. Interest rates are highly sensitive to many factors beyond our control, including the monetary policies of the Central Bank of Chile and the Central Bank of Colombia, changes in regulation of the financial sector in Chile and Colombia, domestic and international economic and political conditions and other factors. Yields on the Chilean government’s90-day benchmark rate reached a high of 3.1% and a low of 2.8% in 2015, a high of 3.6% and a low of 3.5% in 2016, and a high of 3.2% and a low of 2.5% in 2017.2017 and a high of 2.9% and a low of 2.5% in 2018. On the other hand, the Colombian government does not issue short-term bonds of 30, 60 or 90 days as the Chilean government does. Instead, every month the board of directors of the Central Bank of Colombia determines the benchmark rate in order to achieve a specific goal of inflation. Yields on the Colombian benchmark rate reached a high of 5.8% and a low of 4.5% for 2015, a high of 7.8% and a low of 5.8% for 2016, and a high of 7.5% and a low of 4.8% for 2017.2017 and a high of 4.8% and a low of 4.3% in 2018. As of December 31, 2015, 2016 and 2017, we had Ch$515 million, Ch$2,074 million, and Ch$2,663 million, respectively, in financial investments available-for-sale.available-for-sale and as of December 31, 2018, we had Ch$2,657 million in financial instruments at fair value through other comprehensive income. In the current global economic climate, there is a greater degree of uncertainty and unpredictability in the policy decisions and the setting of interest rates by the Central Bank of Chile and the Central Bank of Colombia and, as a result, any volatility in interest rates could adversely affect us, including our future financial performance and the market value of our securities. In addition, inflation rate volatility could adversely affect our net interest income due to fluctuations in the gap between assets and liabilities that are indexed to the UF.
Increased competition and industry consolidation may adversely affect the results of our operations.
The Chilean and Colombian markets for financial services are highly competitive and competition is likely to increase.
In Chile, we face competition from banking andnon-banking institutions with respect to the different products we offer. In the consumer and other loans businesses, we compete with other banks, credit unions and public social security funds (cajas de compensación). In some of our credit products, we face competition from department stores, large supermarket chains and leasing, factoring and automobile finance companies, and in the saving products and mortgage loans businesses we compete with mutual funds, pension funds, insurance companies and with residential mortgage loan managers (Administradoras de Mutuos Hipotecarios). Furthermore, under the Chilean General Banking Act, representative offices ofnon-Chilean banks are allowed to promote the credit products and services of their headquarters, which has increased, and may further increase, competition in our industry and, thus, have an adverse effect on our results of operation and financial condition.
In Colombia, we also operate in a highly competitive environment and increased competitive conditions are to be expected in the jurisdictions where we operate. Intensified merger activity in the financial services industry produces larger, better capitalized and more geographically diverse firms that are capable of offering a wider array of financial products and services at more competitive prices. Our ability to maintain our competitive position in Colombia depends mainly on our ability to fulfill new customers’ needs through the development of new products and services and offer adequate services and strengthen our customer bases through cross-selling. Our Colombian operations will be adversely affected if we are not able to maintain efficient service strategies, or overcome certain delays or difficulties in the transition of the integration of the operational services and activities of Itaú Corpbanca Colombia and Helm Bank. In addition, our efforts to offer new services and products may not succeed if product or market opportunities develop more slowly than expected or if the profitability of opportunities is undermined by competitive pressures.
Our risk management system may not be sufficient to avoid losses that could have a material adverse effect on our business, financial condition and results of operations.
In addition to granting loans, part of our financial portfolio consists of trading transactions by our treasury division. Our financial success depends on, among other factors, our ability to accurately balance the risks we take and the returns we gain from our transactions. We use various processes to identify, analyze, manage and control our risk exposure, both in favorable and adverse market conditions. However, these processes involve subjective and complex judgments and assumptions, including projections of economic conditions and assumptions on the ability of our borrowers to repay their loans. Because of the nature of these risks, we cannot guarantee that our risk management efforts will prevent us from experiencing material losses. In particular, we may experience losses that could have a material adverse effect on our business, financial condition and results of operations if, among other factors:
·we are not capable of identifying all of the risks that may affect our portfolio;
·our risk analysis or our measures taken in response to such risks are inadequate or inaccurate;
·the markets move in an unexpected and adverse way with respect to speed, direction, strength or other aspects and our ability to manage risks in such a scenario is restricted;
·our clients are affected by unforeseen events resulting in their default or losses in an amount higher than those considered in our risk analyses; or
·collateral pledged in our favor is insufficient to cover our clients’ obligations to us if they default.
We are subject to concentration risk.
Concentration risk is the risk associated with potential high financial losses triggered by significant exposure to a particular component of risk, whether it be related to a particular counterparty, industry or geographic concentration. Examples of such risks include significant exposure to a single counterparty, counterparties operating in the same economic sector or geographic region, or financial instruments that depend on the same index or currency.
We believe that an excessive concentration with respect to a particular risk factor could have a material adverse effect on our business, financial condition and results of operations.
We make estimates and assumptions in connection with the preparation of our consolidated financial statements, and any changes to those estimates and assumptions could have a material adverse effect on our operating results.
In connection with the preparation of our consolidated financial statements, we use certain estimates and assumptions based on historical experience and other factors. While we believe that these estimates and assumptions are reasonable under the current circumstances, they are subject to significant uncertainties, some of which are beyond our control. Should any of these estimates and assumptions change or prove to have been incorrect, our reported operating results could be materially adversely affected.
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 was adopted as of January 1, 2018, establishing a new impairment model of expected loss and making changes to the classification and measurement requirements for financial assets and liabilities. In addition, we adopted IFRS 16 as of January 1, 2019, requiring new standards for the recognition, measurement, presentation and disclosure of leases. This led to approximately Ch$176,795 million of assets for the right of use and lease liabilities for the same amount as of the date of adoption of IFRS 16. These changes 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. We cannot assure you that future changes in financial accounting and reporting standards will not substantially affect our results of operations or performance indicators, as we do not know the extent of future standards.
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 tax laws and regulations 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.
As a result of the inherent limitations in our disclosure and accounting controls, misstatements due to error or misconduct may occur and not be detected.
Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in reports we file with or submit to the SEC under the Exchange Act of 1934, as amended (the “Exchange Act”), is accumulated and communicated to management, recorded, processed summarized and reported within the time periods specified in SEC rules and forms. We believe that any disclosure controls and procedures or internal controls and procedures, including related accounting controls, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. In addition, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls.
Any failure by us to maintain effective internal control over financial reporting may adversely affect investor confidence and, as a result, the value of investments in our securities.
We are required under the Sarbanes-Oxley Act of 2002 to furnish a report by our management on the effectiveness of our internal control over financial reporting and to include a report by our independent auditors attesting to such effectiveness. Any failure by us to maintain effective internal control over financial reporting could adversely affect our ability to report accurately our financial condition or results of operations. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent auditors determine that we have a material weakness or significant deficiency in our internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market prices of our shares and ADSs could decline, and we could be subject to sanctions or investigations by the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies subject to SEC regulation, also could restrict our future access to the capital markets.
Our reliance on short-term deposits as our principal source of funds exposes us to sudden increases in our costs of funding which could have a material adverse effect on our revenue.
Time deposits and other term deposits are our primary sources of funding, which represented 40.9%39.1% of our liabilities as of December 31, 2017.2018. If a substantial number of our depositors withdraw their demand deposits or do not roll over their time deposits upon maturity, our liquidity position, results of operations and financial condition may be materially and adversely affected. We cannot assure you that in the event of a sudden or unexpected shortage of funds, any money markets in which we operate will be able to maintain levels of funding without incurring higher funding costs or the liquidation of certain assets. If this were to happen, our business, results of operations and financial condition may be materially and adversely affected.
Currency fluctuations could adversely affect our financial condition and results of operations and the value of our securities.
Economic policies and any future changes in the value of the Chilean peso or the Colombian peso against the U.S. dollar could affect the dollar value of our securities, since the equity value of Itaú Corpbanca is hedged against our base currency Chilean peso. The Chilean peso and the Colombian peso have been subject to significant fluctuations in their value against the U.S. dollar in the past and could be subject to similar fluctuations in the future. As of December 31, 2015, the Chilean peso depreciated against the U.S. dollar by 17.3% and the Colombian peso depreciated against the U.S. dollar by 31.64%, each as compared to December 31, 2014. As of December 31, 2016, the Chilean peso appreciated against the U.S. dollar by 5.7% and the Colombian peso appreciated against the U.S. dollar by 4.72%4.2%, each as compared to December 31, 2015. As of December 31, 2017, the Chilean peso appreciated against the U.S. dollar by 8.3% and the Colombian peso appreciated against the U.S. dollar by 0.56%0.5%, each as compared to December 31, 2016.
As of December 31, 2018, the Chilean peso depreciated against the U.S. dollar by 13.1% and the Colombian peso depreciated against the U.S. dollar by 8.8%, each as compared to December 31, 2017.
Our results of operations may be affected by fluctuations in exchange rates between and among the Chilean peso, the Colombian peso and the U.S. dollar despite our internal policy and Chilean and Colombian regulations relating to the general avoidance of material exchange rate gaps. As of December 31, 2015, 2016, 2017 and 2017,2018, the gap between foreign currency denominated assets and foreign currency denominated liabilities, excluding derivatives, was Ch$222,673(606,535) million, Ch$(606,535)(571,951) million and Ch$(571,951)720,224 million, respectively.
We may decide to change our policy regarding exchange rate gaps. Regulations that limit such gaps may also be amended or eliminated. Greater exchange rate gaps could increase our exposure to the devaluation of the Chilean peso and/or the Colombian peso, and any such devaluation may impair our capacity to service our foreign-currency obligations and may, therefore, materially and adversely affect our financial condition and results of operations.
Our business is highly dependent on proper functioning and improvement of information technology systems.
Our business is highly dependent on the ability of our information technology systems to accurately process a large number of transactions across numerous and diverse markets and products in a timely manner. The proper functioning of our financial control, risk management, accounting, customer service and other data processing systems is critical to our business and our ability to compete effectively. We have backup data for our key data processing systems that could be used in the event of a catastrophe or a failure of
our primary systems, and have established alternative communication networks where available. However, we cannot assure you that our business activities would not be materially disrupted if there were a partial or complete failure of any of these primary information technology systems or communication networks. Such failures could be caused by, among other things, software bugs, computer virus attacks, cyber-attacks or conversion errors due to system upgrading. In addition, a cyber-attack, including any security breach caused by unauthorized access to information or systems, intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, could have a material adverse effect on our business, results of operations and financial condition.
Our ability to remain competitive and achieve further growth will depend in part on our ability to upgrade our information technology systems and increase our capacity on a timely and cost effective basis. Any substantial failure to improve or upgrade information technology systems effectively or on a timely basis could materially and adversely affect our business, financial condition and results of operations.
Our business in Colombia is dependent on certain technology service agreements with affiliates of Banco Santander, S.A.
Upon our acquisition of Banco Santander Colombia in 2012, Banco Santander, S.A. agreed to cause certain of its affiliates to provide us certain technology services. Our business in Colombia is still dependent on such service and support of such affiliates of Banco Santander, S.A. We have recently extended the technology service agreements entered into with such affiliates (including Produban Servicios Informáticos Generales S.L. and Ingeniería de Software Bancario S.L.) until at least May 31, 2018. If the affiliates of Banco Santander, S.A. are unable to service and support our business in Colombia or if we are unable to integrate our information technology systems into our business in Colombia after the expiration of the technology service agreements, then such failure could materially and adversely affect our business, financial condition and results of operations.
A worsening of labor relations in Chile or Colombia could impact our business.
As of December 31, 2017,2018, on a consolidated basis we had 5,8485,685 employees in Chile (including 3132 at our New York Branch), of which 62.3%61.3% were unionized, and 3,6443,494 employees in Colombia, of which 27.9%30.3% were unionized. We are parties to collective bargaining agreements with unions representing our employees in Chile and Colombia. Itaú Corpbanca’s current labor agreements with five unions in Chile were subscribed onin 2017 and expire on May 31, 2020, November 23, 2020 and December 4, 2020. Itaú Corpbanca Colombia’s current labor agreement with 23 unions in Colombia was subscribed on September 1, 2017 and expires on August 31, 2019. We generally apply the relevant terms of our collective bargaining agreement to unionized andnon-unionized employees in each of the markets in which we operate. We have traditionally enjoyed good relations with our employees and their unions. However, we may not be able to renew our collective bargaining agreements on satisfactory terms or at all. This could result in strikes or work stoppages, which could result in substantial losses. The terms of existing or renewed agreements could also significantly increase our costs or negatively affect us. Also, a strengthening of cross-industry labor movements may result in increased employee or labor costs that could materially and adversely affect our business, financial condition or results of operations.
Law 20,940, which became effective on April 1, 2017, introduces significant amendments to the Chilean labor system. The principal amendments enacted by Law 20,940 to the existing labor framework in Chile include, among others:
·Collective bargaining coverage was expanded to certain employees who were prevented from exercising this right, such as apprentices, temporary workers and others. Before the amendments to the labor law, employees who could hire and dismiss employees, were not able to bargain collectible as part of the employees. After the amendments to the labor law, only employees with legal capacity to represent the employer are not able to bargain collectible, unless they do so representing the employer.
·Collective bargaining agreements currently in effect will constitute a floor for the negotiation of new conditions of employment. The financial situation of the company or business as of the date of discussions for a new agreement would not have any bearing on collective bargaining negotiations.
·
The employer’s right to replace those workers participating in a strike with current or new employees while the strike is taking place will be curtailed and replaced with an obligation from unions to provide the personnel required to comply with “minimum services” through “emergency teams.”
·Unions may annually request from large companies information regarding the remunerations and duties associated with each category of employees.
·After the amendments to the labor law, unions will have to agree in the extension of benefits to those employees who are not currently unionized.
The implementation of Law 20,940, as it increases the collective bargaining power of labor unions, may have adverse effects on our overall employment and operating costs and may increase the likelihood of business disruptions on our activities in Chile, which could negatively affect our financial condition and results of operations. The amendments to the labor law intend to encourage the collective bargaining and increase the unionization rates.
We are subject to counterparty risk.
We are exposed to counterparty risk in addition to credit risks associated with our lending activities. We routinely conduct transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutional clients. 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.
We may incur losses if any of our counterparties fail to meet their contractual obligations, due to bankruptcy, lack of liquidity, operational failure or other reasons that are exclusively attributable to our counterparties. 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, currency or commodity trades from proprietary trading activities that fail to settle at the required time due tonon-delivery by the counterparty or systems failure by clearing agents, clearing houses or other financial intermediaries. Failure to meet contractual obligations by our counterparties could have a material adverse effect on our business, financial condition and results of operations.
We rely on third parties for important products and services.
Third-party vendors provide key components of our business infrastructure such as different loan servicing systems, internet connections and network access. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to customers and otherwise to conduct business. Replacing these third-party vendors could also entail significant delays and expense and could negatively impact our business.
We may experience operational problems, errors or misconduct.
We are exposed to many types of operational risks, including the risk of misconduct by employees and outsiders, failure to obtain proper authorizations, failure to properly document transactions, equipment failures and errors by employees. Although we maintain a system of operational controls, there can be no assurances that operational problems or errors will not occur and that their occurrence will not have a material adverse effect on our business, financial condition and results of operations.
Our anti-money laundering and anti-terrorist financing measures may not prevent third parties from using us as a conduit for those activities, which could have a material adverse effect on our business, financial condition and results of operations.
We are required to comply with applicable anti-money laundering and anti-terrorist financing laws and regulations, and we have adopted various policies and procedures, including internal controls and “know-your customer” procedures, aimed at preventing money laundering and terrorist financing. In addition, because we also rely on our correspondent banks having their own appropriate anti-money laundering and anti-terrorist financing procedures, we use what we believe are commercially reasonable procedures for monitoring our correspondent banks. However, these measures, procedures and compliance may not be entirely effective in preventing third parties from using us (and our correspondent banks) as a conduit for money laundering (including illegal cash operations) or terrorist financing without our (and our correspondent banks’) knowledge or consent. If we were to be associated with money laundering (including illegal cash operations) or terrorist financing, our reputation could be harmed and we could become subject to fines, sanctions or legal enforcement (including being added to any “blacklists” that would prohibit certain parties from engaging in transactions with us), which could have a material adverse effect on our business, financial condition and results of operation.
Banking regulations may restrict our operations and thereby adversely affect our financial condition and results of operations.
We are subject to regulation in the markets in which we operate, including by the SBIF and by the Central Bank of Chile in Chile, and by the Central Bank of Colombia, the Colombian Ministry of Finance, the Colombian Superintendency of Finance, the Superintendency of Industry and Commerce (Superintendencia de Industria y Comercio), or SIC, and the Self-Regulatory Organization (Autorregulador del Mercado deValores-AMV, or the SRO) in Colombia.
Pursuant to the Chilean General Banking Act in Chile and the Financial System Organic Act (Estatuto Orgánico del Sistema Financiero) in Colombia, we may, subject to the necessary regulatory approvals, engage in the commercial banking business and in certain businesses in addition to traditional commercial banking. Such additional businesses may include securities brokerage, mutual fund management, securitization, insurance brokerage, leasing, factoring, financial advisory, custody and transportation of securities, loan collection and financial services. Regulators may in the future impose more restrictive limitations on the activities of banks, including us.
New capital adequacy requirements could require us to inject further capital into our business as well as in businesses we acquire, or to capitalize dividends, restrict the type or volume of transactions we enter into, or set limits on or require the change of rates or fees that we charge on certain loans or other products, any of which could lower the return on our investments, assets and equity. We may also face increased compliance costs and limitations on our ability to pursue certain business opportunities.
As a result of the 2008 global financial crisis, there has been an increase in government regulation of the financial services industry in many countries. Such regulation may also be increased in Chile and/or in Colombia, including the imposition of higher capital requirements, heightened disclosure standards and restrictions on certain types of transaction structures. In addition, numerous novel regulatory proposals have been discussed or proposed. If enacted, new regulations could require us to inject further capital into our business, restrict the type or volume of transactions we enter into, or set limits on or require the modification of rates or fees that we charge on certain loans or other products, any of which could lower the return on our investments, assets and equity. We may also face increased compliance costs and limitations on our ability to pursue certain business opportunities.
On February 23, 2017, Law No. 21,000, was published. This new law modifies, among other matters, the corporate governance and operation of the Chilean regulator for securities and insurance and establishes the CMF. For more information, see “Item 4. Information on the Company—B. Business Overview—Changes in the Governance of Our Regulators.” These changes in our regulators’ laws may result in further changes in banking regulations or other consequences that could have a material adverse effect on our financial condition or results of operations.
The banking regulatory and capital markets environment in which we operate is continually evolving and may change.
Changes in banking regulations may materially and adversely affect our business, financial condition and results of operations. Chilean laws, regulations, policies and interpretations of laws relating to the financial system are continually evolving and changing. For more information, see “Item 4. Information on the Company—B. Business Overview—Chilean Banking Regulation and Supervision—Recent Regulatory Developments in Chile.”
In Chile, new regulations have been enacted in the past years which have, among others things, (a) increased the limit on the amount that a bank is allowed to grant as an unsecured loan to a single individual or entity (currently set at 10% of its regulatory capital and up to 30% of its regulatory capital if any loans granted in excess of the 10% are secured by certain collateral, for personsnon-related to the bank and at 5% or 25% if loans in excess of 5% are secured by certain collateral, for certain groups of persons related to the bank), (b) allowed marketing and promotion activities of credit products and services bynon-Chilean banks with representative offices in Chile, (c) strengthened consumers’ rights in connection with financial products and services; and (d) lowered the maximum legal interest rate that can be imposed in general loans valued at over UF 200. These amendments have affected the Chilean banking industry in several ways including by increasing competition, increasing the risks associated with the growth of loan portfolios, providing additional scrutiny regarding prices and contracts for financial products and have caused a loss of flexibility in the determination of price and product distribution strategies in the retail banking unit.
Colombia has also experienced recent changes in applicable laws, regulations and policies, such as those regarding financial inclusion and consumer protection. In order to promote financial inclusion, the Colombian Congress passed Law No. 1,735 of 2014, which created a new type of financial entity called Specialized Electronic Deposit and Payment Institutions (Sociedades Especializadas en Depósitos y Pagos Electrónicos, or SEDPEs). Previously, the only activities these entities were authorized to perform were remotecash-in andcash-out deposit operations, the allocation of customers’ funds in electronic deposit accounts and the offering of transactional services such as remittances, transfers and payments. However, SEDPES have recently been authorized to use correspondent networks and open accounts remotely, and SEDPE customers are authorized to have more than one account per SEDPE, which may further encourage the utilization of SEDPEs in the Colombian financial market. Additionally, along with the global trend to increase the use of technology for different financial services, new regulations may be issued by the Colombian government in order to facilitate the incorporation of these entities into the financial system. Such changes and trends may increase competition in the Colombian financial market and may impair our ability to expand or retain our customer base. On July 31, 2018, the Colombian Ministry of Finance issued Decree No. 1357, which permitted the creation of companies with the purpose of managing electronic systems destined for crowdfunding. The creation of these companies may have an impact on our business, given that they offer an alternative to finance projects that is different from traditional loans.
Pursuant to the objective of the Colombian government in adopting the recommendations set forth by Basel III, the Colombian Ministry of Finance issued Decree No. 1477 of 2018 which provides for complementary ratio mechanisms such as (i) an additional primary solvency ratio (Relación de Solvencia Básica Adicional), (ii) a leverage ratio (Relación de Apalancamiento), and (iii) buffers (Colchones). Financial institutions shall comply with Decree No. 1477 of 2018, no later than February 6, 2020, except on the matters regarding the additional primary solvency ratio and the buffers, which will have a gradual implementation for a four year term, starting after February 6, 2020. See “Item 4. Colombian Banking Regulation and Supervision – Capital Adequacy Requirements Amendment.”
In addition, recently, the Colombian government has expressed its intention to submit this year a bill before the Colombian Congress to change the equivalency of the Colombian Peso by removing three zeroes from current denomination, which may oblige us to incur various operational costs in order to guarantee the continuity of our daily operations.
We also have limited operations outside of Chile and Colombia, including Peru, Spain and the United States. Changes in the laws or regulations applicable to our business in the countries where we operate, or the adoption of new laws, and related regulations or their applicability or interpretation, may have an adverse effect on our operations and financial condition.
We are subject to regulatory inspections, examinations and to the imposition of fines by regulatory authorities in Chile and in Colombia.
We are also subject to various inspections, examinations, inquiries, audits and other regulatory requirements by Chilean and Colombian regulatory authorities.
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 other sanctions, fines, restrictions on our business or other penalties in the future as a result ofnon-compliance. If other 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.
Pursuant to letter No. 16,191, the SBIF fined the Bank for an alleged infringement to the individual lending limits provided by Article 84 No. 1, in relation to Article 85 of the Chilean General Banking Act. The total amount was Ch$21,765 million. In an extraordinary meeting on January 4, 2016, the Bank’s board of directors agreed: to communicate the letter as a material event, expressing disagreement with the alleged infringement and to instruct management to exercise each and every legal action in order to obtain the annulment of the fines.
On January 8, 2016, the Bank paid the full amount of the fines as a mandatory condition precedent to exercise its appeal rights. On January 18, 2016, the Bank brought an action before the Santiago Court of Appeals seeking the annulment of the fines. Pursuant to a final ruling by the Court of Appeals of Santiago dated August 31, 2016, the fines imposed by the SBIF pursuant to letter No.16,191 were declared illegal. In accordance with Article 22 of the General Law on Banks, the favorable ruling obtained by Itaú Corpbanca is not subject to appeal.
On September 6, 2016, the SBIF filed a complaint (Recurso de Queja) against the judges of the Court of Appeals of Santiago before the Supreme Court, which was dismissed by the Supreme Court on May 9, 2017.
On October 19, 2017, the SBIF filed a complaint against Itaú Corpbanca regarding the same alleged violations, giving rise to a new administrative procedure. On November 14, 2017, Itaú Corpbanca filed a special constitutional rights action (Acción de Protección) before the Santiago Court of Appeals that was declared inadmissible. This ruling was confirmed by the Supreme Court. On November 22, 2017, Itaú Corpbanca filed a defense arguing that it acted in full compliance with applicable law. Pursuant to resolution No. 101, dated January 4, 2019, the SBIF partially accepted the defenses of Itaú Corpbanca, imposing a fine for one of the three charges originally formulated. The total amount of the fine imposed was Ch$5,985,328,978. In an extraordinary meeting on January 14, 2019, Itaú Corpbanca’s board of directors analyzed the grounds and consequences of resolution No. 101, including potential courses of action, and reaffirmed the conviction that Itaú Corpbanca has acted in compliance with applicable law. Notwithstanding the foregoing, Itaú Corpbanca decided not to file any appeals against the SBIF’s resolution.
Security breaches, including cyber-attacks, could materially and adversely affect our business, financial condition and results of operations.
We manage and hold confidential personal information of customers in the conduct of our banking operations, and offer various internet-based services to our clients, including online banking services. We could be liable for breaches of security in our online banking services, including cybersecurity breaches. The secure transmission of confidential information over the Internet is essential to maintain our clients’ confidence in our online services. In certain cases, we are responsible for protecting customers’ proprietary information as well as their accounts with us. We have security measures and processes in place to defend against cybersecurity risks; however, cyber-attacks are rapidly evolving (including computer viruses, malicious code, phishing or other information security breaches), and we may not be able to anticipate or prevent all such attacks, which could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our customers’ confidential, proprietary and other information. Individuals may also seek to intentionally disrupt our online banking services or compromise the confidentiality of customer information with criminal intent. Although we have procedures and controls to safeguard personal information in our possession, as well as systems and processes that are designed to recognize and assist in preventing security breaches, failure to protect against or mitigate breaches of security or other unauthorized disclosures remains a possibility. If such event occurs, the Bank could be in breach of privacy laws or other laws and/or regulations, which could make us subject to legal proceedings and administrative sanctions, including damages, and in turn adversely affect our ability to offer and grow our online services, cause a loss of customer relationships, negatively impact our reputation, and have an adverse effect on our business, results of operations and financial condition.
In recent years, computer systems of companies and organizations have been targeted, not only by cyber criminals, but also by activists and rogue states. 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, for example by failing to update our systems and processes in response to new threats, our reputation could be harmed and our operating results, financial condition and prospects could be adversely affected 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.
Our loan and investment portfolios are subject to risk of prepayment, which may result in reinvestment of assets on less profitable terms.
Our 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 adversely affects our operating results. Prepayment risk also has an adverse impact on our residential mortgage portfolio, since prepayments could shorten the weighted average life of this portfolio, which may result in a mismatch in funding or in reinvestment at lower yields. Prepayment risk is inherent to our commercial activity and an increase in prepayments could have a material adverse effect on our business, financial condition and results of operations.
Exposure to government debt could have an adverse effect on our business, financial condition and results of operations.
We invest in debt securities issued by the Chilean and Colombian governments, the Central Bank of Chile and the Chilean Ministry of Finance that, for the most part, are short-term and highly liquid instruments. As of December 31, 2018, 4.7% of our total assets comprised securities issued by the Chilean government and 3.3% of our total assets comprised securities issued by foreign governments, mostly by the Colombian government. If the Chilean or Colombian governments default on the timely payment of such securities, our business, financial condition and results of operations may be adversely affected.
A downgrade of Itaú Corpbanca’s counterparty credit rating by international or domestic credit rating agencies could materially and adversely affect our debt credit rating for domestic and international debt, our business, our future financial performance, shareholders’ equity and the value of our securities.
Following the consummation of the Merger, Standard & Poor’s and Moody’s upgraded our long and short term ratings toBBB+/A-2 andA3/Prime-2, respectively. On August 22, 2018, Standard and Poor’s confirmed the aforementioned ratings and revised our rating outlook from “Negative” to “Stable,” as concerns related to Chile’s economic imbalances have diminished.
Any adverse revision to our credit ratings in Chile or Colombia for domestic and international debt by international and domestic rating agencies may adversely affect our debt ratings, and, as a result, our cost of funding, including interest rates paid on our deposits and securities. If this were to happen, it could have a material adverse effect on our business, future financial performance, shareholders’ equity and the value of our securities.
Mismatches in the maturity of our loan portfolio and our funding sources as well as exchange rate fluctuations related to our funding sources could materially and adversely affect our business, financial condition and results of operations and our capacity to expand our loan business.
We are exposed to maturity mismatches between our loans and sources of funding. The majority of our loan portfolio consists of fixed interest rate loans, and the yield from our loans depends on our ability to balance our cost of funding with the interest rates we charge to our borrowers. An increase in market interest rates in Chile or Colombia could increase our cost of funding, especially the cost of time deposits, and could reduce the spread we earn on our loans, materially and adversely affecting our business, financial condition and results of operations.
Any mismatch between the maturity of our loan portfolio and our sources of funding would magnify the effect of any imbalance in interest rates, also representing a liquidity risk if we fail to obtain funding on an ongoing basis. In addition, since part of our funding comes from securities denominated in U.S. dollars or other foreign currencies that we issue abroad, any devaluation of the Chilean or Colombian peso against the U.S. dollar or such other foreign currencies could increase the cost of funding in relation to these securities. An increase in our total cost of funds for any of these reasons could result in an increase in the interest rates on our loans, which could, as a result, affect our business, financial condition and results of operations and our ability to attract new customers and expand our loan business.
We are subject to financial and operational risks associated with derivative transactions.
We enter into derivative transactions primarily to deliver services to our clients, for hedging purposes and, on a limited basis, for trading purposes. These transactions are subject to market, liquidity, counterparty (the risk of insolvency or other inability of a counterparty to perform its obligations to us) and operational risks.
Market practices and documentation for derivative transactions in Chile and Colombia 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 develop adequate control and administration systems and to hire and retain qualified personnel. Moreover, our ability to monitor and analyze these transactions depends on our information technology systems. These factors may further increase risks associated with derivative transactions and, if they are not adequately controlled, could materially and adversely affect our results of operations and financial condition.
Our level of insurance might not be sufficient to fully cover all liabilities that may arise in the course of our business and insurance coverage might not be available in the future.
We maintain insurance for losses resulting from fire, explosions, floods and electrical shorts and outages at our various buildings and facilities. We also have civil liability insurance covering material and physical losses and damages that may be suffered by third parties. We cannot assure you that our level of insurance is sufficient to fully cover all liabilities that may arise in the course of our business or that insurance will continue to be available in the future. In addition, we may not be able to obtain insurance on comparable terms in the future. Our business and results of operations may be adversely affected if we incur liabilities that are not fully covered by our insurance policies.
The occurrence of natural disasters or terrorist events in the regions where we operate could impair our ability to conduct business effectively and could adversely affect our results of operations.
We are exposed to the risk of natural disasters such as earthquakes or tsunamis as well as floods, mudslides and volcanic eruptions in the regions where we operate. We also recognize that natural disasters could be amplified by the effects of the climate change phenomenon. In the event of a natural disaster, unanticipated problems with our disaster recovery systems could have a material adverse impact on our ability to conduct business in the affected region, particularly if those problems affect our computer-based data processing, transmission, storage and retrieval systems and destroy valuable data. In addition, if a significant number of our local employees and managers were unavailable in the event of a disaster, our ability to effectively conduct business could be severely compromised. A natural disaster, such as the earthquake and tsunami that affected Chile in 2010, could damage some of our branches and automated teller machines, or ATMs, forcing us to close damaged facilities or locations, increased recovery costs as well as cause economic harm to our clients. A natural disaster or multiple catastrophic events could have a material adverse effect on local businesses in the affected region and could result in substantial volatility or adverse harm in our business, financial condition and results of operations for any fiscal quarter or year. Furthermore, we are exposed to terrorist events resulting in physical damage to our buildings (including our headquarters, offices, branches and ATMs) and/or injury to customers, employees and others. Although we maintain comprehensive contingency plans and security procedures, there can be no assurance that terrorist events will not occur and that their occurrence will not have a material adverse impact on our business and results of operations for any fiscal quarter or year.
Other businesses controlled by Itaú Unibanco may face difficulties from a business or reputational standpoint and affect us.
We are currently controlled by Itaú Unibanco, which as of March 31, 2019 had a 38.14% beneficial ownership stake in us. Since we are part of a larger conglomerate of companies owned by Itaú Unibanco, if other businesses controlled by Itaú Unibanco face difficulties from a business or reputational standpoint, we may suffer adverse consequences. If we were to be associated with these events, our reputation could be harmed, which could have a material adverse effect on our business, financial condition and results of operations.
We are subject to arbitration and litigation proceedings that could materially adversely affect our business, financial position and results of operations if an unfavorable ruling were to occur.
As described in “Item 8. Financial Information—A. Consolidated Statements and other Financial Information—Legal Proceedings,” we are currently subject to legal proceedings. Litigation is subject to inherent uncertainties, and unfavorable rulings may occur. From time to time, we may become involved in arbitration, litigation and other legal proceedings relating to claims arising from our operations in the normal course of business. We cannot assure you that the current or other legal proceedings will not materially affect our ability to conduct our business in the manner that we expect or otherwise have a material adverse effect on our business, financial condition and results of operations should an unfavorable ruling occur. See “Item 8. Financial Information—A. Consolidated Statements and other Financial Information—Legal Proceedings.”
In December 2016, Helm LLC (“Helm”) initiated an arbitration proceeding before the ICC International Court of Arbitration (the “ICC”) against Corp Group Holding Inversiones Ltda. (“Corp Group”) and Itaú Corpbanca (collectively, “Respondents”). Helm alleged that the Respondents had breached (i) the Amended and Restated Shareholders Agreement of HB Acquisition S.A.S., dated July 31, 2013, which governs Itaú Corpbanca’s subsidiary Itaú Corpbanca Colombia (formerly Banco Santander Colombia S.A.), and (ii) the Transaction Agreement, dated January 29, 2014, as amended and restated, which governs the merger between Itaú Chile S.A. and Corpbanca, by which Itaú Corpbanca was formed, and the potential acquisition by Itaú Corpbanca of certain shares of Itaú Corpbanca Colombia from Corp Group.
During the course of the proceedings, Helm demanded that Itaú Corpbanca and Corp Group effect the acquisition of its shares of Itaú Corpbanca Colombia at a price in excess of the price agreed with Corp Group in the Transaction Agreement, which would have totaled approximately $850 million (with interest at 9% per year from January 29, 2014 onwards). On February 28, 2019, a three-member Tribunal of the ICC rejected Helm’s demand and ordered Helm to sell its shares of Itaú Corpbanca Colombia, which represent 19.44% of the equity in Itaú Corpbanca Colombia, to Respondents at approximately $299 million (including interest at LIBOR plus 2.7% per year from April 1, 2016 onwards). Itaú Corpbanca intends to purchase the shares from Helm. This price of $299 million implies a valuation multiple of 1.36 times the book value of Itaú Corpbanca Colombia as of December 31, 2018 and is consistent with the valuations of Itaú Corpbanca Colombia in Itaú Corpbanca’s financial statements. The acquisition, when completed, will result in an estimated impact of 0.82% on Itaú Corpbanca’s Common Equity Tier 1 capital, as if we were applying the new regulatory capital requirements on a fully loaded basis, under the Basel III standards (using exchange rates as of February 28, 2019). The purchase of shares of Itaú Corpbanca Colombia by Itaú Corpbanca will be subject to regulatory approvals in Colombia, Chile and Brazil.
We may incur financial losses and damages to our reputation from environmental and social risks.
In recent years, environmental and social risks have been recognized as increasingly relevant, since they can affect the creation of shared value in the short, medium and long terms from the standpoint of the organization and its main stakeholders.
Environmental and social issues may affect our activities and the revenue of our clients, causing reputational damage, delays in payments or default, especially in the case of significant environmental and social incidents. Environmental and social risks become more evident when we finance projects, where should there be environmental damage caused by projects in which we were involved with respect to the financing thereof, we could be deemed to be indirectly responsible for such damage and could consequently be held liable for certain damages.
We may not effectively manage risks associated with the replacement of benchmark indices.
A significant portion of our income, expenses and liabilities is directly tied to interest rates. Therefore, our results of operations and financial condition are significantly affected by inflation, interest rate fluctuations and related government monetary policies. In addition, interest rate, equity, foreign exchange rate and other types of indices which are deemed to be “benchmarks” are the subject of increased regulatory scrutiny. Some of these reforms are already effective while others are yet to be implemented, including the majority of the provisions of the EU Benchmark Regulation (Regulation (EU) 2016/1011). In 2017, the Chief Executive of the U.K. Financial Conduct Authority (the “FCA) announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR 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 perform differently than in the past, or to disappear entirely, or have other consequences, which cannot be fully anticipated, which introduce a number of risks for us including legal risks arising from potential changes required to document new and existing transactions, financial risks arising from any changes in the valuation of financial instruments linked to benchmark rates, pricing risks arising from how changes to benchmark indices could impact pricing mechanisms on some instruments, operational risks arising from the potential requirement to adapt information technology systems, trade reporting infrastructure and operational processes, and 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. Accordingly, 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.
Risks Relating to Chile, Colombia and Other Countries in Which We Operate
Chile has different corporate disclosure and accounting standards than those you may be familiar with in the United States.
As a regulated financial institution, we are required to submit to the SBIF unaudited consolidated and unconsolidated balance sheets and income statements on a monthly basis. These statements have to be prepared in accordance with the Compendium of Accounting Standards (Compendio de Normas Contables y Manual del Sistema de Información), or the “Compendium,” and the rules of the SBIF. Certain exceptions introduced by the SBIF prevent banks from achieving full convergence, for example loan loss provisions, assets received in lieu of payment among others. Also, the SBIF is vested with the authority to issue specific orders to banks, including on accounting matters. In situations not addressed by the guidance issued by the SBIF, institutions must follow IFRS. However, our consolidated financial statements as of and for the three years ended December 31, 2018 have been prepared in accordance with IFRS in order to comply with SEC requirements.
Our consolidated financial statements include the necessary adjustments and reclassifications to the incorporated financial statements of each of Itaú Corpbanca’s subsidiaries and the New York Branch to bring their accounting policies and valuation criteria into line with those applied by the Bank, in accordance with IFRS.
The securities laws of Chile, which govern open or publicly listed companies such as ours, have as one of their principal objectives promoting disclosure of all material corporate information to the public. Chilean disclosure requirements, however, differ from those in the United States in some important respects. Although Chilean law imposes restrictions on insider trading and price manipulation, applicable Chilean laws are different from those in the United States and in certain respects the Chilean securities markets are not as highly regulated and supervised as the United States securities markets.
Chile may impose controls on foreign investment and repatriation of investments that may affect our investors’ investment in, and earnings from, our ADSs.
Investors who are not Chilean residents are required to provide the Central Bank of Chile with information related to equity investments and conduct such operations within the Formal Exchange Market. See “Item 10. Additional Information—D. Exchange Controls” for a discussion of the types of information required to be provided.
Owners 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 converted into U.S. dollars and distributed net of foreign currency exchange fees and fees of the depositary and will be subject to Chilean withholding tax, currently imposed at a rate of 35% (subject to credits in certain cases). If for any reason, including changes in Chilean laws or regulations, the depositary were unable to convert Chilean pesos to U.S. dollars, investors in our ADSs may receive dividends and other distributions, if any, in Chilean pesos.
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 could be imposed in the future and we cannot advise you as to the duration or impact of such restrictions, if imposed.
The legal restrictions on the exposure of Chilean pension funds may adversely affect our access to funding.
We are exposed to counterparty risk in addition to credit risks associated with our lending activities. We routinely conduct transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutional clients. 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.
We may incur losses if any of our counterparties fail to meet their contractual obligations, due to bankruptcy, lack of liquidity, operational failure or other reasons that are exclusively attributable to our counterparties. 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, 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. Failure to meet contractual obligations by our counterparties could have a material adverse effect on our business, financial condition and results of operations.
We rely on third parties for important products and services.
Third-party vendors provide key components of our business infrastructure such as different loan servicing systems, internet connections and network access. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to customers and otherwise to conduct business. Replacing these third-party vendors could also entail significant delays and expense and could negatively impact our business.
We may experience operational problems, errors or misconduct.
We are exposed to many types of operational risks, including the risk of misconduct by employees and outsiders, failure to obtain proper authorizations, failure to properly document transactions, equipment failures and errors by employees. Although we maintain a system of operational controls, there can be no assurances that operational problems or errors will not occur and that their occurrence will not have a material adverse effect on our business, financial condition and results of operations.
Our anti-money laundering and anti-terrorist financing measures may not prevent third parties from using us as a conduit for those activities, which could have a material adverse effect on our business, financial condition and results of operations.
We are required to comply with applicable anti-money laundering and anti-terrorist financing laws and regulations, and we have adopted various policies and procedures, including internal controls and “know-your customer” procedures, aimed at preventing money laundering and terrorist financing. In addition, because we also rely on our correspondent banks having their own appropriate anti-money laundering and anti-terrorist financing procedures, we use what we believe are commercially reasonable procedures for monitoring our correspondent banks. However, these measures, procedures and compliance may not be entirely effective in preventing third parties from using us (and our correspondent banks) as a conduit for money laundering (including illegal cash operations) or terrorist financing without our (and our correspondent banks’) knowledge or consent. If we were to be associated with money laundering (including illegal cash operations) or terrorist financing, our reputation could be harmed and we could become subject to fines, sanctions or legal enforcement (including being added to any “blacklists” that would prohibit certain parties from engaging in transactions with us), which could have a material adverse effect on our business, financial condition and results of operation.
Banking regulations may restrict our operations and thereby adversely affect our financial condition and results of operations.
We are subject to regulation in the markets in which we operate, including by the SBIF and by the Central Bank of Chile in Chile, and by the Central Bank of Colombia, the Colombian Ministry of Finance, the Colombian Superintendency of Finance, the Superintendency of Industry and Commerce (Superintendencia de Industria y Comercio), or SIC, and the Self-Regulatory Organization (Autorregulador del Mercado de Valores-AMV, or the SRO) in Colombia.
Pursuant to the Chilean General Banking Act in Chile and the Financial System Organic Act (Estatuto Orgánico del Sistema Financiero) in Colombia, we may, subject to the necessary regulatory approvals, engage in the commercial banking business and in certain businesses in addition to traditional commercial banking. Such additional businesses may include securities brokerage, mutual fund management, securitization, insurance brokerage, leasing, factoring, financial advisory, custody and transportation of securities, loan collection and financial services. Regulators may in the future impose more restrictive limitations on the activities of banks, including us.
New capital adequacy requirements could require us to inject further capital into our business as well as in businesses we acquire, or to capitalize dividends, restrict the type or volume of transactions we enter into, or set limits on or require the change of rates or fees that we charge on certain loans or other products, any of which could lower the return on our investments, assets and equity. We may also face increased compliance costs and limitations on our ability to pursue certain business opportunities.
As a result of the 2008 global financial crisis, there has been an increase in government regulation of the financial services industry in many countries. Such regulation may also be increased in Chile and/or in Colombia, including the imposition of higher capital requirements, heightened disclosure standards and restrictions on certain types of transaction structures. In addition, numerous novel regulatory proposals have been discussed or proposed. If enacted, new regulations could require us to inject further capital into our business, restrict the type or volume of transactions we enter into, or set limits on or require the modification of rates or fees that we charge on certain loans or other products, any of which could lower the return on our investments, assets and equity. We may also face increased compliance costs and limitations on our ability to pursue certain business opportunities.
On February 23, 2017, Law No. 21,000, was published. This new law modifies, among other matters, the corporate governance and operation of the Chilean regulator for securities and insurance and establishes the Chilean Commission for the Financial Market (Comisión para el Mercado Financiero, or the CMF). For more information, see “Item 4. Information on the Company—B. Business Overview—Changes in the Governance of Our Regulators.” These changes in our regulators’ laws may result in further changes in banking regulations or other consequences that could have a material adverse effect on our financial condition or results of operations.
The banking regulatory and capital markets environment in which we operate is continually evolving and may change.
Changes in banking regulations may materially and adversely affect our business, financial condition and results of operations. Chilean laws, regulations, policies and interpretations of laws relating to the financial system are continually evolving and changing.
In Chile, new regulations have been enacted in the past years which have, among others things, (a) increased the limit on the amount that a bank is allowed to grant as an unsecured loan to a single individual or entity (currently set at 10% of its regulatory capital and up to 30% of its regulatory capital if any loans granted in excess of the 10% are secured by certain collateral, for persons non-related to the bank and at 5% or 25% if loans in excess of 5% are secured by certain collateral, for certain groups of persons related to the bank), (b) allowed marketing and promotion activities of credit products and services by non-Chilean banks with representative offices in Chile, (c) strengthened consumers’ rights in connection with financial products and services; and (d) lowered the maximum legal interest rate that can be imposed in general loans valued at over UF 200. These amendments have affected the Chilean banking industry in several ways including by increasing competition, increasing the risks associated with the growth of loan portfolios, providing additional scrutiny regarding prices and contracts for financial products and have caused a loss of flexibility in the determination of price and product distribution strategies in the retail banking unit.
Colombia has also experienced recent changes in applicable laws, regulations and policies, such as those regarding financial inclusion and consumer protection. In order to promote financial inclusion, the Colombian Congress passed Law No. 1,735 of 2014, which created a new type of financial entity called Specialized Electronic Deposit and Payment Institutions (Sociedades Especializadas en Depósitos y Pagos Electrónicos, or SEDPEs). Previously, the only activities these entities were authorized to perform were remote cash-in and cash-out deposit operations, the allocation of customers’ funds in electronic deposit accounts and the offering of transactional services such as remittances, transfers and payments. However, SEDPES have recently been authorized to use correspondent networks and open accounts remotely, and SEDPE customers are authorized to have more than one account per SEDPE, which may further encourage the utilization of SEDPEs in the Colombian financial market. Additionally, along with the global trend to increase the use of technology for different financial services, new regulations may be issued by the Colombian government in order to facilitate the incorporation of these entities into the financial system. Such changes and trends may increase competition in the Colombian financial market and may impair our ability to expand or retain our customer base.
In addition, recently, the Colombian government has expressed its intention to submit this year a bill before the Colombian Congress to change the equivalency of the Colombian Peso by removing three zeroes from current denomination, which may oblige us to incur various operational costs in order to guarantee the continuity of our daily operations.
We also have limited operations outside of Chile and Colombia, including Peru, Spain and the United States. Changes in the laws or regulations applicable to our business in the countries where we operate, or the adoption of new laws, and related regulations or their applicability or interpretation, may have an adverse effect on our operations and financial condition.
We are subject to regulatory inspections, examinations and to the imposition of fines by regulatory authorities in Chile and in Colombia.
We are also subject to various inspections, examinations, inquiries, audits and other regulatory requirements by Chilean and Colombian regulatory authorities.
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 other sanctions, fines, restrictions on our business or other penalties in the future as a result of non-compliance. If other 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.
Pursuant to letter No. 16,191, the SBIF fined the bank for an alleged infringement to the individual lending limits provided by article 84 No. 1, in relation to article 85 of the Chilean General Banking Act. The total amount was Ch$21,765 million. In an extraordinary meeting on January 4, 2016, the bank’s board of directors agreed: to communicate the letter as a material event, expressing disagreement with the alleged infringement and to instruct management to exercise each and every legal action in order to obtain the annulment of the fines.
On January 8, 2016, the bank paid the full amount of the fines as a mandatory condition precedent to exercise its appeal rights. On January 18, 2016, the bank brought an action before the Santiago Court of Appeals seeking the annulment of the fines. Pursuant to a final ruling by the Court of Appeals of Santiago dated August 31, 2016, the fines imposed by the SBIF pursuant to letter No.16,191 were declared illegal. In accordance with Article 22 of the General Law on Banks, the favorable ruling obtained by Itaú Corpbanca is not subject to appeal.
On September 6, 2016, the SBIF filed a complaint (recurso de queja) against the judges of the Court of Appeals of Santiago before the Supreme Court, which was dismissed by the Supreme Court on May 9, 2017.
On October 19, 2017, the SBIF filed a complaint against Itaú Corpbanca regarding the same alleged violations, giving rise to a new administrative procedure. On November 14, 2017, Itaú Corpbanca filed a special constitutional rights action (acción de protección) before the Santiago Court of Appeals that was declared inadmissible. This ruling was confirmed by the Supreme Court. The administrative procedure is still pending.
Failure to protect personal information could materially and adversely affect our business, financial condition and results of operations.
We manage and hold confidential personal information of customers in the conduct of our banking operations, and offer various internet-based services to our clients, including online banking services. We could be liable for breaches of security in our online banking services, including cybersecurity breaches. The secure transmission of confidential information over the Internet is essential to maintain our clients’ confidence in our online services. In certain cases, we are responsible for protecting customers’ proprietary information as well as their accounts with us. We have security measures and processes in place to defend against these cybersecurity risks but these cyber-attacks are rapidly evolving (including computer viruses, malicious code, phishing or other information security breaches), and we may not be able to anticipate or prevent all such attacks, which could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our customers’ confidential, proprietary and other information. Individuals may also seek to intentionally disrupt our online banking services or compromise the confidentiality of customer information with criminal intent. Although we have procedures and controls to safeguard personal information in our possession, as well as systems and processes that are designed to recognize and assist in preventing security breaches, failure to protect against or mitigate breaches of security or other unauthorized disclosures could constitute a breach of privacy or other laws, subject us to legal actions and administrative sanctions as well as damages, adversely affect our ability to offer and grow our online services, result in the loss of customer relationships, negatively impact our reputation, and have an adverse effect on our business, results of operations and financial condition.
In recent years, computer systems of companies and organizations have been targeted, not only by cyber criminals, but also by activists and rogue states. 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, for example by failing to update our systems and processes in response to new threats, our reputation could be harmed and our operating results, financial condition and prospects could be adversely affected 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.
Our loan and investment portfolios are subject to risk of prepayment, which may result in reinvestment of assets on less profitable terms.
Our 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 adversely affects our operating results. Prepayment risk also has an adverse impact on our residential mortgage portfolio, since prepayments could shorten the weighted average life of this portfolio, which may result in a mismatch in funding or in reinvestment at lower yields. Prepayment risk is inherent to our commercial activity and an increase in prepayments could have a material adverse effect on our business, financial condition and results of operations.
Exposure to government debt could have an adverse effect on our business, financial condition and results of operations.
We invest in debt securities issued by the Chilean and Colombian governments, the Central Bank of Chile and the Chilean Ministry of Finance that, for the most part, are short-term and highly liquid instruments. As of December 31, 2017, 6.4% of our total assets comprised of securities issued by the Chilean government and 3.9% of our total assets comprised securities issued by foreign governments, mostly by the Colombian government. If the Chilean or Colombian governments default on the timely payment of such securities, our business, financial condition and results of operations may be adversely affected.
A downgrade of Itaú Corpbanca’s counterparty credit rating by international or domestic credit rating agencies could materially and adversely affect our debt credit rating for domestic and international debt, our business, our future financial performance, shareholders’ equity and the value of our securities.
Following the consummation of the Merger, Standard & Poor’s and Moody’s upgraded our long and short term ratings to BBB+/A-2 and A3/Prime-2, respectively. On August 4, 2017, Standard and Poor’s confirmed the aforementioned ratings and removed the ‘CreditWatch Negative’ assigned on July 14, 2017 following the sovereign downgrade. The Outlook is ‘Negative’ reflecting S&P’s view that there is at least a one-in-three chance that they could downgrade us and other eight Chilean financial institutions if growth in lending and property prices picks up in Chile, leading to pressures on economic imbalances given the country’s already weakened external position. The latter led to a downgrade of Chile sovereign rating on July 13, 2017.
Any adverse revision to our credit ratings in Chile or Colombia for domestic and international debt by international and domestic rating agencies may adversely affect our debt ratings, and, as a result, our cost of funding, including interest rates paid on our deposits and securities. If this were to happen, it could have a material adverse effect on our business, future financial performance, shareholders’ equity and the value of our securities.
Mismatches in the maturity of our loan portfolio and our funding sources as well as exchange rate fluctuations related to our funding sources could materially and adversely affect our business, financial condition and results of operations and our capacity to expand our loan business.
We are exposed to maturity mismatches between our loans and sources of funding. The majority of our loan portfolio consists of fixed interest rate loans, and the yield from our loans depends on our ability to balance our cost of funding with the interest rates we charge to our borrowers. An increase in market interest rates in Chile or Colombia could increase our cost of funding, especially the cost of time deposits, and could reduce the spread we earn on our loans, materially and adversely affecting our business, financial condition and results of operations.
Any mismatch between the maturity of our loan portfolio and our sources of funding would magnify the effect of any imbalance in interest rates, also representing a liquidity risk if we fail to obtain funding on an ongoing basis. In addition, since part of our funding comes from securities denominated in U.S. dollars or other foreign currencies that we issue abroad, any devaluation of the Chilean or Colombian peso against the U.S. dollar or such other foreign currencies could increase the cost of funding in relation to these securities. An increase in our total cost of funds for any of these reasons could result in an increase in the interest rates on our loans, which could, as a result, affect our business, financial condition and results of operations and our ability to attract new customers and expand our loan business.
We are subject to financial and operational risks associated with derivative transactions.
We enter into derivative transactions primarily to deliver services to our clients, for hedging purposes and, on a limited basis, for trading purposes. These transactions are subject to market, liquidity, counterparty (the risk of insolvency or other inability of a counterparty to perform its obligations to us) and operational risks.
Market practices and documentation for derivative transactions in Chile and Colombia 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 develop adequate control and
administration systems and to hire and retain qualified personnel. Moreover, our ability to monitor and analyze these transactions depends on our information technology systems. These factors may further increase risks associated with derivative transactions and, if they are not adequately controlled, could materially and adversely affect our results of operations and financial condition.
Our level of insurance might not be sufficient to fully cover all liabilities that may arise in the course of our business and insurance coverage might not be available in the future.
We maintain insurance for losses resulting from fire, explosions, floods and electrical shorts and outages at our various buildings and facilities. We also have civil liability insurance covering material and physical losses and damages that may be suffered by third parties. We cannot assure you that our level of insurance is sufficient to fully cover all liabilities that may arise in the course of our business or that insurance will continue to be available in the future. In addition, we may not be able to obtain insurance on comparable terms in the future. Our business and results of operations may be adversely affected if we incur liabilities that are not fully covered by our insurance policies.
The occurrence of natural disasters or terrorist events in the regions where we operate could impair our ability to conduct business effectively and could adversely affect our results of operations.
We are exposed to the risk of natural disasters such as earthquakes or tsunamis as well as floods, mudslides and volcanic eruptions in the regions where we operate. We also recognize that natural disasters could be amplified by the effects of the climate change phenomenon. In the event of a natural disaster, unanticipated problems with our disaster recovery systems could have a material adverse impact on our ability to conduct business in the affected region, particularly if those problems affect our computer-based data processing, transmission, storage and retrieval systems and destroy valuable data. In addition, if a significant number of our local employees and managers were unavailable in the event of a disaster, our ability to effectively conduct business could be severely compromised. A natural disaster, such as the earthquake and tsunami that affected Chile in 2010, could damage some of our branches and automated teller machines, or ATMs, forcing us to close damaged facilities or locations, increased recovery costs as well as cause economic harm to our clients. A natural disaster or multiple catastrophic events could have a material adverse effect on local businesses in the affected region and could result in substantial volatility or adverse harm in our business, financial condition and results of operations for any fiscal quarter or year. Furthermore, we are exposed to terrorist events resulting in physical damage to our buildings (including our headquarters, offices, branches and ATMs) and/or injury to customers, employees and others. Although we maintain comprehensive contingency plans and security procedures, there can be no assurance that terrorist events will not occur and that their occurrence will not have a material adverse impact on our business and results of operations for any fiscal quarter or year.
Other businesses controlled by Itaú Unibanco may face difficulties from a business or reputational standpoint and affect us.
We are currently controlled by Itaú Unibanco, which as of April 2, 2018 had a 36.06% beneficial ownership stake in us. Since we are part of a larger conglomerate of companies owned by Itaú Unibanco, if other businesses controlled by Itaú Unibanco face difficulties from a business or reputational standpoint, we may suffer adverse consequences. If we were to be associated with these events, our reputation could be harmed, which could have a material adverse effect on our business, financial condition and results of operations.
We are subject to arbitration and litigation proceedings that could materially adversely affect our business, financial position and results of operations if an unfavorable ruling were to occur.
As described in “Item 8. Financial Information—A. Consolidated Statements and other Financial Information—Legal Proceedings,” we are currently subject to legal proceedings. Litigation is subject to inherent uncertainties, and unfavorable rulings may occur. From time to time, we may become involved in arbitration, litigation and other legal proceedings relating to claims arising from our operations in the normal course of business. We cannot assure you that the current or other legal proceedings will not materially affect our ability to conduct our business in the manner that we expect or otherwise have a material adverse effect on our business, financial condition and results of operations should an unfavorable ruling occur. See “Item 8. Financial Information—A. Consolidated Statements and other Financial Information—Legal Proceedings.”
On December 20, 2016, Helm LLC initiated an arbitration proceeding (the “Arbitration”) against respondents Itaú Corpbanca and Corp Group Holding Inversiones Ltda. (“Corp Group”), and nominal respondent Itaú Corpbanca Colombia (collectively with Corp Group and Itaú Corpbanca, “Respondents”), by filing a Request for Arbitration in the ICC’s International Court of Arbitration in New York. Helm LLC alleged that Corp Group and Itaú Corpbanca had breached the Amended and Restated Shareholders Agreement of HB Acquisition S.A.S., dated July 31, 2013, between shareholders of Itaú Corpbanca Colombia (the “SHA”). As relief, Helm LLC is seeking, among other things, damages of $598 million, reflecting what it claims is the value to which it is entitled in return for its shares in Itaú Corpbanca Colombia, plus interest. On February 14, 2017, Respondents filed their answers to Helm LLC’s Request for Arbitration, denying Helm LLC’s claims, and Corp Group and Itaú Corpbanca filed a counterclaim against Helm LLC for breaching the SHA. As relief under their counterclaim, Corp Group and Itaú Corpbanca are seeking, among other things, for Helm LLC’s rights under the SHA to be terminated. On April 19, 2017, Helm LLC filed a reply to Corp Group and Itaú Corpbanca’s counterclaim. The Arbitration has continued pursuant to the applicable procedures and an evidentiary hearing is expected to take place in July 2018. Itaú Corpbanca believes Helm LLC’s claim is without merit and intends to enforce its rights under the SHA and applicable law.
We may incur financial losses and damages to our reputation from environmental and social risks.
In recent years, environmental and social risks have been recognized as increasingly relevant, since they can affect the creation of shared value in the short, medium and long terms from the standpoint of the organization and its main stakeholders.
Environmental and social issues may affect our activities and the revenue of our clients, causing reputational damage, delays in payments or default, especially in the case of significant environmental and social incidents. Environmental and social risks become more evident when we finance projects, where should there be environmental damage caused by projects in which we were involved with respect to the financing thereof, we could be deemed to be indirectly responsible for such damage and could consequently be held liable for certain damages.
Risks Relating to Chile, Colombia and Other Countries in Which We Operate
Chile has different corporate disclosure and accounting standards than those you may be familiar with in the United States.
As a regulated financial institution, we are required to submit to the SBIF unaudited consolidated and unconsolidated balance sheets and income statements on a monthly basis. As of January 2008, the statements have to be prepared in accordance with the Compendium of Accounting Standards (Compendio de Normas Contables y Manual del Sistema de Información), or the “Compendium,” and the rules of the SBIF. Although Chilean banks are required to apply IFRS as of January 1, 2009, certain exceptions introduced by the SBIF prevent banks from achieving full convergence, for example loan loss provisions, assets received in lieu of payment among others. Also, the SBIF is vested with the authority to issue specific orders to banks, including on accounting matters. In situations not addressed by the guidance issued by the SBIF, institutions must follow the generally accepted accounting principles issued by the Association of Chilean Accountants, which coincide with IFRS. However, our consolidated financial statements as of and for the three years ended December 31, 2017 have been prepared in accordance with IFRS in order to comply with SEC requirements.
Our consolidated financial statements include the necessary adjustments and reclassifications to the incorporated financial statements of each of Itaú Corpbanca’s subsidiaries and the New York Branch to bring their accounting policies and valuation criteria into line with those applied by the bank, in accordance with IFRS.
The securities laws of Chile, which govern open or publicly listed companies such as ours, have as one of their principal objectives promoting disclosure of all material corporate information to the public. Chilean disclosure requirements, however, differ from those in the United States in some important respects. Although Chilean law imposes restrictions on insider trading and price manipulation, applicable Chilean laws are different from those in the United States and in certain respects the Chilean securities markets are not as highly regulated and supervised as the United States securities markets.
Chile may impose controls on foreign investment and repatriation of investments that may affect our investors’ investment in, and earnings from, our ADSs.
Investors who are not Chilean residents are required to provide the Central Bank of Chile with information related to equity investments and conduct such operations within the Formal Exchange Market. See “Item 10. Additional Information—D. Exchange Controls” for a discussion of the types of information required to be provided.
Owners 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 converted into U.S. dollars and distributed net of foreign currency exchange fees and fees of the depositary and will be subject to Chilean withholding tax, currently imposed at a rate of 35% (subject to credits in certain cases). If for any reason, including changes in Chilean laws or regulations, the depositary were unable to convert Chilean pesos to U.S. dollars, investors in our ADSs may receive dividends and other distributions, if any, in Chilean pesos.
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 could be imposed in the future and we cannot advise you as to the duration or impact of such restrictions, if imposed.
The legal restrictions on the exposure of Chilean pension funds may adversely affect our access to funding.
Chilean regulations impose restrictions on the share of assets that a Chilean pension fund management company (Administradora de Fondos de Pensiones, or AFP) may allocate: (i) per fund (considering allsub-funds within an AFP (A, B, C, D or E)), to deposits in checking accounts and term deposit accounts and in debt securities issued by a single banking institution (or guaranteed by such bank); (ii) per type ofsub-fund, to shares, deposits, derivatives and debt securities of a single banking institution (or guaranteed by such bank); and (iii) per fund (considering allsub-funds), to shares issued by a single banking institution. Additionally, each fund managed by an AFP is permitted to make deposits with a bank for an amount not to exceed the equivalent of such bank’s equity. If the exposure of a pension fund managed by an AFP to a single bank exceeds such limit for investments in securities, the AFP for such pension fund is required to reduce the fund’s exposure below the limit within three years.
As of December 31, 2017,2018, the aggregate exposure of AFPs to us was US$5,9965,928 million or 2.8%3.1% of their total assets. If the exposure of any AFP to us exceeds the regulatory limits, 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 business, financial condition and results of operations.
Future increases in the corporate tax rate or additional modifications to the tax systems of the countries in which we operate may have a material adverse effect on us.
On September 29, 2014, Law No. 20,780 (the “Tax Reform”) went into effect, introducing significant changes to the Chilean tax system and strengthening the powers of the Chilean IRS (Servicio de Impuestos Internos) to control and prevent tax avoidance. One of the main purposes of this reform was to finance major educational reforms under discussion in the Chilean Congress. Subsequently, on February 8, 2016, Law No. 20,899, which simplifies the income tax system and modifies other legal tax provisions, went into effect.
As a corporation (sociedad anónima), we are subject to the partially-integrated tax regime (corporate tax of 25.5% for 2017 and 27% beginning in 2018). Under this system, when the income is actually withdrawn from a company,non-Chilean resident shareholders would be subject to a 35% withholding tax, while Chilean resident shareholders would be required to pay the progressive Complementary Global Tax, with rates ranging between 0% and 35%, against which only a 65% of the corporate tax will be allowed to be used as a credit against the withholding tax or the Complementary Global Tax; Tax (which could raise the final tax burden up to 44.45%);provided that, the deduction available to shareholders resident in a country with which Chile has an agreedmaintains a tax treaty in force would be 100%, with the tax burden then remaining at 35%. See “Item 4—Information on the Company—B. Business Overview—Recent Regulatory Developments in Chile—Tax Reform.”
It should be noted that on August 21, 2018, a bill was submitted to the Chilean National Congress aimed at reforming the tax legislation. Among other modifications, such bill proposes to unify the tax regime applicable to taxpayers subject to corporate tax, under which a general corporate tax rate of 27% would apply, which would be fully creditable against final taxes. To date, this bill is still under discussion by the Chilean National Congress.
In addition, on December 29, 2016, the Colombian Government approved a tax reform under Law No. 1,819.1,819 and subsequently, on December 18, 2018, Law No. 1,943 came into force on January 1, 2019. See “Item 4—Information on the Company—B. Business Overview— Recent Regulatory Developments in Colombia — Tax Reform.”
Changes in legislation, regulation and jurisprudence can affect tax burdens by increasing tax rates and fees, creating new taxes, limiting stated expenses and deductions, and eliminating incentives andnon-taxed income. We cannot assure you that the manner in which corporate taxes are interpreted and applied in the jurisdictions where we operate will not change in the future. In addition, governments may decide to levy additional taxes in the jurisdictions where we operate. The current tax reforms and any further changes to taxes in the jurisdictions where we operate could have a material adverse effect on our business, financial condition and results of operations. Furthermore, uncertainty relating to tax legislation in the jurisdictions where we operate poses a constant risk to Itaú Corpbanca.
Potential changes to the pension system in Chile may impose an increase in our labor costs and therefore have a material adverse effect on our financial results.
On August 10, 2017, formerNovember 6, 2018, President Michelle BacheletSebastián Piñera submitted a bill of law (No. 117-65)BillNo. 12212-13 with the purpose of introducing changes to the existing Chilean pension funds system. Undersystem, specifically related to solidary pensions, the current privateindividual capitalization pension system employees make contributions to fund their individual pension accounts. Under former President Bachelet’s proposal,and new schemes of pensions for the first time,middle class and women.
Under this proposal, companies would have to contribute to the system. The proposal contemplates, among other measures, a gradual increase over the next six years from the current 10%system with 4% contribution funded by employees to a 15% contribution in which the additional 5% will be exclusively funded by employers. As proposed, partThis amendment would have a gradual implementation during a period of this additional contributionfive years. Additionally, the employer would gobe obliged to contribute 0.2% of the gross salary of its employees to fund disability insurance. This insurance would be applicable to all elderly employees with a commonserious physical or mental disability.
Further, the bill states that the solidarity fund (the “solidarity fund” or (pilar solidarioPilar Solidario), rather than employees’ personal savings accounts, in order will increase approximately 40% given that the Chilean government is expected to increasecontribute 1.12% of the pensions for certain lower-income individuals. There are several economic and political discussions overGDP to the content offund.
Should this bill of law. However,come into effect, it is possible to anticipate that some additional contribution from the employers to the Chilean social security system will be approved, which may cause a relevant increase in our labor costs and, therefore, have a material adverse effect on our financial and operational results.
Colombian tax haven regulation could adversely affect our business and financial results.
Decree No. 1,966 of 2014 amended by Decree No. 2,095 of 2014 designates 37 jurisdictions as tax havens for Colombian tax purposes. In October 2014, Panama and Colombia signed a memorandum of understanding by which they agreed to execute a double taxation treaty. Therefore, Panama is currently not considered a tax haven for Colombian tax purposes. However, if in the future Panama is considered a tax haven under Colombian tax regulations, the clients of our Colombian subsidiaries in Panama who are residents in such jurisdiction would be subject to the following regulations: (i) higher withholding tax rates including a higher withholding rates over financial yields derived from investments in the Colombian securities market, (ii) the Colombian transfer pricing regime and its reporting duties, (iii) an assumption for Colombian authorities of residency for the purposes of qualifying a conduct as abusive under tax regulations, (iv) the disallowance of payments made to residents or entities located in tax havens as costs or deductions, unless the respective withholding tax has been applied and (v) other additional information disclosure requirements.
Any downgrading of Chile’s or Colombia’s debt credit rating for domestic and international debt by international credit rating agencies may also affect our business and future financial performance.
Any adverse revisions to Chile’s or Colombia’s credit ratings for domestic and international debt by international rating agencies may adversely affect our ratings, and, as a result, our cost of funding, including interest rates paid on our deposits and
securities. In December 2017, S&P downgraded the rating of its long-term foreign currency sovereign credit ratings on Colombia from “BBB” to “BBB-“BBB-,” on the grounds of Colombia’s weakened fiscal and external profiles generating diminished policy flexibility. Additionally, in February 2018 Moody’s changed Colombia’s rating outlook from stable to negative. This was driven by (i) expectation of a slower pace of fiscal consolidation and weakening fiscal metrics and (ii) the risk that new government, post the 2018 presidential elections, will not have an effective mandate to pass additional fiscal measures to preserve Colombia’s fiscal strength. In December 2018, S&P maintained the previous 2017 rating of Colombia’s long-term foreign currency sovereign credit rating at a“BBB-” given the volatile global economy and oil prices raise risks to what has been a moderate economic recovery, following the tentative nature of the approach due to the 2018 elections as well as risks to the pace of improvement in the country’s external indebtedness and liquidity indicators. Currently,
Colombia’s long-term debt denominated in foreign currency is rated “BBB-“BBB-” by S&P, “Baa2” with negative outlook by Moody’s and “BBB” by Fitch. We cannot assure you that Colombia’s credit rating or rating outlook will not be further downgraded in the future. In July 2017, S&P downgraded Chile’s long-term foreign currency rating to “A+” from “AA-“AA-”, with a stable outlook. Also, Fitch Ratings downgraded Chile’s long-term foreign-currency issuer default rating (IDR) to “A” from “A+”, and long-term local-currency IDR to “A+” from “AA-“AA-” with a stable outlook. Finally, Moody’s changed outlook on Chile’s ratings to negative. We cannot assure you that Chile’s credit rating or rating outlook will not be further downgraded in the future. If further adverse revisions to Chile’s or Colombia’s credit ratings or rating outlook were to occur, it could have a material adverse effect on our business, future financial performance, shareholders’ equity and the value of our securities.
Chilean and Colombian authorities exercise influence on the Chilean and Colombian economies. Changes in monetary, fiscal and foreign exchange policies or in the Chilean and Colombian governments’ structures may adversely affect us.
Chilean and Colombian authorities intervene from time to time in the Chilean and Colombian economies, through changes in fiscal, monetary, and foreign exchange policies, which may adversely affect us. These changes may impact variables that are crucial for our growth strategy (such as foreign exchange and interest rates, liquidity in the currency market, tax burden, and economic growth), thus limiting our operations in certain markets, affecting our liquidity and our clients’ ability to pay and, consequently, affecting us.
In addition, changes in the Chilean and Colombian governments’ structure may result in changes in government policies, which may affect us. This uncertainty may, in the future, contribute to an increase in the volatility of the Chilean and Colombian capital markets, which, in turn, may have an adverse impact on us. Other political, diplomatic, social and economic developments in Chile, Colombia or other countries that affect Chile and Colombia may also affect us.
Our growth and profitability depend on the level of economic activity in Chile, Colombia and other emerging markets.
Substantially all of our loans are to borrowers doing business in Chile or Colombia. Accordingly, the recoverability of these loans in particular, our ability to increase the amount of loans outstanding and our results of operations and financial condition in general, are dependent to a significant extent on the level of economic activity in Chile and Colombia. The Chilean and Colombian economies have been influenced, to varying degrees, by economic conditions in other emerging market countries. Future developments in or affecting the Chilean or Colombian economies, including consequences of economic difficulties in emerging and developed markets, including some of our neighbor countries, or a deceleration in the economic growth of Asian or other developed nations to which Chile and Colombia export a majority of their respective goods, could materially and adversely affect our business, financial condition or results of operations.
In this regard, with close to one third of exports, of which approximately 75.9% is copper, sent to China, developments in the Chinese economy have relevant implications in the investment, growth and exchange valuation in Chile. Additionally, changes in the economic and political outlook in the United States, Europe and Latin America influence our growth prospects, with 16.8%, 11.6% and 15.2 of exports sent to these regions, respectively.
Our results of operations and financial condition could also be affected by changes in economic or other policies of the Chilean or Colombian governments, which have each exercised and continue to exercise a substantial influence over many aspects of the private sector, or other political or economic developments in Chile. In addition, our financial condition and results of operations could also be affected by regulatory changes in administrative practices or other political or economic developments in or affecting Chile or Colombia, over which we have no control.
Inflation and government measures to curb inflation could adversely affect our financial condition and results of operations.
Although Chilean and Colombian inflation have been low in recent years, Chile and Colombia have experienced high inflation in the double-digit levels in the past. Such high levels of inflation in Chile or Colombia could adversely affect the Chilean and Colombian economies and have an adverse effect on our results of operations if such inflation is not accompanied by a matching devaluation of the local currency. We cannot make any assurances that Chilean or Colombian inflation will not revert to prior levels in the future.
We may be unsuccessful in addressing the challenges and risks presented by our operations in countries outside Chile.
We now operate a banking business in Colombia through Itaú Corpbanca Colombia and in Panama through subsidiaries of Itaú Corpbanca Colombia. Our operations are focused on retail banking, as well as wholesale and commercial banking and providing financing and deposit services to SMEs and individuals with medium-high income levels. Itaú Corpbanca Colombia provides a broad range of commercial and retail banking services to its customers, operating principally in the cities of Bogotá, Medellín, Cali, Bucaramanga, Cartagena and Barranquilla.
We have limited experience conducting credit card and consumer finance businesses in countries outside Chile. Accordingly, we may not be successful in managing credit card and consumer finance operations outside of our traditional domestic market in
Chile. We may face delays in payments by customers and higher delinquency rates in any market we enter into, which could necessitate higher provisions for loan losses and, consequently, have an adverse effect on our financial performance.
Colombia has experiencedcontinues to experience internal security issues that have had or could have in the future a negative effect on the Colombian economy.
Colombia has experiencedcontinues to experience internal security issues, primarily due to the activities of guerrilla groups such asnon-demobilized groups within the Revolutionary Armed Forces of Colombia(Fuerzas Armadas Revolucionarias de Colombia, or the FARC), National Liberation Army (Ejército de Liberación Nacional, or the ELN), paramilitary groups drug cartels and drug cartels.criminal gangs (Bacrim). In remote regions of the country with minimal governmental presence, these groups have exerted influence over the local population and funded their activities by protecting, and rendering services to drug traffickers.
A peace agreement with the FARC was reached in September 2016 and the government submitted the agreement to approval via referendum, but the agreement was not approved. However, the Colombian Congress subsequently approved a revised peace agreement, and in December 2016 the agreement implementation process began. The final agreement is expected to provide the FARC with several benefits including: (i) changes in legislation concerning access to credit and financial services; (ii) tax benefits; and (iii) more favorable labor regulations. The implementation of such agreements and other legislative changes arising therefrom could have unpredicted effects and a negative impact on the Colombian economy and on our operations in Colombia.
DespiteNotwithstanding the peace agreement betweenwith the Colombian government and FARC, which have reduced guerrilla and criminal activity, particularly in the form of terrorismterrorist attacks, homicides, kidnappings and extortion such activities persist in Colombia, andColombia. Recent terrorist attacks by the ELN resulted in the Colombian government announcing the termination of any peace negotiations with such group. The possible escalation of such activities and the effects associated with them have had and may have in the future a negative impact on the Colombian economy and on our operations in Colombia, including on our customers, employees, results of operations, and financial condition, and physical assets.
The final peace agreement was reached in September 2016 Since the ELN, paramilitary groups and the government submitted it to a referendum that wasdrug cartels were not approved. However, the Colombian Congress subsequently approvedpart of the peace agreement, and in December 2016 the agreement implementation process began. The final agreementnegotiations, it is expected to provide FARC with several benefits including: (i) changes in legislation concerning access to credit and financial services; (ii) tax benefits; and (iii) more favorable labor regulations. Such agreements and other legislative changes arising therefrom may have a negative impact on the Colombian economy and on our operations in Colombia.
that their activities will continue.
In addition, the peace agreement reached with the FARC may be modified or implemented deficiently by future governments, including the newcurrent Colombian government. Although the Colombian Congress has enacted certain regulations to implement the peace agreement with the FARC, such as the law governing the Peace Special Justice System (Juridiscción Especial para la Paz), certain congressmen have expressed their intention to make amendments to the peace agreement and its related regulations. Likewise, the Colombian president that will take office in 2018.has recently objected to portions of the law regulating the Peace Special Justice System (Juridiscción Especial para la Paz). If there are deviations from the peace agreement or the peace agreement is implemented deficiently, there can be no assurance that criminal actions will not escalate in Colombia.
ELN, paramilitary groups and drug cartels’ were not part of the peace negotiations. It is expected that their activities will continue.
The peace agreement signed with FARC may result in the enactment of new laws and regulations, whose potential impact cannot be predicted.
The implementation of the peace agreement between the Colombian government and FARC will require the enactment of new laws and regulations, which may impact our activity in ways we cannot anticipate. Recently, legislation was enacted in connection with the implementation of the Rural Reform (Reforma Rural Integral) as provided under the peace agreement, such legislation included the creation of a Land Fund for the Rural Reform (Fondo de Tierras para la Reforma Rural Integral), and set forth the parameters to grant land to certain benefited populations and which properties are subject to be granted. Additionally, on April 2, 2018, the Colombian Superintendency of Finance issued External Circular No. 005, which sets forth rules governing the integration of former FARC members into the financial system. The impact of such new legislation is still unknown, and further regulations may be required for such legislation to be implemented. New laws or regulations enacted in connection with the implementation of the peace agreement may impact our activity and may have a negative effect on our financial condition and results of operations in Colombia.
Tensions with Venezuela and Ecuador may affect the Colombian economy and, consequently, our results of operations and financial condition.
Diplomatic relations with Venezuela and Ecuador, two of Colombia’s historical main trading partners, have from time to time been tense and affected by events surrounding the Colombian armed forces combat of the FARC throughout Colombia, particularly on Colombia’s borders with Venezuela and Ecuador.
Additionally, further deterioration in relations with Venezuela and Ecuador may result in the closing of borders, the imposition of trade barriers or a breakdown of diplomatic ties, any of which could have a negative impact on Colombia’s trade balance, economy and general security situation, which may adversely affect our results of operations and financial condition. In 2015, thecondition Since 2013, trade with Venezuela has constantly decrease; exports have decreased by 87.8%. The Venezuelan government has abruptly closed the Colombian-Venezuelan border which resulted in a substantial decrease in trade between Colombia and Venezuela, representing in that year less than 0.7% of total Colombian exports. In recent years, diplomatic tensions between the two governments have increased. We cannot assure you that there will notVenezuelan border. There could be further closures of the border, which may result in further deterioration of trade relations with Venezuela and could have a negative impact in the Colombian economy, especially inwith respect to private consumption. Recently, diplomatic tension between the two governments has increased: Venezuela broke relations with Colombia after Colombia assisted the Venezuelan opposition’s efforts to bring humanitarian aid into Venezuela.
Recently Colombia has recently faced an increase in migration from Venezuela. It is estimated that since 2015 approximately 1.23 million Venezuelans have entered Colombian territory with the intention to stay. The unprecedented migration wave is putting strains on Colombia. Mass migration threatens to increase political instability and social conflict in Colombia. Additionally, mass migration of Venezuelans tointo Colombia has created tense diplomatic relations which will likely hinder regional cooperation in reaching a solution to the migration crisis.
Constitutional collective actions (acciones populares)(Acciones Populares), class actions (acciones(Acciones de grupo)Grupo) and other similar legal actions in Chile and Colombia involving claims for significant monetary awards against financial institutions may have an adverse effect on our business and results of operations.
Under the Chilean Consumer Protection Act and under the Colombian Constitution and Law 472 of 1998, individuals may initiate collective or class actions to protect their collective or class rights, as applicable. See “Item 4—Information on the Company—B. Business Overview— Promulgation of Bill of Law AmendingRecent Regulatory Developments in Chile—Amendment to the Consumer Protection Act.” In the past few years, Chilean financial institutions have experienced limited numbers of collective and class actions mostly relating to abusive clauses in standard contracts.
In the past few years, Colombian financial institutions, including Itaú Corpbanca Colombia, have experienced a substantial increase in the aggregate number of these actions. The great majority of such actions have been related to fees, financial services and interest rates, and their outcome is uncertain. Pursuant to Law No. 1,425 of 2010, monetary awardsincentives for plaintiffs in constitutional collective actions were eliminated as of January 1, 2011. Nevertheless, individuals continue to have the right to initiate constitutional or class actions against Itaú Corpbanca Colombia.
Future restrictions on interest rates or banking fees could negatively affect our profitability.
In the future, additional regulations in the jurisdictions where we operate could impose limitations regarding interest rates or fees charged by Itaú Corpbanca. Any such limitations could materially and adversely affect our results of operations and financial situation.
The Colombian Commerce Code limits the amount of interest that may be charged in commercial transactions. In the future, regulations could impose limitations regarding interest rates or fees we charge. Any such limitations could materially and adversely affect our results of operations and financial position. In the past, there have been disputes in Colombia among merchants, payment services and banks regarding interchange fees. Although such disputes have been resolved, the SIC, may initiate new investigations relating to the interchange fees. This possibility may lead to additional decreases in such fees, which in turn could adversely our operations in Colombia and our consolidated financial results.
Furthermore, the Colombian government has the authority to establish and define criteria and formulas applicable to the calculation of banking fees and other charges and to establish caps on the banking fees, credit card fees, and other charges that we impose on our customers. The Colombian government has established a cap on the fees banks can charge on withdrawals from ATMs outside their own networks. Additionally, under Colombian regulation, other than in connection with mortgage loans, banks are prohibited from charging prepayment penalties or fees on loans, other than in mortgage loans, except when the outstanding amount of a loan is more than the equivalent of 880 monthly minimum wages, or SMMLV (approximately US$240,000)230,000). In mortgage loans, irrespective of their principal amount or in other loans in which the outstanding amount is greater than 880 SMMLV, prepayment penalties or fees may be charged but only when expressly contemplated under the governing loan agreement. With respect to mortgage long-term loans granted in connection with the acquisition of homes, banks are prohibited from charging prepayment penalties. Further limits or regulations regarding banking fees, and uncertainties with respect thereto could have a negative effect on Itaú Corpbanca Colombia and our results of operations and financial condition.
Insolvency laws may limit our monetary collection and ability to enforce our rights.
On January 9, 2014, a new insolvency act was published in Chile in the Official Gazette (Ley No. 20,720 de Reorganización y Liquidación de Empresas y Personas, or the Chilean Insolvency Act) and came into effect on October 10, 2014. Under the Chilean Insolvency Act, monetary collection and enforcement of rights by a creditor may face limitations such as those arising from the Insolvency Protection (as defined below) recognized by the act. For more information on these limitations please see “Item 4—Information on the Company—B. Business Overview—Recent Regulatory Developments in Chile.”
Colombian insolvency laws provide that creditors of an insolvent debtor in default are prohibited from initiating collection proceedings outside the bankruptcy or reorganization process of such debtor. In addition, all collection proceedings outstanding at the beginning of any bankruptcy or reorganization process of any insolvent debtor must be suspended and creditors are prevented from enforcing their rights against the collateral and other assets of the debtor until the reorganization has been agreed (in which case the collection proceeding is resolved within the reorganization agreement) or it is declared that no reorganization was agreed. Additionally, Colombian laws provide insolvency protection fornon-merchant individuals. This insolvency protection entails that, once anon-merchant individual has ceased paying his or her debts, such individual can initiate a voluntary insolvency proceeding before a notary public or mediator to reach an agreement with its creditors. The terms of any agreement reached with a group (two or more) of creditors that represent more than 50% of the total amount of the claims will be mandatorily applicable to all relevant creditors. There are other protections such as an automatic stay for 80 days, which could be extended by 30 additional days. These legal limitations make it difficult to recover on defaulted loans, and as a result, may cause Itaú Corpbanca Colombia to enhance its credit requirements which would result in decreased lending to individuals by making it more expensive. In addition, increased difficulties in enforcing debt and other monetary obligations due to this insolvency law could have an adverse effect on Itaú Corpbanca Colombia and our results of operations and financial condition.
Insolvency proceedings may Adversely Affect our Foreclosure Rights in Respect to Security Registered as Garantía Mobiliaria.
Pursuant to Article 50 of Law No. 1676 of 2013, secured creditors in Colombia with collateral registered as personal property collateral (Garantía Mobiliaria) (i) may be allowed to foreclose the respective collateral owned by the debtor subject to a reorganization proceeding, provided that the assets under the security do not constitute essential assets for the economic activity of the debtors or such assets are at risk of being destroyed and the competent judge authorizes such foreclosure, and (ii) once the reorganization agreement is confirmed, each secured creditor may have priority over the other creditors that are part of the agreement. However, in accordance with recent judicial precedents, such rights will only be available to the secured creditors to the extent that the other assets of the debtor are sufficient to ensure the payment of the salary and benefits derived from the employment contracts as well as alimony, if any. Any inability to enforce our foreclosure rights under this Law could have a material adverse effect on our results of operations and financial condition.
The Central Bank of Colombia may impose requirements on our (and other Colombian residents’) ability to obtain loans in foreign currency.
The Central Bank of Colombia may impose certain mandatory deposit requirements in connection with foreign currency denominated loans obtained by Colombian residents, including Itaú Corpbanca Colombia, although no such mandatory deposit requirement is currently in effect. We cannot predict or control future actions by the Central Bank of Colombia in respect of deposit requirements, which may involve the establishment of a mandatory deposit percentage, and the use of such measures by the Central Bank of Colombia may raise our cost of raising funds and reduce our financial flexibility.
Risks Relating to Expansion and Integration of Acquired Businesses
We may not be able to manage our growth successfully.
We have been expanding the scope of our operations over the past few years, and we expect that this expansion will continue. As we continue to grow, we must improve our operational, technical and managerial knowledge and compliance systems in order to effectively manage our operations across the expanded group. Failure to integrate, monitor and manage expanded operations could have a material adverse effect on our business, reputation and financial results. Our future growth will also depend on our access to internal and external financing sources. We may be unable to access such financing on commercially acceptable terms or at all.
Integration of acquired or merged businesses involves certain risks that may have a material adverse effect on us.
We have engaged in a number of mergers and acquisitions in the past, including the Merger, the Santander Colombia Acquisition, the Helm Bank Acquisition and the subsequent merger of Helm Bank with and into Itaú Corpbanca Colombia, consummated on June 1, 2014, that may make further mergers and acquisitions in the future as part of our growth strategy. We believe that these transactions will contribute to our continued growth and competitiveness in the Chilean, Colombian, and international banking sectors.
These acquisitions and mergers and the integration of such institutions and assets involve certain risks, which as of the current stage of such transactions may still include remaining risks such as:
·integrating new networks, information systems, financial and accounting systems, risk and other management systems, financial planning and reporting, products and customer bases into our existing business may run into difficulties, cause us to incur unexpected costs and operating expenses and place additional demands on management time; and
·the expected operation and financial synergies and other benefits from such mergers or acquisitions may not be fully achieved.
If we fail to achieve the business growth opportunities, cost savings and other benefits we anticipate from mergers and acquisition transactions, or incur greater integration costs than we have estimated, our results of operations and financial condition may be materially and adversely affected.
Acquisitions and strategic partnerships may not perform in accordance with expectations or may disrupt our operations and adversely affect our business financial condition and results of operations.
A component of our strategy is to identify and pursue growth-enhancing strategic opportunities. As part of that strategy we have consummated (i) the Santander Colombia Acquisition in 2012 (now “Itaú Corpbanca Colombia”); (ii) the Helm Bank Acquisition in 2013 (Helm Bank was merged with and into Itaú Corpbanca Colombia on June 1, 2014); and (iii) the Merger in 2016. We will continue to consider additional strategic acquisitions and alliances from time to time, inside and outside of Chile and Colombia. Strategic acquisitions and alliances, could expose us to risks with which we have limited or no experience. Future acquisitions may also be subject to regulatory approval, which we may not receive, particularly in view of our increasing market share in the Colombian banking industry.
We must necessarily base any assessment of potential acquisitions and alliances on assumptions with respect to operations, profitability and other matters that may subsequently prove to be incorrect. Future acquisitions and alliances may not produce anticipated synergies or perform in accordance with our expectations and could adversely affect our business, financial condition and results of operations.
In addition, new demands on our existing organization, management and employees resulting from the integration of new acquisitions could disrupt our operations and adversely affect our business, financial condition and results of operations.
Itaú Corpbanca may be unable to fully realize the anticipated benefits of the combination of Corpbanca and Banco Itaú Chile.
On April 1, 2016, Corpbanca and Banco Itaú Chile completed a business combination, which was consummated through the Merger. The Merger brought together two large financial institutions that had previously operated as independent companies. Significant management attention and resources have been and will continue to be required to integrate certain aspects of the business
practices and operations of Corpbanca and Banco Itaú Chile. The success of the Merger will depend, in part, on the ability of Itaú Corpbanca to realize anticipated revenue synergies, cost savings and growth opportunities resulting from the combination of the businesses of former Corpbanca and former Banco Itaú Chile. We expect to generate synergies resulting from optimization of organizational structures, scalable IT systems, savings related to the branch network and reductions in administrative expenses. There is a risk, however, that Itaú Corpbanca may not be able to combine the businesses of Corpbanca and Banco Itaú Chile in a manner that permits Itaú Corpbanca to realize these revenue synergies, cost savings and growth opportunities in the time, manner or amounts it expects or at all. Potential difficulties Itaú Corpbanca may encounter as part of the mergerMerger process include, among other things:
·complexities associated with managing the combined companies;
·the need to implement, integrate and harmonize various business-specific operating procedures and systems, as well as the financial, accounting, information and other systems of Corpbanca and Banco Itaú Chile;
·the need to coordinate the existing products and customer bases of Corpbanca and Banco Itaú Chile; and
·potential unknown liabilities and unforeseen increased expenses or delays associated with the Merger and the other transactions described in the Transaction Agreement (as defined below).
In addition, it is possible that the integration process could result in:
·diversion of management’s attention from their normal areas of responsibility to address integration issues; and
·the disruption of Itaú Corpbanca’s ongoing businesses or inconsistencies in its standards, controls, procedures and policies,
each of which could adversely affect Itaú Corpbanca’s ability to maintain good relationships with its customers, suppliers, employees and other constituencies, or to achieve the anticipated benefits of the Merger, and could increase costs or reduce its earnings or otherwise adversely affect the business, financial condition, results of operations and/or prospects of Itaú Corpbanca. Actual revenue synergies, cost savings, growth opportunities and efficiency and operational benefits resulting from the Merger may be lower and may take longer than Itaú Corpbanca currently expects. Therefore if the benefits from the Merger are not as expected, we may be required to record impairment losses on the carrying amount (including goodwill) of the acquired business, which may have a material adverse effect on our financial condition and results of operations. See “Item 5. Operating and Financial Review and Prospects – Prospects—A. Operating Results - Results—Critical Accounting Policies and Estimates – Estimate of Impairment of Goodwill.”
The integration of two large companies also presents significant management challenges. In order to achieve the anticipated benefits of the Merger, the operations of the two companies are being reorganized and their resources will need to be combined in a timely and flexible manner. There can be no assurance that Itaú Corpbanca will be able to implement these steps as anticipated or at all. If Itaú Corpbanca fails to achieve the planned restructuring within the time frame that is currently contemplated or to the extent that is currently planned, or if for any other reason the expected revenue synergies, cost savings and growth opportunities fail to materialize, the Merger may not produce the benefits that Itaú Corpbanca currently anticipates.
Itaú Corpbanca has incurred significant costs and expenses in connection with the Merger and will continue to incur additional costs and expenses.
Itaú Corpbanca has incurred and will continue to incur substantial expenses in connection with the integration process derived from the Merger. In 2014 and 2015, after the Merger was announced but prior to its consummation, expenses were related to transaction costs associated to the closing of the Merger, such as investment banks, legal advisors, auditors, filing fees, printing expenses and other related charges. After the Merger, expenses have been related to restructuring costs associated to one-time integration expenses. There are also many processes, policies, procedures, operations, technologies and systems that must be integrated in connection with the Merger. Any delay in the integration of the business operations of former Corpbanca and former Banco Itaú Chile or factors beyond Itaú Corpbanca’s control could affect the total amount or the timing of the integration and implementation expenses.
If additional unanticipated significant costs are incurred in connection with the Merger, these costs and expenses could, particularly in the near term, exceed the savings that Itaú Corpbanca expects to achieve from the elimination of duplicative expenses and the realization of economies of scale, other efficiencies and cost savings. Although Itaú Corpbanca expects to achieve savings and economies of scale sufficient to offset these integration and implementation costs over time, this net benefit may not be achieved in the near term or at all.
Itaú Corpbanca’s future results will suffer if it cannot effectively manage its expanded operations following completion of the Merger.
The size of Itaú Corpbanca’s combined business following the completion of the Merger is significantly larger and more complex than the previous businesses of former Corpbanca or former Banco Itaú Chile individually. Itaú Corpbanca’s future success will depend, in part, on its ability to manage this expanded business, posing substantial challenges for management. There can be no
assurances that Itaú Corpbanca will be successful or that it will fully realize the expected operating efficiencies, cost savings, revenue synergies and other benefits currently anticipated from the Merger.
We may have problems successfully completing the implementation of a new information technology core banking system in Colombia.
A key element of our expansion strategy consists in the acquisition of existing businesses and their integration into our business model and administration and management processes. During 2017, we continued the technology integration process of the bank in Colombia, which includes the implementation of a unique integrated information technology core banking system in Colombia. The original project, which we had been implementing since February 2013, was discontinued after the Merger. New management decided to maintain the existing proprietary platform that Helm Bank had and to integrate all existing IT information instead of implementing a fully new information technology core banking system as originally planned. If we are unable to successfully complete the integration into one platform, the integration process in Colombia could be adversely affected, which could adversely affect our financial condition, results of operations and liquidity. The integration into one single information technology core banking system in Itaú Corpbanca Colombia is underway, on 2017 the branch network migration began, and it is expected to finish in the first half of 2018.
Risks Relating to Our Securities
Our controlling shareholder is able to exercise significant control over us which could result in conflicts of interest.
Itaú Unibanco is the sole controlling shareholder of Itaú Corpbanca. As of April 2, 2018,March 31, 2019 Itaú Unibanco beneficially owned 36.06%38.14% of our voting common shares. In addition, (i) Itaú Unibanco and (ii) Inversiones Gasa Limitada, CorpGroup Holding Inversiones Limitada, CorpGroup Banking S.A., Compañía Inmobiliaria y de Inversiones Saga SpA and CorpGroup Interhold SpA (together, “CorpGroup”) have signed a shareholders’ agreement to determine certain aspects related to corporate governance, dividend policy, transfer of shares, liquidity and other matters (the “Itaú CorpGroup Shareholders’ Agreement”). Itaú Unibanco and CorpGroup are in position to elect 11 of the 13 members of our board of directors. The Itaú CorpGroup Shareholders’ Agreement provides that the directors appointed by Itaú Unibanco and CorpGroup will vote, to the extent permitted by the law, in a block and in accordance with the recommendation of Itaú Unibanco, subject to certain exceptions. Accordingly, Itaú Unibanco is able to control the actions taken by the board of directors of Itaú Corpbanca on most matters, which could result in conflicts of interest.
U.S. securities laws do not require us to disclose as much information to investors as a U.S. issuer is required to disclose.
The corporate disclosure requirements applicable to us may not be equivalent to the requirements applicable to a U.S. company and, as a result, you may receive less information about us than you might otherwise receive in connection with a comparable U.S. company. We are subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that apply to “foreign private issuers.” The periodic disclosure required of foreign private issuers under the Exchange Act is more limited than the periodic disclosure required of U.S. issuers.
We are required to file an annual report onForm 20-F, but we are not required to file any quarterly reports. A U.S. registrant must file an annual report onForm 10-K and three quarterly reports onForm 10-Q.
We are required to furnish current reports onForm 6-K, but the information that we must disclose in those reports is governed primarily by Chilean law disclosure requirements and may differ fromForm 8-K’s current reporting requirements imposed on a U.S. issuer.
We are not subject to the proxy requirements of Section 14 of the Exchange Act and our officers, directors and principal shareholders are not subject to the short swing insider trading reporting and recovery requirements under Section 16 of the Exchange Act.
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.
We are a “controlled company” and a “foreign private issuer” within the meaning of the New York Stock Exchange (NYSE) corporate governance standards, which exempts us 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 (i) a majority of our board of directors (directorioDirectorio), consist of independent directors, (ii) 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, (iii) a compensation committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, (iv) an annual performance evaluation of the nominating and corporate governance and compensation committees be undertaken, and (v) the members of the audit committee meet the Exchange ActRule 10A-3(b)(1) independence requirements. We currently use these exemptions and intend to continue using these exemptions. Accordingly, you will not have the same protections afforded to investors
in companies that are subject to all NYSE corporate governance requirements. See “Item 16G. Corporate Governance” for a comparison of the corporate governance standards of the New York Stock Exchange and Chilean practice.
Investors may find it difficult to enforce civil liabilities against us or our directors, officers and controlling persons.
We are organized under the laws of Chile and our principal place of business (domicilio social) is in Santiago, Chile. Most of our directors, officers and controlling persons reside outside of the United States. In addition, all or a substantial portion of our assets are located outside of the United States. As a result, it may be difficult for investors to effect service of process within the United States on such persons or to enforce judgments against them, including in any action based on civil liabilities under the United States federal securities laws.
Risks Relating to Our ADSs and Common Shares
There may be a lack of liquidity and market for our ADSs and common shares.
A lack of liquidity in the markets may develop for our ADSs, which would negatively affect the ability of the holders to sell our ADSs or the price at which holders of our ADSs desire to sell them. Future trading prices of our ADSs will depend on many factors including, among other things, prevailing interest rates, our operating results and the market for similar securities.
Our common shares underlying the ADSs are listed and traded on the Santiago Stock Exchange and the Chilean Electronic Exchange, although the trading market for the common shares is small by international standards.
In addition, according to articleArticle 14 of theLey No. 18,045 de Mercado de Valores (the “Chilean Securities Market Act”), the CMF –formerly Superintendencia de Valores y Seguros or Chilean Superintendency of Securities and Insurance– may suspend the offer, quotation or trading of shares of any company listed on the Chilean stock 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 CMF will then cancel the relevant listing in the registry of securities. These and other factors may substantially limit your ability to sell the common shares underlying your ADSs at a price and time at which you wish to do so.
You may be unable to exercise preemptive rights.
TheLey 18,046 sobre Sociedades Anónimas and theReglamento de Sociedades Anónimas, which we refer to collectively as the Chilean Corporations Act, and applicable regulations establish that whenever we issue new common shares for cash, we are obligated by law to grant preemptive rights to all of our shareholders (including the depositary on behalf of the holders of ADSs), giving them the right to purchase a sufficient number of shares to maintain their existing ownership percentage. However, we may not be able to offer shares to United States holders of ADSs pursuant to preemptive rights granted to our shareholders in connection with any future issuance of common shares unless a registration statement under the U.S. Securities Act of 1933, as amended, or the Act, is effective with respect to such rights and common shares, or an exemption from the registration requirements of the Act is available.
Our existing shareholders who do not participate in any future preemptive rights offering will suffer an immediate dilution of their percentage equity participation in us. In addition, investors who purchase ADSs or common shares may be subject to dilution of their equity participation in us upon the completion of any future preemptive rights offering. Investors will not know the extent to which they will be diluted until the expiration of any future preemptive rights offering in Chile.
You may have fewer and less well defined shareholders’ rights than with shares of a company in the United States.
Our corporate affairs are governed by ourEstatutos Sociales, orBy-laws, and the laws of Chile. Under such laws, our shareholders may have fewer or less well-defined rights than they might have as shareholders of a corporation incorporated in a U.S. jurisdiction. For example, 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.
Holders of ADSs are not entitled to attend shareholders’ meetings, and they may only vote through the depositary.
Under Chilean law, a shareholder is required to be registered in our shareholders’ registry at least five business days before a shareholders’ meeting in order to vote at such meeting. A holder of ADSs will not be able to meet this requirement, and accordingly is not entitled to vote at shareholders’ meetings, because the shares underlying the ADSs will be registered in the name of the depositary. While a holder of ADSs is entitled to instruct the depositary as to how to vote the shares represented by ADSs in accordance with the procedures provided for in the deposit agreement, a holder of ADSs will not be able to vote its shares directly at a shareholders’ meeting or to appoint a proxy to do so. In certain instances, a discretionary proxy may vote our shares underlying the ADSs if a holder of ADSs does not instruct the depositary with respect to voting. In addition, the vote of a holder of ADSs may not be necessary to approve certain matters since under Chilean law, substantially all of the forms of corporate action can be approved with the votes of our controlling shareholder, Itaú Unibanco, in a duly summoned shareholders’ meeting, except for certain matters requiring supermajority approval according to Chilean law.
U.S. holders of our ADSs or common shares could suffer adverse tax consequences if we are characterized as a passive foreign investment company.
If you are a U.S. holder (as defined in “Item 10. Additional Information—E. Taxation—U.S. federal income tax considerations”) and we are a passive foreign investment company, or PFIC, for any taxable year during which you own our ADSs or common shares, you could be subject to adverse U.S. tax consequences. As of the date of this Annual Report, we do not expect to be classified as a PFIC for U.S. federal income tax purposes for our current taxable year or for any taxable year in the foreseeable future. However, the determination of whether we are a PFIC is made on an annual basis and will depend on the composition and nature of our income and the composition, nature and value of our assets from time to time, and therefore no assurance can be provided regarding our PFIC status. You should consult your tax advisor regarding the U.S. federal, state and local and other tax consequences of owning and disposing of the ADSs or common shares in your particular circumstances. See “Item 10. Additional Information—E. Taxation—U.S. federal income tax considerations” for additional information related to the PFIC rules and their application to the bank.
Bank.
Holders of the ADSs or our common shares could be subject to a 30% U.S. withholding tax.
Pursuant to Sections 1471 through 1474 of the Internal Revenue Code of 1986, as amended, or the Code, and U.S. Treasury Regulations promulgated thereunder, a 30% withholding tax may, in the future, be imposed on all or some of the payments on the ADSs or our common shares to holders andnon-U.S. financial institutions receiving payments on behalf of holders that, in each case, fail to comply with information reporting, certification and related requirements. This withholding tax, if it applies, could apply to any payment made with respect to the ADSs or our common shares, and ADSs or shares of our common shares held through anon-compliant institution may be subject to withholding even if the holder otherwise would not be subject to withholding. U.S. holders are urged to consult their tax advisers regarding the application of these rules to their ownership of the ADSs or our common shares. See “Item 10. Additional Information—E. Taxation—U.S. federal income tax considerations” for additional information related to these rules and their application to holders of ADSs or our common shares.
Exchange controls and withholding taxes in Chile may limit repatriation of your investment.
Equity investments in Chile by persons who are not Chilean residents may be subject to exchange control regulations that govern the repatriation of investments and earnings.
Dividends received by holders of ADSs are paid net of foreign currency exchange fees and fees and expenses of the depositary and are subject to Chilean withholding tax, currently imposed at a rate of 35%, subject to credits in certain cases as described under “Item 10. Additional Information—E. Taxation—Chilean Tax Considerations.” In order to facilitate capital movements from and into Chile and to encourage foreign investment, the Central Bank of Chile eliminated many foreign exchange restrictions and adopted the Compendium of Foreign Exchange Regulations (Compendio de Normas de Cambios Internacionales) effective April 19, 2001.
We cannot assure you that additional Chilean restrictions applicable to the holders of ADSs, the disposition of the shares underlying the ADSs 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 as to the duration or impact of such restrictions, if imposed. If for any reason, including changes in the Foreign Investment Agreement or Chilean law, the depositary is not able to convert Chilean pesos to U.S. dollars, investors would receive dividends or other distributions, if any, in Chilean pesos.
ITEM 4. INFORMATION4.INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
We are a publicly traded company (sociedad anóanónima) organized under the laws of Chile and licensed by the SBIF to operate as a commercial bank. Our legal name is Itaú Corpbanca, and our commercial name is Banco Itaú and/or Itaú. Our principal executive offices are located at Rosario Norte 660, Las Condes, Santiago, Chile. Our telephone number is56-2-2660-8000 and our website is www.itau.cl. Our agent in the United States is Itaú Corpbanca New York Branch, Attention: Joaquín Rojas Walbaum, located at 885 Third Avenue, 33rd33rd Floor, New York, NY 10022. Information set forth on our website does not constitute a part of this Annual Report. Itaú Corpbanca is organized under the laws of Chile and its subsidiaries are organized under the laws of Chile and Colombia. The terms “Itaú Corpbanca,” “Itaú,” “the bank,” “we,” “us” and “our” in this Annual Report refer to Itaú Corpbanca together with its subsidiaries unless otherwise specified.
History
The bank’sBank’s history has been extensive and with a challenging road that has led us to become the oldest private operating bank in Chile, incorporated as Banco de Concepción by Decree No. 180 of the Chilean Ministry of Finance on October 3, 1871, and legally began operations as a bank on October 16 of the same year. We were founded by a group of residents of the city of Concepción, Chile, led by Aníbal Pinto, who would later become President of Chile.
In 1971, Banco de Concepción was transferred to a government agency,Corporación de Fomento de la Producción(the Chilean Corporation for the Development of Production, or CORFO). Also in 1971, Banco de Concepción acquired Banco Francés e Italiano in Chile, which provided for the expansion of Banco de Concepción into Santiago. In 1972 and 1975, the bankBank acquired Banco de Chillán and Banco de Valdivia, respectively. In November 1975, CORFO sold its shares of the bankBank to private business persons, who took control of the bankBank in 1976. In 1980, the name of the bankBank was changed to Banco Concepción. In 1983, control of Banco Concepción was assumed by the SBIF. The bank remained under the control of the SBIF through 1986, when it was acquired bySociedad Nacional de Minería (the Chilean National Mining Society, or SONAMI). Under SONAMI’s control, Banco Concepción focused on providing financing to small- andmedium-sized mining interests, increased its capital and sold a portion of its high-risk portfolio to the Central Bank of Chile.
Investors led by Mr. Alvaro Saieh Bendeck purchased a majority interest of Banco Concepción from SONAMI in 1996. Following the acquisition by Mr. Alvaro Saieh Bendeck in 1996, the brand name changed to Corpbanca, hired a management team with substantial experience in the Chilean financial services industry and commenced a period of significant growth fueled by organic expansion and acquisitions. Our first significant transactions were the acquisition of the assets of the consumer loan division of Corfinsa and the finance company Financiera Condell S.A. in 1998. Both combined created the bank’sBank’s Consumer Division, Banco Condell, focused on themiddle-low income segment of the population in Chile.
With a view to its internationalization in November 2004, the bankBank completed the listing process that enabled it to trade its ADSs on the New York Stock Exchange. Five years later, the New York Branch was opened as a support for clients who can see their possibilities of financing in the United States expanded. Two years later, Corpbanca opened its representative office in Spain, whose role is to inform and promote the bankBank with foreign companies and serve as a liaison with bank clients in Chile and Colombia.
In June 2012, former Corpbanca finalized the acquisition of Banco Santander Colombia S.A. (now Itaú Corpbanca Colombia). With this acquisition, we became the first Chilean bank to have a banking subsidiary outside the country. In 2013, we acquired Helm Bank S.A., and the following year, merged it with and into Itaú Corpbanca Colombia, maintaining the networks of branches separately: Itaú Corpbanca Colombia and Helm.
Becoming a large bank with a regional presence prompted our former controlling shareholder to enter, in early 2014, into a merger agreement with Itaú Unibanco and Banco Itaú Chile.
Itaú financial group expanded into Chile in September 2006 after the acquisition of BankBoston (Chile). On February 28, 2007, BankBoston (Chile) was named Banco Itaú Chile, after the Superintendency of Banks and Financial Institutions approved the acquisition.
In June 2015, the Extraordinary Shareholders Meetings of Corpbanca and Banco Itaú Chile agreed to the merger,Merger, which was approved by the Superintendency of Banks and Financial Institutions in September of the same year. The Merger was consummated on April 1, 2016, the date on which the bankBank was renamed “Itaú Corpbanca.”
As of December 31, 2017,2018, the bankBank is the fourthfifth largest private bank in Chile with approximately 10.8%10.2% market share in the local credit market.
In this way, the stories of Banco Itaú Chile and Corpbanca were merged into a single one, with Corpbanca contributing a long and successful business trajectory which, since its beginning in 1871 in the city of Concepción, has had a clear goal: offering clients a service of excellence being faithful to what inspired its founders. On the other hand, Itaú Unibanco, with more than 90 years of history in Brazil, contributed all its experience as the largest private bank in Latin America and one of the largest banks in the world measured in market capitalization with a leading presence in the Brazilian market.
Our business model is the result of the combination of the local banks’ strengths and local knowledge, which will allow us to reach more clients, with an extended range of products and financial solutions.
A summary of the main milestones in the history of the bankBank is set forth in the following chart:
The Merger
On January 29, 2014, Corpbanca and Itaú Chile agreed to merge (the “Transaction Agreement”). The shareholders of former Corpbanca approved the Merger in an extraordinary shareholders’ meeting held on June 26, 2015, and the shareholders of former Banco Itaú Chile gave their consent to the merger in an extraordinary shareholders’ meeting held on June 30, 2015.
On April 1, 2016 the Merger was consummated and Banco Itaú Chile was merged with and into Corpbanca. As of April 2, 2018,March 31, 2019, Itaú Unibanco and CorpGroup beneficially own 36.06%38.14% and 30.65%28.57% of our outstanding common shares, respectively. Itaú Unibanco and CorpGroup also entered into the Itaú CorpGroup Shareholders’ Agreement. Upon the consummation of the Merger, Itaú Unibanco became the controlling shareholder of the merged bank. For a description of the Itaú CorpGroup Shareholders’ Agreement and the Transaction Agreement, see “Item 10. Additional Information—C. Material Contracts.”
Immediately following the Merger, the corresponding subsidiaries of Banco Itaú Chile and Corpbanca continued to operate independently and their respective clients were served by their current executives. In January 2017, December 2017, and April 2018, respectively, each of our securities brokerage (corredorasCorredoras de bolsaBolsa) subsidiaries, our general fund managers’ (administradoras generalesAdministradoras Generales de fondosFondos) subsidiaries, and our insurance broker’s subsidiaries, were consolidated, leaving one entity for each business.
By consolidating operations in Chile and Colombia, the new bank became one of Chile’s largest private financial institutions, ranking fourthfifth in the industry with a market share by loans of 10.8%10.2% in Chile at the end of 2017.2018. The Merger and combination of the strengths of both banks has translated into an expansion in the offer of products and services for our clients, with a large branch platform in Chile (201)(we operate 201 branch offices in Chile and one branch in New York) and Colombia (174)(161, including one office in Panama).
Client Migration
Platform Integration
In order to migrate our clients from Corpbanca’s platform systems to Banco Itaú Chile’s, we set forth a gradual process defined as “migration waves,” which started after we consummatedAfter the Merger. For this purpose, we scheduled several waves to migrate Corpbanca’s customers. The migration waves also included the change of image of certain Corpbanca branches. This process was completed during the fourth quarter of 2017.
In parallel to the migration waves,Merger, we started to integrate the processes and systems of the merged banks,Corpbanca and Banco Itaú Chile, which contemplatecontemplated the following three stages in order to achieve the Target Operational Model, or TOM:
• |
|
• | TOM Technology and Operations: This stage refers to the technological integration and implementation of improvements of both banks supported in a single core banking. The implementation of these improvements to capture additional synergies is expected to be completed by the end of 2019. |
The Itaú Colombia Acquisition
The obligation of the parties to the Transaction Agreement to cause Itaú Corpbanca to acquire all of the outstanding shares of Itaú BBA Colombia or to carry out a merger of Itaú Corpbanca Colombia, formerly Banco Corpbanca Colombia, with Itaú BBA Colombia was amended on January 20, 2017 and replaced with the obligation of the parties to cause Itaú Corpbanca Colombia to acquire the assets and liabilities of Itaú BBA Colombia at their book value in accordance with the terms and conditions agreed by Itaú Corpbanca Colombia and Itaú BBA Colombia on November 1, 2016 (the “Itaú Colombian Asset & Liabilities Acquisition”). The Itaú Colombian Asset & Liabilities Acquisition was approved by the shareholders of Itaú Corpbanca Colombia and the Colombian Superintendency of Finance (the “CFS”) and completed on June 16, 2017, as established in the agreement signed on June 1, 2017 between Itaú Corpbanca Colombia, as assignee, and Itaú BBA Colombia S.A. Corporación Financiera, as assignor. Pursuant to the Itaú Colombian Asset & Liabilities Acquisition transaction, Itaú Corpbanca Colombia paid to Itaú BBA Colombia S.A. Corporación Financiera Ch$33,205 million. This agreement also contemplated the rendering of certain services by Itaú Corpbanca Colombia in favor of Itaú BBA Colombia and the hiring of the senior management of Itaú BBA Colombia by Itaú Corpbanca Colombia.
Additionally, the amendment to the Transaction Agreement also included the postponement of the date for Itaú Corpbanca to purchase the shares that CorpGroup holds in Itaú Corpbanca Colombia. The purchase of those shares of Itaú Corpbanca Colombia held by CorpGroup (currently representing 12.36% of shares outstanding), which was previously agreed to be carried out no later than January 29, 2017, was postponed until January 28, 2022, subject to receipt of the applicable regulatory approvals. The purchase price for the shares has not changed and will be US$3.5367 per share plus (i) interest from (and including) August 4, 2015 until (but excluding) the payment date at an annual interest rate equal to Libor plus 2.7% minus (ii) the sum of (x) the aggregate amount of dividends paid by Itaú Corpbanca Colombia to CorpGroup since the date of the Transaction Agreement, plus (y) the accrued interest with respect to the amount of such dividends since the date of their payment until the payment date of the purchase price, at an annual interest rate equal to Libor plus 2.7%.
Capital Expenditures
The following table reflects our capital expenditures in the years ended December 31, 2015, 2016, 2017 and 2017:2018:
|
| For the Year Ended December 31, |
| For the Year Ended December 31, | |||||||||||||||
|
| 2015 |
| 2016 |
| 2017 |
| 2016 | 2017 | 2018 | |||||||||
|
| (in millions of Ch$) |
| (in millions of Ch$) | |||||||||||||||
Land and buildings |
| — |
| 11,002 |
| 27,125 |
| 11,002 | 27,125 | 6,207 | |||||||||
Machinery and equipment |
| 15,766 |
| 87,600 |
| 50,681 |
| 87,600 | 50,756 | 74,449 | |||||||||
Furniture and fixtures |
| — |
| — |
| — |
| — | — | — | |||||||||
Vehicle |
| — |
| — |
| — |
| — | — | — | |||||||||
Other |
| 715 |
| 6,555 |
| 9,349 |
| 6,555 | 9,274 | 2,296 | |||||||||
|
|
| |||||||||||||||||
Total |
| 16,481 |
| 105,157 |
| 87,155 |
| 105,157 | 87,155 | 82,952 | |||||||||
|
|
|
Total capital expenditures in 20172018 of Ch$87,15582,952 million consisted mainly of Ch$42,90358,085 million in expenses relating to the purchase of software and computer equipment and other IT-related expenses, including those related to the post-Merger integration of IT systems.equipment. For further details relating to these results and related divestitures, see Notes 1(m) and 13 of our consolidated financial statements included herein.
B. BUSINESS OVERVIEW
COMPETITIVE STRENGTHS
We believe that the Merger will enable us to emerge as a leading banking platform in Chile and Colombia as a result of the following strengths:
Banking Platform with Larger Scale
We believe that as a result of the Merger, we have greater scale and resources to grow and compete more effectively in Chile and Colombia. The merged bank has become the fourthfifth largest private bank in Chile and will result in a banking platform for future expansion in the Andean Region. According to the SBIF, as of December 31, 2017,2018, we ranked fourthfifth among private banks in total loans with 10.8%10.2% market share on an unconsolidated basis (taking into account only our operations in Chile). Additionally, as of the same date, the SBIF ranked us fourthfifth in total deposits with 8.5% market share among private banks in the Chilean market.
In 2017,2018, our operations in Chile and Colombia reached an aggregate net income of Ch$ 62,825166,854 million. This result was primarily driven byFrom a macroeconomic perspective, the events with the greatest impact on our results were: (i) an acceleration of economic activity in both macroeconomic impactsChile and specific eventsColombia, which favored the generation of new business and an improvement of the credit risk of part of the our loan portfolio; (ii) the drop in the monetary policy interest rate in Colombia, which went from 4.75% at the beginning of the year to Itaú Corpbanca particularly4.25% at the end of December, which positively impacted our cost of funding; and (iii) the higher provisions for loan lossesinflation observed in Chile of 2.8% in 2018 compared to 2.3% in 2017, which improved our financial margin as further discussed below in “Item 5—Operating and Financial Review and Prospects—A. Operating Results—The Economy—Results of Operations for the Years Ended December 31, 2015, 2016, 2017 and 2017—2018—Net Income.”
Unique Control and Support from a Leading Institution
We believe that the Merger has provided us with a competitive advantage over our competitors. Since Itaú Unibanco is the largest private financial institution in Brazil and a premier Latin American franchise, the Merger provides us with an opportunity to leverage Itaú Unibanco’s strong global client relationships in the markets the bankBank operates while enhancing opportunities for growth abroad.
We expect that Itaú Corpbanca will be able to expand its offering of banking products through a successful managing model, segmentation and digitalization, all based on Itaú Unibanco’s strategy. Our balance sheet provides us with cross-selling opportunities and allows us to benefit from additional synergies through: (i) the optimization of cost structures; (ii) savings derived from an enhanced branch network; (iii) savings derived from scalable IT systems; and (iv) improvements in the cost of funding.
Diversified Footprint in Chile and Colombia
We believe that the enhanced footprint that Itaú Corpbanca has in Chile and Colombia gives us an increased ability to grow and compete more effectively within those countries, further consolidating our market position in Chile and Colombia.
We believe that our acquisitions in Colombia give us a distinct advantage over our competitors in Chile and Colombia. We are the first, and until September 30, 2015 we were the only, Chilean-based bank to acquire a universal bank outside Chile. As of today, we remain the only Chilean-based bank to have a footprint in Colombia through a universal bank. As of December 31, 2017,2018, according to the SBIF, Itaú Corpbanca was the fourthfifth largest private bank in Chile by loans and deposits and according to the Colombian Superintendency of Finance, Itaú Corpbanca Colombia was the seventh largest bank in Colombia in terms of loans and the eighth largest in terms of deposits.
Experienced Management Team
The chairman of our board of director,directors, Mr. Jorge Andrés Saieh Guzmán, became chairman in February 2012. He has over 1718 years of experience as a member of our board of directors. OurOn August 1, 2018, the Board of Directors of Itaú Corpbanca agreed to appoint Mr. Manuel Olivares Rossetti as the new chief executive officer (CEO), Milton Maluhy, assumed office of the Bank, commencing January 1, 2019. Mr. Olivares shall continue leading the Bank, consolidating all the work and progress attained so far. Mr. Manuel Olivares was most recently the CEO of Banco Bilbao Vizcaya Argentaria, Chile since 2013, after holding various positions at BBVA. Previously, he worked for 12 years in 2016. He is partdifferent positions at Citibank in Chile. Mr. Olivares received a B.A. in Business and Administration from the Universidad de Chile and possesses more than 30 years of experience in the banking industry, both locally and internationally. Since August 2018, Mr. Olivares has been participating in a process of immersion and understanding of the business, policies, standards and culture of Itaú Corpbanca and of Itaú Unibanco, since 2002in coordination with our former CEO, Milton Maluhy. Mr. Milton Maluhy was in his position of chief executive officer of Itaú Corpbanca between April 1, 2016 and a partner since 2010.December 31, 2018. After accomplishing the most relevant milestones of the merger, Mr. Maluhy was president director of Rede S.A. (former Redecar S.A.) and executive director ofhas returned to Itaú Unibanco responsible for alliances between Itaú Unibanco and retail chains, as well as headin Brazil to a new position of Itaú Unibanco’s credit card area. Chief Financial Officer/Chief Risk Officer.
Our chief financial officer (CFO), Gabriel Moura, has over 2122 years of experience in the banking and financial industry. He is part of Itaú Unibanco since 2000 and a partner since 2010. The CEO of Itaú Corpbanca Colombia, Alvaro Pimentel, has over 21 years of experience in Itaú Unibanco. He has a degree in economics from the Universidade Estadual de Campinas—Unicamp in Brazil and an Executive MBAM.B.A. in finance from Insper in Brazil. A number of the members of the board of directors of Itaú Corpbanca Colombia also have a wealth of experience in the Colombian market and the banking and financial services industry.
Sound Risk Management
We believe that our asset quality is superior to the market average in terms of credit risk metrics, despite negative credit events during 2017. As of December 2017, our non-performing loan to total loans and our write-offs to average outstanding loans ratios were 2.3% and 1.1%, respectively. After the Merger, we revised our risk policies to align credit criteria to Itaú’s internal risk policies. This risk management philosophy enables us to identify risks and resolve potential problems on a timely basis. We believe that our asset quality is superior to the market average in terms of credit risk metrics. As of December 2018, ournon-performing loan to total loans and our write-offs to average outstanding loans ratios were 2.1% and 0.6%, respectively.
Operating in a Stable Economic Environment Within Latin America
We conduct a majority of our business in Chile and a significant amount in Colombia. The Chilean and Colombian economies have generally demonstrated a stable macroeconomic environment in terms of growth and inflation. The Chilean economy is generally recognized as among the most stable in Latin America, as evidenced by its investment grade ratings of Aa3A1 by Moody’s, A+ by Standard & Poor’s and A by Fitch Ratings, the highest ratings in the region. Chile has consistently received investment-grade credit ratings since Standard & Poor’s and Moody’s started coverage in 1992 and 1994, respectively. Moody’s and Fitch Ratings have an investment grade rating of Colombia of Baa2 and BBB, respectively, with a “negative” and “stable” outlook, respectively. Standard & Poor’s has an investment grade rating of Colombia ofBBB-, with a “stable” outlook.
STRATEGY
Our strategy aims at enhancing our market position in the Chilean and Colombian financial services industrybeing a leading bank in terms of profitability, market sharesustainable performance and service coverage.customer satisfaction. The key elementsstrategic drivers of our strategy are:
Continue to Grow our Operations Profitably as a Universal Bank
We seek to achieve organic growth in all of our lines of business in Chile and Colombia by offering competitive products and services to our clients. We believe that we have developed a successful wholesale banking business model, which allows us to realize high margins on the cross-selling of our products to our large corporate clients. Our intention is to continue to expand the wholesale banking business model to our operations in Colombia. We are focusing our marketing and sales efforts on adapting this business model to apply to our SME clients in Chile and Colombia. Additionally, we believe that our strong franchise in the retail banking unit offers us the potential for significant growth in our loan portfolio, in thelow-,mid- and high-income segments. In particular, we believe that there is significant opportunity to expand our wealth management business through the offering of unique investment products and opportunities. We believe that the Merger has given us a complementary banking operations and an improved market position, which enhances our client servicing models. In addition, we seek to identify and pursue growth throughout enhancing strategic opportunities. We will continue to evaluate additional strategic acquisitions and alliances from time to time, inside and outside of Chile and Colombia.
Actively Pursue Cross-Selling Opportunities
We intend to increase our market share and profitability by continuing to cross-sell services and products to our existing clients. We have instituted processes that facilitate our ability to offer additional financial services to our clients, which we believe will increase our revenue from high-value-added services. In addition, we cross-sell loan products to our checking and savings account customers that are tailored to their individual needs and financial situation. We believe that the Merger has provided us with further opportunities to offer our clients an improved product menu leveraging the strong position of Itaú Unibanco in both wholesale and retail business.
Efficiency
We are committed to continuing to improve our operating efficiency and profitability. We are working to increase use of internet and mobile banking by our customers, by offering them better technology solutions. Our senior management is focused on implementing technological solutions aimed to identify means of improving our overall profitability and to optimize our cost structure, such as online time deposits which have been an innovative product of great success in Chile. Through these initiatives, we will continue to strive to improve our efficiency ratio. As of December 31, 2018, we had a consolidated efficiency ratio of 67.7% (defined as operating expenses as a percentage of operating income consisting of aggregate of net interest income, net service fee income, net gains frommark-to-market and trading, exchange differences (net) and other operating income (net)).
After the Merger, we have started to enjoy several benefits, including a greater scale and resources to compete more effectively and more efficiently. We believe the merged bank has the potential to continue to generate synergies in Chile which will result in efficiency improvements.
Focus on Building Customer Satisfaction
The quality of service that we provide to our customers is key to our growth strategy. We not only focus on gaining new customers, but on strengthening and establishing long-term relationships. We believe this is done through a constant effort to identify and understand our clients’ needs and to measure their satisfaction. We also continue to develop new processes and technological solutions to improve our customer service. This is a key component of our strategy to continuously create value.
Digital Transformation
Our digital banking strategy is one of the pillars we plan to use to boost, not only our retail banking, but also to further improve our efficiency. In our journey to being digital, since 2017 we have progressively started to make progress. Our digital strategy is not only focused on improvements in our mobile offerings, but also transforming our process in order to become a digital bank from back office to the front office. Therefore, it is anend-to-end strategy. To accomplish that, we currently have over 20 multidisciplinary teams which are fully dedicated and looking into opportunities to digitalize product and process with a disciplined and focused approach. Finally, we are advancing in terms of our digital offerings. This translates in more than 150 new releases and functionalities by the end of 2018 in our online channels.
Our transformation process continually increases the productivity of our IT department and fosters a digital mindset throughout the bank, so as to gain efficiency and improve user experience and client satisfaction. In this context, we are concerned about delivering the best experience to our customers and a key element for this is to develop the best standards in cybersecurity, which is currently a country issue, and has generated various instances of discussion at the level of industry, customer and regulator levels. The world is experiencing a digital revolution that expands the possibilities of people and gives them a unique experience, linked to immediacy, speed and efficiency. However, this becomes a challenge for the industry and for us, so we work continuously so that customers are protected from various attacks on our network, such as, for example, phishing.
We continue to operate in an increasingly hostile cyber threat environment, which requires ongoing investment in business and technical controls to defend against these threats. Key threats include computer viruses, malicious code, phishing or other information security breaches, which could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our customers’ confidential, proprietary and other information. Although there can be no assurance that the measures implemented will be fully effective to prevent or mitigate future attacks or breaches, the consequences of which could be significant to the Bank, we continue to strengthen and invest in both business and technical controls in order to prevent, detect and respond to an increasingly hostile cyber threat environment. We continually evaluate the threat environment for the most prevalent attack types and their potential outcomes to determine the most effective controls to mitigate those threats.
As part of the efforts to improve our cybersecurity risk management, our IT security team has been working on a security roadmap to improve all security layers, perimeter, network, endpoint, data and application, always considering the best alternatives for a security environment. Cyber risk is a priority area for the board of directors and is routinely reported to our board of directors to ensure appropriate visibility, governance and executive support for our ongoing cybersecurity management.
Further Penetrate the Colombian Financial Services Market
We intend to capitalize on the growth of the Colombian market given that we believe that our Colombian operation will offer us significant opportunities for growth. Specifically, we benefit from comparable lower banking penetration rates in terms of GDP per capita in Colombia. The strategic acquisitions in Colombia and Itaú Corpbanca’s mandate to expand businesses in the Andean Region demonstrate our commitment to the Colombian financial market. With respect to our current operations in Colombia, in order to improve our operational efficiency and increase our market share in key sectors, we are putting in place our commercial and operational standards and best practices, while capitalizing on the local management expertise, customer base, services and products. As a result of the Itaú Colombian Asset & Liabilities Acquisition, we expect to achieve a stronger penetration of the wholesale market. We also expect to leverage on Itaú Unibanco’s retail banking best practices, our new controlling shareholder.
Actively Pursue Cross-Selling Opportunities
We intend to increase our market share and profitability by continuing to cross-sell services and products to our existing clients. We have instituted processes that facilitate our ability to offer additional financial services to our clients, which we believe will increase our revenue from high-value-added services. In addition, we cross-sell loan products to our checking and savings account customers that are tailored to their individual needs and financial situation. We believe that the Merger has provided us with further opportunities to offer our clients an improved product menu leveraging the strong position of Itaú Unibanco in both wholesale and retail business.
Efficiency
We are committed to continuing to improve our operating efficiency and profitability. We are working to increase use of internet and mobile banking by our customers, by offering them better technology solutions. Our senior management is focused on implementing technological solutions aimed to identify means of improving our overall profitability and to optimize our cost structure, such as online time deposits which have been an innovative product of great success in Chile. Through these initiatives, we will continue to strive to improve our efficiency ratio. As of December 31, 2017, we had a consolidated efficiency ratio of 67.3% (defined as operating expenses as a percentage of operating income consisting of aggregate of net interest income, net service fee income, net gains from mark-to-market and trading, exchange differences (net) and other operating income (net)).
After the Merger, we have started to enjoy several benefits, including a greater scale and resources to compete more effectively and more efficiently. We believe the merged bank has the potential to continue to generate synergies in Chile which will result in efficiency improvements.
Focus on Building Customer Satisfaction
The quality of service that we provide to our customers is key to our growth strategy. We not only focus on gaining new customers, but on strengthening and establishing long-term relationships. We believe this is done through a constant effort to identify and understand our clients’ needs and to measure their satisfaction. We also continue to develop new processes and technological solutions to improve our customer service. This is a key component of our strategy to continuously create value.
OWNERSHIP STRUCTURE
Itaú Corpbanca capital stock is comprised of 512,406,760,091 common shares traded on the Santiago Stock Exchange and the Chilean Electronic Stock Exchange. Shares are also traded as depositary receipts on the New York Stock Exchange in the form of ADSs.
Since the consummation of the Merger on April 1, 2016, Itaú Corpbanca has been controlled by Itaú Unibanco. After the Merger, Itaú Unibanco indirectly acquired an additional 2.13%, 0.35% and 0.35%2.08% share capital of Itaú Corpbanca from the Saieh Family, on
October 26, 2016, and on September 15, 2017 and on October 13, 2018, respectively. As a result of these acquisitions, the current shareholder structure is as follows:
PRINCIPAL BUSINESS ACTIVITIES
We provide a broad range of wholesale and retail banking services to our customers in Chile and Colombia. In addition, we provide financial advisory services, mutual fund management, insurance brokerage and securities brokerage services through our subsidiaries, and banking services through our New York Branch.
We operate in two main geographic areas: Chile and Colombia. The Chile segment also includes operations carried out by Itaú Corpbanca New York Branch and the Colombia segment also includes the operations carried out by Itaú S.A. (Panama) and Itaú Casa de Valores S.A. The following table sets forth a breakdown of our revenue by geographic market for the years ended December 31, 2015, 2016 and 2017:
|
| Net Interest Income by Geographic Market |
| ||||||||||||||||
|
| 2015 |
| 2016 |
| 2017 |
| ||||||||||||
|
| Chile |
| Colombia |
| Total |
| Chile |
| Colombia |
| Total |
| Chile |
| Colombia |
| Total |
|
|
| (in millions of Ch$) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
| 501,982 |
| — |
| 501,982 |
| 1,013,951 |
| 495,252 |
| 1,509,203 |
| 1,067,124 |
| 579,205 |
| 1,646,329 |
|
Interest expense |
| (278,692 | ) | . |
| (278,692 | ) | (554,246 | ) | (315,782 | ) | (870,028 | ) | (529,584 | ) | (333,763 | ) | (863,347 | ) |
Net interest income |
| 223,290 |
| — |
| 223,290 |
| 459,705 |
| 179,470 |
| 639,175 |
| 537,540 |
| 245,442 |
| 782,982 |
|
The business units presented2017 in this Annual Report correspond to the business units used by the bank after the Merger. Information for 2015, referring to former Banco Itaú Chile’s historical information, is presented using the same segmenting criteria. However, the resultsaccordance with IAS 39 and for the year ended December 31, 2015 are not comparable to the results for the years ended December 31, 2016 and 2017 because of the Merger. See “Item 3. Key Information—Presentation of Financial and Other Information.”
The following table provides information on the composition of our loan portfolio net of allowances as of December 31, 2015 and 20162018 in accordance with IFR 9:
|
| As of December 31, |
| ||||||
|
| 2015 |
| 2016 |
| Variation |
| Variation |
|
|
| (in millions of constant Ch$) |
| (%) |
| ||||
Commercial loans |
|
|
|
|
|
|
|
|
|
Commercial loans |
| 3,568,144 |
| 11,625,087 |
| 8,056,943 |
| 225.8% |
|
Foreign trade loans |
| 414,953 |
| 720,792 |
| 305,839 |
| 73.7% |
|
Current account debtors |
| 37,115 |
| 125,996 |
| 88,881 |
| 239.5% |
|
Factoring operations |
| 56,144 |
| 74,433 |
| 18,289 |
| 32.6% |
|
Student loans |
| 173,254 |
| 597,946 |
| 424,692 |
| 245.1% |
|
Leasing transactions |
| 244,627 |
| 1,043,046 |
| 798,419 |
| 326.4% |
|
Other loans and receivables |
| 10,234 |
| 28,243 |
| 18,009 |
| 176.0% |
|
Subtotals |
| 4,504,471 |
| 14,215,543 |
| 9,711,072 |
| 215.6% |
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans |
|
|
|
|
|
|
|
|
|
Letters of credit loans |
| 16,482 |
| 57,589 |
| 41,107 |
| 249.4% |
|
Endorsable mutual mortgage loans |
| 8,720 |
| 151,167 |
| 142,447 |
| 1,633.6% |
|
Other mutual mortgage loans |
| 1,502,395 |
| 3,344,285 |
| 1,841,890 |
| 122.6% |
|
Leasing transactions |
| — |
| 283,084 |
| 283,084 |
| — |
|
Other loans and receivables |
| — |
| 28,920 |
| 28,920 |
| — |
|
Subtotal |
| 1,527,597 |
| 3,865,045 |
| 2,337,448 |
| 153.0% |
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
|
|
|
|
|
|
|
Consumer loans |
| 370,612 |
| 1,703,973 |
| 1,333,361 |
| 359.8% |
|
Current account debtors |
| 109,913 |
| 172,938 |
| 63,025 |
| 57.3% |
|
Credit card debtors |
| 192,591 |
| 396,514 |
| 203,923 |
| 105.9% |
|
Consumer leasing transactions |
| 308 |
| 16,519 |
| 16,211 |
| 5,263.3% |
|
Other loans and receivables |
| — |
| 74,116 |
| 74,116 |
| — |
|
Subtotal |
| 673,424 |
| 2,364,060 |
| 1,690,636 |
| 251.1% |
|
Total |
| 6,705,492 |
| 20,444,648 |
| 13,739,156 |
| 204.9% |
|
Net Interest Income by Geographic Market | ||||||||||||||||||||||||||||||||||||
2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||||||
Chile | Colombia | Total | Chile | Colombia | Total | Chile | Colombia | Total | ||||||||||||||||||||||||||||
(in millions of Ch$) | ||||||||||||||||||||||||||||||||||||
Interest income | 1,013,951 | 495,252 | 1,509,203 | 1,067,124 | 579,205 | 1,646,329 | 1,208,481 | 530,836 | 1,739,317 | |||||||||||||||||||||||||||
Interest expense | (554,246 | ) | (315,782 | ) | (870,028 | ) | (529,584 | ) | (333,763 | ) | (863,347 | ) | (593,796 | ) | (257,858 | ) | (851,654 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Net interest income | 459,705 | 179,470 | 639,175 | 537,540 | 245,442 | 782,982 | 614,685 | 272,978 | 887,663 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides information on the composition of our loan portfolio net of allowances as of December 31, 2016 and 20172017:
|
| As of December 31, |
| ||||||
|
| 2016 |
| 2017 |
| Variation |
| Variation |
|
|
| (in millions of constant Ch$) |
| (%) |
| ||||
Commercial loans |
|
|
|
|
|
|
|
|
|
Commercial loans |
| 11,625,087 |
| 10,734,858 |
| (890,229 | ) | (7.7)% |
|
Foreign trade loans |
| 720,792 |
| 671,478 |
| (49,314 | ) | (6.8)% |
|
Current account debtors |
| 125,996 |
| 134,597 |
| 8,601 |
| 6.8% |
|
Factoring operations |
| 74,433 |
| 140,375 |
| 65,942 |
| 88.6% |
|
Student loans |
| 597,946 |
| 640,209 |
| 42,263 |
| 7.1% |
|
Leasing transactions |
| 1,043,046 |
| 923,507 |
| (119,539 | ) | (11.5)% |
|
Other loans and receivables |
| 28,243 |
| 24,608 |
| (3,635 | ) | (12.9)% |
|
Subtotals |
| 14,215,543 |
| 13,269,632 |
| (945,911 | ) | (6.7)% |
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans |
|
|
|
|
|
|
|
|
|
Letters of credit loans |
| 57,589 |
| 47,260 |
| (10,329 | ) | (17.9)% |
|
Endorsable mutual mortgage loans |
| 151,167 |
| 134,103 |
| (17,064 | ) | (11.3)% |
|
Other mutual mortgage loans |
| 3,344,285 |
| 3,637,164 |
| 292,879 |
| 8.8% |
|
Leasing transactions |
| 283,084 |
| 273,175 |
| (9,909 | ) | (3.5)% |
|
Other loans and receivables |
| 28,920 |
| 26,032 |
| (2,888 | ) | (10.0)% |
|
Subtotal |
| 3,865,045 |
| 4,117,734 |
| 252,689 |
| 6.5% |
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
|
|
|
|
|
|
|
Consumer loans |
| 1,703,973 |
| 1,709,981 |
| 6,008 |
| 0.4% |
|
Current account debtors |
| 172,938 |
| 195,661 |
| 22,723 |
| 13.1% |
|
Credit card debtors |
| 396,514 |
| 401,505 |
| 4,991 |
| 1.3% |
|
Consumer leasing transactions |
| 16,519 |
| 10,778 |
| (5,741 | ) | (34.8)% |
|
Other loans and receivables |
| 74,116 |
| 58,787 |
| (15,329 | ) | (20.7)% |
|
Subtotal |
| 2,364,060 |
| 2,376,712 |
| 12,652 |
| 0.5% |
|
Total |
| 20,444,648 |
| 19,764,078 |
| (680,570 | ) | (3.3)% |
|
As of December 31, | ||||||||||||||||
2016 | 2017 | Variation | Variation | |||||||||||||
(in millions of constant Ch$) | (%) | |||||||||||||||
Commercial loans | ||||||||||||||||
Commercial loans | 11,625,087 | 10,734,858 | (890,229 | ) | (7.7 | )% | ||||||||||
Foreign trade loans | 720,792 | 671,478 | (49,314 | ) | (6.8 | )% | ||||||||||
Current account debtors | 125,996 | 134,597 | 8,601 | 6.8 | % | |||||||||||
Factoring operations | 74,433 | 140,375 | 65,942 | 88.6 | % | |||||||||||
Student loans | 597,946 | 640,209 | 42,263 | 7.1 | % | |||||||||||
Leasing transactions | 1,043,046 | 923,507 | (119,539 | ) | (11.5 | )% | ||||||||||
Other loans and receivables | 28,243 | 24,608 | (3,635 | ) | (12.9 | )% | ||||||||||
Subtotals | 14,215,543 | 13,269,632 | (945,911 | ) | (6.7 | )% | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Mortgage loans | ||||||||||||||||
Letters of credit loans | 57,589 | 47,260 | (10,329 | ) | (17.9 | )% | ||||||||||
Endorsable mutual mortgage loans | 151,167 | 134,103 | (17,064 | ) | (11.3 | )% | ||||||||||
Other mutual mortgage loans | 3,344,285 | 3,637,164 | 292,879 | 8.8 | % | |||||||||||
Leasing transactions | 283,084 | 273,175 | (9,909 | ) | (3.5 | )% | ||||||||||
Other loans and receivables | 28,920 | 26,032 | (2,888 | ) | (10.0 | )% | ||||||||||
Subtotal | 3,865,045 | 4,117,734 | 252,689 | 6.5 | % | |||||||||||
|
|
|
|
|
|
|
|
Consumer loans Consumer loans Current account debtors Credit card debtors Consumer leasing transactions Other loans and receivables Subtotal Total 1,703,973 1,709,981 6,008 0.4 % 172,938 195,661 22,723 13.1 % 396,514 401,505 4,991 1.3 % 16,519 10,778 (5,741 ) (34.8 )% 74,116 58,787 (15,329 ) (20.7 )% 2,364,060 2,376,712 12,652 0.5 % 20,444,648 19,764,078 (680,570 ) (3.3 )%
The following table provides information on the composition of our loan portfolio net of allowances as of December 31, 2017 and our loan portfolio at amortized cost net of allowances as of December 31, 2018:
As of December 31,(1) | ||||||||||||||||
2017 | 2018 | Variation(2) | Variation(2) | |||||||||||||
(in millions of constant Ch$) | (%) | |||||||||||||||
Commercial loans | ||||||||||||||||
Commercial loans | 10,734,858 | 11,065,601 | 330,743 | 3.1 | % | |||||||||||
Foreign trade loans | 671,478 | 920,479 | 249,001 | 37.1 | % | |||||||||||
Current account debtors | 134,597 | 124,299 | (10,298 | ) | (7.7 | )% | ||||||||||
Factoring operations | 140,375 | 210,558 | 70,183 | 50.0 | % | |||||||||||
Student loans | 640,209 | 625,598 | (14,611 | ) | (2.3 | )% | ||||||||||
Leasing transactions | 923,507 | 903,047 | (20,460 | ) | (2.2 | )% | ||||||||||
Other loans and receivables | 24,608 | 32,611 | 8,003 | 32.5 | % | |||||||||||
Subtotals | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||
13,269,632 | 13,882,193 | 612,561 | 4.6 | % | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Mortgage loans | ||||||||||||||||
Letters of credit loans | 47,260 | 37,892 | (9,368 | ) | (19.8 | )% | ||||||||||
Endorsable mutual mortgage loans | 134,103 | 110,652 | (23,451 | ) | (17.5 | )% | ||||||||||
Other mutual mortgage loans | 3,637,164 | 3,901,107 | 263,943 | 7.3 | % | |||||||||||
Leasing transactions | 273,175 | 307,723 | 34,548 | 12.6 | % | |||||||||||
Other loans and receivables | 26,032 | 22,336 | (3,696 | ) | (14.2 | )% | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Subtotal | 4,117,734 | 4,379,710 | 261,976 | 6.4 | % | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Consumer loans | ||||||||||||||||
Consumer loans | 1,709,981 | 1,766,313 | 56,332 | 3.3 | % | |||||||||||
Current account debtors | 195,661 | 191,913 | (3,748 | ) | (1.9 | )% | ||||||||||
Credit card debtors | 401,505 | 443,141 | 41,636 | 10.4 | % | |||||||||||
Consumer leasing transactions | 10,778 | 5,727 | (5,051 | ) | (46.9 | )% | ||||||||||
Other loans and receivables | 58,787 | 45,373 | (13,414 | ) | (22.8 | )% | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Subtotal | 2,376,712 | 2,452,467 | 75,755 | 3.2 | % | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | 19,764,078 | 20,714,370 | 950,292 | 4.8 | % | |||||||||||
|
|
|
|
|
|
|
|
(1) | Allowance for loan losses as of December 31, 2018 corresponds to allowances for loans and accounts receivable from customers at amortized cost according to IFRS 9. Prior periods are in accordance with IAS 39. |
(2) | As described in footnote (1) above, variations between 2018 and 2017 are not comparable due to our transition to IFRS 9. |
Business activities in Chile have been strategically aligned onto three commercial business units directly related not only to our medium term strategy but to our customers’ needs: 1) Wholesale Banking (a. Corporate, b. Large Companies and c. Real Estate); 2) Retail Banking (a. Itaú Personal Bank, b. Itaú, c. Itaú Private Bank, d. Midsize Companies, e. SMEs and f. Banco Condell, our Consumer Finance Division); and 3) Treasury.
A description of each of the business units in Chile and of our Colombian banking subsidiary as well as of our New York branch is presented below:
Wholesale Banking
Wholesale Banking serves large economic groups, state-owned and private companies, mining companies, utilities, energy, seaports, airports, public hospitals or any business. Wholesale Banking also serves our real estate and project finance customers. It focuses on offering clients a broad range of services tailored to fit their specific needs. These services include deposit-taking and lending in both Chilean pesos and foreign currencies, trade financing, general commercial loans, working capital loans, letters of credit, interest rate, foreign exchange derivatives (including foreign exchange options) and cash flow management.
Corporate Banking. This business unit specializes in institutional customers and customers with annual sales in excess of US$100 million.
Large Companies. This business unit includes a wide range of products and financial services to companies with annual sales between US$8 million to US$100 million.
Real Estate Companies. This business unit is focused on companies or economic groups in the real estate or construction industry with annual sales in excess of US$100,000.
Retail Banking
Retail Banking serves retail individuals customers in Chile across all income levels, fromlow-income to high-income individuals, and also targets midsize companies and SMEs,small and very small companies (SMEs), the latter two grouped under “Itaú Companies.” Retail Banking is organized into the following four business units:
Itaú Personal Bank. In 2017 we launched a new business unit for high-income individuals, with a monthly income in excess ofbetween Ch$2.5 million and Ch$8.0 million. The business model for Itaú Personal Bank is based in our relationship with the customers. This is the first high-income individuals segment in Chile with differentiated branches at ground floor to be access directly from the street, and additionally with differentiated mobile and web channels. Currently, we have 2022 premium branches and 3734 traditional branches with a space for Personal Bank.
Private Banking. Within our Private Banking Division, we provide private banking services to our high-income and high net worth customers in Chile. We consider high-income individuals to be customers with a monthly income in excess of US$1Ch$8.0 million. Each client under our private banking or “Private Banking” program is provided with a liaison officer who oversees the client’s entire relationship with us across all product lines. In addition to the products and services we provide to private banking customers, we offer tailored lending products designed to help keep their businesses growing.
Itaú (Traditional Banking). Our Traditional Banking Division is mainly oriented toward individuals in Chile with medium-high income levels (focused on clients between Ch$600,000 and Ch$2.5 million monthly income). Our traditional banking services are marketed and operated under the Itaú and Corpbanca brand names. We offer our traditional and private banking clients products in Chile such as checking accounts, credit lines, credit and debit cards, personal installment loans, mortgage loans, insurance banking, time deposits and savings accounts in Chilean pesos, Euros, UF and U.S. dollars, among others. In addition, we provide mutual fund and securities brokerage services. This segment is served under 120123 branches.
Banco Condell (Consumer Finance).Our Consumer Finance Division operates under the trade name Banco Condell and is focused on clients in Chile with an annual income between Ch$2.4 million and Ch$7.2 million. Products and services we offer focus on the traditionally underservedlow-to-middle income segments of the Chilean population, where the consumer loans represent the core of the business. Banco Condell has 56 standalone branches and its own brand identity.
Treasury
Our Treasury specializes in financial management and is largely responsible for our funding and liquidity as well as management of any gap on our balance sheet. In addition, through our Treasury we manage proprietary trading functions, market making and distribution and sales of flow andnon-flow instruments for our corporate clients. This area is responsible for obtaining foreign currency-denominated credit lines from financial institutions outside of Chile.
As of December 31, 2017,2018, the outstanding loans from foreign banks to Itaú Corpbanca were US$1,8721,613 million with approximately 2621 financial institutions from the U.S., Canada, Germany, France England,, Japan, Switzerland and other countries, including Latin America. The international global risk assets outstanding as of December 31, 20172018 were US$2,7342,505 million.
Itaú Corpbanca Colombia
Itaú Corpbanca Colombia provides a broad range of commercial and retail banking services to its customers in Colombia, operating principally in the cities of Bogotá, Medellín, Cali, Bucaramanga, Cartagena and Barranquilla. As of December 31, 2017,2018, according to the Colombian Superintendency of Finance, Itaú Corpbanca Colombia was the sixthseventh largest bank in Colombia in terms of total assets, the seventh largest bank in Colombia in terms of total loans and the seventheighth largest bank in Colombia, in terms of total deposits as reported under local regulatory and accounting principles.
As of December 31, 2017,2018, Itaú Corpbanca Colombia had total assets of Ch$6,253,6426,605,000 million (US$10,1779,507 million), including total loans of Ch$4,479,7914,439,256 million (US$7,2906,390 million), total deposits of Ch$3,939,179 million (US$6,411 million) and total shareholders’ equity of Ch$621,428613,243 million (US$1,011883 million). As of December 31, 2017,2018, Itaú Corpbanca Colombia had total net interest income of Ch$228,877296,088 million (US$372.5426.2 million) and a loss before tax of Ch$32,65313,161 million (US$53.118.9 million). As of December 31, 2017,2018, Itaú Corpbanca Colombia had 174161 branches, 176174 ATMs and 3,6443,494 employees in Colombia and Panama.
New York Branch
Our New York Branch, offers a wide rangewhich supports the commercial needs of credit operations and services to both Chilean and non-Chilean retail customers and large and medium-sized companies.other Latin American companies that conduct business overseas, was established in 2009. Operating with an offshore foreign branch of a Chilean bank is especially attractive to clients abroad as it provides a sense of proximity and it allows us to accompany our customers as they operate overseas, responding to their needs and service requirements. Our target market on the liability side consists of retail customers with sophisticated financial needs, medium and large Chilean companies, other Latin American companies, and Chilean and other Latin American banks without offshore branch offices, among others. The
Our New York Branch has a Yankee Certificate of Deposits program that is placed directly to clients or through U.S. dealers.
Our The New York Branch supports the commercial needs of Chilean and Latin American companies doing business overseas. Another important service is the participationparticipates in syndicated loans, together with other international institutions, to finance a variety of investment projects. Our New York Branch also has a private banking unit to provide checking accounts and other associated services. As of December 31, 2017,2018, the branch had US$1,7031,590 million in assets.assets and had a net income of US$32 million for the year ended December 31, 2018.
Financial Services Offered Through Subsidiaries
We have made several strategic long-term investments in financial services companies in Chile (each of which are regulated and supervised by either the SBIF or the CMF), which are engaged in activities complementary to our core banking activities. Through wholly-owned subsidiaries, we intend to continue to develop a comprehensive financial services group able to meet the diverse financial needs of our current and potential clients. As of December 31, 2017,2018, assets of our subsidiaries represented 0.8%1.1% of total consolidated. For the year ended December 31, 2017,2018, net income of our subsidiaries totaled Ch$27,01939,696 million (US$44.057 million).
The following table sets forth certain financial information with respect to our financial services subsidiaries as of December 31, 2015, 2016, 2017 and 2017,2018, in millions of Chilean pesos. Amounts relating to inter-company transactions have not been removed for purposes of this table.
Financial Services Offered Through Subsidiaries
As of and for the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||||||
Assets | Equity | Net Income | Assets | Equity | Net Income | Assets | Equity | Net Income | ||||||||||||||||||||||||||||
(in millions of Ch$) | ||||||||||||||||||||||||||||||||||||
Itaú Corredores de Bolsa S.A.(1) | 56,121 | 39,482 | 365 | 118,651 | 42,567 | (515 | ) | 200,158 | 40,998 | 546 | ||||||||||||||||||||||||||
Itaú Adm. General de Fondos S.A.(2) | 14,823 | 11,628 | 5,263 | 15,870 | 11,084 | 4,951 | 15,195 | 12,922 | 6,790 | |||||||||||||||||||||||||||
Itaú Asesorías Financieras S.A.(3) | 4,473 | 3,207 | 3,031 | 2,865 | 1,773 | 1,590 | 11,798 | 6,803 | 8,321 | |||||||||||||||||||||||||||
Itaú Corredores de Seguros S.A.(4) | 19,792 | 14,681 | 8,056 | 20,589 | 13,666 | 7,421 | 43,025 | 27,043 | 19,630 | |||||||||||||||||||||||||||
Itaú Chile Corredora de Seguros Limitada(4) | 18,168 | 13,093 | 10,499 | 18,965 | 12,389 | 9,796 | — | — | — | |||||||||||||||||||||||||||
Corp Legal S.A.(5) | 2,654 | 2,306 | (277) | 1,819 | 1,815 | (491 | ) | 125 | 125 | (229 | ) | |||||||||||||||||||||||||
Recaudaciones y Cobranzas S.A.(6) | 2,473 | 1,098 | 447 | 3,833 | 1,211 | 91 | 3,842 | 1,316 | 105 | |||||||||||||||||||||||||||
Itaú Corredor de Seguros Colombia S.A. | 3,534 | 1,692 | 388 | 3,826 | 1,898 | (25 | ) | 3,468 | 2,047 | 73 | ||||||||||||||||||||||||||
Itaú Securities Services Colombia S.A. Sociedad Fiduciaria | 13,888 | 13,484 | 600 | 12,652 | 12,268 | 945 | 13,119 | 12,906 | 189 | |||||||||||||||||||||||||||
Itaú Asset Management Colombia S.A. Sociedad Fiduciaria | 18,771 | 15,530 | 2,392 | 19,188 | 15,807 | 2,916 | 17,941 | 16,137 | 2,495 | |||||||||||||||||||||||||||
Itaú Comisionista de Bolsa S.A. | 11,267 | 10,012 | 890 | 12,303 | 7,214 | 352 | 17,748 | 9,174 | 1,685 | |||||||||||||||||||||||||||
Itaú Bank (Panamá) S.A. | 538,240 | 62,032 | (171) | 355,330 | 61,570 | 5,026 | 416,786 | 71,548 | 2,449 | |||||||||||||||||||||||||||
Itaú Casa de Valores S.A. | 616 | 501 | 43 | 570 | 450 | (12 | ) | 679 | 556 | 92 | ||||||||||||||||||||||||||
Corpbanca Securities Inc.(7) | 481 | 467 | (259) | — | — | — | — | — | — |
|
| As of and for the Year Ended December 31, |
| ||||||||||||||||
|
| 2015 |
| 2016 |
| 2017 |
| ||||||||||||
|
| Assets |
| Equity |
| Net |
| Assets |
| Equity |
| Net |
| Assets |
| Equity |
| Net |
|
|
| (in millions of Ch$) |
| ||||||||||||||||
Itaú Corpbanca Corredores de Bolsa S.A. (1) |
| — |
| — |
| — |
| 56,121 |
| 39,482 |
| 365 |
| 118,651 |
| 42,567 |
| (515 | ) |
Itaú Adm. General de Fondos S.A. (2) |
| 37,302 |
| 35,374 |
| 6,532 |
| 14,823 |
| 11,628 |
| 5,263 |
| 15,870 |
| 11,084 |
| 4,951 |
|
Itaú Asesorías Financieras S.A. (3) |
| — |
| — |
| — |
| 4,473 |
| 3,207 |
| 3,031 |
| 2,865 |
| 1,773 |
| 1,590 |
|
Itaú Corredores de Seguros S.A.(4) |
| — |
| — |
| — |
| 19,792 |
| 14,681 |
| 8,056 |
| 20,589 |
| 13,666 |
| 7,421 |
|
Itaú Chile Corredora de Seguros Limitada(4) |
| 51,998 |
| 50,945 |
| 8,049 |
| 18,168 |
| 13,093 |
| 10,499 |
| 18,965 |
| 12,389 |
| 9,796 |
|
Corp Legal S.A. |
| — |
| — |
| — |
| 2,654 |
| 2,306 |
| (277 | ) | 1,819 |
| 1,815 |
| (491 | ) |
Itaú Corpbanca Recaudaciones y Cobranzas S.A. (5) |
| — |
| — |
| — |
| 2,473 |
| 1,098 |
| 447 |
| 3,833 |
| 1,211 |
| 91 |
|
Itaú Corredor de Seguros Colombia S.A. |
| — |
| — |
| — |
| 3,534 |
| 1,692 |
| 388 |
| 3,826 |
| 1,898 |
| (25 | ) |
Itaú Securities Services Colombia S.A. Sociedad Fiduciaria |
| — |
| — |
| — |
| 13,888 |
| 13,484 |
| 600 |
| 12,652 |
| 12,268 |
| 945 |
|
Itaú Asset Management Colombia S.A. Sociedad Fiduciaria |
| — |
| — |
| — |
| 18,771 |
| 15,530 |
| 2,392 |
| 19,188 |
| 15,807 |
| 2,916 |
|
Itaú Comisionista de Bolsa S.A. |
| — |
| — |
| — |
| 11,267 |
| 10,012 |
| 890 |
| 12,303 |
| 7,214 |
| 352 |
|
Itaú (Panamá) S.A. |
| — |
| — |
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
Itaú Casa de Valores S.A. |
| — |
| — |
| — |
| 616 |
| 501 |
| 43 |
| 570 |
| 450 |
| (12 | ) |
Corpbanca Securities Inc.(6) |
| — |
| — |
| — |
| 481 |
| 467 |
| (259 | ) | — |
| — |
| — |
|
(1) |
|
(2) | On December 29, 2017, Itaú Chile Administradora General de Fondos S.A. merged into Corpbanca Administradora General de Fondos S.A. The legal name of the merged entity was changed to “Itaú Administradora General de Fondos S.A.” and the commercial name was changed to “Itaú Asset Management.” |
(3) | On April 21, 2016, the legal name of Corpbanca Asesorías Financieras S.A. was changed to Itaú Asesorías Financieras S.A. |
(4) | On April 1, 2018, Itaú Chile Corredora de Seguros Limitada merged into Corpbanca Corredores de Seguros S.A. The legal name of the merged entity was changed to “Itaú Corredores de Seguros S.A.” and the commercial name was changed to “Itaú Corredores de Seguros.” |
(5) | On January 8, 2019, Itaú Corpbanca filed with the SBIF a request to buy the one share of CorpLegal S.A. that Itaú Corredores de Bolsa Ltda. owns in CorpLegal S.A. Once we acquire that share, we will have 100% ownership, which consequently will immediately terminate CorpLegal S.A. by absorption. |
(6) | On October 25, 2017, the legal name of “Recaudaciones y Cobranzas S.A.” was changed to “Itaú Corpbanca Recaudaciones y Cobranzas S.A.” On November 5, 2018 “Itaú CorpBanca Recaudaciones y Cobranzas S.A.” changed its legal name to “Recaudaciones y Cobranzas Ltda.” |
(7) | Corpbanca Securities Inc., the broker-dealer in the United States, was dissolved on December 18, 2017. |
Itaú Corredores de Bolsa Ltda. (formerly Itaú Corpbanca Corredores de Bolsa S.A. The legal name of the merged entity was changed to “Itaú Corpbanca Corredores de Bolsa S.A.” and the commercial name was changed to “Itaú Corredores de Bolsa.”
(2) On December 29, 2017, Itaú Chile Administradora General de Fondos S.A. merged into Corpbanca Administradora General de Fondos S.A. The legal name of the merged entity was changed to “Itaú Administradora General de Fondos S.A.” and the commercial name was changed to “Itaú Asset Management.”
(3) On April 21, 2016, the legal name of Corpbanca Asesorías Financieras S.A. was changed to Itaú Asesorías Financieras S.A.
(4) On April 1, 2018, Itaú Chile Corredora de Seguros Limitada merged into Corpbanca Corredores de Seguros S.A. The legal name of the merged entity was changed to “Itaú Corredores de Seguros S.A.” and the commercial name was changed to “Itaú Corredores de Seguros.”
(5) On October 25, 2017, the legal name of Recaudaciones y Cobranzas S.A. was changed to Itaú Corpbanca Recaudaciones y Cobranzas S.A.
(6) Corpbanca Securities Inc., the broker-dealer in the United States, was dissolved on December 18, 2017.
Itaú Corpbanca Corredores de Bolsa S.A. (formerly Corpbanca Corredores de Bolsa S.A.)
Our subsidiary Itaú Corpbanca Corredores de Bolsa S.A., or ICCB,ICB, is a member of the Santiago Stock Exchange and is registered with the CMF as a security broker. ICCB’sICB’s primary activities are providing brokerage services in equities, fixed income, and foreign currency exchange. ICCB’sICB’s net income was Ch$515546 million for the year ended December 31, 2017. ICCB2018. ICB had assets under custody of Ch$640,087 million450 billion as of December 31, 2017.2018. For the year ended December 31, 2017, ICCB’s2018, ICB’s net income was driven by a decreasean increase in our local and foreign institutional customers’ investments volumes and fees, partially offset by lower revenues from retail customers that were impacted by higher volatility in the local equity adversely affecting operating revenue.markets. Our customer base is mainly comprised of the retail customer unit, whichbase has historically shown a higher risk aversion thancompared to other customer business units.segments.
On January 1, 2017, Itaú BBA Corredor de Bolsa Limitada merged into Corpbanca Corredores de Bolsa S.A. Itaú BBA Corredor de Bolsa Limitada or ICB, was also a member of the Santiago Stock Exchange and was registered with theformer Superintendencia de Valores y Seguros (the CMF currently) as a security broker. ICB’sItaú BBA Corredor de Bolsa’s primary activities were providing brokerage services in equities, fixed income, and foreign currency exchange.
Itaú Administradora General de Fondos S.A. (formerly Itaú Chile Administradora General de Fondos S.A.).
We incorporated Itaú Administradora General de Fondos S.A., or IAGF to complementcomplements our banking services offered to our individual and corporate clients. IAGF’s current function is to providecurrently provides asset management services to individual, corporate and institutional clients. For the years ended December 31, 2015, 2016, 2017 and 2017,2018, IAGF had net income of Ch$6,5325,263 million, Ch$5,2634,951 million and Ch$4,9516,790 million, respectively. IAGF had total assets of Ch$37,302 million.14,823 million, Ch$14,82315,870 million and Ch$15,87015,195 million as of December 31, 2015, 2016, 2017 and 2017,2018, respectively. As of December 31, 2017,2018, IAGF managed 4923 mutual funds, including fixed income funds and ETFs and had total assets under management amounting to Ch$1,681,483 million,2,225,6 billion, an increase of Ch$588,187 million300 billion as compared to December 31, 2016.2017. During 2017,2018, IAGF experienced an increase of 65% of its assets under management,37.1% in net income, explained mostlyprimarily by the withdrawals observedan increase in the last quarter of 2017, due tovolume driven by a higher volatility environment observed in local and international markets.
simpler commercial offer focused on our competitive advantages.
On December 29, 2017, Corpbanca Administradora General de Fondos S.A., or CAGF, merged into Itaú Chile Administradora General de Fondos S.A. CAGF’s, primary activities were providing asset management services to individual, corporate and institutional clients. For the year ended December 31, 2016, CAGF had net income of Ch$3,067 million. CAGF had total assets of Ch$6,363 million as of December 31, 2016. As of December 31, 2016, CAGF managed 24 mutual funds, including fixed income funds and six private investment funds, and had total assets under management amounting to Ch$1,013,732 million. In 2016, CAGF’s assets under management were impacted mostly by the withdrawals observed in the last quarter of 2016, due to a higher volatility environment observed in local and international markets.
The legal name of the merged entity was changed to “Itaú Administradora General de Fondos S.A.” and the commercial name was changed to “Itaú Asset Management.”
Itaú Asesorías Financieras S.A.
Itaú Asesorías Financieras S.A., or ICAF, provides a broad range of financial advisory services to a variety of corporations and government agencies, including those services related to debt restructurings, syndicated loans, structured loans, structured investment funds, bilateral grants, mergers and acquisitions, privatizations and company valuations. For the year ended December 31, 2017,2018, ICAF had net income of Ch$1,5908,321 million. ICAF had total assets of Ch$2,86511,789 million as of December 31, 2017.2018.
Itaú Corredores de Seguros S.A. (formerly Corpbanca Corredores de Seguros S.A.)
In accordance with our strategy of expanding the breadth of financial services that we offer, our subsidiary Itaú Corredores de Seguros S.A., or ICS, offers a full line of insurance products. Many of these products complement our banking services by offering clients unemployment and life insurance related to personal loans, as well as insurances in connection with mortgage loans. Through ICS, we also providenon-credit-related insurance to existing clients and the general public. For the year ended December 31, 2017,2018, ICS had net income of Ch$7,42116,630 million. ICS had total assets of Ch$20,58942,833 million as of December 31, 2017.
2018.
On April 1, 2018, Itaú Chile Corredora de Seguros Limitada, or ICCS, merged into Corpbanca Corredores de Seguros S.A. ICCS’s primary activities were providing a full line of insurance products to our clients. For the years ended December 31, 2015, 2016 and 2017, ICCS had net income of Ch$8,049 million, Ch$10,499 million and Ch$9,796 million, respectively. ICCS had total assets of Ch$51,998 million, Ch$18,168 million and Ch$18,695 million as of December 31, 2015, 2016 and 2017, respectively.
The legal name of the merged entity was changed to “Itaú Corredores de Seguros S.A.” and the commercial name was changed to “Itaú Corredores de Seguros.”
Corp Legal S.A.
Corp Legal S.A. was created in 2007 and is regulated by the SBIF. It provides standard legal services to Itaú Corpbanca, its subsidiaries and its clients.
On January 8, 2019, Itaú Corpbanca filed with the SBIF a request to buy the one share of CorpLegal S.A. that Itaú Corredores de Bolsa Ltda. owns in CorpLegal S.A. Once we acquire that share, we will have 100% ownership, which consequently will immediately terminate CorpLegal S.A. by absorption.
Recaudaciones y Cobranzas Ltda. (formerly Itaú Corpbanca Recaudaciones y Cobranzas S.A. (formerly Recaudaciones y Cobranzas S.A.)
On February 25, 2015, former Corpbanca, directly and indirectly, acquired all of the issued and outstanding shares of Recaudaciones y Cobranzas S.A, or Instacob, a debt collection company providing court andout-of-court collections services for loans. As a result of this transaction, Instacob became a wholly owned subsidiary of ours.
On November 5, 2018 Itaú CorpBanca Recaudaciones y Cobranzas S.A. changed its legal name to Recaudaciones y Cobranzas Ltda.
Itaú Corredor de Seguros Colombia S.A. (formerly Helm Corredor de Seguros S.A.)
Itaú Corredor de Seguros Colombia S.A. is a Colombian corporation (sociedad anónima), which acts as an insurance broker. It has its main domicile in the city of Bogota, D.C., Colombia, and is regulated by the Colombian Superintendency of Finance.
Itaú Securities Services Colombia S.A. Sociedad Fiduciaria (formerly Corpbanca Investment Trust Colombia S.A. Sociedad Fiduciaria)
We acquired a 91.9% equity interest in Corpbanca Investment Trust Colombia S.A. Sociedad Fiduciaria, now Itaú Securities Services Colombia S.A. Sociedad Fiduciaria, or ISS Colombia, in 2012 as part of the acquisition of Banco Santander Colombia. ISS Colombia is a financial services company operating in Colombia that specializes in trust and custodial services.
During 2015, ISS Colombia completed the implementation of a new custody software and became the first custodian to be certified with the Colombia Stock Exchange for the automation of processes for the development of the custodian activities. Its operations have grown starting withfrom a value of assets under custody of COP$1.6 billion (Ch$363342 million) in July 2015, to COP$5.2 billion (Ch$1,1551,112 million) as of December 31, 2016, and to COP$6.8 billion (Ch$1,3991,455 million) as of December 31, 2017.2017, and to COP $9.4 billion (Ch$2,011 million) as of December 31, 2018. The value of assets under local and global custody were COP$3.1COP $4.9 billion (Ch$6381,048 million) and COP$3.7COP $4.5 billion (Ch$761963 million), respectively, as of December 31, 2017.2018. ISS has contracts with entities in Panama, Mexico, Brazil and Luxembourg for global custody arrangements.
Itaú Asset Management Colombia S.A. Sociedad Fiduciaria (formerly Helm Fiduciaria S.A.)
Itaú Asset Management Colombia S.A. Sociedad Fiduciaria, is a Colombian corporation (sociedad(sociedad anónima), which is engaged in trust portfolio management, including investment trust management, administration, security, real estate trusts and fund administration. It has its main domicile in the city of Bogota, D.C., Colombia and is regulated by the Colombian Superintendency of Finance.
Itaú Comisionista de Bolsa S.A. (formerly Helm Comisionista de Bolsa S.A.)
Itaú Comisionista de Bolsa S.A. is a licensed securities broker dealer operating in Colombia that is the result of the consolidation of two previously separate subsidiaries of Itaú Corpbanca Colombia, Corpbanca Investment Valores Colombia S.A. and Helm Comisionista de Bolsa S.A.
Itaú Comisionista de Bolsa S.A. offers and maintains a complete portfolio of products and services dedicated especially to the distribution of investments, and it complements its value proposition with financial advisory services.
Itaú Casa de Valores S.A. (formerly Helm
Itaú Casa de Valores (Panamá) S.A.)
Itaú Casa de Valores S.A. is a Panamanian corporation (sociedad(sociedad anónima) that acts as a brokerage firm. It has its main domicile in Panama City and is regulated by the Panamanian Superintendency of Securities Market.
SEASONALITYItaú Corredor de Seguros S.A.
Itaú Corredor de Seguros S.A. is a Colombian corporation (sociedad anónima), which acts as an insurance broker. It has its main domicile in the city of Bogota, D.C., Colombia, and the Colombian Superintendency of Finance regulates it.
SEASONALITY
Our business is not materially affected by seasonality.
RAW MATERIALS
On a consolidated basis, Itaú Corpbanca is not dependent on sources or availability of raw materials.
DISTRIBUTION CHANNELS, ELECTRONIC BANKING AND TECHNOLOGY
Itaú Corpbanca
Our distribution network provides integrated financial services and products to our customers through diverse channels, including ATMs, traditional branches, mobile banking, internet banking and telephone banking. As of December 31, 2017,2018, we operated 201202 branch offices in Chile and New York, which includes145includes 145 branches operating as Itaú, 56 branches operating as Banco Condell, our consumer finance division and our New York Branch. In addition, as of December 31, 2017,2018, we owned and operated 469464 ATMs in Chile, and our customers have access to over 7,6207,490 ATMs (including Banco del Estado de Chile’s ATMs) in Chile through our agreement with Redbanc. We utilize a number of different sales channels including account executives, telemarketing and the internet to attract new clients. Our branch system serves as the main distribution network for our full range of products and services.
We offer internet and mobile banking to our customers 24 hours a day through our password-protected internet site, www.itau.cl. Our internet site offers a broad range of services, includingup-to-date information on balances in deposit, checking, loan, credit card and other accounts and transactional capabilities such as transfers and payments. As of December 31, 2017,2018, we had 219,721246,232 customers with checking accounts who have activated internet or mobile application passwords in Chile, allowing them to access our internet banking services. We are a member of theSociedad Interbancaria de Transferencias Electrónicas S.A., an organization that facilitates electronic banking transactions on behalf of our customers as well as other Chilean banks. We also provide our customers with access to a24-hour phone-banking call center that grants them access to account information and allows them to effect certain payments by telephone.
As part of the Merger process, during 2017 we conducted an operational and brand integration in Chile. As of December 31, 2017, we migrated our retail customers form the legacy IT systems to the platform used by former Banco Itaú Chile. For the activities of former Corpbanca, we maintain several service and lease agreements with IBM de Chile S.A.C., which provides us with the computer hardware and networkbuild-out that we use in our headquarters and branch offices, the recovery data center is in NetGlobalis. Our main platform is Altamira. For the activities of former Corpbanca, our platform uses IBS (Integrated Banking System) with additional internal developments .developments. We also have our own main data centers as well as a recovery data centers.
Itaú Corpbanca Colombia
Itaú Corpbanca Colombia’s distribution channel provideschannels provide integrated financial services and products to its customers in Colombia through several diverse channels,mechanisms, including ATMs, branches, internet banking, mobile app, and telephone banking.
As of December 31, 2017,2018, Itaú Corpbanca Colombia operated 174161 branch offices in Colombia and Panama and owned and operated 176174 ATMs in Colombia, and also providedproviding its customers with access to over 15,29015,828 additional ATMs through Colombia’s other financial institutions.institutions as of June 2018. Itaú Corpbanca Colombia utilizes a number of different sales channels including account executives, telemarketing and the internet to attract new clients. Itaú Corpbanca Colombia’s branch system serves as the main distribution network for its full range of products and services.
Itaú Corpbanca Colombia offers internet banking to its customers 24 hours a day through its password-protected internet site, www.bancoCorpbanca.com.co.www.itau.co. Itaú Corpbanca Colombia’s internet site offers a broad range of services, includingup-to-date information on balances in deposit, checking, loan, credit card and other accounts and transactional capabilities such as transfers and payments. As of December 31, 2017,2018, Itaú Corpbanca Colombia had 94,43696,758 customers with activated internet passwords who used the electronic banking service at least once during the last month, allowing them to access Itaú Corpbanca Colombia’s internet banking services. Itaú Corpbanca Colombia is a member of ACH Colombia S.A. and Cenit S.A., organizations that facilitate electronic banking transactions on behalf of its customers as well as other Colombian banks. Itaú Corpbanca Colombia also provides its customers with access to a24-hour phone-banking call center that grants them access to account information and allows them to effect certain payments by telephone.
During 2018 Itaú Corpbanca Colombia is currently in the implementation phase ofsuccessfully completed the migration of former Corpbanca Colombia’s brand platform to the proprietary platform, now having all of its customers in the same technological platform. Itaú Corpbanca has The Bank offerson-line banking for individuals and commercial customers, and an app targeted for the consumer banking clients.
PATENTS, LICENSES AND CONTRACTS
Itaú Corpbanca is not dependent on patents or licenses, nor is it substantially dependent on any industrial, commercial or financial contracts (including contracts with customers or suppliers).
COMPETITION
Competition in Chile
Description of the Chilean Financial System. The Chilean financial services market consists of a variety of largely distinct sectors. The most significant sector, commercial banking, includes 1918 privately-owned banks and one state-owned 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 those that are Chilean-owned, i.e., controlled by a Chilean entity, as well as a number of foreign-owned banks which are operated in Chile but controlled by a foreign entity. In 2017, four2018, five private sector banks along with the state-owned bank together accounted for 75.6%88% of all outstanding loans by Chilean financial institutions as of December 31, 2017:2018: Banco Santander-Chile (18.7%(18.3%), Banco de Chile (17.2%(16.9%), Banco de Crédito e Inversiones, or Bci (13.6%(13.9%), Scotiabank Chile (13.8%), Itaú Corpbanca (10.8%(10.2%), and Banco del Estado de Chile (15.3%(14.5%). All market share statistics in this paragraph are presented as reported to the SBIF calculated under local regulatory and accounting principles on an unconsolidated basis.
Financial System Evolution in Chile. The Chilean banking system has experienced a consolidation process in the past decades with mergers and acquisitions of banking entities in line with global trends.
Following rapid consolidation among Chilean banks commencing in the late 1990s through today, the market has become characterized by fewer larger players. Our principal competitors in Chile are Banco de Chile, Banco Santander-Chile, Bci and a new bank expected to result fromScotiabank Chile. The recent acquisitions ofnon-banking credit card businesses such as Promotora CMR by Bank of Falabella and Walmart Servicios Financieros by Bci have recently increased competition in the merger of Scotiabank Chile with Banco Bilbao Vizcaya Argentaria Chile, announced on December 6th, 2017.credit card business. As compared to other Chilean banks, we believe our position in the Chilean banking industry after the Merger enables us to compete with international banks seeking to provide loans to companies operating in Chile, especially since we have a greater scale and resources to grow and compete more effectively. Additionally, we have a unique control and support from a leading institution such as Itaú Unibanco. Itaú Corpbanca will be able to expand its banking products’ offering through proven segmentation and digitalization models.
Commercial banks, such as us, face increasing competition from other financial intermediaries who can provide larger companies with access to the capital markets as an alternative to bank loans. To the extent permitted by the Chilean General Banking Act, we seek to maintain a competitive position in this respect through the investment banking activities of our subsidiary Itaú Asesorías Financieras.
We face competition in our mortgage and consumer loans businesses from insurance companies, which have been permitted to grant mortgage loans. In addition to the other banks that operate in Chile, our main competitors in the credit card business are department stores and othernon-banking businesses involved in the issuance of private-label credit cards. We intend to remain competitive in the mortgage loan services and credit card markets through product innovation.
We also experience competition from banks that provide international private banking services such as JPMorgan Chase and BNP Paribas, among others. We believe our main competitive advantage in our Private Banking business unit has been our ability to provide our customers with tailored lending products and responses to their needs as soon as possible. Our lower income retail banking business unit, Banco Condell, competes with consumer divisions of other banks such as Banefe, CrediChile and Banco Nova, among others, as well as certain consumer credit providers, including department stores. We believe that the main competitive advantage of our Banco Condell business unit is our ability to provide responses as soon as possible, know our customers’ needs and provide a fair price structure.
Competition in Colombia
Description of the Colombian Financial System. In recent years, the Colombian banking system has been undergoing a period of consolidation given thea series of mergers and acquisitions that have taken place within the sector, includingsector. Between 2010 and 2015 the number of commercial banks increased from 19 to 25 as a result of: (a) five financing companies and two financial cooperatives converting their licenses to operate as banks; (b) Banco Mundo Mujer S.A. becoming a bank after acting as a microloan originator; (c) the creation of Banco Santander de Negocios Colombia Acquisition and the Helm Bank Acquisition. Several mergers and acquisitions have taken place since 2008, including: (a) the acquisition of the Colombian arm of ABN Amro Bank by the Royal Bank of Scotland; (b) the acquisition ofS.A. in 2013; (d) Scotiabank acquiring a majority stake in Banco Colpatria, by Scotiabank; (c) the acquisition of BAC-Credomatic, which has operations in several countries in Central America, by Banco de Bogotáturn dissolved former Scotiabank Colombia S.A.; (d)(e) the merger of Helm Bank S.A. with and into Banco Corpbanca Colombia S.A., after the latter entered the market by acquiring Banco Santander Colombia S.A.; and (e)(f) the merger of Banco GNB Colombia S.A. (previously known as Banco HSBC Colombia S.A.) with and into Banco GNB Sudameris S.A. During 2015, three newSince 2016 the number of commercial banks commenced operationshas remained stable.
One of the recent changes in Colombia:the Colombian banking system has been the arrival of the Itaú brand. On April 1, 2016, Corpbanca in Chile (at the time, the parent company of Banco Mundo MujerCorpbanca Colombia) and Itaú Chile merged, resulting in the bank Itaú Corpbanca. Such operation changed the controlling shareholder of the Banco Corpbanca Colombia. As part of the integration and technological migration plan, Banco Corpbanca Colombia introduced the Itaú brand in the previous Helm-branded branches and changed its corporate name to Itaú Corpbanca Colombia S.A. (previously operating as a microloan originator); Banco MultibankFor the Corpbanca-branded branches the migration towards Itaú was completed in stages beginning in the second half of 2017 and Banco Compartir S.A., which converted its licenses from financing companies to banks.
Additionally, pursuantending in the first quarter of 2018. In addition, according to the Transaction Agreement with Itaú Unibanco, and its amendment dated January 20, 2017, Itaú Corpbanca Colombia acquired the assets and liabilities of Itaú BBA Colombia S.A. Corporación Financiera on June 16, 2017. The
transaction was approved by the shareholders of Itaú Corpbanca Colombia on December 21, 2016, by the shareholders of Itaú BBA Colombia on November 15, 2016, by Helm LLC (in its capacity of minority shareholder of Itaú Corpbanca Colombia), and by the CFSColombian Financial Superintendency (the “CFS”) on April 7, 2017.
The latest change in the composition of the Colombian banking system was the decision by Citibank Colombia to sell its retail business, including individual and small enterprises to Scotiabank Colpatria. Such sale was approved by the CFS on June 18, 2018.
In addition, Colombian banks have been expanding abroad over the last decade, mostly in Central America. One example is the acquisition ofBAC-Credomatic (which has operations in several countries in Central America) by Banco de Bogotá, with Davivienda and Bancolombia also having made similar investment aiming to grow their businesses.
As of December, 31, 2017,2018, and according to the Colombian Superintendency of Finance, the principal participantsmain actors in the Colombianlocal financial system were the Colombian Central Bank, of Colombia, 25 commercial banks (14 domestic private banks, 10 foreign banks, and one domestic state-owned bank), five finance corporations and 15 financing companies (three leasing companies and 12 traditional financing companies). In addition, trust companies, cooperatives, insurance companies, insurance brokerage firms, bonded warehouse, special state-owned institutions, pension and severance pay funds also participate in the Colombian financial system.
The Financial Reform Act
Regulatory matters. On August 6, 2018, the Colombian Ministry of 2009 (Law 1328 passed July 15, 2009) authorized banks to provide merger and acquisition loans and allowed them to conduct financial leasing operations. As a result, some competitors have absorbed their financial leasing subsidiaries into their banking franchises and some leasing companies areFinance issued Decree 1477, regulating the standards of capital for credit institutions under by Basel III. Its content covers the following areas: (a) alignment in the processdefinitions of becoming banks.
capital ratio; (b) an update in the measurements of the Risk-Weighted Assets (RWA); (c) implementation of buffers; and (d) leverage ratio. The CFS is expected to publish the new instructions and methodology for the calculations of the capital ratio by May 2019. The transition towards the new regulation will have two phases: a9-month period for the credit institutions to comply with the alignment in the definitions of capital ratio and measurement of RWA and a4-year period starting on February 2020, in which banks will have to meet the new limits and buffers for the capital ratios. See “Item 4. Information on the Company—B. Business Overview—Colombian Banking Regulation and Supervision—Regulatory Developments in Colombia.”
Financial System Evolution in Colombia during 20162017 and 20172018. 20172018 was a challenging year of moderate growth for the Colombian financial services sector. The inflation rate decreased throughout the year and ended on 4.09%at 3.18% as of December 31, 2017, close to but still above2018, within the Central Bank’s target raterange of 2%-4% to 4%. The reference interest rate decreased by 22550 basis points on 2017.in 2018. The Central Bank’s rate was 7.50%4.75% as of January 1, 20172018 and 4.75%4.25% as of December 31, 2017. Bank lending2018. As of December 2018, banks increased 6.1% on 2017their gross loans by 6.0% as compared to 12.2% on 2016, similarlygrowths of 6.1% in 2017 and 12.2 in 2016. Similarly, deposits grew 6.7%5.1% as of December 31, 2017, compared to December 31, 2016.
2017.
The Colombian banking system’s level ofpast-due loans as a percentage of the system’s total loan portfolio increasedcontinued increasing over the first half of 2018, peaking at 5.0% in July 2018. The second half of the year showed signs of recovery and the ratio decreased to 4.3% for4.5% as of December 2017, after2018, slightly higher than the 3.1%4.3% registered for December 2016.2017. The growth rate of growth of past due loans above 30 days was 12.3% as of December 2018, after reaching 45.5% for the year 2017 until December. As a consequence, coverage,2017. Coverage, measured as the ratio of allowances topast-due loans, ended December 20172018 at 134.0%137.3%, compared to 155.5%134.0% at the end of 2016.2017.
TheAs of December 2018 the demand for business, small business and consumer loans granted by banksslowed down as compared to December 2017. Business loans grew 3.3% after registering 3.6% the previous year, small business loans grew 3.4%, after a growth of 7.6% in 2017, and consumer loans increased by 3.6% for 2017, a moderation on the dynamics compared to8.8% after an 11.4% increase in 2016. Consumer loans granted by banks also decreased its rate of growth with 9.1% increase in 2017 , compared to a 13.2% increase observed in 2016. A similar behavior was presented on mortgages werethe previous year. On the other hand, the gross amount of mortgage loans increased of 11.2%12.2%, compared to 15.1% on 2016. On the other hand, small business loans increased 7.6%11.2% in 2017 while on 2016 that category increased 6.1%.
2017.
During 2017,2018, lending lost some weightdecreased in the Colombian banks system’s structure. Net loans decreased from 68.5%67.9% of total assets at the end of 20162017 to 67.9% at the end66.4% as of December 2017, and investment2018. Investment portfolio and derivatives, as a percentage of total assets, increased from 17.2% at the end of 2016 to 17.8% at the end of 2017.
2017 to 18.5% at the end of 2018.
As of December 31, 2017,2018, the Colombian financial sector recorded COP$608,551,285659,310,049 million in total assets, representing a 5.9%8.4% increase as ofcompared to December 31, 2016.2017. The Colombian financial system’s total composition of assets shows banks withhold a market share of 95.5%95.1%, followed by financial corporations with 2.0%at 2.3%, financing companies withat 2.0% and financial cooperatives withat 0.5%.
As of December 31, 2017,2018, the capital adequacy ratio (Tier 1 + Tier 2) for credit institutions was 16.6%16.34% (including banks, finance corporations, financing companies and cooperative entities), increasing by 73decreasing 24 basis points when compared to December 31, 2016, and which is2017, well above the minimum legal requirement of 9%.
Loans
As of December 31, 20162017 and 2017,2018, our gross consolidated loan portfolio was Ch$21,048,48420,439,448 million and Ch$20,439,44821,548,899 million, respectively, as reported to the SBIF calculated under local regulatory and accounting principles. This placed us as the fourthfifth largest financial institution among private Chilean banks and fifthsixth place among all banks operating in Chile. Our gross consolidated loan portfolio represented 10.8%10.2% of the market for loans in the Chilean financial system (comprising all commercial banks) as of December 31, 2017.2018. In 2016, due to the Merger and the consolidation of the loan portfolios of former Corpbanca and former Banco Itaú Chile, our aggregate gross loan portfolio grew by 42.1%. However, due to the decline investment activity in Chile and a more challenging economic scenario in 2017, when compared to the combined loan portfolios in 2016, our consolidated loan portfolio decreased in 2017 by 2.9%. In 2018, our loan portfolio increased 5.4% driven primarily by (i) a positive trend in our consumer loans, particularly in installment loans, due to our strategy to grow our retail banking segment; and (ii) the growth of our commercial and mortgages loans.
The following table sets forth the aggregate outstanding loans for us and the five other private sector banks with the largest market shares in Chile as of December 31, 2015, 20162017 and 2017,2018, based on information as reported to the SBIF calculated under local regulatory and accounting principles:
|
| Bank Loans (1) |
| Bank Loans(1) | |||||||||||||||
|
| As of December 31, |
| As of December 31, | |||||||||||||||
|
| 2015 |
| 2016 |
| 2017 |
| 2016 | 2017 | 2018 | |||||||||
|
| (in millions of Ch$) |
| (in millions of Ch$) | |||||||||||||||
Banco Santander-Chile |
| 25,289,880 |
| 26,933,624 |
| 27,563,229 |
| 26,933,624 | 27,563,229 | 30,266,929 | |||||||||
Banco de Chile |
| 24,558,041 |
| 25,385,534 |
| 25,439,535 |
| 25,385,534 | 25,439,535 | 27,914,322 | |||||||||
Banco de Crédito e Inversiones (Bci) |
| 20,134,981 |
| 22,324,012 |
| 24,531,460 |
| 22,324,012 | 24,531,460 | 30,099,862 | |||||||||
Itaú Corpbanca (2) |
| 6,823,977 |
| 21,048,484 |
| 20,439,448 |
| 21,048,484 | 20,439,448 | 21,548,899 | |||||||||
Banco Bilbao Vizcaya Argentaria, BBVA |
| 9,002,343 |
| 9,252,921 |
| 9,702,467 |
| ||||||||||||
Scotiabank Chile |
| 8,227,571 |
| 8,840,341 |
| 10,448,203 |
| ||||||||||||
Banco Bilbao Vizcaya Argentaria, BBVA(3) | 9,252,921 | 9,702,467 | — | ||||||||||||||||
Scotiabank Chile(3) | 8,840,341 | 10,448,203 | 22,823,339 | ||||||||||||||||
Others |
| 47,933,251 |
| 35,771,491 |
| 38,352,083 |
| 35,771,491 | 38,352,083 | 44,375,257 | |||||||||
|
|
| |||||||||||||||||
Total |
| 141,970,044 |
| 149,556,407 |
| 156,476,425 |
| 149,556,407 | 156,476,425 | 177,028,608 | |||||||||
|
|
|
Source: SBIF monthly consolidated financial information |
(1) | Excludes interbank loans. |
(2) | The amounts under IFRS for 2016, 2017 and 2018 are Ch$21,003,952 million, Ch$20,382,605 million and Ch$21,482,490 million, respectively. |
(3) | Figures for 2018 only attributed to Scotiabank Chile after the merger with Banco Bilbao Vizcaya Argentaria. |
(1) Excludes interbank loans.
(2) The amounts under IFRS for 2015, 2016 and 2017 are Ch$6,801,071 million, Ch$21,003,952 million and Ch$20,382,605 million, respectively.
Deposits
We had consolidated deposits of Ch$14,206,91014,421,586 million as of December 31, 2017,2018, as reported under local regulatory and accounting principles, which consisted of our checking accounts, bankers’ drafts, savings accounts, time deposits and other commitments. Our market share of 8.5%10.2% for deposits and other obligations as of such date ranks us in fourthfifth place among private sector banks in Chile.
The following table sets forth the aggregate deposits for us and the five other private sector banks with the largest market share as of December 31, 2015, 2016, 2017 and 2017,2018, based on information as reported to the SBIF calculated under local regulatory and accounting principles:
|
| Bank Deposits and Other Obligations (1) |
| Bank Deposits and Other Obligations(1) | |||||||||||||||
|
| As of December 31, |
| As of December 31, | |||||||||||||||
|
| 2015 |
| 2016 |
| 2017 |
| 2016 | 2017 | 2018 | |||||||||
|
| (in millions of Ch$) |
| (in millions of Ch$) | |||||||||||||||
Banco Santander-Chile |
| 19,538,888 |
| 20,691,024 |
| 19,682,111 |
| 20,691,024 | 19,682,111 | 21,809,236 | |||||||||
Banco de Chile |
| 18,234,740 |
| 18,874,049 |
| 18,983,484 |
| 18,874,049 | 18,983,484 | 20,240,662 | |||||||||
Banco de Crédito e Inversiones (BCI) |
| 17,349,184 |
| 18,151,951 |
| 20,226,470 |
| 18,151,951 | 20,226,470 | 24,551,315 | |||||||||
Itaú Corpbanca |
| 4,933,922 |
| 16,034,901 |
| 14,206,910 |
| 16,034,901 | 14,206,910 | 14,421,586 | |||||||||
Banco Bilbao Vizcaya Argentaria Chile (BBVA) |
| 6,689,730 |
| 6,876,369 |
| 6,810,027 |
| ||||||||||||
Scotiabank Chile |
| 5,204,251 |
| 6,144,361 |
| 7,024,759 |
| ||||||||||||
Banco Bilbao Vizcaya Argentaria Chile (BBVA)(2) | 6,876,369 | 6,810,027 | — | ||||||||||||||||
Scotiabank Chile(2) | 6,144,361 | 7,024,759 | 14,927,861 | ||||||||||||||||
Others |
| 47,616,730 |
| 36,739,147 |
| 40,206,196 |
| 36,739,147 | 40,206,196 | 42,974,991 | |||||||||
|
|
| |||||||||||||||||
Total |
| 119,567,445 |
| 123,511,802 |
| 127,139,957 |
| 123,511,802 | 127,139,957 | 138,925,651 | |||||||||
|
|
|
Source: SBIF monthly consolidated financial information
(1) |
|
(1) Our aggregate deposits as calculated under IFRS for the years ended December 31, 2015, 2016 and 2017 were Ch$4,933,922 million, Ch$16,034,901 million and Ch$14,206,910 million, respectively.
(2) | Figures for 2018 only attributed to Scotiabank Chile after the merger with Banco Bilbao Vizcaya Argentaria. |
Shareholders’ Equity
We were the firstsecond largest among private sector banks in Chile with Ch$3,149,6633,324,531 million in shareholders’ equity (excluding net income and accrualprovision for mandatory dividends) as of December 31, 2017,2018, as reported to the SBIF calculated under local regulatory and accounting principles.
The following table sets forth the level of shareholders’ equity for us and the five largest private sector banks in Chile (measured by shareholders’ equity) as of December 31, 2015, 2016, 2017 and 2017,2018, based on information as reported to the SBIF calculated under local regulatory and accounting principles:
|
| Shareholders’ Equity (1)(2) |
| ||||
|
| As of December 31, |
| ||||
|
| 2015 |
| 2016 |
| 2017 |
|
|
| (in millions of Ch$) |
| ||||
Banco Santander-Chile |
| 2,420,484 |
| 2,538,055 |
| 2,670,809 |
|
Banco de Chile |
| 2,505,558 |
| 2,620,394 |
| 2,842,609 |
|
Banco de Crédito e Inversiones (BCI) |
| 1,771,113 |
| 2,280,185 |
| 2,467,862 |
|
Itaú Corpbanca (3) |
| 740,335 |
| 3,172,486 |
| 3,149,663 |
|
Banco Bilbao Vizcaya Argentaria Chile (BBVA) |
| 722,896 |
| 768,215 |
| 844,129 |
|
Scotiabank Chile |
| 703,600 |
| 772,684 |
| 827,611 |
|
Others |
| 4,933,087 |
| 4,129,791 |
| 4,083,895 |
|
Total |
| 13,797,073 |
| 16,281,810 |
| 16,886,578 |
|
Shareholders’ Equity(1)(2) | ||||||||||||
As of December 31, | ||||||||||||
2016 | 2017 | 2018 | ||||||||||
(in millions of Ch$) | ||||||||||||
Banco Santander-Chile | 2,538,055 | 2,670,809 | 3,239,546 | |||||||||
Banco de Chile | 2,620,394 | 2,842,609 | 3,304,152 | |||||||||
Banco de Crédito e Inversiones (BCI) | 2,280,185 | 2,467,862 | 3,457,509 | |||||||||
Itaú Corpbanca(3) | 3,172,486 | 3,149,663 | 3,324,531 | |||||||||
Banco Bilbao Vizcaya Argentaria Chile (BBVA)(4) | 768,215 | 844,129 | — | |||||||||
Scotiabank Chile(4) | 772,684 | 827,611 | 2,013,539 | |||||||||
Others | 4,129,791 | 4,083,895 | 3,185,318 | |||||||||
|
|
|
|
|
| |||||||
Total | 16,281,810 | 16,886,578 | 20,228,785 | |||||||||
|
|
|
|
|
|
Source: SBIF monthly consolidated financial information
(1) Shareholders equity = Equity attributable to shareholders excluding net income and accrual for mandatory dividend.
(2) For comparison purposes with other banks, the information is presented under standards issued by the SBIF.
(3) The amounts under IFRS, excluding net income and accrual for mandatory dividends, for the years ended December 31, 2015, 2016 and 2017 were Ch$737,793 million, Ch$3,171,365 million and Ch$3,160,890 million, respectively.
(1) | Shareholders equity = Equity attributable to shareholders excluding net income and provision for mandatory dividend. |
(2) | For comparison purposes with other banks, the information is presented under standards issued by the SBIF. |
(3) | The amounts under IFRS, excluding net income and provision for mandatory dividends, for the years ended December 31, 2016, 2017 and 2018 were Ch$3,171,365 million, Ch$3,160,890 million and Ch$3,099,761 million, respectively. |
(4) | Figures for 2018 only attributed to Scotiabank Chile after the merger with Banco Bilbao Vizcaya Argentaria. |
CHILEAN BANKING REGULATION AND SUPERVISION
General
In Chile, only banks may maintain checking accounts for their customers and accept time deposits. The principal financial institutions regulators in Chile are the SBIF and the Central Bank of Chile. Chilean banks are primarily subject to the Chilean General Banking Act and secondarily, to the extent not inconsistent with such statute, the provisions of theLey 18.046 sobre Sociedades Anónimasor the Chilean Corporations Act 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 the Chilean General Banking Act. The Chilean General Banking Act sets forth the regulatory framework to which banks are subject outlining the activities that a bank may and may not carry out in Chile and their attributions-in addition to traditional banking activities- including general underwriting powers for new issuances of certain debt and equity securities and the power to create subsidiaries to engage in activities related to banking, such as brokerage, investment advisory, mutual fund services, administration of investment funds, factoring, securitization products and financial leasing services.
Following the Chilean banking crisis of 1982 and 1983, the SBIF assumed control of 21 financial institutions representing approximately 51% of the total loans in the banking system. As part of the solution to this crisis, the Central Bank of Chile acquired from financial institutions a certain portion of their distressed loan portfolios, at the book value of such loan portfolios. Each institution then repurchased such loans at their economic value (which, in most cases, was much lower than the book value at which the Central Bank of Chile had acquired the loans) and the difference was to be repaid to the Central Bank of Chile out of future income. Pursuant to Law No. 18,818, which was passed in 1989, this difference was converted into a subordinated obligation with no fixed term, known asdeuda subordinada or subordinated debt, which in the event of liquidation of the institution, would be paid after the institution’s other debts had been paid in full.
Central Bank of Chile
The Central Bank of Chile is an autonomous legal entity created by the Chilean Constitution. It is subject to the Chilean Constitution and its ownley orgánica constitucional, or Constitutional Act. To the extent not inconsistent with the Chilean Constitution or the Central Bank of Chile’s Constitutional Act, the Central Bank of Chile is also subject to private sector laws (but in no event it is subject to the laws applicable to the public sector). It is directed and administered by a council composed of five members designated by the President of Chile, subject to the approval of the Senate.
The legal purpose of the Central Bank of Chile is to maintain the stability of the Chilean peso and the orderly functioning of Chile’s internal and external payment system. The Central Bank of Chile’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.
SBIF
Banks in Chile are currently supervised by the SBIF, an independent Chilean governmental agency. The main responsibilities of the SBIF are to authorize the incorporation of new banks and to interpret and enforce, with broad powers, legal and regulatory
requirements applicable to Chilean banks and other entities. Furthermore, in case ofnon-compliance with such legal and regulatory requirements, the SBIF may impose sanctions, including fines payable by the directors, managers and employees of a bank as well as the bank itself. In extreme cases it can appoint, by special resolution with the prior approval of the board of directors of the Central Bank of Chile, a provisional administrator to manage a bank. It must also approve any amendment to a bank’sby-laws (including, 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 monthly unaudited consolidated and unconsolidated financial statements to the SBIF and publish their quarterly and annual financial statements 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. Financial statements as of December 31 of any given year must be audited. A bank’s annual financial statements and the opinion of its independent auditors must also be submitted to the SBIF for review.
The SBIF must approve in advance any direct or indirect acquisition of more than 10% of the share capital of a bank. The absence of such approval will cause the acquirer to lose the voting rights of such shares. The SBIF may only refuse to grant its approval based on specific grounds set forth in the Chilean General Banking Act and its regulations.
On January 12, 2019, Law No. 21,130 was enacted, which modified the Chilean General Banking Act for purposes of adopting Basel III and replacing the SBIF with the CMF. According to Transitory Article Ninth of such law, the President of the Republic of Chile shall issue a Decree with Force of Law through the Ministry of Finance, which among other matters, shall determine the date in which the CMF shall replace the SBIF. In this regard, it has been publicly announced by the Ministry of Finance that the CMF would replace the SBIF effective as of June 1, 2019.
CMF
The CMF is the public entity responsible for overseeing the correct functioning, development and stability of the financial market, facilitating the participation of market agents and promoting the protection of the public interest. It is in charge of regulating and supervising the entities part of the securities and insurance market and, pursuant to Law No. 21,130, will replace the SBIF and will be vested with the authority to supervise banks. As indicated above, pursuant to Transitory Article Ninth of such law, the President of the Republic of Chile shall issue a Decree with Force of Law through the Ministry of Finance, which among other matters, shall determine the date in which the CMF shall replace the SBIF. In this regard, it has been publicly announced by the Ministry of Finance that the CMF would replace the SBIF effective as of June 1, 2019.
Limitations on Types of Activities
Chilean banks can only conduct those activities allowed by the Chilean General Banking Act: making loans, accepting deposits, issuing bonds, engaging in certain international operations, performing specially entrusted activities (comisionesComisiones de confianzaConfianza) and, subject to limitations, making investments and performing financial services related to banking. Investments are restricted to real estate and physical asset for the bank’s own use, gold, foreign exchange and debt securities. In addition, local banks are allowed to engage in certain derivatives such as options, swaps and forward contracts over certain underlying assets. Through subsidiaries, banks may also engage in other specific financial service activities such as securities brokerage services, mutual fund management, investment fund management, factoring, securitization, financial advisory and leasing activities. Subject to specific limitations and the prior approval of the SBIF and the Central Bank of Chile, Chilean banks may own majority or minority interests in foreign banks.
Deposit Insurance
In Chile, the government guarantees up to 90% of the aggregate amount of certain time deposits held by individuals in the Chilean banking system. The government guarantee covers those obligations with a maximum value of UF120 per person (Ch$3.2 million or US$5,233 as of December 31, 2017) in each calendar year.
Reserve Requirements
Deposits are subject to a reserve requirement (Encaje) of 9% for all demand deposits and obligations that are payable on demand, and 3.6% for time deposits and deposits in savings accounts in any currency of any term, judicially ordained deposits, and any other deposit (captacióCaptación) for a term of up to one year. For purposes of calculating this reserve requirement, banks are authorized to make certain daily deductions from their liabilities in Chilean pesos, the most relevant of which include:
·cash clearance account, which should be deducted from demand deposits for calculating reserve requirements;
·certain payment orders issued by pension providers; and
·the amount subject to “technical reserve” (as described below), which can be deducted from reserve requirements.
In the case of liabilities in foreign currency, banks are authorized to deduct for this purpose the amounts mentioned in the first and third bullet above.
The Central Bank of Chile has statutory authority to require banks to maintain reserves of up to an average of 40% for demand deposits and up to 20% for time deposits (irrespective, in each case, of the currency in which they are denominated) to implement monetary policy. In addition, according to the Chilean General Banking Act and the regulations issued by the SBIF and the Central Bank of Chile, Chilean banks must maintain a technical reserve (Reserva Técnica) of 100% of all deposits and obligations a bank has acquired in its financial business that are payable on demand, except for obligations with other banks, whenever such deposits and obligations exceed 2.5 times their basic capital.capital capital net equity (Patrimonio Efectivo). This technical reserve must be calculated daily, and must be kept in deposits in the Central Bank of Chile or documents issued by the Central Bank of Chile or the Chilean Treasury with a maturity date of no more than 90 days.days of any term. If the technical reserve is breached, the bank is sanctioned with a fine calculated by applying the maximum conventional interest rate (Interés Máximo Convencional) fornon-adjustable transactions (Operaciones no Reajustables) to the daily deficit;provided, however, that the SBIF may decide not to apply this fine if the deficit lasts up to three business days and the bank has not incurred in further deficits during the same calendar month.
During 2015, the Chilean Central Bank published a final version of new liquidity standards for local banks, based on Basel III guidelines. The SBIF is the institution empowered to put these guidelines into practice and monitor them on an ongoing basis. Accordingly, the SBIF released a set of new liquidity requirements for banks (Circular No. 3,585) on July 31, 2015. These guidelines established reporting requirements for local banks with respect to management and measurement of banks’ liquidity positions, compelling banks to share financial information with the regulator and the general public regarding liquid assets, liabilities,
concentration of financial instruments by type of liability and counterparty and weighted maturity by type of liability, among other metrics. The most significant 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.
The first stage of these new liquidity requirements which is currently beingwas implemented is intended to improve the information—in quantity and quality—aboutinformation relating to the actual situation of banks without imposing specific limits, except liquidity mismatches for 30-and 30 and90-day periods, for which thresholds with respect to banks’the capital of banks are already in place. On December 28, 2018, the SBIF released an update on the liquidity requirements (Circular No. 3,644), which established a limit of 60% for the LCR as of January 1, 2019. The final limits and results should begin to be published by the end of 2018 or 2019.
LCR limit will increase 10% per year until it reaches 100% in 2023.
Minimum Capital
Under the Chilean General Banking Act, a bank must have a minimumpaid-in capital and reserves of UF800,000 (Ch$21,438.522,052.6 million or US$34.931.7 million as of December 31, 2017)2018).
Capital Adequacy Requirements
TheAccording to the Chilean General Banking Act (as amended from time to time, including without limitation, by Law No. 21,130) and the Regulations of the SBIF, includeas a modified version of the capital adequacy guidelines issued by the Basel Committee. According to such modified guidelines,general rule, the capital and reserves of a bank, or basic capital, cannot be less than (y) 4.5% of its risk weighted assets and (z) 3% of its total assets, in both cases, net of allowances, and its “effective net equity” cannot be less than 8% of its risk-weighted assets net of required loan loss allowances.allowances, as calculated in accordance with Chilean Bank GAAP. Note, however, that in any of the following events a higher effective net equity and/or a higher basic capital may be required:
(1) | If at the moment in which the incorporation deed of a bank is granted (or at the moment in which the authorization of existence of a branch of a foreign bank is granted), at least 50% of the minimumpaid-in capital and reserves, or basic capital (capital básico) (i.e., UF800,000 (Ch$22,052.6 million or US$31.7 million as of December 31, 2018)) has not been paid, the respective bank shall have an additional basic capital equal to 2% of its risk weighted assets, net of required allowances, above the general minimum basic capital of 4.5%plus any additional basic capital that may be applicable pursuant to number (2) below. The additional 2% requirement will be reduced to 1% once the bank’s paid basic capital reaches UF 600,000 (Ch$16,539.5 million or US$23.8 million as of December 31, 2018). |
(2) | Once the CMF replaces the SBIF, the following shall occur: |
a. | Within 18 months from the date in which such replacement occurs, the CMF shall issue a regulation (with the affirmative consent of the Council of the Chilean Central Bank) setting forth (i) the standardized methodology for risk weighting the assets of a bank and, (ii) in the event of banks authorized to use their own methodologies, the requirements to use and implement them. Once such regulation becomes effective, a bank will be required to have an additional basic capital equal to 2.5% of its risk weighted assets, net of required allowances, above the minimum requirements. This additional requirement will come into effect progressively during a4-year term at a ratio of 0.625% per year, starting on the date in which the CMF issues the aforementioned regulation; |
b. | Within 18 months from the date in which such replacement occurs, the CMF shall issue a regulation setting forth the conditions that may trigger the imposition by the Chilean Central Bank of an additional basic capital requirement up to 2.5% of a bank’s risk weighted assets, net of required allowances, above the minimum requirements. This additional requirement may be imposed by the Chilean Central Bank on a general basis applicable to all banking institutions, as a contra-cyclical measure; |
c. | Within 18 months from the date in which such replacement occurs, the CMF shall issue a regulation (with the affirmative consent of the Council of the Chilean Central Bank), which shall set forth the criteria for considering a bank or group of banks of systemic importance. Further, with the affirmative vote of the Chilean Central Bank, the CMF may determine, through a grounded resolution, that a bank is of systemic importance. In such event, the CMF will be entitled to impose, among others, one or more of the following conditions: (y) an increase between 1% and 3.5% to the basic capital over risk weighted assets, net of required allowances, above the aforementioned 8% minimum effective net equity (Patrimonio Efectivo) requirement and (z) an increase of up to 2% to the basic capital over total assets, net of required allowances, above the aforementioned 3% minimum basic capital requirement. The conditions imposed on a bank qualified of systemic importance, may be terminated in the event the Council of the CMF determines that a bank no longer has systemic importance; and |
d. | If after a review process, to the judgment of the CMF, a bank presents risks not properly protected with the equity requirements mentioned above, the CMF may impose additional equity requirements. In any event, the additional equity requirements shall not exceed 4% of its risk weighted assets, net of required allowances. For these purposes, the CMF shall issue a regulation which shall set forth the criteria applicable in these cases. |
Basic capital is defined as a bank’spaid-in capital and reserves and is similar to Tier 1 capital except that it does not deduct goodwill noror intangible assets.
Regulatory capital or “effective net equity” is defined as the aggregate of:
·a bank’spaid-in capital and reserves;
·bonds issued without a maturity date and preferred stock issued once the CMF issues a regulation authorizing their issuance. These instruments shall be valued at their issue price, for an amount up to one third of its basic capital;
its subordinated bonds, valued at their placement price (but decreasing by 20% for each year during the period commencing six years prior to maturity), for an amount up to 50% of its basic capital;
·goodwill or premiums, paid balances and investments in companies that are not part of the consolidation, which shall be deducted;
·its voluntary allowances for loan losses for an amount of up to 1.25% of risk-weighted assets;assets. Note that the CMF shall issue regulations setting forth (i) the standardized methodology for calculating risk-weighted assets, and (ii) in the event of banks authorized to use their own methodologies, the requirements to use and implement them. Once such regulation is issued, voluntary allowances shall be considered up to the following amounts: (y) up to 1.25% of its credit risk weighted assets, if standard methodologies are applied or (z) 0.625% in the eventnon-standard methodologies are applied;
·minority interests of up to 20% of the basic capital (provided that if such minority interests exceed 20%, only 20% will be taken into account); and
·other adjustments as instructed by the SBIF.
In cases where a limit is required to be applied on an unconsolidated basis, capital attributable to subsidiaries and foreign branches shall be excluded.
The Chilean General Banking Act containsPursuant to Transitory Article First of Law No. 21,130, until the date in which the CMF issues the regulations that shall set forth (i) the standardized methodology for calculating risk-weighted assets and (ii) in the event of banks authorized to use their own methodologies, the requirements to use and implement them, a five-category risk classification system towill be applied to bank assets that is based on the Basel Committee recommendations.
As provided in articleArticle 68 of the Chilean General Banking Act, if a bank fails at any time to meet the legal requirements relating to the maintenance of regulatory capital (which is comprised of effective net worth and basic capital, as both concepts are defined in articleArticle 66 of the Chilean General Banking Act and Chapter12-1 of the Regulations of the SBIF), the bank would have to comply with such legal requirements within a period of 60 days. ForFurther, for each day in which the bank it fails to comply with such legal requirements, it would be subject to a daily penalty equal to one thousandth of the deficit of the effective net worth or basic capital, as the case may be.
In line withNote that once the future adoption of Basel III regulations in Chile,CMF replaces the SBIF, has maintained a proposal to increase the minimum effective BIS capital adequacy ratio fromaforementioned sanction will be replaced by those set forth in Title III of Law No. 21,000 which created the current 8% to 10.5%. This change requires an amendmentCMF (i.e., the CMF may impose one or more of the following sanctions (i) censure; (ii) fines up to the Chilean General
Banking Act by the Chilean Congress. The changes to the Chilean General Banking Ac that were proposed to the Chilean Congress, establish the main guidelines for the application of Basel III in Chile, which includes a full implementationfollowing amounts: (x) UF 15,000 (approximately US$595,000 as of December 2024, with a minimum total capital31, 2018), but in the event the entity is sanctioned for breaches of 10.5%, without consideringsimilar nature before, the cyclical buffer requirements and SIFI that must be defined by the regulator. It should be noted that there are still several key definitions pending so that all the impactsamount of the application are not known, as well asfine could be up to five times the exact capital deductions from the regulatory capital, specific buffer sizes, possible changes in the weightaforementioned amount, (y) 30% of the Risk-Weighted Assets (“RWA”), as well as the definitive models of market and operational risk, and the general roll-in phase. Given that the final regulation is not yet available, it is difficult to establish with certainty assumptions that make possible to have a precise new capital position. In this way, the bank contemplates periodic reviewsirregular operation or (z) double of the premises in suchbenefits realized as a way as to reduceresult of the volatility in the projections. Although we have not failed in the past to comply with our capital maintenance obligations, there can be no assurance that we will not do so in the future.
irregular operation; and/or (iii) revocation of its authorization of existence.
Lending Limits
Under the Chilean General Banking Act, Chilean banks are subject to certain lending limits, including the following:
·a bank cannot extend to any entity or individual, directly or indirectly, unsecured credit in an amount that exceeds 10% of the bank’s effective net equity, or in an amount up to 30% of its effective net equity if the excess over 10% is secured by certain assets with a value equal to or higher than such excess. In the case of foreign currency export trade financing, the ceiling for secured credits is also established at 30%. In the case of financing infrastructure projects built through the concession mechanism, the 10% ceiling for unsecured credits is 15% 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, while the ceiling for secured credits remains at 30%;
·a bank cannot extend loans to another financial institutionbank subject to the Chilean General Banking Act in an aggregate amount exceeding 30% of itsthe effective net equity;equity of the lender bank;
• | the total amount of loans granted by a bank to a group of persons or entities belonging to the same business group (grupo empresarial) as this term is defined in Title XV of the Chilean Securities Market Act, cannot exceed 30% of the actual equity of the lending bank. For these purposes, the loans mentioned in the preceding bullet shall not be considered; |
·
a bank cannot directly or indirectly grant a loan whose purpose is to allow an individual or entity to acquire shares of the lender bank;
·a bank cannot lend, directly or indirectly, to a director or any other person who has the power to act on behalf of such bank; and
·
a bank cannot grant loans to related parties (which relation can arise from management or for ownership reasons, including holders of more than 1% of its shares, except in the case of companies which are actively traded on the Santiago Stock Exchange, like Itaú Corpbanca, in which case the limit is 5%) on more favorable terms than those generally offered tonon-related parties. In addition, the aggregate amount of loans to a single group of related parties cannot exceed 5% of the bank’s effective net equity or 25% if the excess thereof is secured by certain assets with a value equal to or greater than such excess, or by certain other collateral specified in the Chilean General Banking Act. The definitions of “related” and “group” for these purposes are determined by the SBIF. The aggregate amount of all credits granted to related parties of the bank cannot exceed its effective net equity.
To determine the lending limits with respect to a particular person, the obligations undertaken by partnerships in which the relevant person is an unlimited partner or by companies of any nature in which such person has more than 50% of their capital or more than 50% of their profits, will be accounted as obligations of such person. Likewise, if the participation of the relevant person in a company is higher than 2% but not higher than 50% of its capital or profits, then the obligations of such company will be accounted for as obligations of such person in proportion to its actual participation. Finally, when there is a plurality of debtors of the same obligation, then the obligation will be deemed joint and several with respect to each and all of the debtors, unless expressly undertaken in other terms.
Any breach of the lending limits set forth in clauses a), b) and c) above, will be subject to a fine equivalent to 10% of the excess amount. In case of breach of the rules set forth in clause f) above, it will be subject to a fine equivalent to 20% of the loan granted.
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 must classify and evaluate their credits portfolio pursuant to the rules issued by the SBIF. However, a bank may request the authorization of the SBIF to use its own internal evaluation model for groups, to the extent they comply with certain requirements.
Classification of Banks and Loan Portfolios
Solvency and Management. Chilean banks are classified into categories I through V based uponon their solvency and management ratings. The classification of each bank is confidential.
• | Category I: This category is reserved for financial institutions that have been rated level A in terms of solvency and management. |
·Category I: This category is reserved for financial institutions that have been rated level A in terms of solvency and management.
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With respect to solvency, banks are qualified as level A, B and C.
A bank fits within level A if (y) it complies with the general minimum effective net equity and basic capital requirements and (z) with the following additional requirements (if applicable), once they come into effect:
2. | An additional basic capital up to 2.5% of its risk weighted assets, net of required allowances, above the
A bank fits within level B, if it complies with the general minimum effective net equity and basic capital requirements, but not with the additional requirements outlined in the preceding paragraph, once they come into effect. A bank fits within level C if it does not comply with the general minimum effective net equity and basic capital requirements. With respect to a bank’s management rating, level A banks are those that are not rated as level B or C. Level B banks display some weakness in their corporate governance, internal controls, security in their networks, information systems, response to risk, private risk rating or ability to manage contingency scenarios, which must be corrected within the period preceding the next evaluation, considering also the penalties imposed to the bank (except for those with a pending claim). Level C banks display significant deficiencies in internal controls, information systems, response to risk, private risk rating or ability to manage contingency scenarios. The CMF shall issue a regulation setting forth the terms and conditions necessary to implement the aforementioned management rating, which shall consider, among others, compliance by the bank of the regulations to be issued by the CMF governing critical information infrastructure in cyber security. Main Differences Between the Accounting Policies under IFRS and Chilean Banking GAAP The financial information included herein is prepared and presented in accordance with IFRS. Certain differences exist between Chilean Banking GAAP and IFRS which might be material to the financial information contained herein. The matters described below summarize certain differences between Chilean Banking GAAP and IFRS that may be material. We are responsible for preparing the summary below. We have not prepared a comprehensive reconciliation of our consolidated financial statements and related footnote disclosures between Chilean Banking GAAP and IFRS and have not quantified such differences. Accordingly, no assurance is provided that the following summary of differences between Chilean Banking GAAP and IFRS is complete. Effective interest rate.Under Chilean Banking GAAP, the Bank recognizes the interest of some loans on a contractual basis. Under IFRS, this situation it is not permitted and interest must be recognized based on the effective interest rate. Loan loss allowances. Prior to the adoption of IFRS 9 on January 1, 2018, we calculated loan loss allowances in accordance with IAS 39. The main difference between Chilean GAAP and IFRS 9 and IAS 39 regarding loan loss allowances is that loan loss allowances under Chilean GAAP are calculated using expected loss models based on specific guidelines set by the SBIF, which in turn are based on an expected losses approach while 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 we have adjusted the consolidated financial statements to fully comply with IFRS standards. The most significant impact of IFRS 9 on our 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 of our equity on January 1, 2018 is Ch$129,025 million (net of tax). Suspension of recognition of income on an accrual basis. Under Chilean Banking GAAP, the Bank does not recognize income on an accrual basis in the Statement of Income for certain loans included in the impaired portfolio. Under IFRS, this situation it is not permitted and interest must be recognized based on the effective interest rate. Loan write-offs. Under Chilean Banking GAAP, write-offs of loans and accounts receivable are based on due, past due and current installments, and the term begins at the moment of default, i.e., when the default time of an installment or a portion of a loan reaches the write-off term established by the SBIF. The term corresponds to the time elapsed since the date on which payment of all or part of the obligation in default became due. 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 consolidated financial statements. Under IFRS, it is not required to establish acharge-off date. Investments in other companies. Investments in other companies in which the Bank does not exercise significant influence (ownership interest less than 20%) were reclassified and presentedas available-for-sale financial investment in accordance with IAS 39. Under IFRS 9 these investments are reclassified according to the Bank’s intention either as financial instruments at fair value through profit or loss (FVTPL) or fair value through other comprehensive income (FVTOCI). Other assets. Assets in lieu of payment were reclassified and recognized in accordance with IFRS 5. Country risk provision and contingent loans. Under Chilean Banking GAAP, the Bank recognizes provisions for country risk and allowances related to the undrawn available credit lines and contingence loans in accordance with the local regulations. IFRS only permits the recognition of allowances based on the incurred loss model until December 31, 2017. Since January 1, 2018, in accordance with IFRS 9, expected credit losses for contingent loans are recorded in our consolidated financial statements. Deferred taxes. Correspond to the deferred tax effects of all differences between Chilean Banking GAAP mentioned above. Capital Markets Under the Chilean General Banking Act, banks in Chile may purchase, sell, place, underwrite and act as paying agents with respect to certain debt securities. In addition, banks in Chile may place and underwrite certain equity securities. Bank subsidiaries may also engage in debt placement and dealing, equity issuance advisory services 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, by the CMF, the regulator of the Chilean securities market and of open-stock (public) corporations. Subsidiaries and Affiliated Companies Chilean banks are authorized to create subsidiaries to engage in (1) brokerage of securities, (2) management of mutual funds, investment funds, offshore funds, housing funds or all the foregoing, (3) insurance brokerage, (4) leasing operations, (5) factoring operations, (6) securitization, (7) financial advisory, (8) custody and transportation of funds, (9) provision of other financial services as authorized by the SBIF, (10) real estate leasing, and (11) social security advice. These subsidiaries are regulated by the SBIF except for the cases referred to in (1), (2), (3) and (6) above in which the SBIF may request information but the entities are regulated by the CMF or, with respect to social security, by the Superintendency of Pensions (Superintendencia de Pensiones) or SAFP. Currently, banks are not authorized to create or engage in the business of insurance companies (other than as insurance brokers) and pension funds or health insurance administrators. Banks may also, with the prior authorization of the SBIF, create and participate in companies exclusively destined to the carrying out of activities in support of the main banking operations, such as payment card operators. Legal Provisions Regarding Banking Institutions with Financial Instability or Poor Management Liquidation of Chilean banks may not be ordered in bankruptcy procedures, except when undergoing voluntary liquidation. The Chilean General Banking Act sets forth that if a bank is under certain specific adverse circumstances that are indicative of financial instability or poor management, the bank must (i) immediately inform the SBIF of the occurrence of any such circumstance, and (ii) submit to the SBIF within five days (extendable up to 10 days), a remediation plan approved by its board of directors. The remediation plan must include concrete measures towards the remediation of the situation affecting the bank and secure its normal operation. The SBIF is also authorized to request such remediation plan in the event it becomes aware that a bank has been affected by any such circumstances without having received timely notice thereof from the affected bank. The SBIF shall communicate, on a confidential basis, to the Financial Stability Council the bank’s submission of a remediation plan, as well as its approval, rejection and/or comments made by the SBIF. The remediation plan submitted by the bank must be approved by the SBIF and shall set forth a maximumsix-month term from the date of its approval by the SBIF for its satisfaction, unless otherwise expressly authorized by the SBIF. Additionally, the bank must provide the SBIF with periodic reports as to the implementation of the remediation plan. If the remediation plan includes, as one of its remediation measures, a capital increase, with the prior approval of the SBIF, the board of directors of the bank must summon a shareholders meeting to approve such increase. If the shareholders reject the capital increase, or if approved, it is not paid within the approved term, or if the SBIF rejects for a second time the conditions to summon the shareholders meeting, the SBIF may prohibit the bank for a maximum term of six months, renewable once for the same period, among others, from granting new loans, extending any loans beyond 180 days and releasing or limiting the collateral on existing loans. The Chilean General Banking Act provides that the remediation plan can include a three-year term loan from another bank which will be subordinated to other liabilities of the bank. The terms and conditions of such a loan must be approved by the directors of both banks, as well as by the SBIF, but need not be submitted to the borrowing bank’s shareholders for their approval. In any event, a creditor bank cannot grant interbank loans to an insolvent bank in an amount exceeding 25% of the creditor bank’s effective net equity. If a bank does not submit a remediation plan, or if the remediation plan is rejected by the SBIF, or if the bank breaches any of the measures set forth therein, or has incurred in repeated breaches or fines, or is reluctant to comply with the SBIF’s orders or has incurred in any material fact that threatens its financial stability, or if the SBIF does not approve the remediation plan, or if such plan is not timely submitted by the bank or the terms of such plan are breached by the bank, or if the capital increase included in the remediation plan is approved by the shareholders of the bank but not paid within the approved term, or if the SBIF rejects for the second time the conditions to summon the shareholders meeting that shall approve the capital increase, the SBIF is authorized to appoint a delegated inspector and/or, with the prior consent of the Council of the Central Bank of Chile, to appoint a provisional administrator who will be in charge of the bank’s administration. The appointment of a delegated inspector or provisional administrator shall be for a period no longer than one year, renewable for one additional year in case of the delegated inspector, and indefinitely in the case of the provisional administrator. Dissolution and Liquidation of Banks The SBIF may provide that a bank must be liquidated if the safety of its depositors or other creditors so demands it, or when such bank does not have the necessary solvency to continue its operations. In such case, the SBIF must revoke such bank’s authorization of existence and mandate its liquidation, subject to approval by the Central Bank of Chile. The SBIF’s resolution must state the reason for ordering the liquidation and must appoint a liquidator, unless the Superintendent of Banks assumes this responsibility. Once the CMF replaces the SBIF, the CMF shall appoint a liquidator, who shall be a person that meets the suitability and technical capacity requirements to be determined by the CMF pursuant to a regulation to be issued by the CMF. Upon a liquidation order, all checking accounts deposits and obligations payable on demand from the ordinary course of business are required to be paid by using the bank’s existing funds, its deposits with the Central Bank of Chile or its investments in instruments that represent its reserves. If these funds are insufficient to 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 of Chile will lend the bank the funds necessary to pay these obligations. Any such on demand obligations are preferential to any claims of other creditors of the liquidated bank. Investments in Foreign Securities Under current Chilean banking regulations, banks in Chile may grant loans to foreign individuals and entities and invest in certain foreign currency securities. Chilean banks may only invest in equity securities of foreign banks and certain other foreign companies which may be affiliates of the bank or which would support the bank’s business if such companies were incorporated in Chile. Banks in Chile may also invest in debt securities traded in formal secondary markets. Within certain limits, banks in Chile may invest in such debt securities, in the event such debt securities qualify as securities issued or guaranteed by (1) foreign sovereign states or their central banks or (2) other foreign or international financial institutions of which Chile is a member or bonds issued by foreign corporations. Such foreign currency securities must have a minimum rating as follows:
A Chilean bank may invest in securities having a minimum rating as follows, provided that in case the total amount of these investments, together with the loans granted to certain classes of foreign debtors, exceeds 20% (or 30% for banks with a BIS ratio equal or exceeding 10%) of the effective net equity of the bank, a provision of 100% of the excess shall be established by the bank:
If investments in these securities and certain loans referred to below exceed 70% of the effective net equity of the bank, a provision for 100% of the excess shall be established, unless the excess, up to 70% of the bank’s effective net equity, is invested in securities having a minimum rating as follows:
Additionally, a Chilean bank may invest in foreign securities, with ratings equal to or exceeding those set forth in the table above, in: (1) overnight and term deposits with foreign banks, subject to a limit of up to 30% of the effective net equity of the Chilean bank that makes the investment (or limit of 25% of its effective net equity regarding deposits with certain related parties); and (2) securities issued or guaranteed by sovereign states or their central banks or those securities issued or guaranteed by international institutions of which Chile is a part, subject to a limit of up to 50% of the effective net equity of the Chilean bank. Subject to specific conditions, a bank may grant loans in dollars to subsidiaries or branches of Chilean companies located abroad, to companies listed on foreign stock exchanges authorized by the Central Bank of Chile and, in general, to individuals and entities domiciled abroad, as long as the Central Bank of Chile is kept informed of such activities. A bank may also grant loans in dollars to finance exports to or from Chile. In the event that the sum of the investments of a bank in foreign currency and of the commercial and foreign trade loans granted to foreign individuals and entities exceeds 70% of the effective net equity of such bank, the excess is subject to a mandatory reserve of 100%. Changes in the Governance of Our Regulators On February 23, 2017, Law No. 21,000, which establishes the CMF, was published. This new law modifies, among other matters, the corporate governance and operation of the Chilean regulator for securities and insurance, a role that has historically been performed by the Chilean Superintendency of Securities and Insurance. This law came into effect in March 2017. The main features of this new law are the following: The Chilean Superintendency of Securities and Insurance was replaced by a new body, which is the Commission for the Financial Market which became operational on December 14, 2017. The direction of the Commission for the Financial Market corresponds to the Council of the Commission for the Financial Market, which is composed of five members. This commission continues to supervise the entities that formerly were under the supervision of the Chilean Superintendency of Securities and Insurance. The new law required the President of Chile to submit to the Chilean Congress, within one year of the publication of the law, a bill to amend the Chilean General Banking Law in order to subject banks and financial institutions to the supervision of the Commission for the Financial Market. This bill was submitted to the Chilean Congress in June 2017. Law No. 21, 130 was enacted to modify the Chilean General Banking Act for purposes of adopting Basel III.
In addition to the former powers of the Chilean Superintendency of Securities and Insurance, the Commission for the Financial Market has other powers, such as the authority to seize documents, intercept communications and obtain information on banking operations (including those subject to bank secrecy).
The new law also encourages the self-regulation of entities subject to the supervision of the Commission for the Financial Market through the creation of the Financial Self-Regulation Committee. Financial Stability Council Law No. 20,789 created the Financial Stability Council, composed by the Minister of Finance (Ministro de Hacienda), the chairman of the CMF and the Superintendent of Pensions. The purpose of this council is to facilitate the technical coordination and the exchange of information by these market regulators in all matters related to the prevention and management of situations which may involve a risk for the financial system. This law also expanded the authority of the SBIF to request information regarding controlling shareholders of banks and entities which are part of their corporate group. Anti-Money Laundering, Anti-Terrorist Financing and Foreign Corrupt Practices Act Regulations United States We, as a foreign private issuer whose securities are registered under the U.S. Securities Exchange Act of 1934, are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA. The FCPA generally prohibits 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. The accounting provisions of the FCPA require an issuer to maintain books and records and have a system of internal accounting controls sufficient to, among other things, provide reasonable assurances that transactions are executed and assets are accessed and accounted for in accordance with management’s authorization. Significant penalties and fines may be imposed against us, and/or our officers, directors, employees, and agents, for violations of the FCPA. Furthermore, we may be subject to a variety of U.S. anti-money laundering and anti-terrorist financing laws and regulations, including, but not limited to, the Bank Secrecy Act of 1970, as amended, and the USA PATRIOT Act of 2001, as amended. A violation of such laws and regulations may result in substantial penalties, fines and imprisonment of our officers and/or directors. Chile The Anti-Money Laundering Act, or the AML Act, requires banks, among others, to report any “suspicious transactions or activities” that they may become aware of in the ordinary course of business to the Chilean Financial Analysis Unit (Unidad de Análisis Financiero), or FAU. “Suspicious activities or transactions” are defined by the AML Act as any act, operation or transaction that, in accordance with the uses and customs of the relevant activity, is considered unusual or devoid of apparent economic or legal justification or that may constitute any of the actions described in Article 8 of Law No, 18,314 (terrorist actions), or entered into by an individual or a legal entity included in any resolution issued by the United Nations Security Council, whether carried out in an isolated or recurrent basis. In accordance with the AML Act, banks must keep special records for any transaction in cash for amounts exceeding US$10,000, and report them to the FAU if so required by the latter authority. In addition, the entities subject to the AML Act are also subject to Circular No. 49 and other regulations issued by the FAU, which provides additional guidelines for the prevention of money laundering. With regard to Chilean banks the SBIF has also provided rules and guidelines for banks to set up an AML and Combating Financing of Terrorism, or CFT, prevention system applicable in their ordinary course of business, which must take into consideration the volume and complexity of their transactions, including their affiliates and supporting entities, and their international presence. In case ofnon-compliance of these rules and guidelines, the SBIF may impose administrative sanctions upon the infringing bank such as fines and warnings. Among other requirements, such system shall include at least (1) ”know your customer” policies, (2) a manual of policies and procedures, (3) the appointment of a compliance officer, and (4) all necessary technological tools to developred-flag systems to identify and detect unusual operations. For more information on our Anti-Money Laundering Committee, see “Item 6. Directors, Senior Management and Employees—C. Board Practices—Other Committees—Anti-money laundering and anti-terrorism finance prevention committee.” On December 2, 2009, Chilean Law 20,393 came into effect. Law 20,393 regulates and provides for the criminal liability of legal entities for certain crimes, such as money laundering, financing of terrorism, bribery, misappropriation (Apropiación Indebida), unfair administration (Administración Desleal), incompatible negotiation (Negociación Incompatible), and corruption between private parties (Corrupción entre Particulares). Pursuant to Law 20,393, a legal entity will be exempted from criminal liability if it has adopted and implemented a crime prevention model (Modelo de Prevención de Delitos) which shall include at a minimum (i) the appointment of a compliance officer, who shall be given enough powers and resources to exercise its duties and (ii) a system to prevent the commission of crimes which must be certified by external auditors, the respective risk classification entities and other specialized entities registered with the CMF. In this regard, Itaú Corpbanca and its subsidiaries have adopted and implemented a Crime Prevention Model which has been certified by BH Compliance Limitada. Colombia The regulatory framework to prevent and control money laundering is contained in, among others, Decree 663 of 1993 and External Circular No. 029 of 2014 (Basic Legal Circular), Title IV, Chapter IV, “Instructions Related to Risk Management of Laundering and Terrorist Financing,” issued by the Colombian Superintendency of Finance, as well as Law 599 of 2000 (Colombian Criminal Code, as amended). Colombian laws adopt the latest guidelines related to anti-money laundering and other terrorist activities established by the Financial Action Task Force on Money Laundering, or FATF. Colombia, as a member of theGAFI-SUD (Grupo de Acción Financiera de Sudamérica) (a FATF style regional body), follows all of FATF’s 40 recommendations. Finally, the Colombian criminal code introduced criminal rules and regulations to prevent, control, detect, eliminate and adjudicate all matters related to financing terrorism and money laundering. The criminal rules and regulations cover the omission of reports on cash transactions, mobilization or storage of cash, and the lack of controls. Anti-money laundering provisions have been complemented with provisions aimed at deterring terrorism financing. For that purpose, by means of External Circular 26 of 2008, the Colombian Superintendency of Finance has issued regulations requiring the implementation by financial institutions of a risk management system for money laundering and terrorism financing. These regulations emphasize “know your customer” policies and knowledge of customers and markets. They also establish processes and parameters to identify and monitor a financial institution’s customers. According to these regulations, financial institutions must cooperate with the appropriate authorities to prevent and control money laundering and terrorism. Regarding foreign corrupt practices regulations, the Colombian Congress enacted Law 1778 of 2016 pursuant to which rules on liability of legal entities related with the commission of acts of transnational corruption were established (the “Law 1778”). Law 1778 grants authority to the Colombian Superintendence of Companies regarding the possibility to investigate and sanction legal entities whose employees, contractors, directors or partners (of their own or any subordinate entity) give, offer or promise to give to a foreign public official sums of money, any object of monetary value or any other kind of benefit or value in exchange for the latter to perform, omit or delay acts related with their duties and in connection with a business or international transaction. Additionally, according to Law 1778, the parent companies may also be responsible, along with their subordinate entities when, with the latter’s acknowledgement or tolerance, such subordinate entities (employees, contractors, directors or partners) perform acts of transnational bribery. Finally, the Colombian Criminal Code includes rules and regulations to prevent, control, detect, eliminate and adjudicate all matters related to financing terrorism and money laundering. The criminal rules and regulations cover the omission of reports on cash transactions, and the lack of controls. Recent Regulatory Developments in Chile Capital Adequacy Requirements As noted above, on January 12, 2019, Law No. 21,130, which modified the Chilean General Banking Act, was enacted. Such law has adopted the capital adequacy requirements applicable to banks under Basel III. As of the date hereof, not all the provisions of Law No. 21,130 are in effect. Some capital adequacy provisions will come into effect once the CMF issues certain regulations to be issued according to such law. See “Item 4—Information on the Company—B. Business Overview—Chilean Banking Regulation and Supervision—SBIF.” Commission for the Financial Market On February 23, 2017, Law No. 21,000, which establishes the CMF, was published. This new law modifies, among other matters, the corporate governance and operation of the Chilean regulator for securities and insurance, a role that has historically been performed by the Chilean Superintendency of Securities and Insurance. This law came into effect in March 2017. See “Item 4. Information on the Company—Changes in the Governance of Our Regulators.” Further, on January 12, 2019, Law No. 21,130, which modified the Chilean General Banking Act for purposes of adopting Basel III, was published. According to a Transitory Article Ninth of such law, the President of the Republic of Chile shall issue a Decree with Force of Law through the Ministry of Finance, which among other matters, shall determine the date in which the Chilean Commission for the Financial Market shall replace the SBIF. In respect of this, it has been announced that the Chilean Commission for the Financial Market will replace the SBIF effective as of June 1, 2019. Modification to the AML Act The AML Act has been recently amended as follows: On February 18, 2015 Law No. 20,818 was enacted, amending certain provisions of the AML Act by: (i) increasing the authority of the FAU; (ii) increasing the scope of entities that are subject to the AML Act; (iii) amending the definition of “suspicious activities or transactions”; (iv) reducing the minimum amounts of the cash transactions to be registered and potentially reported to the FAU; (v) amending the sanctions applicable to any breach to the AML Act; (vi) adding new base crimes for the crime of money laundering; (vii) requiring entities subject to the AML Act to report to the FAU any transaction entered into by any individual or entity contained in any resolution issued by the United Nations Security Council; and (viii) establishing the obligation of the entities subject to the AML Act to register with the FAU, among other things. On November 20, 2018 Law No. 21,121 was enacted amending, among others, the AML Act by including misappropriation (Apropiación Indebida) and unfair administration (Administración Desleal) as crimes of money laundering. Tax Reform On September 29, 2014, the Tax Reform was published in the Chilean Official Gazette, introducing the most significant amendments to the Chilean tax system over the last 30 years and strengthening the powers of theServicio de Impuestos Internos, or the Chilean IRS to control and prevent tax avoidance. One of the main purposes of this reform was to finance major educational reforms. Thereafter the Tax Reform was modified by Law No. 20,899, published on February 8, 2016. Due to the Tax Reform, the Bank is now subject to the partially integrated system where companies are subject to a corporate tax of 27%. Then, when the income is actually withdrawn from a company,non-Chilean resident shareholders would be subject to a 35% withholding tax, while Chilean resident shareholders would be required to pay the progressive Complementary Global Tax, with rates ranging between 0% and 35%, against which only a 65% of the corporate tax will be allowed to be used as a credit against the withholding tax or the Complementary Global Tax. Nevertheless, the foreign holder shall be entitled full corporate tax credit, if such holder is established on, domiciled in, or resident of a country with which Chile has a double taxation treaty in force or, until December 31, 2021, Chile has signed a double taxation treaty with such country, although not in force, given that the foreign holder credits his tax residency under the Chilean IRS’s Resolution No. 11, which was issued on January 20, 2019. This Resolution provides the requirements that must be met by foreign investors and their tax certificates in order to be eligible for this benefit. Law No. 20,899 introduced changes to both systems in order to simplify them. Other amendments included in this Law are related to the accuracy of the general anti-avoidance rules and the implementation of Value Added Tax (VAT) for certain operations, mainly to the sale of real estate and leases with purchase option. On August 21, 2018, a bill was submitted to the Chilean National Congress aimed at reforming the tax legislation. This bill proposes to unify the tax regimes referred to above, abolishing the current attributed income system, and providing for a general regime under which the corporate tax would apply as a general rule with a 27% rate, which would be fully creditable against the withholding tax or Global Complimentary Tax. To date, such bill is still under discussion by the Chilean National Congress. Foreign source income obtained by taxpayers domiciled or resident in Chile is generally subject to taxes in Chile on a cash basis. However, in the case of branches or other permanent establishments located abroad, both accrual and received income are considered in Chile for tax purposes. Also, taxpayers who obtain passive income from foreign companies, in which they have control, as defined by law, will have to pay taxes on accrual and cash basis, for the passive income accrued or perceived by those controlled entities. Bonds and other debt instruments issued in Chile by Chilean companies are deemed to be located in Chile for capital gains purposes. However, bonds issued outside of Chile by Chilean companies are not deemed located in Chile for capital gain purposes and, consequently, the sale of such bonds by anon-Chilean resident is not subject to capital gains tax in Chile (according to section 11 of theLey Sobre Impuesto a la Renta, or the Chilean Income Tax Law, it would be considered a foreign source income obtained by anon-Chilean resident). Law No. 20,855 On September 25, 2015 the Consumer Protection Act and the Pledge Without Conveyance Act were amended in order to include several provisions regarding the release and cancellation of mortgages and certain pledges. According to this law, once an obligation secured with any of the said security interests has been extinguished, the relevant creditorex officio shall grant and afford the corresponding release and cancellation public deed, and its record cancellation. Furthermore, the relevant creditor shall inform such proceedings to the debtor within the term established by law. New Securities Brokerage Regulation On March 9, 2015, the Chilean Superintendency of Securities and Insurance issued its General Rule No. 380, which came into effect on September 9, 2016. This new rule replaced the rules regarding the relationship of Chilean securities brokers with their customers by setting forth new regulations on matters such as suitability, contracts with clients, conflicts of interest, execution of orders and registration and recording of orders, among others. Based on this new rule, Chilean securities brokers are required to execute contracts with clients that shall include the information set forth in this rule (i.e., communications to the client of the existence of conflicts of interest, procedures to deal with such conflicts, communications between the securities broker and the client, granting of security interest, fees, etc.). Also, the Chilean stock exchanges changed their internal regulations to adopt the new regulations set forth by General Rule No. 380, including providing forms of the contracts required to be executed with clients. Amendment to the Consumer Protection Act On September 13, 2019, Law No. 21,081 was published in the Official Gazette. This law, which enters into effect pursuant to a schedule that ranges between March 14, 2019 and September 13, 2020, amends the Consumer Protection Act in the following manner: (i) strengthens consumer organizations; (ii) substantially increases the fines applicable for breaching the Chilean Consumer Protection Act; (iii) increases the period of the statute of limitations for liability; (iv)��amends procedures in several respects in order to make them more consumer-friendly; and (v) increases the inspection powers of the National Consumer Service (SERNAC). Bill Regarding the Limitation of Liability of Users of Payment Methods in Loss, Theft, Robbery or Fraud Cases Since April 2005, Law No. 20,009 has provided the Chilean legal framework governing the liability of cardholders in case of thefts, losses and robbery of his or her credit or debit cards. Under Law No. 20,009, to the extent a cardholder notifies the issuer of the loss, theft or robbery of its credit or debit cards, they will be exempt from liability in respect of transactions made after such notification; further the issuer of the card must provide evidence that the transactions were made by the cardholder. Although it is generally considered that this mechanism has worked adequately, there is currently a bill of law under discussion in the Chilean Congress to amend certain aspects of Law No. 20,009 that is aimed at the establishment of a new liability regime in cases of loss, theft, robbery or fraud of payment cards or other similar payment methods, as well as in cases of fraud in electronic transactions (collectively, the “Payment Methods”). Pursuant to such bill of law, users of a Payment Method may limit their responsibility in cases of loss, theft, robbery or fraud by providing notice thereof to the issuer of the applicable Payment Method. Upon such notice, the issuer of the applicable Payment Method shall be liable for all operations occurring thereafter. Further, with respect to operations that took place prior to the corresponding notice by a user and that a user denies to have approved or performed, the user shall make a claim in respect thereof concurrently with the notice mentioned above, or within five business days thereafter. Upon such claim, the issuer of the Payment Method shall cancel the charges or reimburse the funds within seven business days. If the issuer of a Payment Methods desires to contest the claim of a user, the issuer shall bear the burden of proof. COLOMBIAN BANKING REGULATION AND SUPERVISION Colombian Banking Regulators Pursuant to the Colombian Constitution, the Colombian Congress has the power to prescribe the general legal framework within which the government may regulate the financial system. The agencies vested with the authority to regulate the financial system are the board of directors of the Central Bank of Colombia, the Colombian Ministry of Finance, the Colombian Superintendency of Finance, the SIC, and the SRO. Central Bank of Colombia The Central Bank of Colombia exercises the customary functions of a central bank, including price stabilization, monetary policy, regulation of currency circulation, regulation of credit, exchange rate monitoring and management of international reserves. Its board of directors is the regulatory authority for monetary, currency exchange and credit policies, and is responsible for the direction of the Central Bank of Colombia’s duties. The Central Bank of Colombia also acts as lender of last resort to financial institutions. Colombian Ministry of Finance and Public Credit One of the functions of the Colombian Ministry of Finance is to regulate all aspects of finance and insurance activities. As part of its duties, the Colombian Ministry of Finance issues decrees relating to financial matters that may affect banking operations in Colombia. In particular, the Colombian Ministry of Finance is responsible for regulations relating to capital adequacy, risk limitations, authorized operations, disclosure of information and accounting of financial institutions. Colombian Superintendency of Finance The Colombian Superintendency of Finance is the authority responsible for supervising and regulating financial institutions, including commercial banks such as Itaú Corpbanca Colombia, finance companies, financial services companies and insurance companies. The Colombian Superintendency of Finance has broad discretionary powers to supervise financial institutions, including the authority to impose fines on financial institutions and their directors and officers for violations of applicable regulations and certain judicial attributions regarding controversies among customers and banks. The Colombian Superintendency of Finance can also conducton-site inspections of Colombian financial institutions. The Colombian Superintendency of Finance is also responsible for monitoring and regulating the market for publicly traded securities in Colombia and for monitoring and supervising securities market participants, including the Colombian Stock Exchange, brokers, dealers, mutual funds and issuers. Financial institutions must obtain the prior authorization of the Colombian Superintendency of Finance before commencing operations. Violations of the financial system rules and regulations are subject to administrative, and in some cases, criminal sanctions. Self-Regulatory Organization The SRO is a private entity responsible for the regulation of intermediaries participating in the Colombian capital markets. The SRO may issue mandatory instructions to its members and supervise its members’ compliance and impose sanctions for violations. All capital market intermediaries, including Itaú Corpbanca Colombia and its subsidiaries, must become members of the SRO and are subject to its regulations. Superintendency of Industry and Commerce The SIC is the authority responsible for supervising and regulating competition in several industrial sectors, including financial institutions. The SIC is authorized to initiate administrative proceedings and impose sanctions on banks, including Itaú Corpbanca Colombia, whenever the financial entity behaves in a manner considered to be anti-competitive. The Colombian Superintendency of Finance is the authority responsible for approving mergers, acquisitions and integrations between financial institutions such as Itaú Corpbanca Colombia. For such approvals, the Colombian Superintendency of Finance must obtain anon-binding prior written opinion by the SIC. Capital Adequacy Requirements Capital adequacy requirements for Colombian financial institutions (as set forth in Decree 2555 of 2010, as amended, or Decree 2555) are based on applicable Basel Committee standards. Decree 2555 establishes four categories of assets, which are each assigned different risk weights, and require that a credit institution’s Technical Capital (as defined below) be at least 9% of that institution’s total risk-weighted assets. Currently, Decree 2555 sets forth, among other things:
the criteria for debt and equity instruments to be considered ordinary primary capital, additional primary capital and secondary capital. The Colombian Superintendency of Finance will review whether a given instrument adequately complies with these criteria in order for an instrument to be considered tier one, additional tier one or tier two capital, upon request of the issuer. Debt and equity instruments that have not been classified by the SFC as ordinary primary capital or secondary capital, will not be considered tier one, additional tier one or tier two capital for purposes of capital adequacy requirements; the minimum total solvency ratio of 9% of the financial institution’s technical capital divided by total risk-weighted assets; however, each entity must also comply with a minimum basic solvency ratio of 4.5%, which is defined as the ordinary primary capital after deductions divided by the financial institution’s total risk-weighted assets. In addition, solvency ratios must be met individually, by each credit institution, and must be met and monitored on a consolidated basis; that the calculation of the total solvency ratio will take into account operational risk; however the Colombian Superintendency of Finance has not yet defined the methodology to be used to estimate such effect; and that credit institutions are able to include hybrids instruments designed to have characteristics of a fixed income and characteristics of equity market security, as part of its basic additional capital. When the solvency ratio of a financial institution is below 10%, the Colombian Superintendency of Finance implements a closer supervision on banking activities of the entity based on the supervision policy implemented by the Colombian Superintendency of Finance. If a bank fails to comply with the capital adequacy requirements applicable to Colombian financial institutions, it may be subject to certain penalties and sanctions that are graduated depending on the level of compliance failure, and which may include an administrative take-over by the government with the purpose of administration or liquidation. Minimum Capital Requirements The minimum capital requirement for banks on an unconsolidated basis set forth in the Financial System Organic Act was COP$79,835 million (Ch$17,813 million) for 2015, COP$85,240 million (Ch$19,019 million) for 2016, COP$90,142 (Ch$20,715 million) for 2017, COP$93,829 million (Ch$19,310 million) for 2018 and COP$96,813 million for 2019. Failure to meet such requirement can result in the relevant financial institution take over (Toma de Posesión) by the Colombian Superintendency of Finance. Minimum capital requirements are adjusted in January each year based on the inflation percentage for the precedent year. The capital requirements for each type of financial institution (financial corporations, financing companies, trust companies, etc.) are different, with banks having the highest minimum amount. Additionally, there are capital requirements above this minimum for the purposes of credit exposure and derivatives transactions. Capital Investment Limit All investments in subsidiaries and other authorized capital investments, other than those made in order to abide by legal requirements, may not exceed 100% of the total aggregate of capital, equity reserves and the equityre-adjustment account of the respective bank, financial corporation or commercial finance company, excluding unadjusted fixed assets and including deductions for accumulated losses. Mandatory Investments The Central Bank of Colombia’s regulations require financial institutions, including Itaú Corpbanca Colombia, to make mandatory investments in securities issued by Finagro, a Colombian public financial institution that finances production and rural activities, to support the agricultural sector. The amount of these mandatory investments is calculated based on the current Colombian peso-denominated obligations of the relevant financial institution. Foreign Currency Position Requirements According to Resolution 1, issued by the Central Bank of Colombia issued in 2018, as amended, a financial institution’s foreign currency position (Posición Propia en Moneda Extranjera) is the difference between such institution’s foreign-currency-denominated assets and liabilities (including anyoff-balance sheet items), made or contingent, including those that may be sold in Colombian legal currency. Resolution 1 provides that the average of a bank’s foreign currency position for three business days cannot exceed the equivalent in Colombian pesos of 20% of the bank’s Technical Capital. Currency exchange intermediaries such as Itaú Corpbanca Colombia are permitted to hold a three-business-days average negative foreign currency position not exceeding the equivalent in foreign currency of 5% of its Technical Capital (with penalties being payable after the first business day). Resolution 1 also defines foreign currency position in cash (Posición Propia de Contado en Moneda Extranjera), as the difference between all foreign-currency-denominated assets and liabilities. A bank’s three business days average foreign currency position has no limit. Finally, Resolution 1 requires banks to comply with a gross position of leverage (Posición Bruta de Apalancamiento). Gross position of leverage is defined as the sum of (i) the rights and obligations of term and future contracts denominated in foreign currency, excluding obligations of a transaction that imply either the right or an obligation on foreign currency, plus (ii) foreign currency cash operations with settlement higher or equal to one banking day, excluding obligations of a transaction that imply either the right or an obligation on foreign currency plus (iii) the exchange rate risk exposure associated with debtor and creditor contingencies acquired in the trading of exchange rate options and derivatives. Resolution 1 sets no limit on the gross position of leverage with respect to the currency position in cash. Deposit Insurance In Colombia, the deposit insurance fund, FOGAFIN (Fondo de Garantías de Instituciones Financieras), guarantees up to COP$50 million (US$15,385.79 as of December 31, 2018) per person, for each institution calculated as the aggregate amount of time, savings and demand deposits held by individuals in a Colombian financial institution. Payment will be made in case of an administrative compulsory liquidation of the financial institution. Reserve Requirements Commercial banks are required by the board of directors of the Central Bank of Colombia to satisfy reserve requirements with respect to deposits and other cash demands. Such reserves are held by the Central Bank of Colombia in the form of cash deposits. According to Resolutions 5 and 11 of 2008 issued by the board of directors of the Central Bank of Colombia, as amended, the reserve requirements for Colombian banks are measuredbi-weekly and the amounts depend on the class of deposits. Credit institutions must maintain reserves of 11% over the following deposits, cash demands and other passive obligations: Private demand deposits; Government demand deposits; Other deposits and liabilities; and Savings deposits. In addition, credit institutions must maintain reserves of 4.5% for term deposits with maturities fewer than 18 months and 0% for term deposits with maturities of more than 18 months. Credit institutions may maintain these reserves in their accounts at the Central Bank of Colombia, or cash. Marginal reserve requirements were eliminated by the Central Bank of Colombia in 2008. Since 2009, the reserve requirements have no remuneration. Also, pursuant to theCircular Básica Contable y Financiera (Basic Accounting and Financial Circular) , to measure liquidity risk exposure on internal models, banks are required to calculate a liquidity risk indicator (LRI) accumulated for the band periods of 7, 15 and 30 days, as established by the Colombian Superintendency of Finance’s standard model. Foreign Currency Loans Residents of Colombia may obtain foreign currency loans from foreign residents and from Colombian currency exchange intermediaries or by placing debt securities abroad. Foreign currency loans must be either disbursed through a foreign exchange intermediary or deposited in offshore compensation accounts. According to regulations issued by the Central Bank of Colombia, every Colombian resident and institution borrowing funds in foreign currency is generally required to post with the Central Bank of Colombianon-interest bearing deposits for a specified term, although the size of the required deposit is currently zero. Notwithstanding the foregoing, such deposits would not be required in certain cases set forth in the External Resolution 1, including in the case of foreign currency loans aimed at financing Colombian investments abroad. Moreover, Resolution 1 sets forth a number of restrictions and limitations as to the use of proceeds in the case of foreign currency loans obtained by Colombian currency exchange intermediaries (including Itaú Corpbanca Colombia) and also provides that deposits would not be required in the event such restrictions and limitations are observed. Such foreign currency loans may be used, among others, for lending activities in a foreign currency with a tenor equal to, or shorter than, the tenor of the foreign financing. As a general rule, interest payments to foreign currency loans granted by foreign banks to Colombian residents are currently subject to a withholding tax at: (i) the general tax rate applicable to entities that are not Colombian residents for tax purposes (33% in 2019, 32 % in 2020, 31% in 2021 and in 2022 and onward 30%), when such payments are made to entities located in a preferential tax regime jurisdiction,non-cooperative jurisdiction orlow-tax jurisdiction, according to paragraph of section 408 of the Colombian Tax Code; (ii) 5% when those interest payments are (a) derived from loans with an eight-year or longer term and (b) related to infrastructure projects under Law 1508 of 2012; (iii) 15% when interest payments are related to a loan with a term of more than one year; and (iv) 15% in 2018 and 20% in 2019 and onward as a general rule (i.e. in other cases different than (i), (ii) and (iii) above) according to section 408 of the Colombian Tax Code. Finally, pursuant to Law 9 of 1991, the board of directors of the Central Bank of Colombia is entitled to impose conditions and limitations on the incurrence of foreign currency indebtedness, as an exchange control policy, in order to avoid pressure in the currency exchange market. Non-Performing Loan Allowance The Colombian Superintendency of Finance maintains guidelines onnon-performing loan allowances for financial institutions. This information has been provided in order to provide the reader with a morein-depth analysis. Notwithstanding, our allowance and provision for loan losses as recorded in our consolidated financial statements included herein have been determined in accordance with IFRS. Recent Regulatory Developments in Colombia Tax Reform On December 28, 2018, the Colombian Government approved a tax reform under Law No. 1.943. The most relevant features of this reform are: General income tax rate will be reduced from 37% in 2018 down to 30% in 2022 as follows:
To be paid only by taxpayers whose income surpasses COP$800 million. Financial entities will be subject to a corporate income tax rate of 37% in 2019, 35% in 2020 and 34% in 2021. As of 2019, input VAT in the acquisition of fixed assets may be treated as a tax credit and may be offset against the income tax due. In fiscal year 2018, the thin capitalization rule applied to all kinds of indebtedness and thedebt-to-equity ratio was 3:1. As of 2019, the thin capitalization rule will apply only to indebtedness between related parties. In order to determine thenon-deductible interest, thedebt-to-equity is to 2:1. For the deductibility of interest, taxpayers will have to prove to the Colombian Tax Administration, upon request, that there is no indebtedness between related parties throughback-to-back operations or any other kind of operation in which the creditor is a substantially related party. In such case, the parties involved in the operation may be jointly liable for the taxes, sanctions and interest. The tax rate on dividends distributed to foreign companies, out of profits that were taxed at the corporate level is: (i) 5% in 2018; and (ii) 7.5% in 2019. As of 2019, the dividends distributed between Colombian companies may be subject to a 7.5% withholding tax rate, which may be offset as a tax credit by the beneficial owner (either an individual tax resident or a foreign investor). Dividends distributed among Colombian entities duly registered as a corporate group before the Chamber of Commerce would not subject to withholding tax. In fiscal year 2018, dividends distributed among Colombian companies, out of profits that were taxed at the corporate level, were not subject to withholding tax.
As of 2019, Colombia may levy a capital gains tax on the sale of shares of anon-Colombian entity when suchnon-Colombian entity owns assets/shares in Colombia. (Enajenaciones Indirectas.) Entities and individuals involved in operations considered as tax abuse or tax fraud by the Colombian Tax Administration may be jointly liable for the taxes, sanctions and interest, pursuant to Section 793 of the Colombian Tax Code. Private equity funds and collective investment funds remain asnon-taxpayers and its beneficiaries may defer the realization of the income when certain conditions are met. Abandoned Accounts On February 1, 2016, Law No. 1777 was enacted. Abandoned accounts are regulated in order to establish a public use for funds in these accounts. Funds are considered abandoned in bank accounts after three consecutive years without any account movement. Such abandoned funds may be invested in the creation and administration of a fund in the public financial institute that finances educational credit (Crédito Educativo y Becas en el Exterior or ICETEX). Costs of Financial Services On July 7, 2016, Law No. 1793 was enacted in order to regulate the costs of financial services. Among other things, this new law establishes that clients of entities authorized to collect funds from the public may access all of the funds deposited in their savings accounts or electronic deposits, without having the obligation to maintain a minimum balance. The entities must provide mechanisms for this purpose without charging additional fees to clients. This new law also establishes that: (i) for savings accounts, entities authorized to raise funds from the public may only charge financial and/or transactional costs for the first 60 days of inactivity and/or absence of financial movements by the user, and in no case may such entities make retroactive charges when the account becomes active again; (ii) for savings accounts that are inactive at the time of entry into force of the new law, the period of 60 days for the suspension of collections will start from the date of effectiveness of the law; and (iii) entities authorized to raise funds from the public are obligated to recognize users with a minimum interest rate in all savings accounts for any level of deposit. In addition, the receiving entities must inform the consumers about these changes in law. Abusive Contract Clauses and Practices On May 26, 2016, the Colombian Superintendence of Finance issued its Circular No. 18, which modified the then-current instructions related to abusive contract clauses and practices. The circular forbids certain practices that were considered abusive by the Colombian Superintendence of Finance, as well as those practices informed by the Financial Consumer Defenders. Financial institutions were given a maximum term of six months from the entry into force of the circular to adjust their contracts and practices to its instructions. Total Unified Value (Valor Total Unificado or VTU)
On July 12, 2016, the Colombian Superintendence of Finance issued its External Circular Letter No. 23, setting forth instructions related to the obligation of banking entities to report to their clients a “Total Unified Value” (Valor Total Unificado or VTU) of active and passive operations, when offering basic services and an “Annual Report of Total Costs” (Reporte Annual de Costos Totales or RACT). The purpose of this circular was to: (i) update and harmonize the instructions related to the scope, content and form of delivery of the RACT, and the basic services package; (ii) incorporate the components to be taken into account for the calculation and reporting of “Total Unified Value in Active Transactions” (Valor Total Unificado de Operaciones Activas or VTUA) and “Total Unified Value in Passive Transactions” (Valor Total Unificado de Operaciones Pasivas or VTUP); and (iii) establish the method of calculation of the VTUA and VTUP. Interruptions of Services On August 3, 2016, the Colombian Superintendence of Finance issued its External Circular No. 28, setting forth instructions applicable to all financial sector companies in connection with events that generate interruptions of services and that prevent operations from being carried out by clients. The circular aimed to guarantee that clients are informed of these interruptions and have mechanisms to guarantee the effective exercise of their rights. The circular also includes instructions related to: (i) the information that credit institutions must provide to clients when encountering interruptions in the provision of services; and (ii) the general requirements regarding security and quality of information. Requirements for Trust Products On July 27, 2016, the Colombian Superintendence of Finance issued its Circular No. 024, which established the minimum requirements for trust products linked to the development of real estate projects, accountability and the process of commercialization of the participation in any trust fund. The circular also sets forth the information that must be provided to financial consumers of trust products of any kind. For this purpose, the Colombian Superintendence of Finance published an ABC on business trust about real estate projects providing general guidance to those interested in this class of investment. Reversal of Payments On April 11, 2016, the Colombian Ministry of Industry and Commerce issued its Decree No. 587, which added a chapter to the Unique Decree of the Commerce, Industry and Tourism Sector, Decree 1074 of 2015, and regulated Article 51 of Law 1,480 of 2011. The decree establishes the conditions and procedures for reversals of payments requested by consumers, when the purchase of the goods or services was made through electronic commerce mechanisms with an electronic payment instrument such as a credit or debit card. Accessibility for People with Disabilities On March 31, 2018, the Colombian Superintendency of Finance issued External Circular No. 008, which amended the Basic Legal Circular regarding the system of attention to financial consumers in situation of disability. Securities Custodian On January 26, 2017, the Colombian Ministry of Finance issued its Decree No. 119, which amended Decree No. 1068 of 2015 in relation to the general regime of foreign capital investment in Colombia and of Colombian investments abroad and other provisions regarding foreign exchange. The decree establishes that only entities such as trustee companies, broker companies and investment management companies can act as representatives of foreign portfolio investments. Specialized Electronic Deposit and Payment Institutions On December 7, 2017, the Colombian Ministry of Finance issued its Decree No. 2076, which amended Decree No. 2555 Publication of the Current Banking Interest Rate Beginning on September 1, 2017, the Colombian Superintendency of Finance started publishing the current banking interest rate ( Financial Conglomerates On September 21, 2017, Law 1870 was enacted. This law establishes that financial holdings will be subject to the inspection and oversight of the Colombian Superintendency of Finance under the terms of said law and of the decrees issued in the future for this regulation. A financial holding is understood as any legal person or investment vehicle that exercises the first level of control or significant influence over the entities that make up the financial conglomerate. Furthermore this law gives the Colombian Superintendency of Finance the faculty to request information regarding the members of the financial conglomerate to verify if they meet requirements regarding: (i) the appropriate levels of capital; (ii) solvency margins; (iii) with exposure limits; and (iv) concentration risks. Also this law permits the Colombian Superintendency of Finance to verify if each member entity of the conglomerate complies with applicable regulations in relation to: (i) risk management; (ii) internal control; (iii) disclosure of information; (iv) conflicts of interest; and (v) corporate governance. Such requirements will not be applicable if the foreign financial holding proves to the Colombian Superintendency of Finance that is already subject to an equivalent regime of prudential regulation and consolidated supervision. Modification of the Initial Conditions of Credits On September 29, 2017 the Colombian Superintendency of Finance issued External Circular No. 026, which provides guidelines for the management of credits of which the initial conditions have been modified, based on potential or real deterioration in the debtor’s payment capacity, in order to standardize the existing policies regarding this type of credit. Mutual Funds Portfolio Investments On December 20, 2017, the Colombian Superintendency of Finance issued its external Circular No. 037 which sets forth instructions with the objective of updating the existing valuation methodologies for the valuation of the assets that make up the portfolios of mutual funds. Properties and Investments of Financial Institutions On November 30, 2017, the Colombian Superintendency issued its external Circular No. 33 which amends Chapter V, Title I, Part I of the Basic Legal Circular, with the purpose of updating the accounts that compute the calculation of fixed assets and investments. Withdrawal of Money On June 9, 2017 Law 1836 was enacted. The law obliges financial institutions to provide a free form of withdrawal of money to the beneficiaries in the deposit agreements. The Colombian Superintendency of Finance will be in charge of ensuring compliance with this legal duty. Liquidation Formula for Public-Private Association Agreements On January 15, 2018, the Colombian president signed Law 1882 of 2018, which incorporates a liquidation formula for public-private association agreements and transport infrastructure concessions, providing that if an agreement is declared void, the state-owned entity will still pay for the costs, investments and expenses actually incurred by the concessionaire. This means that the credits associated with those contracts will be entitled to receive such payments, and that the concessionaire will only have a right to receive payments after such credits are paid, but no more than the total amount of equity contributions made by its shareholders less the total amount of dividends paid to them. Purchase of Assets and Assumption of Liabilities in the Liquidation of a Credit Establishment On March 15, 2018, the Colombian Ministry of Finance issued Decree No. 521, amending Decree No. 2555, Access to the Financial System for Former Members of FARC On April 2, 2018 the Colombian Superintendency of Finance issued External Circular No. 005, which sets forth rules governing the integration into the financial system of former FARC members who have taken part in a process of reincorporation into civil life, and of any legal entity in which they may be part as shareholders, contributors or members. Electronic Savings Accounts On April 26, 2018 the Colombian Ministry of Finance issued Decree No. 720, amending Decree No. 2555, regarding the characteristics of the electronic savings accounts. Capital Adequacy levels for Financial Conglomarates On May 8, 2018 the Colombian Ministry of Finance issued Decree No. 774, amending Decree No. 2555, which incorporates a chapter regulating the adequate capital levels that must be complied by financial conglomerates, for which such financial institutions will have an 18 month term to comply with Decree No. 774. Foreign Exchange On May 25, 2018 the Colombian Central Bank issued External Resolution 1, which repeals the previous resolutions on foreign exchange, compiling and amending different matters on this subject that where established on External Resolutions (i) 8 of 2000, (ii) 3 of 2006, (iii) 1 of 2012, (iv) 9 of 2013, (v) 6 of 2015, and (vi) 3 of 2016. Resolution Plans and Coordination Mechanisms On May 28, 2018 the Colombian Ministry of Finance issued Decree No. 923, amending Decree No. 2555, which incorporates a chapter implementing the resolution plans and coordination mechanisms, which must be presented by the entities supervised by the Colombian Superintendency of Finance to foresee the strategy, resources, action guide processes and procedures adopted by these entities, in order to deal with situations of financial stress that are considered material in a timely and adequate manner. Cybersecurity On, June 5, 2018, the Colombian Superintendency of Finance issued External Circular No. 007, which sets the minimum requirements that must be set by entities supervised by the Colombian Superintendency of Finance, manage their systems of cybersecurity risks. Capital Adequacy Requirements Amendment On August 6, 2018 the Colombian Ministry of Finance issued Decree No. 1477, amending Decree No. 2555, regarding the capital adequacy requirements for financial institutions. Decree No. 1477 creates two complementary ratio mechanisms called (i) additional primary solvency ratio (Relación de Solvencia Básica Adicional) and (ii) leverage ratio (Relación de Apalancamiento). Additional primary solvency ratio is defined as the sum of the ordinary primary capital net of deductions and the additional primary capital, divided by the value of the weighted assets by their level of credit and market risk. The additional primary solvency of a financial institution must be at least 6%. In the case of the leverage ratio, this term is defined as the sum of the ordinary primary capital net of deductions and the additional primary capital, divided by the leverage value. This leverage ratio must be at least 3%. Furthermore, Decree No. 1477 added the following buffers (Colchones), in order to increase both the quality and the amount of capital, to provide greater coverage to the risks assumed by the entity:
Financial institutions shall comply with Decree No 1477 no later than February 6, 2020, except on the matters regarding the additional primary solvency ratio and the buffers, which will have a gradual implementation in a four year term, starting after February 6, 2020. Investments in Companies of Innovation and Financial Technology On December 27, 2018, the Colombian Ministry of Finance issued Decree No. 2443, amending Decree No. 2555, authorizing credit establishments to invest in companies, which sole purpose is to develop and /or apply innovations and technology related to the corporate purpose of the investing credit establishment. SELECTED STATISTICAL INFORMATION The following information is included for analytical purposes and should be read in conjunction with our consolidated financial statements as well as “Item 5. Operating and Financial Review and Prospects.” Unless otherwise indicated, financial data in the following tables as of December 31, Average Balance Sheets, 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 monthly balances on an unconsolidated basis. Unless otherwise set forth herein, such average balances as they apply to the operations of our subsidiaries were calculated on the basis ofmonth-end balances. Such average balances are presented in Chilean pesos, in UFs and in foreign currencies (principally US$). The nominal interest rate has been calculated by dividing the amount of interest and principal readjustment due to changes in the UF index (gain or loss) during the period by the related average balance, both amounts expressed in Chilean pesos. The nominal rates calculated for each period have been converted into real rates using the following formulas:
Where: Rp= real average interest rate for Chilean peso-denominated assets and liabilities (in Ch$ and UF) for the period, Rd= real average interest rate for foreign currency denominated assets and liabilities for the period, Np= average nominal interest rate for Chilean peso-denominated assets and liabilities for the period, Nd= average nominal interest rate for foreign currency denominated assets and liabilities for the period, D= devaluation rate of the Chilean peso to the U.S. dollar for the period, and I= inflation rate in Chile for the period (based on the variation of the Chilean consumer price index). The real interest rate can be negative for a portfolio of Chilean peso-denominated loans when the inflation rate for the period is higher than the average nominal rate of the loan portfolio for the same period. A similar effect could occur for a portfolio of foreign currency denominated loans when the inflation rate for the period is higher than the sum of the devaluation rate for the period and the corresponding average nominal rate of the portfolio. The formula for the average real rate for foreign currency denominated assets and liabilities (Rd) reflects a gain or loss in purchasing power caused by the difference between the devaluation rate of the Chilean peso and the inflation rate in Chile during the period. The following example illustrates the calculation of the real interest rate for a dollar-denominated asset bearing a nominal annual interest rate of 10% (Nd = 0.10), assuming a 5% annual devaluation rate (D = 0.05) and a 12% annual inflation rate (I = 0.12):
In the example, since the inflation rate was higher than the devaluation rate, the real rate is lower than the nominal rate in dollars. If, for example, the annual devaluation rate were 15%, using the same numbers, the real rate in Chilean pesos would be 12.9%, which is higher than the nominal rate in U.S. dollars. Using the initial example, if the annual inflation rate were greater than 15.5%, the real rate would be negative. Interest and average balances have been calculated by taking into consideration the following:
The following tables show, by currency of denomination, average balances and, where applicable, interest amounts, nominal rates and rates for our assets and liabilities for the years ended December 31, For presentation purposes only, we have grouped certain information set forth in the tables below as follows:
Because of these differences, the information for the year ended December 31, 2016 and
Ch$ UF Foreign currency Total Total interest earning assets Ch$ UF Foreign currency Total NON-INTEREST EARNING ASSETS Cash Ch$ UF Foreign currency Total Allowance for loan losses(1) Ch$ UF Foreign currency Total Property, plant and equipment Ch$ UF Foreign currency Total Derivatives Ch$ UF Foreign currency Total Other assets Ch$ UF Foreign currency Total Totalnon-interest earning assets Ch$ UF Foreign currency Total Total assets(2) Ch$ UF Foreign currency Total
UF Foreign currency Total Repurchase agreements Ch$ UF Foreign currency Total Mortgage finance bonds Ch$ UF Foreign currency Total Bonds Ch$ UF Foreign currency Total Other interest bearing liabilities Ch$ UF Foreign currency Total Total interest bearing liabilities Ch$ UF Foreign currency Total NON-INTEREST EARNING LIABILITIES Non-interest-bearing demand deposits Ch$ UF Foreign currency Total Derivatives Ch$ UF Foreign currency Total Othernon-interest-bearing Ch$ UF Foreign currency Total Equity Ch$ UF Foreign currency Total Totalnon-interest-bearing liabilities and shareholders’ equity Ch$ UF Foreign currency Total Total liabilities and equity(1) Ch$ UF Foreign currency Total
Interest-earning Assets—Net Interest Margin The following tables analyze, by currency of denomination, our levels of average interest-earning assets and net interest, and illustrate the comparative margins obtained, for each of the periods indicated:
Changes in Net Interest Income and Interest Expense—Volume and Rate Analysis The following tables allocate, by currency of denomination, changes in our net interest income between changes in the average volume of interest-earning assets and interest bearing liabilities and changes in their respective nominal interest rates from For presentation purposes only, we have grouped certain information set forth in the tables below as follows:
Because of these differences, the information for the year ended December 31, 2016 and Volume and rate variances have been calculated based on movements in average balances over the year and changes in nominal interest rates, average interest-earning assets and average interest bearing liabilities. The net change attributable to changes in both volume and rate has been allocated proportionately to the change due to volume and the change due to rate. ASSETS INTEREST EARNING ASSETS Deposits in Central Bank Ch$ UF Foreign currency Total Financial Investments Ch$ UF Foreign currency Total Total Loans Ch$ UF Foreign currency Total Interbank Loans Ch$ UF Foreign currency Total Investment under resale agreements Ch$ UF Foreign currency Total Other interest earning assets Ch$ UF Foreign currency Total Total interest earning assets Ch$ UF Foreign currency Total
LIABILITIES AND SHAREHOLDERS’ EQUITY INTEREST BEARING LIABILITIES Time deposits Ch$ UF Foreign currency Total Central Bank borrowings Ch$ UF Foreign currency Total Repurchase agreements Ch$ UF Foreign currency Total Mortgage finance bonds Ch$ UF Foreign currency Total Bonds Ch$ UF Foreign currency Total Other interest bearing liabilities Ch$ UF Foreign currency Total Total interest bearing liabilities Ch$ UF Foreign currency Total ASSETS INTEREST EARNING ASSETS Deposits in Central Bank Ch$ UF Foreign currency Total Financial Investments Ch$ UF Foreign currency Total Total Loans Ch$ UF Foreign currency Total Interbank Loans Ch$ UF Foreign currency Total Investment under resale agreements Ch$ UF Foreign currency Total Other interest earning assets Ch$ UF Foreign currency Total Total interest earning assets Ch$ UF Foreign currency Total LIABILITIES AND SHAREHOLDERS’ EQUITY INTEREST BEARING LIABILITIES Time deposits Ch$ UF Foreign currency Total Central Bank borrowings Ch$ UF Foreign currency Total Repurchase agreements Ch$ UF Foreign currency Total Mortgage finance bonds Ch$ UF Foreign currency Total Bonds Ch$ UF Foreign currency Total Other interest bearing liabilities Ch$ UF Foreign currency Total Total interest bearing liabilities Ch$ UF Foreign currency Total Return on Equity and Assets The following tables set forth our return on average shareholders’ equity and average total assets and related information for each of the periods indicated.
Investment Portfolio
Financial investments as of December 31,
We do not hold securities of any issuer other than the Central Bank of Chile, the Chilean Treasury, and the Colombian Ministry of Finance, in which the aggregate book value of the investment in such securities exceeds 10% of our shareholders’ equity as of the end of the latest reported period. The following table sets forth an analysis of our investments, by time remaining to maturity and the weighted average nominal rates of such investments, as of December 31,
Other financial instruments: Promissory notes related to deposits in local banks Chilean mortgage finance bonds Chilean financial institution bonds Other local investments Financial instruments issued abroad: Foreign Government and central bank instruments Other foreign investments Impairment provision Unquoted securities in active markets Chilean corporate bonds Other foreign investments Impairment provision Other investment Total
Financial instruments issued abroad: Foreign government and central bank instruments Other foreign investments Impairment provision Unquoted securities in active markets Chilean corporate bonds Other foreign investments Other investment Impairment provision Total Loan Portfolio The following table presents our loans by type of loan. Except where otherwise specified, all loan amounts stated below are before deduction for the allowance for loan losses. Total loans reflect our loan portfolio, including past due principal amounts. For 2018, our loan portfolio refers to loans and accounts receivable from customers at amortized cost; and for periods prior to 2018, our loan portfolio refers to loans and accounts receivable from customers, net.
The loan categories are as follows: Commercial Loans Commercial loans: Commercial loans are long- and short-term loans granted to companies, including checking overdraft lines for companies, in Chilean pesos, inflation-linked UF, US$ or Colombian pesos on an adjustable or fixed rate basis, primarily to finance working capital or investments. Commercial loans represent the largest portion of our loan portfolio. Interest accrues daily on a30-day or360-day basis. Loan payments are scheduled monthly, biannually or yearly, depending on the terms of the loan. Foreign trade loans: Foreign trade loans are fixed rate, short-term loans made in foreign currency (principally US$) to finance imports or exports. Current account debtors: The term “current account debtors” refers to our customers that receive short-term operating loans with apre-approved credit limit. This category includes overdrafts loans. Factoring operations: Factoring operations refer to the transactions in which our customers assign their accounts receivable (invoices, bills, among others) to us, which allows them to convert their sales into cash regardless the original terms agreed for payment, improving their liquidity, financial indices and also delegating the collection management efforts to us and/or our subsidiaries. Student loans: Loans with a government guarantee for college education, known asCréditos con Aval del Estado (“CAE”), established by law No. 20,027. Leasing transactions: Leasing transactions are agreements for the financial lease of capital equipment and other property of our clients. Other loans and receivables: Other loans and receivables refer to outstanding loans including commercial loans not classified in any of the categories described above. Mortgage Loans Mortgage loans: This category includes mortgage loans granted to individuals in order to acquire, expand, repair or build residential houses or apartments. Mortgage loans are granted in the form of endorsable ornon-endorsable instruments/credit operations and letters of credit, Mortgage loans include the followingsub-categories:
Endorsable mutual mortgage loans: Thissub-category includes outstanding balances due from housing loans with mortgage loans which funding was obtained by the placement of mortgage bonds. Mortgage bonds backed loans: Thissub-category includes long-term inflation-indexed mortgage loans (fixed and variable rate) with monthly payments of principal and interest secured by a real property mortgage that are financed by mortgage bonds. Other mutual mortgage loans: Thissub-category includes inflation-indexed long-term mortgage loans (fixed and variable rate) with monthly payments of principal and interest secured by a real property mortgage that are financed by our general borrowings. Housing Leasing transactions: Thissub-category includes outstanding balances owed by tenants in financial leases transactions Letters of credit loans: Thissub-category includes 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 notes. Other loans and receivables: Thissub-category includes loans that are ancillary or that complement mutual mortgage loans. The balances of the renegotiated mortgage loans as of December 31
Consumer Loans Consumer loans. This category includes all loans granted to individuals for the purpose of acquiring consumer goods or services, except for student loans. It includes different types of loans (such as loans payable in installments or revolving loans) and outstanding balances arising from the Consumer loans include the followingsub-categories: Consumer loans: Thissub-category is comprised by loans granted to individuals in Chilean pesos, generally on a fixed rate nominal basis, to finance the purchase of consumer goods or to pay for services. This loans are generally paid in monthly installments which include principal amortization and interest payments. Current account debtors: Thissub-category includes checking overdraft lines granted to individuals, in Chilean pesos, generally on a fixed rate nominal basis and linked to an individual’s checking account. Credit card debtors: Thissub-category includes outstanding balances arising from the use of credit cards by individuals. Consumer leasing transactions: Thissub-category includes outstanding balances owed by tenants of consumer goods under financial leasing transactions. Other loans and receivables: Thissub-category includes other revolving consumer loans and other accounts receivable granted to individuals not included in the above categories. The balances of the renegotiated consumer loans as of December 31,
As part of our business model we seek to be able to assist our customers when they are experiencing financial problems that cause them to fall behind on their payments. As a result, we make certain concessions when we renegotiate a loan, which may include the following: (i) extension of payment period; (ii) modifications to the interest rate based on each customer’s ability to pay; and (iii) forgiveness of interest payments. The above-mentioned concessions are considered on acase-by-case basis. The grant of any concessions will depend on the situation of each customer and pursuant to the analysis by Furthermore, we offer a range of
Remedial Management
The remedial portfolio table set forth below represents the commercial loan portfolio and leasing portfolio managed by the remedial portfolio management unit (internally named process. The
Currently, our remedial management portfolio is handled by a designated and specialized team
During
As established in our remedial management process,
Customers involved in judicial proceedings; Customers that experience a sudden and severe deterioration in their financial position; and
The remedial portfolio management team is responsible for determining any action that will be taken related to the customer (renegotiation of the exposure or collection), within a period not exceeding 30 days. Risk Index of Our Loan Portfolio The risk index is calculated as ratio of the allowance for loan losses over total loans. Allowance for loan losses as of December 31, 2018 refers to allowances for loans at amortized cost according to IFRS 9 and allowance for loan losses for periods are in accordance with IAS 39. Our risk index for commercial loans is calculated by including commercial current account debtors, foreign trade loans, commercial leases, factoring and other commercial loans. Mortgage loans include mortgage leasing arrangements and consumer mortgage loans, which include consumer leasing. Commercial loans. Our risk index as of December 31, The main objective of our credit risk division is to maintain an adequate risk-return ratio for our assets, providing balance between commercial business goals and sound risk acceptance criteria, in accordance with our strategic objectives. This division’s work is based on its associates’ experience in evaluating credit risk using specialized, segmented management techniques, which has enabled it to build a sound, risk-conscious culture aligned with our strategy. Such division helps define credit processes for the companies’ business unit, including approval, monitoring and collections practices, using a regulatory and preventive outlook on credit risk. It also actively participates in loan approval and monitoring processes, which has helped us spread a risk-focused culture, Finally, the division’s assets quality ratios developed less favorably in comparison to 2015. Nevertheless, our asset quality ratios, including the risk index, thenon-performing loans and thepast-due loans, continued to outperform the financial system. Mortgage loans. The risk index of our residential mortgage loans as of December 31,
Consumer loans. The risk index of our consumer loans as of December 31, The division also created a risk committee, or the Risk Committee, comprised of directors and senior executives that continuously monitor division activities based on the objectives of the We consider Itaú Corpbanca’s Risk Index to be an important indicator of the quality of Itaú Corpbanca’s loan portfolio.
Our Risk Index as of December 31, 2016 and 2017 (calculated using general ledger RISK INDEX
During 2017, our loan portfolio and, Our loan portfolio decreased 3.0% and was mainly impacted by the decrease in our commercial loans from Ch$14,634,471 million to Ch$13,716,546 million. On the other hand, both our mortgage loan portfolio, and our consumer loan portfolio increased (6.8% and 1.3%, respectively). Our mortgage loans, which is the business unit with the lowest level of risk, increased from Ch$3,888,517 million in 2016 to Ch$4,152,753 million in 2017 and our consumer loans, the business unit with the highest level of risk, increased from Ch$2,480,964 million in 2016 to Ch$2,513,306 million in Our Risk Index (calculated using general ledger balances) presented below as of December 31, 2017 is not comparable to the data as of December 31, 2018 due to the differences between the IFRS 9 standard we applied in 2018 and the IAS 39 standard we applied in 2017. RISK INDEX
During 2018, our loan portfolio and, consequently, our allowances for loan losses, were positively impacted by (i) an acceleration of economic activity in both Chile and Colombia, which led to a partial improvement in the credit risk of our loan portfolio and (ii) a decrease in exposure to major corporate single-names made after the merger, producing favourable credit risk adjustments. Higher allowances for loan losses in 2018 resulted primarily from the effects of our first time adoption of IFRS 9. Our loan portfolio increased by 5.4% in 2018 as compared to 2017 as a result of the different dynamics we saw in our business segments. We continued to see a good performance throughout the year in our retail portfolio, particularly our consumer loans led by our strategy that began in the second quarter of 2017, to grow our retail segment in order to produce a more balanced portfolio in terms of retail and wholesale loans. Thus our mortgage loan portfolio, and our consumer loan portfolio increased (7.1% and 6.2%, respectively). Our mortgage loans, which is the business unit with the lowest level of risk, increased from Ch$4,152,753 million in 2017 to Ch$4,445,827 million in 2018 and our consumer loans, the business unit with the highest level of risk, increased from Ch$2,513,306 million in 2017 to Ch$2,669,763 million in 2018. When looking at our commercial loan portfolio, which still was a drag on overall growth in 2018, we did see a stronger performance in terms of margins. As of December 31, 2018, commercial loans, mortgage loans and consumer loans represented 66.9%, 20.7% and 12.4% of our total loan portfolio. Consumer loans represent the single highest level of risk in our loan portfolio. As of December 31, Our consumer loan portfolio may experience loan losses due to the absence of collateral in respect of unsecured loans, insufficient collateral in collateralized loans, and risks relating to the circumstances of individual borrowers, including unemployment or incapacitation of our consumer borrowers. Maturity and Interest Rate Sensitivity of Loans The following table sets forth an analysis of our loans by type and time remaining to maturity as of December 31,
The following table presents the interest rate analysis of our outstanding loans due after one year as of December 31,
The following table sets forth an analysis of our foreign loans by type and time remaining to maturity as of December 31,
Loans by Economic Activity The following table sets forth as of the dates indicated, an analysis of our gross loan portfolio Loans by Economic Activity
Foreign Country Outstanding Loans Our cross-border outstanding loans are principally trade-related. The table below lists our total amounts outstanding to borrowers in foreign countries as of December 31,
We also maintain deposits abroad (primarily demand deposits) in foreign banks, as needed to conduct our foreign trade transactions. The table below lists the amounts of foreign deposits by country as of December 31,
Credit risk management is the responsibility of the Corporate Risk Management Unit, which reports to the CEO. Its objective is to ensure that risk management is a competitive advantage for the Bank. To accomplish this goal, the Corporate Risk Management Unit combines, among others, a well-defined credit process in terms of approval, monitoring and collection procedures, a strong supervision of all stages of the credit cycle, monitoring the quality and performance of our loan portfolio and taking promptly measures over potentiallynon-performing loans, while ensuring strong compliance of the legal, regulatory and normative framework. The Credit Risk Management and Control structure is segregated in Wholesale Credit Risk, Retail Credit Risk, Credit Risk Control, Wholesale Credit Risk is accountable for the credit process of the wholesale banking business segments comprised of Corporate, Real Estate Companies, Large Enterprises, Financial Institutions, Representative Office in Peru, Risk Countries, Subsidiaries and Wholesale Remedial Unit. Retail Credit Risk is responsible for the Credit Risk Control has a transversal function focused on monitoring the performance of the credit portfolio, assets classification and models development. Additionally, it verifies the consistency of credit policies and procedures and also generates information and analysis related to credit risk for the decision making of the different units. Retail Collection is responsible for the full collection process, including the strategy and operations of the Bank’s retail segments, composed of Retail Companies, Private Banking, Personal Bank, Itau Branches and Banco Condell. The collection strategy is designed based on the products, business segmentation, days past due, channels, legal actions, geographic cover and collection operations, using an internal collections group and vendors. Risk Architecture has a transversal function, focused on the analysis and coordination of technological projects that involve the improvement of our business processes. Additionally, Risk Architecture controls the efficiency of our resources, using technological or robotics tools, in addition to the development of analytics and machine learning. Credit Review Process Credit risk and the exposure to be assumed with regard to our clients are evaluated in accordance with the credit policies and the risk appetite that have been approved by the Board of Directors. Risk analysis, both of our Wholesale and Retail Banking customers, is periodically performed. In Wholesale Banking, customers’ credit exposure is reviewed at least once a year, and credit limits can be reduced if potential weaknesses in loan repayment capability are detected. A wholesale borrower’s assessment focuses on the credit history and on the reputation and management capacity of its owners, on their market position and on the demand for their products or services, on their current and projected cash, their solvency and, when applicable, on the guarantees offered in connection with the loan. In the case of Retail Banking customers, we mainly use a centralized evaluation and decision-making process, but also acase-by-case assessment when the applicant does not fit the standard model. The credit approval process is based on an assessment of the customer’s credit behavior in the financial system, taking into account current debt, credit history, income and expense level, ability to pay, personal assets and previous experience (if any) with the Wholesale Credit Risk The credit evaluation process is carried out on acase-by-case assessment of each of our customers. Our internal approval governance structure ensures that credit decisions are adjusted to the risk acceptance parameters, identifying potential risks while keeping a healthy composition of our loan portfolio, aligned with our strategy, commercial objectives and risk’s appetite. Before granting credits to a wholesale customer, we perform an analysis to assign an internal credit risk rating to each client. This internal credit risk rating is based on information such as: the client’s financial situation, cash generating capabilities and the current and projected situation on the economic sector in which it operates. Credit decisions are made on the basis of the precedents indicated in the procedures manual of each business segment, with at least the following elements of analysis: market and competition, current and projected financial situation and cash flow, customer experience, relationship with the Credit committees are structured according to the customer’s credit risk rating and the credit limit submitted to the committee’s decision. Any rejection by the committee of a credit proposal may be raised to be evaluated by the upper committee instance. Retail Credit Risk In Retail Banking, credit risk management is responsible for the The credit risk management process for customers of the different segments of Retail Banking is composed of the following stages: Credit Our credit initiation process consists of:
Analytical Driven Sales Process. We know the customers that we want and we guide the search for prospects, according to this definition. We permanently offerpre-approved offers of consumer loans, credit cards and revolving credit lines to our current customers, whose risk profile is within thecut-off Control Environment. To assess the loan authorization ability (approving credit worthy customers and decliningnon-credit Maintenance. We strive to have high market share in the most profitable business units Renewals/Non-Renewals (Revolving Products). Renewals andnon-renewals are based on customer payment behavior and profitability. Campaigns. Top-up and cross-selling offers are implemented. Credits are offered permanently to our current customers, such aspre-approved Collection. We focus on having a high quality collection process, with a consistent strategy in terms of products, policies, suppliers, means of payment and specialized Collection Strategy. Our collection strategy is currently based on our products, business segments, delinquency lines, collection channels, geographic coverage, and applied test policies (champions and challengers). Delinquent debtors are reported to credit bureaus. Collection Operations. Our collection operations strategy is based on internal teams and suppliers. The collection operations teams provide coverage through different channels (e.g., digital collection, telephone collection, property collection, collection in branches and judicial collection) and operate under a performance model and merit considerations. In addition, our continuity plan requires the use of external collection emergencies in cases of emergency or union instability, among others. Policies and Products. Rewrites, standardization offers and payments agreements are made as necessary. Our objective is to maximize the recovery of capital. Control Environment and Support. Reliable information management systems are used, which allow us to have a controlled process. We have a collection system and predictive dialers for telephony. Write-off Policy, Recovery and Planning Thewrite-off policy, recovery and planning process consists of: Write-off Policy. As a general rule, charge-offs should be done when all collection efforts have been exhausted. These charge-offs consisted of derecognition from the consolidated statements of financial position of the corresponding loans transactions in their entirety, and, therefore, included portions of loans that were not past due in the case of installments loans or leasing transactions (no partial charge-offs exist). For portfolios without guarantees (consumer loans in installments), thewrite-off is made at 180 days of delinquency; for commercial loans, thewrite-off is made at 24 to 36 months of delinquency (depending on the type of guarantees); and for the mortgage portfolio, thewrite-off is made at four years of delinquency. Loan Loss Reserve. History of defaults, recoveries, write-offs and collection expenses are used to calculate the allowances of each portfolio. Back Testing Analyses are periodically performed in order to ensure the right coverage, as well as the correct models performance. Classification of Loan Portfolio Loan Portfolio is divided into: (1) consumer loans (including loans granted to individuals for the purpose of financing the acquisition of consumer goods or payment of services); (2) 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 125% of the amount of the loan); and (3) commercial loans (including all loans other than consumer loans and residential mortgage loans). Impairment Assessment as of January 1, 2018 (Under IFRS 9) Starting from January 1, 2018, we replaced the “incurred loss” model of IAS 39 with an “expected credit loss” (“ECL”) model established by IFRS 9. The new impairment model applies to all financial assets measured at amortized cost and debt securities measured at 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. We accounted for ECL related to financial assets measured at amortized 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 for as a provision in the statements of financial position. We recognize in profit or loss, as an impairment gain or loss, the amount of ECL (or reversal) that was required to adjust the loss allowance at the reporting date to the amount that is required to be recognized in accordance IFRS 9 for financial assets measured at amortized cost and contingent loans. The new model uses a dual measurement approach, under which the loss allowance is measured as either: 12-month ECL Lifetime ECL We have defined default on an individual or collective basis as follows: Individual: when exposure is more than 89 days past due, it has been restructured, it is in judicial collection, or it has beenwritten-off. Collective: when exposure is more than 89 days past due, it has been restructured, or has been identified as impaired by an internal risk committee. For collective assessment purposes, financial assets are grouped based on characteristics of shared credit risk, considering the type of instrument, credit risk classifications, initial recognition date, remaining term, industry, geographical location of the counterparty, among other significant factors. The ECL measurement basis depends on whether there has been a significant increase in credit risk (“SICR”) 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: Change in credit quality since initial recognition
We, at the end of each reporting period, evaluates whether a financial instrument’s credit risk has significantly increased since initial recognition or whether an asset is considered to be credit-impaired, and consequently classify financial instruments into the respective stage: Stage 1: When loans are first recognized, the Bank recognizes an allowance based on12-month 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, we record an allowance based on lifetime ECL. Stage 2 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 based on lifetime ECL, setting the probability of default (“PD”) at 100%. Our assessment of a SICR and the calculation of ECL incorporate forward-looking information. We perform historical analysis and identify the key economic variables that impact credit risk and ECL for each portfolio. These can include GDP, inflation, interest rates and unemployment, among others. Where applicable, we incorporate these economic variables and their associated impacts into our models. Credit risk assessment and forward looking information (including macro-economic factors), includes quantitative and qualitative information based on our 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 ratestep-ups, requiring additional collateral or guarantees, or other changes to the contractual framework of the instrument. We have 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. We did not rebut the backstop presumption of IFRS 9 relating to SICR or default. 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 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 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 derecognized 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. 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 measuring12-month and lifetime ECL, cash shortfalls are identified as follows: 12-month ECL: the portion of lifetime ECL that represents the ECL that result from default events on the financial instruments that are possible within the 12 months after the reporting date. Lifetime ECL: the ECL that result from all possible default events over the expected life of the financial instrument. We considered a multi-factor analysis to perform our credit risk analysis. The type of portfolio or transactions, and whether individually or collectively assessed. We divide our portfolio into commercial loans, mortgage loans, consumer loans and contingent loans. We evaluate individually whether objective evidence of impairment exists for loans that are individually significant, then collectively assess 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. Contingent loans We enter into various irrevocable loan commitments and contingent liabilities. Even though these obligations may not be recognized on our statements of financial position, they contain credit risk and, therefore, form part of our overall risk. We estimate the ECL for contingent loans, we estimate the expected portion of the loan commitment that will be drawn down over its expected life. 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 Real estate prices Modifications of financial assets When a loan measured at amortized cost has been renegotiated or modified but not derecognized, the Bank recognizes the resulting gains or losses as the difference between the carrying amount of the original loans, and modified contractual cash flows discounted using the Effective Interest Rate (“EIR”) before modification. The 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. For ECL estimation purposes of financial assets that have been modified, we are 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 requirements. Collateral We seek to use collateral to mitigate our credit risks on financial assets, where possible. Types of collateral are cash, securities, letters of credit, real estate and inventories. Our accounting policy for collateral assigned to us through our lending arrangements under IFRS 9 is the same is it was under IAS 39. Collateral, unless repossessed, is not recorded our statements of financial position. However, the fair value of collateral affects the calculation of ECLs. The main collateral associated to mortgage loans are real estate, 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. Our policy when an asset (real estate) is repossessed, it is transferred to assets held for sale at its fair value less cost to sell and classified asnon-financial assets at the repossession date. Guarantees Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it occurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instruments. Such financial guarantees are given to banks, financial institutions and others on behalf of customers to secure loans, overdrafts and other banking facilities. Financial guarantee contracts are initially measured at fair value and subsequently measured at the higher of: The amount of the loss allowance (calculated as described in Note 19 of our consolidated financial statements); and The premium received on initial recognition less income recognized in accordance with the principles of IFRS 15. Loan commitments provided by us are measured as the amount of the loss allowance (calculated as described in Note 28 of our consolidated financial statements). We have not provided any commitment to provide loans at a below-market interest rate, or that can be settled net in cash or by delivering or issuing another financial instrument. For loan commitments and financial guarantee contracts, the loss allowance is recognized as a provision. However, for contracts that include both a loan and an undrawn commitment and we cannot separately identify the ECLs on the undrawn commitment component from those on the loan component, the ECLs on the undrawn commitment are recognized together with the loss allowance for the loan. To the extent that the combined ECLs exceed the gross carrying amount on the loan, the ECLs are recognized as a provision. Charge-offs The gross carrying amount of a financial asset is reduced when there is no reasonable expectation of recovery. Acharge-off constitutes a derecognition event of the corresponding loan transaction in its entirety, and therefore, include portions notpast-due for installments loans or leasing operation (no partialcharge-off). Subsequent recoveries of amounts previouslycharge-off are credited to the income statements, as recovery of loans previouslycharged-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:
Impairment Assessment prior to January 1, 2018 (Under IAS 39) Loans Analyzed on an Individual Basis For individually analyzed commercial loans, As a result of this classification process,
For loans classified as A1, A2, A3, A4, A5, A6, B1, B2, B3 and B4, Estimated Incurred Loan Loss = Allowance for Loan Losses The Estimated Incurred Loan Loss (EIL)
Exposure at Default (EAD) is the loan amount outstanding at the balance sheet date that is considered in the calculation and not any future movements and draw downs. Probability of Default (PD) Loss Identification Period (LIP) Loss Given Default (LGD) Allowances for loan losses for each C risk category are based mainly on the value of the collateral, adjusted for the estimated expenses associated with the recovery and asset sale discounted by the effective interest rate. The allowance percentage for each category is then based mostly on the level of collateral. Loans Analyzed on a Group Basis For the consumer loan and group-evaluated commercial loan portfolio the allowances for credit risk are determined by statistical models. The population (clients) is first profiled with a wide range of variables such as demographic variables, payment behavior, aging of the balance of the loan, in order to determine “probability of default” factors indicating transfer into the normalization portfolio. Each profile in the group-evaluated loan portfolio has aggregated information basically, historical loss experience (less recoveries). This historical loss experience, which represents the derived loan loss allowance percentage, is applied by profile to the consumer and commercial loan portfolio, taking into consideration, if applicable, any additional factors, such as increase in the unemployment rate in the country, economic downswings, etc. based upon more recent experience, should they affect the level of necessary loan loss reserves. The sufficiency of provisions is permanently monitored, with the objective of ensuring an adequate coverage. For this, loan loss allowances are compared against the effective losses and against the default portfolio, with thresholds ofpre-defined alerts and with an established governance framework for the review of these parameters. Total Loans — Models Based on Group Analysis The following tables provide statistical data regarding the classification of our loans as of the
Consumer Loans — Models Based on Group Analysis
Analysis of Our Loan Classification The following tables provide statistical data regarding the classification of our loans as of the
2017
As of December 31, 2017 Loans and receivables from banks Allowances for loan losses As percentage of total loans Loans and receivable from customers Commercial loans: Commercial loans Foreign trade loans Checking account debtors Factoring operations Student loans Leasing transactions Other loans and receivables Subtotal Commercial loans Allowances for loan losses As percentage of total loans Consumer loans Allowances for loan losses As percentage of total loans Mortgage loans Allowances for loan losses As percentage of total loans Total loans and receivable to customers Allowances for loan losses As percentage of total loans Financial investments As of December 31, 2018 Loans and receivables from banks Allowances for loan losses As percentage of total loans Loans and receivable from customers Commercial loans Commercial loans Foreign trade loans Current account debtors Factoring operations Student loans Leasing transactions Other loans and receivables Subtotal Commercial loans Allowances for loan losses As percentage of total loans Consumer loans Allowances for loan losses As percentage of total loans Mortgage loans Allowances for loan losses As percentage of total loans Total loans and receivable to customers Allowances for loan losses As percentage of total loans
Classification of Loan Portfolio Based on the Customer’s Payment Performance The following tables set forth the amounts that are current as to payments and interest and the amounts that are overdue under IFRS, as of the dates indicated: Total Loans
Analysis of Impaired Loans, Non-Performing Loans and Past Due Loans The following tables analyze our impaired loans and past due loans and the allowances for loan losses existing as of the dates indicated:
The following table provides further information on ournon-performing loans:
Analysis of Allowances for Loan Losses The following table analyzes our provisions for loan losses charged to income and changes in the allowances attributable to write-offs, allowances released, recoveries, allowances on loans
The following sets forth the movements in our allowances for loan losses Balances as of January 1, 2018 Changes in the allowances - Net transfers to stage 1 - Net transfer to stage 2 - Net transfer to stage 3 - Increases due to change in credit risk - Decreases due to change in credit risk - Charge-offs - Changes due to modifications that did not result in derecognition New financial assets originated or purchased Financial assets that have been derecognized Net transfer from (to) group assessed Foreign exchange and other movements Balances as of December 31, 2018 Our policy with respect to write-offs is as disclosed in Note 1(q) to our financial statement included herein. The following table shows the write-offs breakdown by loan category:
The following table shows loan loss recoveries by loan category for the periods indicated:
Based on information available regarding our debtors, Allocation of Allowances for Loan Losses The following tables set forth, as of December 31,
Composition of Deposits and Other Commitments The following table sets forth the composition of our deposits and similar commitments as of December 31,
Maturity of Deposits The following table sets forth information regarding the currency and maturity of our deposits as of December 31,
The following table sets forth information regarding the maturity of the outstanding time deposits in excess of US$100,000 (or its equivalent) issued by us as of December 31,
Minimum Capital Requirements The following table sets forth our minimum capital requirements as of December 31,
Our capital ratios levels increased 2017 and decreased to 14.6% as of December 31, 2018. Short-term Borrowings Our short-term borrowings (other than deposits and other obligations) totaled Ch$ The principal categories of our short-term borrowings are amounts borrowed under foreign trade lines of credit, domestic interbank loans and repurchase agreements. The table below presents the amounts outstanding at the end of each period indicated and the weighted average nominal interest rate for each such period by type of short-term borrowing.
The following table shows the average balance and the weighted average nominal rate for each short-term borrowing category during the periods indicated:
The following table presents the maximummonth-end balances of our principal sources of short-term borrowings during the periods indicated:
C. ORGANIZATIONAL STRUCTURE The following diagram presents our current corporate structure, including our principal subsidiaries, as of the date of this Annual Report. ITAÚ CORPBANCA & SUBSIDIARIES-CORPORATE STRUCTURE
Itaú For more information about the services our subsidiaries and our New York Branch provide see “Item 4. Information on the Company—B. Business Overview—Principal Business Activities—Financial Services Offered Through Subsidiaries.” D. PROPERTY Our principal executive offices are located at Rosario Norte 660, Las Condes, Santiago, Chile since 2007. As of December 31, ITEM 4A. UNRESOLVED STAFF COMMENTS None. ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS A. OPERATING RESULTS The following discussion should be read in conjunction with our consolidated financial statements, together with the notes thereto, included elsewhere in this Annual Report, and in conjunction with the information included under “Item 3A. Selected Financial Data” and “Item 4B. Business Overview — Selected Statistical Information.” Our consolidated financial statements as of December 31, 2015, 2016, 2017 and Our financial statement data as of and for the years ended December 31, 2015 and 2016 are not comparable to the data as of and for the The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from these discussed in forward-looking statements as a result of various factors, including those set forth in “Cautionary Statement Regarding Forward-Looking Information” and “Item 3D. Risk Factors.” INTRODUCTION We are a banking corporation organized under the laws of Chile. Our common shares are listed on the Santiago Stock Exchange and the Chilean Electronic Exchange, and our ADSs are listed on the NYSE. We are regulated by the SBIF. We offer general commercial and consumer banking services and provide other services including factoring, collection, leasing, securities and insurance brokerage, asset management and investment banking. The following classification of revenues and expenses is based on our consolidated financial statements: Revenues We have three main sources of revenues, which include both cash andnon-cash items: Interest income We earn interest income from our interest-earning assets, which are mainly represented by loans to customers. Income from service fees We earn income from service fees related to checking accounts, loans, mutual funds, credit cards and other financial services. Other operating income We earn income relating to changes in the fair value of our securities portfolio, other trading activities and foreign exchange transactions. Expenses We have three main sources of expenses, which include both cash andnon-cash items: Interest Expense We incur interest expense on our interest bearing liabilities, such as deposits, short-term borrowings and long-term debt. Provisions for Loan Losses Our allowance and provision for loan losses as recorded in our consolidated financial statements included herein have been determined in accordance with IFRS. Other Operating Expenses We incur expenses relating to salaries and benefits, administrative expenses and othernon-interest expenses. THE ECONOMY Primary Markets in Which We Operate A majority of our investments are located in Chile and Colombia. Accordingly, our financial condition and results of operations are substantially dependent upon economic conditions prevailing in Chile and Colombia. Developments in the Chilean Economy
The widespread improvement of investment was another factor of the end of four years of contraction in 2018. The improvement began in late 2017, when purchases of machinery and equipment recovered, with construction growth picking up throughout the year. The improvement was fueled by higher copper prices in 2018, as compared to 2017, thereby increasing investment in mining; increased business confidence after the conclusion of the presidential elections was also likely a contributing factor. Investment, measured as the net increase in physical assets (investment minus disposals), expanded to 5%, as compared to the negative 1.1% decrease in 2017. The contribution from net exports continued to improve due to higher copper volume exports, despite improvement in domestic demand. Overall, the Chilean economy expanded 4.0% in 2018, as compared to 1.5% in 2017. On the other hand, external accounts were hurt by falling copper prices and higher average oil prices during the year. The 2018 current account deficit increased to US$7.8 billion (negative 2.6% of GDP), from US$4.1 billion (negative 1.5% of GDP in 2017). The trade balance surplus decreased to US$5.4 billion in 2018, as compared to US$7.9 billion in 2017. As copper prices remained below US$3/lb in 2018, it is expected that the current account deficit may increase in 2019. However, despite a larger current account deficit, foreign direct investment remained robust and fully funded the external imbalance. In 2018, foreign direct investment remained stable as compared to 2017, at US$7 billion (2.5% of GDP). Falling copper prices and a general global risk aversion hurt the Chilean peso. After ending 2017 at Ch$
Some narrowing of the output gap The Chilean Central Bank expressed that the current degree of monetary stimulus is unnecessary, considering the output gap narrowing that took place in the first half of 2018. Thus, in its Monetary Policy Report for the third quarter of 2018, the board of the Chilean Central Bank indicated that a tightening cycle (from the 2.5% monetary policy rate level) would begin shortly. The board implemented one 25 basis points rate hike to 2.75% in October and retained the tightening bias, despite holding the rate steady at its December meeting. It was generally expected that the Chilean Central Bank would make several rate hikes this year; however, there may be bias towards fewer, given the continued elevated uncertainty in the global financial markets.
Developments in the Colombian Economy 2018 brought mixed news for Colombia’s economy. Activity remained subdued, despite improving at the end of the year, inflationary pressures were contained, interest rates remained stable, and the correction of external accounts moderated amid recovering domestic demand and flailing oil prices. Arising from last year’s congressional and the presidential elections, a continuity government was elected, a stabilizing development that soothed markets. However, it is widely believed that President Duque’s administration faces an uphill battle in order to keep fiscal accounts healthy.
The Presidential elections cycle, falling private sector sentiment, and lower oil prices kept activity subdued in the first half of the year. While the economy did recover in the second half of 2018, uncertainty about external conditions likely limited such recovery. Investment remained weak, but construction showed signs of recovery, alongside industrial activity. However, the prolonged period of weak activity The fiscal and external deficits remain points of attention. On the fiscal side, last year’s nominal was likely a 3.1% of GDP deficit, Rating agencies have been lenient regarding Colombia’s fiscal situation. Fitch, for instance, commented that gross general government debt will remain stable at around 41% of GDP in 2018—near the ‘BBB’ rating category median, assuming continued fiscal adjustment. Late last year, S&P retained its‘BBB-’ rating with a stable outlook, and stated Colombia might not meet the mandated 2.4% of GDP deficit target this year, but that would not necessarily prompt a rating downgrade, which would lead to a loss of the investment grade rating. Meanwhile, Moody’s Investors Service and Fitch Ratings continue to rate Colombia two notches above investment grade. Higher imports led the trade deficit to reach US$6 billion in 2018, as compared to US$6.1 billion in 2017. Despite the weakening
Inflation General In the past, Chile has experienced high levels of inflation, which has significantly affected our financial condition and results of operations during such periods. In recent years, Chile has experienced relatively low inflation rates, with sporadic episodes where price growth deviated from the Chilean Central Bank’s2%-4% target range. In
Under Chilean law, banks are authorized to earn interest income on loans that are adjustable for the effects of inflation. Most banks, including Itaú Corpbanca, charge an interest rate that includes an estimate of future inflation. In addition, the peso-denominated value of our assets and liabilities that are denominated in UF fluctuate as the UF is adjusted based on inflation. In the case of assets, these fluctuations are recorded as income (for increases in the peso-denominated value) and losses (for decreases in the peso-denominated value). In the case of liabilities, these fluctuations are recorded as losses (for increases in the peso-denominated value) and income (for decreases in the peso-denominated value). Colombia has experienced high levels of inflation recently amid its currency depreciation and supply-side shocks affecting food prices. The rate of inflation in Colombia in UF-Denominated Assets and Liabilities The UF is revalued by the INE on a monthly basis. Every day in the period beginning the tenth day of the current month through the ninth day of the succeeding month, the nominal Chilean peso value of the UF is indexed up (or down in the event of deflation) in order to reflect each day a proportional amount of the prior calendar month’s change in the CPI. One UF was equal to Ch$ Chilean Peso-Denominated Assets and Liabilities Interest rates prevailing in Chile are materially affected by the current rate of inflation during the period and market expectations concerning future inflation. The responsiveness to such prevailing rates of our Chilean peso-denominated interest-earning assets and interest bearing liabilities varies. See Interest Rates Interest rates earned and paid on our assets and liabilities, respectively, reflect, to a certain degree, inflation, expectations regarding inflation, shifts in short-term interest rates set by the Central Bank of Chile and the Central Bank of Colombia and movements in long-term real rates. Interest Rates in Chile The Central Bank of Chile manages short-term interest rates based on its objective of maintaining currency stability. Because our liabilities are generallyre-priced to reflect interest rate changes more frequently than our interest-earning assets, changes in the rate of inflation or in the monetary policy interest rate published by the Central Bank of Chile are reflected in the interest rates we pay on our liabilities before such changes are reflected in the interest rates we earn 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 because generally ourUF-denominated assets exceed ourUF-denominated liabilities. See “Item 5. Operating and Financial Overview and Prospects—A. Operating Results—The Economy—Developments in the Chilean Economy” and In addition, because our Chilean peso-denominated liabilities have relatively shortre-pricing periods, they are generally more responsive to changes in inflation or short-term rates than ourUF-denominated liabilities. As a result, during periods when current inflation or expected inflation exceeds the previous month’s inflation, customers often switch funds from Chilean peso-denominated deposits to more expensiveUF-denominated deposits, thereby adversely affecting our net interest margin. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Sources of Liquidity—Financial Investments.” Interest Rates in Colombia The Central Bank of Colombia manages short-term interest rates based on its objectives of maintaining a low and stable inflation rate, stabilizing output around its natural levels and contributing to the preservation of financial stability. Colombian commercial banks, finance corporations and financing companies are required to report data to the Central Bank of Colombia on a weekly basis regarding the total volume (in Colombian pesos) of certificates of deposit issued during the prior week and the average interest rates paid for certificates of deposit with maturities of 90 days. Based on such reports, the Central Bank of Colombia calculates the Depósito a Término Fijo As of A significant portion of our banking subsidiaries’ assets are linked to the DTF; accordingly, changes in the DTF affect our banking subsidiaries’ net interest income. The Central Bank of Colombia increased its decreased rate to 3.25% on March 26, 2013, and the interest rate remained stable until March of 2014. On average, the DTF went from 7.96% in 2007 to 3.88% in the first quarter of 2014. From April 2014 to August 2014, the Central Bank of Colombia increased the Repo Rate by 125 Rates reached 4.25% in April 2018. In response to the changing monetary policy conditions, the DTF adjusted upward moving from 4.34% in 2014 to 5.22% at the end of December 2015 and 7.59% by the end of July 2016, before retreating to 6.86% byyear-end 2016. As monetary loosening proceeded in 2017, the DTF rate dropped to 5.21% byyear-end. Currency Exchange Rates A material portion of our assets and liabilities is denominated in foreign currencies, principally the U.S. dollar and the Colombian peso. Our reported income is affected by changes in the value of the Chilean peso with respect to foreign currencies (principally the U.S. dollar and Colombian peso) because such assets and liabilities, as well as interest earned or paid on such assets and liabilities, and gains (losses) realized upon the sale of such assets, are converted to Chilean pesos in preparing our consolidated financial statements. 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. In the past, the Chilean peso has been subject to significant volatility when compared to the U.S. dollar. In 2014, the Chilean peso depreciated against the U.S. dollar by 15.0% as compared to 2013. In 2015 the Chilean peso depreciated against the U.S. dollar by 17.3% as compared to 2014. In 2016, the Chilean peso appreciated against the U.S. dollar by 5.7% as compared to 2015. In 2017, the Chilean peso appreciated against the U.S. dollar by 1.3% as compared to 2016. In 2018, falling copper prices and a risk aversion sentiment led to a 12% depreciation of the Chilean peso. The exchange rate between the Chilean peso and the U.S. dollar as of December 31, 2016, 2017 and Entering into forward exchange transactions enables us to reduce the negative impact of material gaps between the balances of our foreign currency-denominated assets and liabilities. As of December 31, Critical Accounting Policies and Estimates General In our filings with the SEC, we prepare our consolidated financial statements in accordance with IFRS. In preparing our consolidated financial statements, we use estimates and assumptions to account for certain assets, liabilities, revenues, expenses and other transactions. While we review these estimates and assumptions in the ordinary course of business, the portrayal of our financial condition and results of operations often require our management to make judgments regarding the effects on our financial condition and results of operations on matters that are inherently uncertain. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. The following discussion describes those areas that require the most judgment or involve a higher degree of complexity in the application of the accounting policies that currently affect our financial condition and results of operations. Actual results may differ from those estimated under different variables, assumptions or conditions, and if these differences could have a material impact on our reported results of operations. Note 1 to our consolidated financial statements contains a summary of our significant accounting policies. In addition to the critical accounting policies described below, information regarding other accounting policies is set forth in the notes to our consolidated financial statements. Allowance for Loan Losses
Until December 31, 2017, we recorded our allowances following our internal models for the recording of incurred
For a further description Derivative Financial Instruments Derivative financial instruments are recorded at fair value. Fair values are based on market quotes, discounted cash flow models and option valuations, as appropriate. If market information is limited or in some instances, not available, management applies its professional judgment. Other factors that may also affect estimates are incorrect model assumptions, market dislocations and unexpected correlations. Notwithstanding the level of subjectivity in determining fair value, we believe our estimates of fair value are adequate. The use of different models or assumptions could lead to changes in our reported results. See “Note 1—General Information and Summary of Significant Accounting Policies.” In addition, we make loans and accept deposits in amounts denominated in foreign currencies, principally the U.S. dollar. Such assets and liabilities are translated at the applicable exchange rate at the balance sheet date. Financial Investments See “Item 5. Operating and Financial
our financial investments. Estimate of Impairment of Goodwill We assess annually, or when there is a triggering event, whether goodwill has experienced any impairment, according to the accounting policy described in our consolidated financial statements. The recoverable amount of the cash generating units (“CGUs”) has been determined using the methodology of a dividend discount model. This methodology considers the cash flows that would generate the dividends distributed to its shareholders in a perpetual forecast projection, discounted at their rate of cost of capital at the valuation date. In this way, the economic equity value can be estimated, using projections of cash flows derived from financial budgets and other assumptions approved by the management. The projection of cash flows is carried out using the functional currency of each country and considering a horizon of Estimates and judgments included in the calculations of recoverable amounts are based on historical experience and other factors, including the expectations of management for future events that are considered reasonable in the current circumstances. Due to the inherent uncertainty associated with considering these estimates, actual results could differ from those estimates. Future events and changing market conditions may impact the Bank’s assumptions as to future interest and commissions’ revenue, net interest margin growth rates or discount rates, which may result in changes in the estimates of the Bank’s future cash flows. The following factors, among others, could significantly impact the impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on the Company’s financial condition and results of operations:
Recently Adopted and New Accounting Pronouncements See Note IFRS 9 Financial Instruments We adopted IFRS 9 as issued by the IASB in July 2014 with a date of transition of January 1, 2018, which resulted in changes to our accounting policies. The adoption of IFRS 9 has resulted in changes in our accounting policies for recognition, classification and measurement of financial assets and financial liabilities and impairment of financial assets. IFRS 9 also significantly amends other standards dealing with financial instruments such as IFRS 7 “Financial Instruments: Disclosures”. As per the permitted transitional provisions of IFRS 9, we elected not to revise comparative figures; accordingly, some IFRS 9 disclosures presented in our consolidated financial statements and this Annual Report with respect to certain financial assets are not comparable since their classification and measurement may differ between IFRS 9 and the prior standard of IAS 39. Any adjustments to the carrying amounts of financial assets and liabilities as of the date of transition were recognized as an adjustment to the opening retained earnings. We have elected to continue to apply the hedge accounting requirements of IAS 39 on the adoption of IFRS 9. Consequently, for disclosures purposes, the amendments to IFRS 7 have also been applied to the current period only. The comparative period disclosures shows those disclosures made in the prior year. Set out below are disclosures regarding the impact of the adoption of IFRS 9 on us and further details of the specific IFRS 9 accounting policies applied in the current period (as well as the previous IAS 39 accounting policies applied in the comparative period). Classification and Measurement of Financial Instruments
Financial assets are classified into a measurement category based on both our business model for managing the financial asset and the contractual cash flow characteristics of our 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 we perform the SPPI test, which assesses the contractual term to identify whether they meet SPPI criterion, the contract is a basic lending arrangement. We apply judgment and consider 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 we manage our financial assets in order to generate cash flows. We determined our 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. Our business model represents how financial assets are managed to generate cash flows and does not depend on our management’s intention regarding an individual instrument, but at a higher level of aggregated portfolio and is based on observable factors such as: risks that affect the performance of business model; how business managers are compensated; how the performance of business model is assessed and reported to our management. In addition, our business model is not assessed on aninstrument-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, among others. In accordance with IFRS 9 the business models are:
Reclassification Reclassification of financial assets is required if, and only if, the objective of our business model for managing those financial assets changes. Financial liabilities cannot be reclassified. Measurement of Financial Instruments 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 of financial assets and financial liabilities carried at fair value are expensed in profit or loss. Subsequent measurement- financial assets After initial recognition, we measure a financial asset at:
For certain equity instruments, we 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. Subsequent measurement- financial liabilities After initial recognition, we measure a financial liability at amortized cost, except for derivatives that are measured at fair value through ptofit or loss. Derecognition of financial assets and liabilities Financial assets are derecognized when, and only when: the contractual rights to the cash flows from the financial asset expire, or we transfer substantially all the risks and rewards of ownership of the financial asset, and therefore we derecognize the financial asset and recognize separately any rights and obligations created or retained in the transfer. In some cases, we enter 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. we only transfer collected amounts from original assets, selling or pledging original assets is prohibited, and we have the obligation to remit cash flows collected without material delay. When a financial asset is sold and we simultaneously agree to repurchase it (or an asset that is substantially the same) at a fixed price on a future date, we continue to recognize 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 recognized as a financial asset and a financial liability is recognized for the obligation to pay the repurchase price. Financial liabilities are derecognized when, and only when, they are extinguished, cancelled or expired. Contingent loans We issue contingent loans (including letters of credit, foreign letters of credit and performance guarantee) and loan commitments. Contingent loans and undrawn loan commitments are commitments under which, over the duration of the commitment, we are required to provide a loan withpre-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 19. Offsetting Financial assets and financial liabilities are offset in the balance sheet only when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. As of December 31, 2018, we do not have balance offsetting of financial instruments. Derivatives and hedging activities We have elected to continue applying the hedge accounting requirements of IAS 39 on adoption of IFRS 9. We have not provided comparative information for prior periods on the date of initial application of IFRS 9 for the new disclosures introduced by IFRS 9 as a consequential amendment to IFRS 7, as permitted by IFRS 7 paragraph 44z. For presentation purposes, derivatives are presented in accordance with their positive or negative fair value as assets or liabilities, respectively, and include trading and hedging instruments separately (see Note 8). Expected credit losses allowance – under IFRS 9 Starting from January 1, 2018, we replaced the “incurred loss” model of IAS 39 with an “expected credit loss” (“ECL”) model established by IFRS 9. For a description of the expected credit loss model, see “Item 4. Information on the Company—B. Business Overview—Selected Statistical Information—Impairment Assessment as of January 1, 2018 (Under IFRS 9).” IFRS 15 Revenue from Contracts with Customers On January 1, 2018, IFRS 15 “Revenues from contracts with customers” became effective. In accordance with our activities, income and expenses arising from fees and commission are under the scope of this new standard. Consequently a review over fees and commissions has been performed, to ensure the five step approach is fully met. We have elected to adopt IFRS 15 using a modified retrospective approach where the cumulative effect of initially applying it was recognized as an adjustment to the opening balance of retained earnings and comparative information was not restated. We concluded that there was no impact as of January 1, 2018, however new note disclosure requirements were adopted. See Note 1 and Note 24 to our consolidated financial statements included in this Annual Report. In addition, new standards and interpretations to IFRS standards have been issued but not yet adopted in our consolidated financial statements as of December 31, IFRS
or after January 1, 2019. Its early application is allowed, provided that IFRS 15 “Revenue from Contracts with Customers Our management evaluated the impact of the adoption of this new standard
For a description of these new accounting standards, see Note Results of Operations for the Years Ended December 31, 2018
As per the permitted transitional provisions of IFRS 9, we elected not to revise comparative figures; accordingly, some IFRS 9 disclosures presented in our consolidated financial statements and this Annual Report with respect to certain financial assets are not comparable since their classification and measurement may differ between IFRS 9 and the prior standard of IAS 39.
Introduction We ended 2018 with Ch$166,854 million in consolidated net income, the strongest result since the merger, posting a 165.6% increase when compared to 2017 based on stronger loan growth with lower delinquency, the The acceleration of economic activity in both Chile and Colombia favored the generation of new business and the credit risk financial margin. In 2017 our main focus was to comply with the terms of the Merger by minimizing its effects on the quality of our service. Economic activity in 2017 was lower than what we initially expected, especially in Chile. While it accelerated toward the end of the year, 2017 showed the lowest growth since 2009. This translated into the lowest loan growth rates in Chile in over seven years. Investment showed a fourth consecutive year of contraction, and commercial loans grew only 1.2% year-over-year. Due to our current portfolio mix, this has noticeable effects on our revenues growth. On the other hand, inflation and interest rates decreased, especially in Colombia where the275-basis point reduction in the year positively affected our banking book. Net Income (Loss)
2017. The increase in our consolidated net income for the year ended December 31, lower provisions for loan loss expenses. The following table sets forth the components of our net income for the years ended December 31,
Net Interest Income The following table sets forth the components of our net interest income for the years ended December 31,
The following table sets forth information as to the components of our interest income for the years ended December 31,
The following table sets forth information as to the components of our interest expense for the years ended December 31,
2018 Compared to 2017 Our net interest income was Ch$887,663 million for the year ended December 31, 2018, an increase of 13.4% as compared to Ch$782,982 million for the year ended December 31, 2017. The increase in interest income was primarily the result of (i) an increase in inflation-related income in Chile and (ii) the decrease in monetary policy rates in Colombia (4.25% as of December 31, 2018, as compared to 4.75% as of December 31, 2017), which positively affected our net interest margin given that our interest-earning assets in Colombia are mostly fixed-rate and with a long duration, whereas our interest-bearing liabilities are mostly floating-rate and with a shorter duration. The aforementioned factors had a total Ch$104,681 million impact in our net interest margin (net interest income divided by average interest-earning assets), which increased by 32 basis points to 3.67% in 2018 from 3.35% in 2017. 2017 Compared to 2016 Our net interest income was Ch$782,982 million for the year ended December 31, 2017, an increase of 22.5% as compared to Ch$639,175 million for the year ended December 31, 2016. The increase in interest income was primarily the result of (i) the consolidation of former Corpbanca into former Banco Itaú Chile from April 1, 2016 and (ii) the decrease in monetary policy rates in Colombia (4.75% as of December 31, 2017 coming from 7.5% as of December 31, 2016), which positively affected our net interest margin The aforementioned factors had a total Ch$143,807 million impact in our net interest margin (net interest income divided by average interest-earning assets), which increased by 12 basis points to 3.35% in 2017 from 3.23% in 2016. Allowances for Loan Losses
IAS 39. The following table sets forth information relating to our allowances for loan losses as of December 31,
2018 Compared to 2017 Allowances for loan losses (excluding allowances for loan loss on loans and receivables to banks) increased by 24.2% to Ch$768,120 million as of December 31, 2018 compared to Ch$618,527 million as of December 31, 2017. Higher allowances for loan losses resulted primarily from the effects of the first adoption of IFRS 9 in 2018 and provisions we took for new financial assets originated or purchased. Our
2017 Compared to 2016 Allowances for loan losses (excluding allowances for loan loss on loans and receivables to banks) increased by 10.6% to Ch$618,527 million as of December 31, 2017 compared to Ch$559,304 million as of December 31, 2016. Higher allowances for loan losses resulted primarily from an increase in provisions for certain corporate clients, both in Chile and in Colombia, as well as higher delinquency rates in our retail operations, especially in Colombia due to the worsening of economic conditions. Our Provisions for Loan Losses
2017 Compared to 2016 Provisions for loan losses increased by 28.2% to Ch$315,417 million for the year ended December 31, 2017, compared to Ch$245,990 million for the year ended December 31, 2016. The increase in our provisions for loan losses was due Net Service Fee Income
The increase in our
2017 Compared to 2016 Our net service fee income (including income from financial advisory services) for the year ended December 31, 2017 was Ch$177,571 million, representing a 17.8% increase when compared to Ch$150,796 million for the year ended December 31, 2016. Our income from service fees during the year ended December 31, 2017 increased by 11.7% to Ch$216,420 million from Ch$193,801 million for the year ended December 31, 2016. Our expenses from service fees decreased by a 9.7% to Ch$38,849 million for the year ended December 31, 2017, from Ch$43,005 million for the year ended December 31, 2016. The increase in our net service fee income was driven primarily by the consolidation of former Corpbanca into former Banco Itaú Chile from April 1, 2016.
Other Net Operating Income The following table sets forth the components of our other net operating income for the years ended December 31,
2018 Compared to 2017 In the year ended December 31, 2018, trading and investment, foreign exchange gains and other net operating income increased by 89.1 % to Ch$181,446 million from Ch$95,965 million in 2017. This increase was mainly the result of more favorable market environment and by the result of the hedge position for the tax effect of our investments in Colombia and New York. For tax purposes, the “Servicio de Impuestos Internos” (Chilean Internal Revenue Service) considers that our investments abroad are denominated in U.S. dollars, which for Colombia and our New York Branch, based on the exchange rates of each of the disbursements (not current exchange rates), amounts to US$1,437 million, and for our New York branch amounts to US$ 166 million, respectively. Because we are obligated to translate the valuation of this investment from U.S. dollars to Chilean pesos in our book, the volatility of the exchange rate generates an impact on the net income attributable to shareholders. In order to limit that effect, management has decided to hedge this exposure with financial instruments to be analyzed along with income tax expenses. 2017 Compared to 2016 In the year ended December 31, 2017, trading and investment, foreign exchange gains and other net operating income increased by 14.9% to Ch$95,965 million from Ch$83,551 million in 2016. This increase was mainly the result of the consolidation of former Corpbanca and former Banco Itaú Chile from April 1, 2016 and gains on the sale of the former Banco Itaú Chile headquarters. This was partially offset by the result of the hedge position for the tax effect of our investment in Colombia. For tax purposes, the “Servicio de Impuestos Internos” (Chilean Internal Revenue Service) considers that our investment in Colombia is denominated in U.S. dollars, which, based on the exchange rates of each of the disbursements (not current exchange rates), amounts to US$1,437.51 million. Because we are obligated to translate the valuation of this investment from U.S. dollars to Chilean pesos in our book, the volatility of the exchange rate generates an impact on the net income attributable to shareholders. In order to limit that effect, management has decided to hedge this exposure with financial instruments to be analyzed along with income tax expenses.
Operating Expenses The following table sets forth the components of our operating expenses for the years ended December 31,
2018 Compared to 2017 Operating expenses increased by 1.4% to Ch$741,527 million for the year ended December 31, 2018 from Ch$731,147 million for the year ended December 31, 2017. This increase was primarily the result of higher personnel salary and expenses, an increase in depreciation and amortization that reflects the investments made in technology and a fine in the amount of Ch$ 5,985 million imposed by the SBIF by means of Resolution No. 101 as described in “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.” 2017 Compared to 2016 Operating expenses increased by 18.6% to Ch$731,147 million for the year ended December 31, 2017 from Ch$616,627 million for the year ended December 31, 2016. This increase was primarily the result of the consolidation of former Corpbanca and former Banco Itaú Chile from April 1, 2016. Income Taxes
Chilean Internal Revenue Service to be denominated in U.S. dollars and the appreciation/depreciation of this currency when compared to the Chilean peso generates a taxable gain/loss. 2017 Compared to 2016 Our income tax for the year ended December 31, 2017 was Ch$52,871 million compared to an
Results of Our Operating Segments The following discussion should be read in conjunction with our consolidated financial statements, especially Note 4 regarding segment information included elsewhere in this Overview Reported segments are determined based on our operating segments: Chile—which includes our New York Branch—and Colombia. Each of Chile and Colombia mainly differentiates by the risks and returns that affect them in their own markets. Reported segments are in accordance with IFRS 8 “Operating Segments.”
Chile. The The Bank manages these business areas under a managerial reporting system for profitability purposes. The operating results are regularly reviewed by our senior management for operating decisions as one single cash generating unit (“CGU”), to decide about resource allocation for each segment and to evaluate its performance accordingly. Colombia: Colombia has been identified as a separate operating segment based on the business activities. Its operating results are regularly reviewed by our senior management for operating decisions as one single CGU, to decide about resource allocation for the segment and to evaluate its performance. The bank’s commercial activities in Colombia are carried out by Itaú Corpbanca Colombia S.A. (former Banco Corpbanca Colombia S.A) and its subsidiaries. The operations and businesses carried out by these entities in that country are related to the needs of their clients and the Year Ended December 31, 2018 Results The following table presents summary information related to each of our operating segments for the year ended December 31, 2018:
Year Ended December 31, 2017 Results The following table presents summary information related to each of our operating segments for the year ended December 31, 2017:
Year Ended December 31, 2016 Results The following table presents summary information related to each of our operating segments for the year ended December 31, 2016:
2018 Compared to 2017
From a macroeconomic perspective, the events with the greatest impact on our results by segments were: (i) an acceleration of economic activity in both Chile and Colombia, which favored both the generation of new business and an improvement in the credit risk of part of our
Despite the positive factors in Colombia mentioned in the paragraph above, in 2018, we did not achieve the expected turn-around point in Colombia mainly due to the effects of our first time adoption of IFRS 9. Nevertheless, despite a continued challenging environment in Colombia, our gross operating income showed a more sustainable trend primarily as a result of two main factors: (i) the normalization of our interest margins as we incorporated the effects of the normalization of market risk in our banking book; and (ii) a strong focus on cost management and efficiency as this is part of the culture we are establishing at the bank in Colombia. Overall, we believe that despite a prolonged slow economic cycle, we are on track to achieving a gradual increase in sustainable results that are more in line with the overall markets in both of our segments. 2017 Compared to 2016 Our consolidated net income for 2017 was a gain of Ch$62,825 million, which is composed of a gain of Ch$77,617 million in Chile and a loss of Ch$14,792 million in Colombia, showing a recovery compared to 2016. Macroeconomic and other factors specific to Itaú Corpbanca influenced our 2017 result. From the macroeconomic perspective, the events with the greatest impact on our results were: (i) the reduction in economic activity in both Chile and Colombia, which negatively affected both the generation of new business as well as the credit risk of a part of our loan portfolio; (ii) the drop in the monetary policy interest rate in Colombia, which went from 7.50% at the beginning of the year to 4.75% at the end of December, positively impacting our cost of funding in the year; and (iii) lower inflation in Chile, 1.7% in 2017 against a variation of the CPI of 2.7% in 2016, which reduced our financial margin. B. LIQUIDITY AND CAPITAL RESOURCES We maintain adequate liquidity to ensure our ability to honor withdrawals of deposits, make repayments of other liabilities at maturity, extend loans and meet our own working capital requirements. Sources of Liquidity Our funding strategy aims for diversification by counterparties and maturities, both in the domestic and foreign markets. We are permanently monitoring the main vulnerability factors that could affect our current and potential capacity to obtain funding. Our objective is to ensure a diversified funding base by tenors within a risk appetite framework and cost structure. Stable and diversified financing is obtained through different sources by types of providers, products and markets. In this way, we have generated robust liquidity levels to face potential liquidity stress scenarios. Regarding mismatches, our Assets and Liabilities Committee (ALCO) defines the limitation framework. Within this framework, each unit manages term mismatches. Once the ALCO has set the limits of term mismatches, they are confirmed by our board of directors. From a liquidity point of view, the ALCO also proposes to the board of directors the liquidity reserves that each unit must maintain and manage. The determination of these limits depends, among other things, on the maturity structure for the next 30 days, on the type of customers holding short-term deposits andon-demand deposits and on other obligations we maintain. The ALCO also defines the type of eligible instruments to be considered liquidity reserves, and it periodically monitors the liquidity levels maintained at all time. The compliance of the entire structure of limits is monitored daily by our Market Risk department. For our operations in Chile, the main source of funding are deposits provided by three major types of clients: (i) institutional investors; (ii) large corporations; and (iii) retail clients. For short-term funding (less than one year), we usually issue deposits. Interest rates granted to clients consider characteristics of stability of the funding by type of customer and terms associated with the operation. If the funding requirements are longer than one year, we may also carry out other operations such as bilateral credits with correspondent banks, syndicated loans with foreign banks, and the issuance of bonds in both the local and foreign markets. The choice of one or the other of the aforementioned options will depend, among other factors, on the tenor, the specific price conditions and the amount. In general, in transactions between one and three years, bilateral credits are used with correspondent banks and syndicated loans. For operations exceeding these terms, we access the capital markets through bonds. The price conditions and the size of the transaction will determine if the issuance will be carried out in the domestic or in the foreign market. On the other hand, our funding strategy considers not having currency mismatches and, therefore, for operations carried out in foreign markets to finance operations in local currency, derivatives are used to transform the foreign currency into local currency. Any mismatch of currencies presented on the balance sheet is measured in our currency risk reports that are daily calculated. Within this context, in Our strategy of diversification also includes two syndicated loans, one for US$465 million (Ch$ Capital As of December 31, Note, however, that in any of the following events a higher effective net equity and/or a higher basic capital may be required:
For these purposes, the effective net equity of a bank is the sum of (i) a bank’s basic capital, (ii) bonds issued without a maturity date and preferred stock issued once the CMF issues a regulation authorizing their issuance. These instruments shall be valued at their issue price, for an amount up to one third of its basic capital, (iii) subordinated bonds issued by a bank valued at their The calculation of the effective net equity does not include the capital contributions made to subsidiaries of a bank and is made on a consolidated basis rather than on an unconsolidated basis. Pursuant to Transitory Article First of
Basic capital is defined as a bank’spaid-in capital and reserves and is similar to Tier 1 capital, except that does not deduct goodwill nor intangible assets. Reserves Under the Chilean General Banking Act in effect as of December 31, 2018 (i.e., without considering the amendments under Law No. 21,130), a bank must have a minimumpaid-in capital and reserves of UF 800,000 (Ch$ The following table sets forth our minimum capital requirements as of the dates indicated. See Note 34 to our consolidated financial statements included herein for a description of the minimum capital requirements.
Our capital ratio levels With respect to the minimumpaid-in capital and Financial Investments Since 2018, our financial investments are classified into measurement categories based on both our business model for managing the financial asset and the contractual cash flow characteristics of the financial asset. For periods prior to 2018, our financial investments are classified at the time of purchase, based on our management’s determination, as trading or investment instruments, the latter being categorized as
Unused Sources of Liquidity As part of our liquidity policy, we maintain at all times a diversified portfolio of highly liquid assets that can be quickly monetized, including cash, financial investments and Central Bank of Chile and other government securities. Working Capital The majority of our funding is derived from deposits and other borrowings from the public. In the opinion of management, our working capital is sufficient for our present needs. Liquidity Management We seek 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. See “Item 11. Quantitative and Qualitative Disclosures about Financial Risk” for more detailed information relating to the methods we employ in managing our liquidity. Cash Flow The tables below set forth information about our main sources and uses of cash. No legal or economic restrictions exist on the ability of our Chilean subsidiaries to transfer funds to us in the form of loans or cash dividends as long as these subsidiaries abide by the regulations in the Chilean Corporations Law regarding loans to related parties, and dividend payments. In addition, no legal or economic restrictions exist on the ability of our Colombian subsidiaries to transfer funds to us in the form of cash dividends. However, in the case of Itaú Corpbanca Colombia, for the following four to five years there is a possibility that shareholders may vote to capitalize such dividends in order to meet current capital adequacy requirements following Basel standards, as they did in respect of 2013 dividends, 2014 dividends and 2015 dividends. Itaú Corpbanca Colombia may also transfer funds to Itaú Corpbanca in the form of loans, as long as they abide by the regulations in the Colombian financial law regarding loans to related parties. Colombian subsidiaries (other than Itaú Corpbanca Colombia) may not transfer funds to us in the form of loans, due to their limited corporate purpose. Net Cash (Used in) Provided by Operating Activities
Our net cash used in operating activities for the year ended December 31, instruments. Net Cash (Used in) Provided by Investing Activities
Our net cash used in investing activities decreased from Ch$ Net Cash (Used in) Provided by Financing Activities
Deposits and Other Borrowings The following table sets forth our averagemonth-end balance of our liabilities for the years ended December 31,
Our current funding strategy is to continue to utilize all sources of funding in accordance with their cost, their availability and our general asset and liability management strategy. Our most important source of funding is our time deposits. Time deposits represented Total Borrowings The following tables set forth the long-term, short-term and total outstanding amounts of our principal categories of borrowings for the years ended December 31,
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:
These are short-term and long-term borrowings from domestic and foreign banks used to fund our foreign trade business. The maturities of the outstanding amounts are as follows:
Mortgage finance bonds These securities are used to finance mortgage loans. The range of maturities of these securities is between five and twenty years. Loans are indexed to UF and pay a yearly interest rate.
The bonds are denominated principally in UFs and are primarily used to fund assets with similar durations. The maturities of these bonds are as follows:
The following table sets forth as of the dates indicated our issued bonds. In
Sub total Former Banco Itaú Chile BCORAF0710 BCORAG0710 BCORAI0710 BCOR-L0707 BCORAJ0710 BCOR-P0110 BCORBW0914 BCOR-R0110 BCORUSD0118 BCORUSD0919 BCORAL0710 BCORAN0710 BCORAO0710 BCORBX0914 BCORCA0914 BCORAR0710 BCORBZ0914 BCORBY0914 BCORAP0710 BCORAQ0710 BCORAK0710 Sub total Former Corpbanca BBSA168B18 BBSA26SA48 BBSA316SA060 BBCR1109B84 BBCR3119B84 BBSA4188B024 BBSA4189C060 BBCR1099B120 BBSA69C120 BBSA69C180 BBSA3169C180 BBSA168B18 BBCR3117C84 BBSA5188B030 BBSA5189C048 Sub total Itaú Corpbanca Colombia Total
The following table sets forth, at the dates indicated our issued subordinated bonds. The subordinated bonds are denominated principally in UFs and are primarily used to fund the
In
Other obligations are summarized as follows:
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES We do not currently conduct any significant research and development activities. D. TREND INFORMATION Our net interest income for the year ended December 31, Our operating income depends significantly on our net interest income. For the years ended December 31, Consolidation in the market, which can result in the creation of larger and stronger competitors, may adversely affect our financial condition and results of operations by decreasing the net interest margins we are able to generate and increasing our costs of operation. In addition, we expect to continue to face competition fromnon-banking financial entities such as department stores, leasing, factoring and automobile finance companies, mutual funds, pension funds and insurance companies. The following are the most important trends, uncertainties and events that are reasonably likely to affect us or that would cause the financial information disclosed herein not to be indicative of our future operating results or financial condition:
Also see “Item 5. Operating and Financial Review and Prospects—A. Operating Results.” E. We are party to transactions withoff-balance-sheet risk in the normal course of our business. These transactions expose us to credit risk in addition to amounts recognized in
Such commitments are agreements to lend money to a customer at a future date, subject to the customer’s compliance with contractual terms. Since a substantial portion of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent our actual future cash requirements. The aggregate amount outstanding of these commitments was Ch$ 2018. Contingent loans are those operations or commitments in which the The The total amount of contingent loans held off balance sheet as of December 31, See Note 1 “General Information and Summary of Significant Accounting Policies” and Note 21 “Contingencies, Commitments and Responsibilities” to our consolidated financial statements included herein for a better understanding and analysis of the figures held off sheet balance. We use the same credit policies in making commitments to extend credit as we do for granting loans. In the opinion of our management, our outstandingoff-balance sheet commitments do not represent an unusual credit risk. Traditional financial instruments which meet the definition of a “derivative,” such as forwards in foreign currency, UF, interest rate futures currency and interest rate swaps, currency and interest rate options and others, are initially recognized on the balance sheet at their fair value. Fair value is obtained from market quotes, discounted cash flow models and option valuation models, as applicable. For further details of fair value, see Note 8 of our consolidated financial statements included herein. In terms of outstanding exposure to credit risk, the true measure of risk from derivative transactions is themarked-to-market value of the contracts at a point in time (i.e., the cost to replace the contract at the current market rates should the counterparty default prior to the settlement). For most derivative transactions, the notional principal amount does not change hands; it is simply an amount that is used as a reference upon which to calculate payments. F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS In addition to the scheduled maturities of our contractual obligations which are included under “—Liquidity and Capital Resources—Sources of Liquidity” above, as of December 31, The following table includes both the accrued interest and the interest expense projected over time of each contractual obligation as of December 31,
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. DIRECTORS AND SENIOR MANAGEMENT We are managed by our CEO (Gerente General) under the direction of our board of directors, which, in accordance with the Company’sby-laws, consists of 11 directors and two alternates who are elected at our annual ordinary shareholders’ meetings. Pursuant to the provisions of our bylaws, members of the board of directors are generally elected for three-year terms. All of the members of the board of directors were elected on Our current directors are as follows:
Jorge Andrés Saieh Guzmán became a director on August 25, 1998. On February 2, 2012, Mr. Saieh Guzmán became the chairman of our board of directors. Mr. Saieh Guzmán also serves as the chairman of the board of directors for Consorcio Periodístico de Chile S.A. Mr. Saieh Guzmán has also served as the vice chairman of the board of AFP Protección, as a member of the board of AFP Provida, as member of the board of the Chilean National Press Association and as a member of the board of Ricardo Villela Marino became a director on April 11, 2016. Mr. Marino has served Itaú Unibanco Group as a Vice President of Itaú Unibanco since August Jorge Selume Zaror became a director on May 23, 2001. Mr. Selume also serves as director of the board, among others, for Clínica Indisa, Andean Region — Laureate International, Universidad Andrés Bello, Universidad Las Americas, Instituto Profesional AIEP and Blanco y Negro. Prior to this, Mr. Selume was a director on the board of directors of Banco Osorno y La Unión, a director of the government budget office of Chile, chairman of our former affiliate Corpbanca Venezuela and the CEO of Corpbanca between 1996 and 2001. Mr. Selume received a B.A. in Business and Administration and graduated from the Universidad de Chile. Mr. Selume holds a Masters in Economics from the University of Chicago. Fernando Aguad Dagach became a director on June 18, 1996. Mr. Aguad has previously held similar positions in a variety of institutions including Interbank Perú, Banco Osorno y La Unión and Canal de Televisión La Red. Mr. Aguad is an investor in financial institutions. Gustavo Arriagada Morales became a director on September 28, 2010. He has held different senior positions since 1979 in the Chilean Production Development Corporation (Corporación para el Fomento de la Producción orCORFO), Banco de Talca, Chilean Copper Commission (Comisión Chilena del Cobre), Banco de Chile and Banco del Estado, among others. Mr. Arriagada also served in the Chilean Superintendence of Banks and Financial Institutions (Superintendencia de Bancos e Instituciones Financieras or SBIF) as director and as intendent between 1997 and 2005 and as superintendent between 2005 and 2010. He received a B.A. in Business and Administration and an Economics degree from the Universidad de Chile.
Caio Ibrahim David became a director on January 1, 2019. Mr. David has held several positions within the Itaú Unibanco Group including Finance, Accounting and International Business.
Andrés Bucher Cepeda became a director on February 23, 2017. Mr. Bucher has held numerous senior management positions in the Chilean financial industry in the past 28 years. He served as Banchile Corredores de Bolsa’s Chief Executive Officer from November 2012 until May 2016. Mr. Bucher previously worked as the Investment Banking and Capital Markets Division Manager at Banco de Chile beginning in 2008. Before that, Mr. Bucher was Investment Banking head for Citigroup Chile, where he worked for more than 19 years. Mr. Bucher holds a degree in industrial civil engineering from the Pontificia Universidad Católica de Chile and an Pedro Samhan Escandarbecame a director on September 27, 2016. Mr. Samhan was formerly a member of the Board of Citibank in Panama and Costa Rica. Before that, he was the CFO of Banco de Chile and was appointed as director of Banchile Trade Services Limited. Previously, Mr. Samhan was the CFO of Citigroup Chile for several years. He served as a member of the board of directors of Cruz Blanca Seguros de Vida from 1994 to 1997, AFP Habitat from 1996 to 2006 and Compañía Minera Las Luces from 1994 to 1996. Mr. Samhan was CFO of Citicorp for Caribbean and Central America from 1990 to 1993 and investment banking head of Citicorp Chile from 1988 to 1990. Mr. Samhan holds a degree in civil industrial engineering from Universidad de Chile. Fernando Concha Ureta became a director on April 11, 2016. Mr. Concha is aco-founding partner at Falcom Capital. He has more than 30 years of experience in the financial industry in Chile and the region. While at Citigroup, he held several leading positions, including Banamex Corporate Director of Treasure Operations, CEO at Citibank Chile and CEO of the Andean Cluster and Central America, among others. In addition, he has also represented Citi as member in several boards and committees, such as Banco de Chile Board, among others. He holds a degree in Business from the Pontificia Universidad Católica de Chile. Bernard Pasquierbecame a director on May 31, 2017. Mr. Pasquier has served as consultant and independent board director since 2008 and as a secretary general in Compagnie Monegasque de Banque in Monaco between 2004 and 2007. Mr. Pasquier was appointed by IFC on the Board of Directors of Grupo Mundial, Panama (2008-2013), Gorenje (Slovenia), Davivienda (Colombia
Diego Fresco Gutiérrez became an alternate director on March 28, 2018. Mr. Fresco is currently a member of the Audit Committee of Itaú Unibanco Holding S.A. He previously served as a partner at PwC Jessica López Saffie became an alternate director on March 19, 2019. Currently, Ms. López is the executive chairperson of the National Association of Healthcare Services Companies (Asociación Nacional de Empresas de Servicios Sanitarios, ANDESS AG). She has more than 35 years of executive and management experience in financial institutions in Chile and specializes in design and strategic execution, risk management, internal audit, and team management. Ms. López previously served as chief executive officer at Banco del Estado de Chile and chairperson of the board of directors of Banco Estado Microempresas. Prior to that, she was also vice chair of the board of directors, member of the board of directors, executive committee and audit committee and chair of the ethics committee and the operational risk committee at Banco del Estado de Chile. She received a B.A. in Business and Administration and an Economics degree from Universidad de Chile. Our current Executive Officers are as follows:
Manuel Olivares Rossetti became Chief Executive Officer on January 1, 2019. He is also currently the Chairman of the board of
School. Gabriel Amado de Mourabecame CFO of Itaú Corpbanca on April 1, 2016. Mr. Moura joined Itaú Unibanco in 2000 and became an associate partner in 2010. He has more than Christian Tauber Domínguezbecame corporate director of Wholesale Banking in October 2016. Previously, he served as Corporate Banking director in BBVA. He joined Banco Itaú Chile in October 2007 as the Corporate Banking manager, and from 2011 to 2016 he served as the Corporate Banking manager of Itaú Chile. In 2016 Mr. Tauber took office as the Corporate Manager of Corporate Banking. Mr. Tauber received a B.A. in Business and Economics from the Pontificia Universidad Católica de Chile. Julián Acuña Morenobecame corporate director of Retail Banking in September 2016. Mr. Acuña has vast experience in both national and international banking, having worked as Commercial Division Manager in Chile and in Colombia in Banco Santander-Chile and in Banco Santander Colombia, respectively. Mr. Acuña holds an Accountant Auditor degree from the Universidad Diego Portales, Chile. Pedro Silva Yrarrázavalbecame corporate director of Treasury on April 1, 2016. Between October 2006 and March 2016, Mr. Silva held the same position at Corpbanca. Mr. Silva previously served as CEO of our subsidiary Corpbanca Administradora General de Fondos S.A. (Asset Management). Mr. Silva received a B.A. in Business and Administration from the Universidad de Chile and also a M.B.A. from the University of Chicago.
the Fundação Getulio Vargas of Brazil. Mauricio Baeza Letelierbecame Chief Risk Officer in September 2016. With almost 30 years of experience in the banking industry, Mr. Baeza Letelier has held diverse executive positions in risk management areas of local banking institutions. During the last five years he was the Manager of Corporate Risk of Banco de Chile, while leading the Risk Committee of the Bank and Financial institution Association of Chile (Asociación de Bancos e Instituciones Financieras de Chile). Mr. Baeza received an undergraduate degree in Civil Engineering from the Pontificia Universidad Católica de Chile.
Luis Antônio Rodriguesbecame Corporate Director of IT in October 2017 after the split of the IT & Operations division from which he was responsible for since April 1, 2016 until September 2017. Mr. Rodrigues has been a director of Itaú Unibanco since 2004, a partner since 2010 and an executive director since 2011. He initiated his career in the Itaú group 32 years ago, and participated on the technology side of every merger and acquisition of the group (Banco Francês e Brasileiro, Banerj, Bemge, Banestado and BankBoston), as well as having a key role in the system integration of Itaú and Unibanco.
and a Master of Science in Finance from Fundação Getulio Vargas. Cristián Toro Cañasbecame General Counsel in June 2016. Mr. Toro worked for more than 10 years in Citibank Chile, acting as general counsel since 2004. In 1999 he worked Marcela Leonor Jiménez Pardobecame Corporate Director of Human Resources in April 2016. Between July 2012 and March 2016 she held the same position at Corpbanca. Previously, she served in the Global Banking Consulting Group at Banco de Chile from 2008 to 2012. Mrs. Jiménez received an undergraduate degree in Philology from the Pontificia Universidad Católica de Chile and a postgraduate degree in Human Resources Management from Universidad Adolfo Ibáñez. Emerson Bastian Vergara became Chief Audit Executive in April 2017. Previously, Mr. Bastian was a partner in Deloitte Chile´s Governance, Regulatory and Risk Strategies practice. Mr. Bastian received an undergraduate degree in Accounting from Universidad de Chile and a Master degree in Business Administration from Universidad Adolfo Ibáñez. Sven Riehl became Chief Compliance Officer in August Joaquín Rojas Walbaum became General Manager of Itaú Corpbanca’s New York Branch in October 2017. Previously he was Treasury Director at the New York Branch since September 2009 and beforehand worked in the investment division at MetLife Chile and credit division at MetLife Investments Latin America. Mr. Rojas has more than 14 years of experience. He holds an undergraduate degree in Economics from Universidad de Chile and a Master of Business Administration from Columbia University. Alvaro De Alvarenga Freire Pimentelbecame CEO of Itaú Corpbanca Colombia on January 6, 2017. Previously, Mr. Pimentel held different positions during his 20 years with the group in Corporate Banking and the General Operation and Technology areas. He is a partner of Itaú Unibanco. Mr. Pimentel received a degree in Economics from the Universidad de Campinas and an Executive
B. COMPENSATION Consistent with Chilean law, we do not disclose to our shareholders, or otherwise make public, information regarding the individual compensation of our officers. However, we publicly disclose the fees paid to each of our directors and members of the board committees. For the year ended December 31,
(c) Audit Committee: UF50 per month for each member and UF150 per month for its chairman; (d) Corporate Governance Committee: UF50 per month; (e) Anti-Money Laundering and Anti-Terrorism Finance Prevention Committee: UF50 per month; (f) Compliance Committee: UF50 per month; and
No amounts were set aside or accrued by us to provide pension, retirement or similar benefits for our directors and executive officers. In the year ended December 31, At our ordinary shareholders’ meeting held on March a)
b) Other committees: UF50 for attending meetings of each such committee.
C. BOARD PRACTICES The period during which the directors have served in their office is shown in the table under Section A of this Item 6. The date of expiration of the current term of office is shown in the table below:
Pursuant to the provisions of our bylaws, the members of the board are generally renewed every three years, based on length of service and according to the date and order of their respective appointments. In the Annual Ordinary Shareholders’ Meeting held on March Consequently, the BOARD COMMITTEES Audit Committee Our board of directors maintains an audit committee which is currently comprised of five members, including two directors, one alternate director and twonon-director members. The current members of the audit committee are Messrs. Andrés Bucher Cepeda, who chairs it, Gustavo Arriagada Morales, Diego Fresco Gutiérrez, Juan Echeverría González and Antonio de Lima Neto. A description of the experience and qualifications for Messrs. Andrés Bucher Cepeda, Gustavo Arriagada Morales, and Diego Fresco Gutiérrez, each of whom is a director of our Company, is included in “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management.” Below we include a summary of the experience and Juan Echeverría Gonzálezcurrently serves as Corporate Chief Compliance Officer at CorpGroup. He was previously a partner in charge of Deloitte’s audits of Corpbanca, Banco Osorno y la Unión, Banco Bilbao Vizcaya Argentaria, Chile, Banco del Desarrollo, Banco Internacional, Financiera Condell, Banco Corpbanca Venezuela, and of several services provided to such financial institutions from 1993 to 2012. Mr. Echeverría is currently a director and a member of the audit committee of Itaú Corpbanca Colombia, Consorcio Periodístico de Chile (COPESA), Grupo de Radios DIAL S.A., CorpGroup Activos Inmobiliarios S.A., Centro Cultural CorpGroup SpA, and an advisor to the board of directors and audit committee of Compañía Minera San Gerónimo. He has participated in several local and international seminars regarding corporate governance, restructurings and business acquisitions. Mr. Echeverría received a B.A. in Accounting from Universidad de Chile and received two Master degrees from Universidad Adolfo Ibáñez in Business Law and Tax Law. He also holds two Diplomas in Tax Law from Universidad Adolfo Ibáñez. Antonio de Lima Neto has served as President (August 2009 to October 2013) at Banco Fibra S.A. He has worked as President (December 2006 to April 2009); Vice President of Retail and Distribution (July 2005 to December 2006); Vice President of International Business and wholesale (November 2004 to July 2005); Commercial Director (September 2001 to November 2004); Executive Superintendent of the Commercial Board (July 2000 to September 2001); Tocantins State Superintendent (May 1999 to May 2000) and Regional Superintendent of Belo Horizonte (January 1997 to May 1999) at Banco do Brasil S.A. He has also served as Member of the Board of Directors (2007 to 2009) at Brasilprev Seguros e Previdência S.A.; Member of the Board of Directors (2006 to 2009) at FEBRABAN Brazilian Federation of Banks; Member of the Board of Directors (2004 to 2005) at BB Seguridade e Participações S.A; Member of the Board of Directors (2003 to 2005) at Brasilsaúde Companhia de Seguros; Member of the Board of Directors (2001 to 2009) at Alliance Insurance Company of Brazil; Member of the Board of Directors (2000 to 2007) at BB Securities Limited Pension Fund. He the Brazilian Institute of Corporate Governance (2014); a Postgraduate degree in Marketing fromPUC-Rio (2001); Training for Executive The local regulator for the banking industry (SBIF) recommends that at least one of the members of the audit committee be experienced with respect to the accounting procedures and financial aspects of banking operations. Moreover, the members of the audit committee are appointed by the board of directors and must be independent according to the criteria set forth by the board of directors, and they cannot accept any payment or other compensatory fee from the Company, other than in their role and responsibility as members of the board of directors, of the audit committee or of other established Committees. Members of the audit committee receive a monthly remuneration. The audit committee has one charter that establishes its composition, objectives, roles, responsibilities and extension of its activities. The SBIF requires the audit committee to meet at least every four months and to provide an annual written report to the board of directors informing it of its activities. This report must also be presented to the annual shareholders’ meeting. According to their charter, the audit committee meetings take place at least twice a month. The main objectives of the audit committee are to oversee the effectiveness of the internal controls established by management, as well as to oversee compliance with laws and regulations. Other specific responsibilities of the audit committee include:
Directors’ Committee Our board maintains a directors’ committee which is currently comprised of three members, all of which are considered under Chilean law as independent directors of our board of directors. Also, a fourth director participates as a guest member. The current members of the directors committee are Messrs. Gustavo Arriagada Morales, who chairs it, Fernando Concha Ureta and Bernard Pasquier, as office-holders, and Pedro Samhan as permanent guest. A description of the experience and qualifications for Messrs. Gustavo Arriagada Morales, Fernando Concha Ureta, Pedro Samhan and Bernard Pasquier, each of whom is a director of the Company is included in “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management.” The directors’ committee has bylaws that establish their composition, organization, objectives, duties, responsibilities and extension of its activities. The SBIF requires the directors committee to meet at least every four months and to provide an annual written report to the board of directors informing it of its activities. The report must also be presented to the annual shareholders’ meeting. According to its charter, the directors committee meets once per month. The directors committee’s responsibilities are, among others:
reviewing the compensation plans of executive officers and principal officers;
examining the systems of remuneration and compensation plans for managers, senior executives and employees of the company;
OTHER COMMITTEES Corporate Governance Committee The corporate governance committee was established by the board of directors as an advisory body of it that aims to ensure the existence and development of better corporate governance practices for financial institutions. For that purpose, it is in charge of evaluating practices and policies that are currently in execution, making proposals to the board of directors of improvements, adjustments or reforms and pursuing for the proper implementation and applications of said practices and policies of corporate governance. The committee performs its duties with respect to the The committee is composed of six directors and onenon-director member. This committee is empowered to engage external consultants. This committee is currently comprised by Mr. Andrés Bucher Cepeda, who chairs it, and Messrs. Ricardo Villela Marino, The committee is regulated by its bylaws, by applicable legal and regulatory rules and by the principles established by the Organization for EconomicCo-operation and Development (OECD) as well as those defined by the Basel Committee on Banking Supervision on good corporate governance matters for financial institutions. Anti-Money Laundering and Anti-Terrorism Finance Prevention Committee This committee is in charge of preventing money laundering and terrorism financing. Its main purposes include planning and coordinating activities to comply with related policies and procedures, staying informed about the work carried out by the Compliance Officer and making decisions on any improvements to control measures proposed by the Compliance Officer. This committee is comprised of two directors, the CEO, the Compliance Committee The purpose of this committee is to monitor compliance with our codes of conduct and other complementary rules, establish and develop procedures necessary for compliance with these codes, interpret, administer and supervise compliance with these rules and resolve any conflicts that may arise. This committee is comprised of Assets and Liabilities Committee The main purpose of this committee is to monitor compliance with the financial guidelines established by our board of directors. In this regard, it approves and follows up on the financial strategies that guide the Credit Committee The purpose of this committee is to (i) establish the limits and procedures of the credit policy of the Management and Talent Committee The purpose of this committee is to determine an objective process to recommend the appointment of the senior management and perform an advisory role in relation with the administration of the senior management, including the right to makenon-binding recommendations to the board of directors relating to the compensation, the milestones to be achieved and the evaluation of the CEO and other senior officers. This committee is comprised of D. EMPLOYEES As of December 31, The table below shows our employees by geographic area:
E. CONTROLLING SHAREHOLDER’S SHARE OWNERSHIP As of The following chart is an overview of our ownership structure as of
Our directors and senior managers do not have different or preferential voting rights with respect to those shares they own. We do not have any arrangements for issuing capital to our employees, including any arrangements that involve the issue or grant of options of our shares or securities.
A. MAJOR SHAREHOLDERS Our only outstanding voting securities are our common shares. As of The following table sets forth information with respect to the record and beneficial ownership of our capital stock as of
Shareholders Saga III SpA Saieh Family Corp. Group Banking S.A. Cía. Inmob. y de Inversiones Saga SpA(1) IFC Others Securities Brokerage ADSs holders and Foreign Inst. Investors Local Institutional Investors Other minority shareholders Total
As of Itaú Unibanco Holding S.A., ITB Holding Brasil Participações Limitada, CGB II SpA, CGB III SpA, Saga II SpA and Itaú Unibanco and CorpGroup have signed the Itaú CorpGroup Shareholders’ Agreement to determine aspects related to corporate governance, dividend policy (based on performance and capital metrics), transfer of shares, liquidity and other matters. For a description of the Itaú CorpGroup Shareholders’ Agreement and the Transaction Agreement, see “Item 10. Additional Information—C. Material Contracts.” B. RELATED PARTY TRANSACTIONS GENERAL In the ordinary course of our business, we engage in a variety of transactions with certain of our affiliates and related parties. The Chilean Corporations Act requires that our transactions with related parties be in our interest and also on anarm’s-length basis or 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. In the event that the transaction is not within the ordinary course of business, prior to its effectiveness, the directors committee must prepare a report describing the conditions of the operation and present it to the board of directors for its express approval. Directors of companies that violate this provision are liable for the resulting losses. Under the Chilean General Banking Act, transactions between a bank and its affiliates are subject to certain additional restrictions. Under the Chilean Corporations Act, a “related party transaction,” in the case of an open stock corporation, is any operation between such corporation and (i) one or more related persons under Article 100 of the Securities Market Act provides that the following persons are “related” to a company: (i) the other entities of the business conglomerate to which the company belongs, (ii) parents, subsidiaries and equity-method investors and investees of the company, (iii) all directors, managers, officers and liquidators of the company and their spouses or blood relatives to the second degree, or any entity controlled, directly or indirectly, by any of the referred individuals, (iv) any person that, by him/herself or with other persons under a joint action agreement, may appoint at least one member of the management of the company or control ten percent or more of the capital or voting capital of a stock company and (v) other entities or persons determined as such by the CMF. A publicly-traded corporation may only enter into a related transaction when its aim is to contribute to the corporate general interests, its conditions are set at arm’s length and the corporation has followed the procedure indicated in the Chilean Corporations Act. The procedure to approve a related transaction can be summarized as follows: (i) the directors, managers, administrators, principal officers and liquidators involved in the potential transaction must give notice thereof to the board (these persons are obligated to disclose their interest in the transaction and their reasons to justify the convenience of the transaction for the corporation, both of which must be informed to the public), (ii) the absolute majority of the board, excluding any director involved in the transaction, must approve the transaction, (iii) the approval given by the board must be informed to the next shareholders’ meeting, (iv) if the directors involved in the transaction form the majority of the board, the transaction may only be approved by the unanimity of the remaining directors or bytwo-thirds of the issued voting shares in the corporation in a shareholders’ meeting, and (v) where the approval of the shareholders’ meeting is required, the board will request an independent appraiser to submit to the shareholders the conclusions regarding the conditions of the transaction. These rules are not applicable tonon-material transactions in terms of amounts involved, transactions included in the ordinary course of business of the corporation, according to the policies approved by the board and transactions with another entity of which the corporation owns at least 95% of its shares or rights. Non-compliance with these rules does not invalidate the transaction, but the persons involved will be obligated to transfer the benefit accrued thereby from the transaction to the corporation and will be held liable for the potential damages suffered by the corporation. These rules apply to all publicly-traded corporations and to their subsidiaries, regardless of their corporate type. We believe that we have complied with the applicable requirements of the Chilean Corporations Act in all transactions with related parties and affirm that we will continue to comply with such requirements. As of December 31, LOANS TO RELATED PARTIES As of December 31,
All loans to related parties were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectability or present other unfavorable features. During OTHER TRANSACTIONS WITH RELATED PARTIES During
These transactions were carried out on terms normally prevailing in the market at the date of the transaction. C. INTERESTS OF EXPERTS AND COUNSEL Not applicable. A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION See “Item 17. Financial Statements.” LEGAL PROCEEDINGS We are involved in collections proceedings initiated by us in the normal course of business and certain proceedings against us in the ordinary course of banking business as disclosed in Note 21 to our consolidated financial statements included herein. On December 30, 2015, the SBIF issued On January 8, 2016, the On September 6, 2016, the SBIF filed a complaint On October 19, 2017, the SBIF
During the course of the proceedings, Helm The purchase of shares of Itaú Corpbanca Colombia by Itaú Corpbanca will be subject to DIVIDEND POLICY Under the Chilean Corporations Act, Chilean open stock companies, such as ours, are generally required to distribute at least 30% of their net income each year, unless otherwise agreed by the unanimous consent of our shareholders. In the event of any loss of capital or of the legal reserve, no dividends can be distributed so long as such loss is not recovered from earnings or otherwise. No dividends above the legal minimum can be distributed if doing so would result in the On the other hand, the Itaú CorpGroup Shareholders’ Agreement provides for a dividend policy that targets, in the following order of priority: (i) first, complying with the Optimal Regulatory Capital for such fiscal year, as this term is defined therein, (ii) second, the payment of cash dividends aggregating at least US$370 million for each year and (iii) third, achieving a growth rate of the total assets of Itaú Corpbanca and Itaú Corpbanca Colombia above the Minimum Growth Rate (as this term is defined therein) and other reasonable objectives as determined by the board of Itaú Corpbanca. See “Item 10. Additional Information—C. Material Contracts — Itaú CorpGroup Shareholders’ Agreement.” The Itaú CorpGroup Shareholders’ Agreement provides for the distribution of the 100% of the fiscal year’s net income, calculated as total net income for the period less an amount provisioned to comply with the Optimal Minimum Regulatory Capital, as this term is defined in the Itaú CorpGroup Shareholders’ Agreement. In accordance with the Itaú CorpGroup Shareholders’ Agreement, at our ordinary shareholders’ meeting held on March 27,
The actual 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. In the event that dividends are paid, holders of ADSs will be entitled to receive dividends to the same extent as the owners of common shares. Dividends received by holders of ADSs will, absent changes in Chilean exchange controls or other laws, be converted into U.S. dollars and distributed net of currency exchange expenses and fees of the depositary and will be subject to Chilean withholding tax, currently imposed at the rate of 35% (which may be subject to credits in certain cases). Owners of ADSs are not charged with any fees with respect to cash or stock dividends. B. SIGNIFICANT CHANGES There have been no significant changes since the date of our annual financial statements. ITEM 9. OFFER AND LISTING DETAILS Not applicable. A. OFFER AND LISTING DETAILS Not applicable.
B. PLAN OF DISTRIBUTION Not applicable. C. MARKETS Our common shares are traded on the Santiago Stock Exchange and the Chilean Electronic Stock Exchange under the symbol “ITAUCORP.” Our ADSs have been listed since November 1, 2004 on the New York Stock Exchange under the symbol “ITCB.” D. SELLING SHAREHOLDER
Not applicable. E. DILUTION Not applicable. F. EXPENSES OF THE ISSUE Not applicable. ITEM 10. ADDITIONAL INFORMATION A. SHARE CAPITAL Not applicable. B. MEMORANDUM AND ARTICLES OF INCORPORATION Set forth below is material information concerning our share capital and a brief summary of the significant provisions of ourby-laws and Chilean law. This description contains material information concerning the shares, but does not purport to be complete and is qualified in its entirety by reference to ourby-laws, the Chilean General Banking Act, the Chilean Corporations Act and the Chilean Securities Market Act each referred to below. GENERAL
Shareholders rights in a Chilean bank that is also a special corporation ( The Chilean securities markets are principally regulated by the CMF under the Chilean Securities Market Act and the Chilean Corporations Act. In the case of banks, compliance with these laws is supervised by the SBIF. These two acts provide for disclosure requirements, restrictions on insider trading and price manipulation, and protection of minority investors. The Chilean Securities Market Act sets forth requirements relating to public offerings, stock exchanges, securities brokers and dealers, and outlines disclosure requirements for companies that issue publicly offered securities. The Chilean Corporations Act sets forth the rules and requirements for establishing public companies while eliminating government supervision of closed (closely-held) corporations. Public companies are those that voluntarily, or are legally required to, register their shares in the Securities Registry kept by the CMF. BOARD OF DIRECTORS Our board of directors has 11 regular members and two alternate members, elected by shareholders’ vote at ordinary shareholders’ meetings. The directors may be either shareholders ornon-shareholders of the Company. There is no age limit for directors. A director remains in office for three years and may bere-elected indefinitely. If for any reason, the ordinary shareholders’ meeting in which the new appointments of directors are to be made is not held, the duties of those serving as such shall be extended until their replacements are designated, in which case, the board of directors shall convene a meeting at the earliest possible time in order to effect the appointments. The directors are entitled to compensation for the performance of their duties. The amount of their compensation is determined annually at the ordinary shareholders’ meeting. In addition, payments in the form of wages, fees, travel accounts, expense accounts, dues as representatives of the board of directors and other cash payments, payments in kind or royalties of any sort whatsoever, may be paid to certain directors for the performance of specific duties or tasks in addition to their functions as directors imposed upon them specifically by the ordinary shareholders’ meeting. Any special compensation must be reported at the ordinary shareholders’ meeting, and for that purpose, a detailed and separate entry shall be made in our annual report to investors, which shall expressly indicate the complete name of each of the directors receiving special compensation. Without prejudice to any other incapacity or incompatibility established by the Chilean Corporations Act, according to the Chilean General Banking Act, the following may not be directors: (i) those persons who have been sentenced or are being tried for crimes punishable with a principal or accessory penalty of temporary or permanent suspension from or incapacity to hold public office, (ii) those persons who have been declared bankrupt and have not been rehabilitated, (iii) members of the Chilean Congress, (iv) directors or employees of any other financial institutions, brokers and security traders, together with its directors, officers, executives and managers; employees appointed by the President of Chile and employees or officers of (x) the State, (y) any public service, public institution, semi-public institution, autonomous entity or state-controlled company, or any such entity, a Public Entity, or (z) any enterprise, corporation or public or private entity in which the State or a Public Entity has a majority interest, has made capital contributions, or is represented or participating, provided that persons holding positions in teaching activities in any of the above entities may be directors, and (v) the bank’s employees, which shall not prevent a director from holding on a temporary basis and for a term not to exceed 90 days the position of manager. The CEO may not be elected as a director. For purposes of the election of directors, each shareholder shall have the right to one vote per share for purposes of electing a single person, or to distribute his votes among candidates as he or she may deem convenient, and the persons obtaining the largest number of votes in the same and single process shall be awarded positions, until all positions have been filled. The elections of regular and alternate board members are carried out separately. For purposes of casting votes, the chairman and the secretary, together with any other persons that may have been previously designated by at the meeting to sign the minutes thereof, shall issue a certificate giving evidence of the oral votes of shareholders attending, following the order of the list of attendance being taken. Each shareholder is entitled to cast his or her vote by means of a ballot signed by him or her, stating whether he or she signs for his own account or as a representative. This entitlement notwithstanding, in order to expedite the voting process, it can be ordered that the vote be taken alternatively or by oral vote or by means of ballots. At the time of polling, the chairman may instruct that the votes be read aloud, in order for those in attendance to count the number of votes issued and verify the outcome of the voting process. Every election of directors, or any changes in the election of directors, shall be transcribed into a public deed before a notary public, published in a newspaper of Santiago and notified to the SBIF by means of the filing of a copy of the respective public deed. Likewise, the appointments of general manager, manager and deputy managers shall be communicated and transcribed into a public deed. If a director ceases to be able to perform his or her duties, whether by reason of conflict of interest, limitation, legal incapacity, impossibility, resignation or any other legal cause, the vacancy is filled as follows: (i) the positions of regular director is filled by a member appointed by the board of directors on its first meeting after the vacancy occurs and such member appointed by the board of directors will remain in the position until the next ordinary shareholders’ meeting, where the appointment may be ratified, in which case, the replacement director will remain in his or her position until the expiration of the term of the director he or she replaced and act as full director; and (ii) while the vacancy has not been filled by the board of directors, an alternate director shall act as regular member. The alternate directors may temporarily replace regular directors in case of their absence or temporary inability to attend a board meeting. Alternate board members are always entitled to attend and speak at board meetings. They are entitled to vote at such meetings only when a regular member is absent and such alternate member acts as the absent member’s replacement. During the first meeting following the ordinary shareholders’ meeting, the board of directors elects, by an absolute majority and in separate and secret votes, from among its members, a chairman and a vice chairman. If no director obtains such majority, the election is repeated among those three directors who obtained the most votes, adding any blank votes to the person who obtained the greatest number of votes. In case of a tie, the vote is repeated and, if a tie were to occur again, there is a drawing. The chairman and the vice president may be reelected indefinitely. The board of directors meets in ordinary sessions at least once a month, held onpre-set dates and times determined by the board. Extraordinary meetings are held whenever called by the chairman, whether at his own will or upon the request of one or more directors, so long as the chairman determines in advance that the meeting is justified, except if the request is made by the absolute majority of the directors in office, in which case the meeting shall be held without such prior determination. The extraordinary meetings may only address those matters specifically included in the agenda for the extraordinary meeting, except that, if the meeting is attended by all the directors in office, they may agree otherwise by a unanimous vote. Notifications of meetings of the board of directors shall be made by certified letter sent to the address of each director registered with the bank, at least five days in advance of the date on which the ordinary or extraordinary session should be held. Thefive-day period shall be calculated from the date on which the letter is placed in the mail. The quorum for the board of directors’ meeting is majority of its members in office, this is six directors. Resolutions shall be adopted by the affirmative vote of the absolute majority of the attending directors. In the event of a tie, the person acting as the chairman of the meeting shall have a casting vote. Directors having a vested interest in a negotiation, act, contract or transaction that is not related to the bank business, either as principal or as representative of another person, shall communicate such fact to the other directors. If the respective resolutions are approved by the board, it shall be in accordance with the prevailing company’s interest and fair market conditions and such director’s interest must be disclosed at the next ordinary shareholders’ meeting by the chairman of such board meeting. The discussions and resolutions of the board of directors shall be recorded in a special book of minutes maintained by the secretary. The relevant minutes shall be signed by the directors that attended the relevant meeting. If a director determines that the minutes for a meeting are inaccurate or incomplete, he or she is entitled to record an objection before actually signing the minutes. The minutes shall be deemed approved as from the moment it is signed by all the directors that attended such meeting and all the resolutions adopted may be carried out upon the approval. However, by unanimous consent of the directors that attended the meeting, the resolutions adopted by the board may be carried out before the approval of the minutes, provided that the agreement is recorded in a written document signed by all the relevant directors. In the event of death, refusal or incapacity for any reason of any of the directors attending to sign the minutes, such circumstance shall be recorded at the end of the minutes stating the reason for the impediment. The directors are personally liable for all of the acts they effect in the performance of their duties. Any director who wishes to disclaim responsibility for any act or resolution of the board of directors must record his or her opposition in the minutes, and the chairman must report such opposition at the following ordinary shareholders’ meeting. The board will represent us in and out of court and, for the performance of the CAPITALIZATION Under Chilean law, the shareholders of a bank, acting at an extraordinary shareholders’ meeting, have the power to authorize an increase in such company’s capital with the authorization of the SBIF. 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 amending theby-laws, also grant the right to receive dividends or distributions of capital. An 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 receive a correspondingpro-rata portion of the dividends declared and/or returns of capital with respect to such shares unless the company’sby-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 board of directors is obligated to initiate legal action to recover outstanding amounts unless holders oftwo-thirds of the issued shares in an extraordinary shareholders meeting authorizes the board of directors to refrain from pursuing the collection, in which case the company’s capital will be reduced to the amount actually paid. Upon termination of the actions for collection, the board of directors shall propose to the shareholders meeting thewrite-off of thenon-paid amount and the reduction of the capital of the company to the amount effectively paid in. Authorized shares and issued shares which have not been subscribed and paid for within the period fixed for their payment (which cannot be longer than three years) are cancelled and are no longer available for issuance by the company, unless in case of an issuance of convertible bonds (in which case the unsubscribed portion of the capital increase shall remain in place for a number of shares sufficient to comply with the option) or when reserved for compensation plans for employees (in which case the maximum term for subscription and payment cannot be longer than five years). Article 22 of Chilean Corporations Act states that the purchaser of shares of a company implicitly accepts itsby-laws and any agreements adopted at shareholders’ meetings. OWNERSHIP RESTRICTIONS Under Article 12 of the Chilean Securities Market Act and the Regulations of the SBIF, shareholders of Public Companies are required to report the following to the CMF and the Chilean stock exchanges:
The foregoing requirements also apply to the acquisition or sale of securities or agreements which price or return depends or is conditioned (all or in a significant part) on changes or movements in the price of such shares. Such report shall be made the day following the execution of the transaction. In addition, majority shareholders must state in any such report whether their purpose is to acquire control of the company or if they are making a financial investment. Any beneficial owner of ADSs representing 10% or more of our share capital is subject to these reporting requirements under Chilean law. The Chilean Securities Market Act also sets forth certain regulations on takeovers of corporations. Under Article 54 of the Chilean Securities Market Act and the regulations of the CMF, persons or entities intending to acquire control, directly or indirectly, of a Public Company, 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 ten business days before the date of perfection of the acts which allow to obtain control of the company, but in any case, as soon as negotiations regarding the change of control are formalized and/or as soon as reserved information and/or documents concerning the target are delivered to the potential acquirer through a filing with the CMF, 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. Within the same term, a written communication to such effect must be sent to the target corporation, the controlling corporation, the corporations controlled by the target corporation, the CMF, and to the Chilean stock exchanges on which the securities are listed. In addition to the foregoing, Article 54A of the Chilean Securities Market Act requires that within two business days of the completion of the transactions pursuant to which a person has acquired control of a Public 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. A beneficial owner of ADSs intending to acquire control of us is also subject to the foregoing reporting requirements. The provisions of the aforementioned articles do not apply whenever the acquisition is being made through a tender or exchange offer. Title XXV of the Chilean Securities Market Act on tender offers and the regulations of the CMF provide that the following transactions shall be carried out through a tender offer:
Nevertheless, the following exceptions are applicable to all the cases described above (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, or (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. Article 200 of the Chilean Securities Market Act prohibits any shareholder that has taken control of a Public Company to acquire, within the period of 12 months from the date of the transaction that permitted such shareholder to take control of the Public Company, a number of shares equal to or higher than 3% of the outstanding issued shares of the target without making a tender offer at a price per share not lower than the price paid at the time of the change of control transaction. However, if the acquisition is 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 Act sets forth the basis to determine what constitutes control of a business group and a related party while Title XXV establishes a special procedure for acquiring control of a Public Company through a tender offer. The Chilean Securities Market Act defines control as the power of a person, or group of persons acting pursuant to a joint action agreement, to direct the majority of the votes in the shareholders meetings of the corporation, or 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 acting together pursuant to a joint action agreement holding, directly or indirectly, at least 25% of the voting share capital, unless:
According to the Chilean Securities Market Act, 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:
Likewise, the CMF may determine that a joint action agreement exists between two or more entities considering, among others, the number of companies in which they simultaneously participate and the frequency with which they vote identically in the election of directors, appointment of managers and other resolutions passed at shareholders’ meetings. According to Article 96 of the Chilean Securities Market Act, 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 securities issued by, them. According to the Chilean Securities Market Act, the following entities are part of the same business group:
a substantial part of the assets of the company are involved in the business group, whether as investments in securities, equity rights, loans or guaranties;
Article 36 of the Chilean General Banking Act states that as a matter of public policy, no person or company may acquire, directly or indirectly, shares that alone or jointly with the shares previously owned by it, represent more than 10% of the shares of a bank without the prior authorization of the SBIF, which may not be unreasonably withheld. The prohibition also applies to beneficial owners of ADSs. In the absence of such authorization, any person or group of persons acting in concert would not be permitted to exercise voting rights with respect to the shares or ADSs acquired. In determining whether or not to issue such an authorization, the SBIF considers a number of factors enumerated in the Chilean General Banking Act, including the financial stability of the purchasing party. Article 35bis of the Chilean General Banking Act establishes that prior authorization of the SBIF is required for:
the acquisition of all or a substantial portion (more than one third) of a bank’s assets and liabilities by another
Such prior authorization is required solely when the acquiring bank or the resulting group of banks would own a significant market share in loans (
that the technical reserve established in Article 65 of the Chilean General Banking Act be applicable when deposits exceed one and a half times the resulting bank’s effective net equity (which is the sum of(x) paid-in capital and reserves, plus (y) subordinated bonds up to 50% of letter (x) above under certain terms, plus (z) certain effective risk voluntary reserves up to 1.25% of its risk weighted assets); or
If the acquiring bank or resulting group would have a market share in loans defined by the SBIF to be more than 15% but less than 20%, the authorization will be conditioned on the bank or banks maintaining an effective net equity not lower than 10% of their risk-weighted assets for the time set forth by the SBIF, which may not be less than one year. The calculation of 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. According to the Chilean General Banking Act a bank may not grant loans to related parties on more favorable terms than those generally offered tonon-related parties. Article 84 No. 2 of the Chilean General Banking Act and the Regulations of the SBIF create the presumption, among other cases, that natural persons who are holders of shares and who beneficially own more than 1% of the shares (or 5% in the case of bank’s shares actively traded) are 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 representing more than 1% of the shares, and accordingly the limitations of Article 84 No. 2 would be applicable to such beneficial owners. 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% or more of the total amount of shares of capital stock issued by such bank. Article 16bis of the Chilean General Banking Act provides that the individuals or legal entities which, individually or with other people, directly control a bank and who individually own more than 10% of its shares shall send to the SBIF reliable information on their financial situation in the form and within the time set forth in Chapter1-3 of the regulations of the SBIF (Recopilación Actualizada de Normas). Also, controlling shareholders must submit information regarding their financial situation pursuant to Chapter1-17 of said regulations. PREEMPTIVE RIGHTS AND INCREASES OF SHARE CAPITAL The Chilean Corporations Act provides that whenever a Chilean company issues new shares for consideration, it must offer to its existing shareholders the right to purchase a sufficient number of shares to maintain their existing ownership percentages in the company. Pursuant to this requirement, preemptive rights in connection with any future issuance of shares will be offered by us to the depositary as the registered owner of the shares underlying the ADSs. However, the depositary will not be able to make such preemptive rights available to holders of ADSs unless a registration statement under the Securities Act is effective with respect to the underlying shares or an exemption from the registration requirements thereunder is available. We intend to evaluate, at the time of any preemptive rights offering, the practicality under Chilean law and Central Bank of Chile 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 common shares 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 attempt to sell such holders’ preemptive rights and distribute the proceeds thereof, after deduction of its expenses and fees, 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. The inability of all or certain holders of ADSs to exercise preemptive rights in respect of common shares underlying such ADSs could result in such holders not maintaining their percentage ownership of the common shares following such preemptive rights offering unless such holder made additional market purchases of ADSs or common shares. 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 (except for shares as to which preemptive rights have been waived), Chilean Public Companies are not permitted to offer any newly issued shares for sale to any third party. For an additional30-day period thereafter, a Chilean company 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. Thereafter, unsubscribed shares may be offered through any Chilean stock exchange without any indication of price. Unsubscribed shares that are not sold on a Chilean stock exchange can be sold to third parties only on terms no more favorable for the purchaser than those offered to shareholders. SHAREHOLDERS’ MEETINGS AND VOTING RIGHTS An annual ordinary meeting of shareholders is held within the first four months of each year, generally in March and must be called by the board of directors. The annual ordinary meeting of shareholders is the corporate body that approves the annual financial statements, approves all dividends in accordance with the dividend policy proposed by the board of directors, elects the members of our board of directors and approves any other matter which does not require an extraordinary shareholders’ meeting. The last annual ordinary meeting of our shareholders was held on March 19, 2019. Extraordinary meetings may be called by our board of directors when deemed appropriate, and ordinary or extraordinary meetings must be called by our board of directors when requested by shareholders representing at least 10% of the issued voting shares or by the SBIF. Notice to convene the annual ordinary meeting or an extraordinary meeting is given by means of written notice which must be published at least three different days in a newspaper of our corporate domicile (currently Santiago) designated by the shareholders at their annual meeting and if a shareholder fails to make such designation, the notice must be published in the Official Gazette pursuant to legal regulations. The first notice must be published not less than 15 days nor more than 20 days in advance of the scheduled meeting. Notice must also be mailed 15 days in advance to each shareholder and to the SBIF, CMF and the Santiago The quorum for a shareholders’ meeting is established by the presence, in person or by proxy, of shareholders representing at least an absolute majority of the issued common shares; if a quorum is not present at the first meeting, the meeting can be reconvened (in accordance with the procedures described in the previous paragraph) and, upon the meeting being reconvened, shareholders present at the reconvened meeting are deemed to constitute a quorum regardless of the percentage of the shares represented. The shareholders’ meetings pass resolutions by the affirmative vote of an absolute majority of those voting shares present or represented at the meeting. Only shareholders registered with us on the fifth business day prior to the date of a meeting are entitled to attend and vote their shares. A shareholder may appoint another individual (who need not be a shareholder) as his proxy to attend and vote on his behalf. Every shareholder entitled to attend and vote at a shareholders’ meeting has one vote for every share subscribed. Under ourby-laws, directors are elected by cumulative voting. Each shareholder has one vote per share and may cast all of his or her votes in favor of one nominee or may apportion is or her votes among any number of nominees. The following matters can only be agreed upon at an extraordinary shareholders’ meeting:
the conveyance of 50% or more of the assets of a subsidiary, if represent at least 20% of our total assets, and any transfer of shares of a subsidiary that implies the Company loses control of such subsidiary;
other matters that require shareholder approval according to Chilean law or ourby-laws. The matters referred to in the first five items listed above may only be approved at a meeting held before a notary public, who shall certify that the minutes are a true record of the events and resolutions of the meeting. Theby-laws establish that resolutions are passed at shareholders’ meetings by the affirmative vote of an absolute majority of those shares present or represented at the meeting. However, under the Chilean Corporations Act, the vote of atwo-thirds majority of the outstanding voting shares is required to approve any of the following actions:
to establish the right of the controller to force other shareholders to sell their shares in case the controller has surpassed 95% of the shares of the company as a result of a tender offer for 100% of its shares under certain circumstances;
In general, Chilean law does not require a Chilean public company 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 company within the15-day period before the ordinary annual meeting. Under Chilean law, a notice of a shareholders’ meeting listing matters to be addressed at the meeting must be mailed not fewer than 15 days prior to the date of such meeting, and, in cases of an ordinary annual meeting, shareholders must have available an annual report of the company’s activities which includes audited financial statements. 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. The Chilean Corporations Act provides that whenever shareholders representing 10% or more of the issued voting shares so request, a Chilean company’s annual report must include, in addition to the materials provided by the board of directors to shareholders, such shareholders’ comments and proposals in relation to the company’s affairs. Similarly, the Chilean Corporations Act provides that whenever the board of directors of a public company convenes an ordinary meeting of the shareholders and solicits proxies for that meeting, or distributes information supporting its decisions, or other similar material, it is obligated to include as an annex to its said materials any pertinent comments and proposals that may have been made by shareholders owning 10% or more of the company’s voting shares who have requested that such comments and proposals be so included. DIVIDEND, LIQUIDATION AND APPRAISAL RIGHTS Under the Chilean Corporations Act, Chilean companies are generally required to distribute at least 30% of their earnings as dividends, unless there is unanimous consent to the contrary. In the event of any loss of capital or of the legal reserve, no dividends can be distributed so long as such loss is not recovered. Also, no dividends of a bank can be distributed if doing so would result in the bank exceeding certain capital ratios. 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. The right to receive dividends lapses if it is not claimed within five years from the date the dividend is payable. 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. In the event of our liquidation, the holders of fully paid shares would participate equally and ratably, in proportion to the number ofpaid-in shares held by them, in the assets available after payment of all creditors. In accordance with the Chilean General Banking Act, our shareholders have no appraisal rights. APPROVAL OF FINANCIAL STATEMENTS Our board of directors is required to submit our audited financial statements to the shareholders annually for their approval at the ordinary shareholders meeting. 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 forre-election for the ensuing period. REGISTRATIONS AND TRANSFERS Our common shares are registered by an administration agent named DCV Registros S.A. This entity is responsible for our shareholders’ registry. In the case of jointly owned common shares, anattorney-in-fact must be appointed to represent the joint owners in dealings with us. C. MATERIAL CONTRACTS The following is a brief summary of our material contracts currently in force. A copy of each of these contracts has been included as an exhibit hereto. See “Item 19. Exhibits.” Transaction Agreement This section describes the material terms of (i) the Transaction Agreement executed by former Corpbanca, CorpGroup Parent, Itaú Unibanco and former Itaú Chile on January 29, 2014, and amended on June 2, 2015 and on January 20, 2017; and (ii) the text of the Itaú CorpGroup Shareholders’ Agreement contemplated by the Transaction Agreement and executed by Itaú Unibanco Holding S.A., Inversiones Gasa Limitada, CorpGroup Holding Inversiones Limitada, CorpGroup Banking S.A., Compañía Inmobiliaria y de Inversiones Saga SpA and CorpGroup Interhold SpA on April 1, 2016. The rights and obligations of the parties to the Transaction Agreement and the Itaú CorpGroup Shareholders’ Agreement are governed by the express terms and conditions of such agreement and not by this summary or any other information contained in thisForm 20-F. The description in this section and elsewhere in thisForm 20-F is qualified in its entirety by reference to the complete text of the Transaction Agreement and the form of Itaú CorpGroup Shareholders’ Agreement, copies of which are attached as Exhibit 10.C.1 and are incorporated by reference herein. This summary does not purport to be complete and may not contain all of the information about the Transaction Agreement or the Itaú CorpGroup Shareholders’ Agreement. Itaú Corpbanca encourages you to read the Transaction Agreement and the Itaú CorpGroup Shareholders’ Agreement carefully and in their entirety. Capitalized terms used but not defined herein shall have the same meaning as in the Transaction Agreement or the Itaú CorpGroup Shareholders’ Agreement, as applicable. Explanatory Note Regarding the Transaction Agreement The following summary is included to provide you with information regarding the terms of the Transaction Agreement. This section is not intended to provide you with any factual information about Itaú Corpbanca. Such information can be found elsewhere in this The representations, warranties and covenants made in the Transaction Agreement by former Itaú Chile and former Corpbanca were qualified and subject to important limitations agreed to by Itaú Chile and Corpbanca in connection with negotiating the terms of the Transaction Agreement. In particular, in your review of the representations and warranties contained in the Transaction Agreement and described in this summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purpose of establishing the circumstances in which a party to the Transaction Agreement may have the right not to consummate the Merger if the representations and warranties of the other party proved to be untrue due to a change in circumstance or otherwise, and allocating risk between the parties to the Transaction Agreement, rather than establishing matters as facts. The representations and warranties are also subject to a contractual standard of materiality and in some cases were qualified by the matters contained in the disclosure schedules that the parties delivered in connection with the Transaction Agreement. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the Transaction Agreement, which subsequent information may or may not be fully reflected in public disclosures by Itaú Unibanco or former Corpbanca. The representations and warranties and other provisions in the Transaction Agreement should not be read alone but instead together with the information provided elsewhere in thisForm 20-F and in the documents incorporated by reference hereto. We Overview To help you better understand the Merger and the other transactions contemplated by the Transaction Agreement the charts below illustrate, in simplified form, the organizational structure of former Corpbanca and Itaú Chile in Chile and Colombia. The Merger The following transactions occurred prior to the Merger:
After these transactions occurred, Itaú Chile merged with and into Corpbanca, with Corpbanca as surviving entity under the name of “Itaú Corpbanca.” The Merger resulted in the issuance of 172,048,565,857 shares of Corpbanca (representing 33.58% of the shares of Itaú Corpbanca) to Itaú Unibanco. The Saieh Family retained 33.13% of the capital stock of Itaú Corpbanca and the remaining 33.29% of the capital stock was held by public shareholders. After the Merger, Itaú Unibanco indirectly acquired an additional 2.13% and 0.35% interest in our share capital from the Saieh Family, on October 26, 2016 and on September 15, 2017, respectively, which resulted in an aggregate holding of 36.06% of the capital stock of Itaú Corpbanca. Consummation of the Merger In an extraordinary shareholders’ meeting held on June 26, 2015, our shareholders approved the Merger and the other Transactions contemplated in the Transaction Agreement. On September 4, 2015 the SBIF issued Resolution After the Merger, and according to the Transaction Agreement and its amendment on January 20, 2017, the following transactions will be implemented:
The foregoing transactions are collectively referred to as the Transactions. Employee Matters Following completion of the Merger, Itaú Corpbanca had the discretion to either (i) offer generally to officers and employees of Itaú Chile and its subsidiaries that have or will become employees of Itaú Corpbanca or its subsidiaries, or the Itaú Chile Continuing Employees, employee benefits under compensation and benefit plans on terms and conditions similar to those maintained by former Corpbanca and its subsidiaries and/or (ii) maintain for the benefit of Itaú Chile Continuing Employees, the compensation and benefit plans maintained by former Itaú Chile immediately before the Merger. For purposes of eligibility, participation, vesting and benefit accrual (except not for purposes of benefit accrual to the extent that such credit would result in a duplication of benefits) under former Corpbanca’s compensation and benefit plans, service with or credited by former Itaú Chile or any of its subsidiaries or any of their predecessors shall be treated as service with former Corpbanca. Indemnification of Officers and Directors From and after completion of the Merger, in the event of any threatened or actual claim, action, suit, proceeding or investigation, whether civil, criminal or administrative, in which any person who was a director or officer of former Corpbanca or former Itaú Chile or any of their subsidiaries, or the Indemnified Parties, is, or is threatened to be, made a party on the basis of the Transaction Agreement or the Transactions, Itaú Corpbanca has agreed to indemnify, defend and hold harmless, to the fullest extent permitted by applicable law, each such Indemnified Party against any liability, judgments, fines and amounts paid in settlement in connection with any such threatened or actual claim, action, suit, proceeding or investigation. Registration of the Shares of Itaú Corpbanca Colombia S.A. Itaú Corpbanca and CorpGroup will carry out commercially reasonable efforts, in accordance with the shareholders agreement of Itaú Corpbanca Colombia S.A., in order to cause Itaú Corpbanca Colombia to be registered as a public company in the National Registry of Securities and Issuers of the CFS and its shares to be listed in the Colombian Stock Market (the “CSM”). The registration process is subject to the approval of Itaú Corpbanca Colombia’s extraordinary shareholders’ meeting. Itaú Corpbanca and CorpGroup, pursuant to the terms of the shareholders’ agreement dated July 1, 2013 entered into with Helm LLC and other shareholders of Itaú Corpbanca Colombia, requested to submit for the shareholders’ approval the registration of Itaú Corpbanca Colombia in the National Registry of Securities and Issuers of the CFS and the listing of its shares in the CSM. On February 1, 2017, in a meeting of shareholders of Itaú Corpbanca Colombia called for the decision of the above-mentioned matters, Helm LLC voted against such registration and listing and, therefore, those matters were rejected. Following this rejection, Itaú Corpbanca and CorpGroup filed a counterclaim in the Arbitration held in New York against Helm LLC for breaching the shareholders’ agreement. See “Item 8. Financial Information—A. Consolidated Statements and other Financial Information—Legal Proceedings.” Insurance Matters Following completion of the Merger, Itaú Unibanco is required to cause Itaú Chile Compañía de Seguros de Vida S.A. to provide life insurance-related products to all the clients of Itaú Corpbanca that are permitted to obtain an offer from an insurance broker to acquire life insurance and to pay Corpbanca Corredores de Seguros, S.A. and Itaú Chile Corredora de Seguros Limitada brokerage and/or services fees in an aggregate annual amount equal to 47.7%, or the Applicable Premium Percentage of the aggregate revenues generated by them from the sales of such life-insurance related products for the relevant year, in consideration and exchange for the offer of such products to the clients of Itaú Corpbanca. The Applicable Premium Percentage will be revised on a yearly basis as provided by the Transaction Agreement. If Itaú Unibanco desires not to continue to cause Itaú Chile Compañía de Seguros de Vida S.A. to offer the life-insurance related products to the insurance clients of Itaú Corpbanca, Itaú Unibanco shall use its reasonable best efforts to, enter into an agreement with a third party and one or more Corpbanca Corredores de Seguros, S.A. and/or Itaú Chile Corredora de Seguros Limitada, whereby such third party will provide life-insurance related products to the insurance clients of Itaú Corpbanca and pay to Corpbanca Corredores de Seguros, S.A. and/or Itaú Chile Corredora de Seguros Limitada, as applicable, the related insurance brokerage fees on substantially the same terms described above. Until an agreement with such third party has been executed, Itaú Unibanco will continue to pay Itaú Corpbanca or Corpbanca Corredores de Seguros, S.A. and/or Itaú Chile Corredora de Seguros Limitada an amount equal to the average of the Insurance Brokerage Fees paid by Itaú Chile Compañía de Seguros de Vida S.A. in the12-month period prior to the date on which Itaú Chile Compañía de Seguros de Vida S.A. ceases to provide life-insurance related products to Itaú Corpbanca or Corpbanca Corredores de Seguros, S.A. and/or Itaú Chile Corredora de Seguros Limitada.
Itaú CorpGroup Shareholders’ Agreement The following summary is included to provide you with information regarding the terms of the form of Itaú CorpGroup Shareholders’ Agreement executed by Itaú Unibanco Holding S.A. and CorpGroup on April 1, 2016. This section is not intended to provide you with any factual information about Itaú Corpbanca. Such information can be found elsewhere in the public filings that Itaú Corpbanca makes with the SEC. Corporate Governance Composition and size of the Board of Directors of Itaú Corpbanca and its subsidiaries. Itaú Unibanco and CorpGroup Parent agreed that of the number of directors of each of the board of (i) Itaú Corpbanca and Itaú Corpbanca Colombia that they are entitled or able to appoint (including by causing Itaú Corpbanca to appoint) at any time (in addition to any independent directors required by applicable law) and (ii) the respective subsidiaries of Itaú Corpbanca and Itaú Corpbanca Colombia that they are entitled or able to appoint at any time (in addition to any independent directors required by applicable law), each of Itaú Unibanco and CorpGroup Parent shall be entitled to designate a number in proportion to its respective direct and indirect percentage ownership in Itaú Corpbanca, rounded to the nearest whole number; provided that Itaú Unibanco shall designate at least a majority of such directors of each board appointed by them and that at least one of such directors of each board is appointed by CorpGroup Parent. The board of Itaú Corpbanca shall be comprised of 11 directors and two alternate directors (one selected by Itaú Unibanco and one selected by CorpGroup Parent). The board of Itaú Corpbanca Colombia shall be comprised of nine directors and the number of directors of the board of all other subsidiaries shall be specified by the board of Itaú Corpbanca. Itaú Unibanco and CorpGroup Parent agreed to cause, (i) a designee of CorpGroup Parent to be the chairman of the board of Itaú Corpbanca as long as CorpGroup Parent holds at least 13% of the capital stock of Itaú Corpbanca, (ii) a designee of CorpGroup Parent to be the chairman of the board of Itaú Corpbanca Colombia as long as CorpGroup Parent holds at least 13% of the capital stock of Itaú Corpbanca and (iii) a designee of Itaú Unibanco to be the vice-chairman of Itaú Corpbanca and Itaú Corpbanca Colombia. The chairman of the board of Itaú Corpbanca shall not have a casting vote. Itaú Unibanco and CorpGroup Parent shall cause the directors of the relevant board appointed by them to vote, to the extent permitted by applicable law, together as a single block on all matters in accordance with the recommendation of Itaú Unibanco (except in the cases subject to shareholder consent rights). To this end, in the event that (i) a director of Itaú Corpbanca, Itaú Corpbanca Colombia or any other subsidiary of Itaú Corpbanca designated by CorpGroup Parent or Itaú Unibanco does not vote with the other directors as a single block and (ii) as a consequence, the relevant board is unable to adopt a decision on such matter in accordance with the recommendation of Itaú Unibanco (except that (ii) will not be required if such director is a member of the Saieh Group, or fails to comply on more than two occasions and more than two matters in any calendar year), Itaú Unibanco or CorpGroup Parent (whomever designated such director), shall take all required action to have such director removed from the relevant board within 60 calendar days. Failure to take such action shall be considered to constitute a Material Breach by the shareholder who designated such director. A majority of the directors will constitute quorum for all meetings of the relevant boards. However, if less than all of the directors appointed by Itaú Unibanco to such board are not present, a quorum will not exist without the consent of the majority of the directors appointed by Itaú Unibanco to such board. The vote of the majority of the directors attending a meeting will be required to pass a resolution of the relevant boards (except in the cases subject to shareholder consent rights). Board Committees Itaú Unibanco and CorpGroup Parent agreed to cause Itaú Corpbanca and Itaú Corpbanca Colombia to each create the following committees of the board of directors: Directors Committee, Audit Committee, Management and Talent Committee, Assets and Liabilities Management Committee and Credit Committee. The Credit Committee shall (i) have binding power to establish the limits and procedures of the credit policy of Itaú Corpbanca and its subsidiaries and the power to establish approval exceptions for financial decisions exceeding certain thresholds (to be defined by the Credit Committee) and (ii) shall impose a binding framework with upper limits on credit exposures for which approval of Itaú Unibanco will be required. In connection with the latter, Itaú Unibanco shall respond to any such requests for approval within seven business days (the absence of explicit denial being considered as an approval). The Credit Committee shall be comprised of five members (of which three shall be appointed by Itaú Unibanco and two by CorpGroup Parent), all of whom shall be local executives or directors of the relevant board, and be headed by a local executive officer or director recommended by the CEO of Itaú Corpbanca or its relevant subsidiary, as applicable. Officers The board of directors of Itaú Corpbanca shall appoint from time to time the CEO, the country heads and other senior management of Itaú Corpbanca and Itaú Corpbanca Colombia. Itaú Unibanco and CorpGroup Parent shall cause Itaú Corpbanca to cause its subsidiaries to appoint designees of the board of Itaú Corpbanca from time to time to the designated positions at such subsidiary. A Management and Talent Committee will determine an objective process to recommend designees to these positions based on internal promotion, international, merit-based standards and professional track record, and relevant industry and jurisdiction-specific experience, and will provide a list of selected candidates to the board of Itaú Corpbanca who will be ultimately responsible for their final appointment. CorpGroup Parent may request the removal of the CEO of Itaú Corpbanca and of Itaú Corpbanca Colombia if during three consecutive years (excluding the year of the closing of the Merger) the ROE (return on equity) of the respective bank is at least 1% lower than the average ROE of the three largest privately-owned banks (measured by assets, and excluding Itaú Corpbanca and Itaú Corpbanca Colombia) of Chile or Colombia, as the case may be, during such three-year period. Shareholder Consent Rights Subject to certain exceptions set forth in the Itaú CorpGroup Shareholders’ Agreement, Itaú Unibanco and CorpGroup Parent agreed that Itaú Corpbanca shall not take, and shall not permit any subsidiary to take, any of the following transactions without the consent of (i) CorpGroup Parent, so long as CorpGroup Parent owns at least 13% of the capital stock of Itaú Corpbanca, and (ii) Itaú Unibanco:
issue or sell any equity securities of Itaú Corpbanca or any of its subsidiaries, other than solely to the extent required to comply with immediate legal and regulatory requirements or to meet the Optimal Regulatory Capital;
make any change to the dividend policy;
Transfer of Shares of Itaú Corpbanca Itaú Unibanco and CorpGroup Parent have agreed not to directly or indirectly purchase or otherwise acquire shares of Itaú Corpbanca or any beneficial interest therein to the extent such acquisition would require Itaú Unibanco or CorpGroup Parent to launch a tender offer to acquire all shares of Itaú Corpbanca. Any transfer of shares of Itaú Corpbanca made by Itaú Unibanco and CorpGroup Parent shall be implemented through the Santiago Stock Exchange with afive-day prior notice to the other party. So long as CorpGroup Parent and Itaú Unibanco collectively hold an aggregate direct or indirect participation in the voting shares of Itaú Corpbanca of at least 50% plus one share, CorpGroup Parent shall keep (and may not transfer) the direct or indirect ownership of a number of shares of Itaú Corpbanca representing the lesser of: (i) 16.42% of the shares of Itaú Corpbanca at the time of execution of the Itaú CorpGroup Shareholders’ Agreement (i.e. at the closing of the Transactions) or (ii) the minimum percentage of such shares that allows Itaú Unibanco and CorpGroup Parent to hold such aggregate direct or indirect participation in the voting shares of Itaú Corpbanca. Such number of shares will be pledged by CorpGroup Parent in favor of Itaú Unibanco. Right of First Offer,Tag-Along and Drag-Along Rights Right of first offer Subject to the terms set forth on the Itaú CorpGroup Shareholders’ Agreement, Itaú Unibanco and CorpGroup Parent shall have a right of first offer with regard to potential transfers of shares of the Companies. If either Itaú Unibanco or CorpGroup Parent intend to transfer shares of the Companies, such party shall notify in writing to the other party of such intention, stating the number of shares, the price and other terms and conditions of the proposed transfer. The recipient party shall have the right to purchase all such shares for a price and under terms and conditions equal to those notified by the selling shareholder. If the recipient party elects not to purchase all the shares intended to be transferred, the selling shareholder shall be permitted for a period of six (6) months from the date the notice to purchase the shares was due to be received by the selling party, to transfer to a third party not less than the number of shares, at a price not less than and on terms and conditions not materially less favorable to the selling shareholder than those stated in the notice of such proposed transfer. Tag-along CorpGroup Parent will have the right totag-along on the sale of shares of Company One or of shares of Itaú Corpbanca owned by Company One by Itaú Unibanco and jointly sell to a third party with Itaú Unibanco in such sale. Pursuant to such right, in the event of a proposed transfer of shares of Company One or shares of Itaú Corpbanca by Itaú Unibanco, Itaú Unibanco shall deliver to CorpGroup Parent prompt written notice stating, to the extent applicable, (i) the name of the proposed transferee, (ii) the number of shares proposed to be transferred, (iii) the proposed purchase price and (iv) any other material terms and conditions of the proposed transfer. The proposed transferee will not be obligated to purchase a number of shares exceeding that set forth in the notification of the proposed transfer. In the event such transferee elects to purchase less than all of the total shares sought to be transferred by CorpGroup Parent and Itaú Unibanco, CorpGroup Parent shall be entitled to transfer to the proposed transferee a number of shares equal to (i) the total number of shares originally proposed to be transferred by Company One and Itaú Unibanco multiplied by (ii) a fraction, (A) the numerator of which is the total number of shares of Itaú Corpbanca held by Company Two, and (B) the denominator of which is the total number of shares of Itaú Corpbanca held by the Companies. Drag-along In the event of a proposed sale of all of the issued and outstanding shares of Company One or shares of Itaú Corpbanca held by Itaú Unibanco to a third party and if at such time CorpGroup Parent owns less than 10% of the capital stock of Itaú Corpbanca, Itaú Unibanco may notify CorpGroup Parent in writing of such proposed sale stating (i) the name of the proposed transferee, (ii) the proposed purchase price (which shall be equal to at least the higher of fair value and market price), (iii) the obligation of the transferee to purchase all of CorpGroup Parent shares of Itaú Corpbanca, and (iv) any other material terms and conditions of the transfer. Under these circumstances, CorpGroup Parent shall be obligated to sell all of its shares of Itaú Corpbanca, free and clear of liens at the same price and on other terms no less favorable than Itaú Unibanco. Put of Company Shares If and to the extent that CorpGroup Parent is prohibited from selling its shares of Itaú Corpbanca, CorpGroup Parent shall have the unconditional right, from time to time on one or more occasions, to sell to Itaú Unibanco, and Itaú Unibanco shall have the unconditional obligation to acquire from CorpGroup Parent, any number of shares of Company Two at a price per share equal to the market price as of the date on which CorpGroup Parent notifies Itaú Unibanco of CorpGroup Parent’s exercise of its unconditional right to sell if immediately following such sale CorpGroup Parent and Itaú Unibanco would continue to collectively hold an aggregate direct or indirect participation in the voting shares of Itaú Corpbanca of at least 50% plus one share. At the time of payment of the purchase price of the shares of Company Two, Itaú Unibanco shall pay CorpGroup Parent, as an indemnity for not being able to benefit from the exemption on capital gains set forth in Article 107 of the Chilean Income Tax Law to which it would otherwise have been entitled to if it would have sold the underlying shares of Itaú Corpbanca in the Santiago Stock Exchange, a cash amount equal to (i) 50% of any taxes of CorpGroup Parent or its affiliates arising out of or in connection with such transfer that would not have arisen if it had sold the underlying shares of Itaú Corpbanca in the Santiago Stock Exchange and benefit from the abovementioned exemption on capital gains, and (ii) any taxes of CorpGroup Parent or its affiliates arising out of the application of such indemnity payment. Change of Control of CorpGroup Parent Under the Itaú CorpGroup Shareholders’ Agreement, CorpGroup Parent shall notify Itaú Unibanco prior to consummating a Change of Control of CorpGroup Parent and provide Itaú Unibanco a right of first offer to purchase a number shares of Company Two equal to the number required by Itaú Unibanco to hold an aggregate direct or indirect participation in the voting shares of Itaú Corpbanca of at least 50% plus one share at a price equal to the higher of the market price or fair value. If Itaú Unibanco accepts the price proposed by CorpGroup Parent, CorpGroup Parent shall be obligated to cause Company Two to sell such number of Itaú Corpbanca’s shares to Itaú Unibanco at such price. In the event that Itaú Unibanco does not accept the price proposed by CorpGroup Parent and as a result, an agreement is not reached, then CorpGroup Parent shall be permitted to proceed with such Change of Control and Itaú Unibanco shall be entitled to unilaterally terminate the Itaú CorpGroup Shareholders’ Agreement during a period of 60 days after receipt of notice from CorpGroup notifying of the consummation of such Change of Control. For purposes of the Itaú CorpGroup Shareholders’ Agreement, Change of Control shall mean, with respect to CorpGroup Parent, the Saieh Group ceasing to own, directly and indirectly, in a single transaction or in a series of related transactions, at least 50% plus one additional share of the issued voting stock of CorpGroup Parent. Right to Exchange Shares for Shares of Itaú Unibanco In the event Itaú Unibanco issues or sells certain equity securities of Itaú Unibanco to any third-party as consideration for or in connection with a transaction or series of transactions involving the direct or indirect investment by Itaú Unibanco in such equity securities or assets of any other third party, Itaú Unibanco shall inform CorpGroup Parent of such issuance or sale and shall offer to CorpGroup Parent the right to exchange for the same type of equity securities of Itaú Unibanco. CorpGroup Parent shall be entitled to exchange any or all of its shares of Company Two (or shares of Itaú Corpbanca) for such equity securities of Itaú Unibanco at an exchange ratio that reflects the relative fair values of the relevant equity securities of Itaú Unibanco and the shares of Company Two or Itaú Corpbanca, as the case may be.
Notwithstanding the foregoing, if the issuance of any such equity securities to CorpGroup Parent would result in Itaú Unibanco Participações S.A. ceasing to hold more than 50% of Itaú Unibanco’s voting equity, then CorpGroup Parent shall have the right to exchange no more than an amount of equity securities of Itaú Unibanco the issuance of which would not result in Itaú Unibanco Participações S.A. ceasing to hold more than 50% of Itaú Unibanco’s voting equity. Controlling Shareholder Notwithstanding the other provisions of the Itaú CorpGroup Shareholders’ Agreement, Itaú Unibanco shall have no obligation to purchase shares of Itaú Corpbanca or Company Two, to the extent such purchase would, in and of itself, require Itaú Unibanco to make a tender offer for all of the outstanding shares of Itaú Corpbanca. If Itaú Unibanco ceases to be the Controlling Shareholder (as defined in Article 97 of the Chilean Securities Market Act) of Itaú Corpbanca, prior to consummating any obligation pursuant to a provision of the Itaú CorpGroup Shareholders’ Agreement to purchase shares of Itaú Corpbanca or Company Two from CorpGroup Parent which would result in Itaú Unibanco being the Controlling Shareholder of Itaú Corpbanca, Itaú Unibanco shall commence a tender offer to purchase a number of shares of Itaú Corpbanca which would result in Itaú Unibanco being the Controlling Shareholder of Itaú Corpbanca for the purchase price provided in such applicable provision of the Itaú CorpGroup Shareholders’ Agreement and shall in any event satisfy its obligation (whether through the tender offer or a subsequent purchase thereafter) within 90 calendar days. CorpGroup Parent Liquidity Put and Call Options During a period of 18 months from the closing date of the Merger, CorpGroup Parent shall have the right to (i) sell to Itaú Unibanco, a number of shares of Company Two representing in the aggregate up to 6.6% of all of the outstanding shares of Itaú Corpbanca at a price equal to the market price as of the notice date of such put right; or (ii) cause Company Two to sell to Itaú Unibanco, through one of the mechanisms available on the Santiago Stock Exchange that only allows block sales, a number of shares of Itaú Corpbanca representing up to 6.6% of all of the outstanding shares of Itaú Corpbanca (in which event Itaú Unibanco will place an order to purchase such shares in the Santiago Stock Exchange at a price not less than such market price). If, as a result of the competitive bidding procedures of the Santiago Stock Exchange, the shares of Itaú Corpbanca sold by Company Two are unexpectedly sold over the Santiago Stock Exchange to a third party other than Itaú Unibanco or any of its affiliates at a higher price, then CorpGroup Parent shall no longer have the right to repurchase such shares of Itaú Corpbanca from Itaú Unibanco or one of its wholly-owned subsidiaries. If the put right described above has been exercised, at any time and from time to time during the five-year period thereafter, CorpGroup Parent shall have the unconditional right either to (i) acquire from Itaú Unibanco a number of shares of Company Two up to the number of shares sold pursuant to the put right described above at the same price per share as was paid by Itaú Unibanco pursuant to such put right plus an annual interest rate at the ChileanÍndice de Cámara Promedio plus a spread that is not to exceed the lowest spread then being offered by Itaú Corpbanca tonon-governmental borrowers in Chile; or (ii) cause Itaú Unibanco to place an order on the Santiago Stock Exchange to sell to CorpGroup Parent and/or Company Two a number of shares of Itaú Corpbanca of up to the number of shares of Itaú Corpbanca sold to Itaú Unibanco pursuant to the put right described above at the same price per share as was paid by Itaú Unibanco pursuant to such put right plus an annual interest rate at the ChileanÍndice de Cámara Promedio plus a spread that is not to exceed the lowest spread then being offered by Itaú Corpbanca tonon-governmental borrowers in Chile. If, as a result of the competitive bidding procedures of the Santiago Stock Exchange, the shares of Itaú Corpbanca sold by Itaú Unibanco or one of its wholly-owned subsidiaries are sold over the Santiago Stock Exchange to a third party at a higher price, then CorpGroup Parent and/or Company Two shall not have the right to repurchase such shares of Itaú Corpbanca. Call Option in Event of Material Breach If either Itaú Unibanco or CorpGroup Parent commits a Material Breach of the Itaú CorpGroup Shareholders’ Agreement, or the Breaching Shareholder, thenon-Breaching Shareholder shall have the right to give written notice to the Breaching Shareholder describing such Material Breach and demanding that the Breaching Shareholder cure the Material Breach by fully performing its obligation. If the Breaching Shareholder has not cured its Material Breach within 50 calendar days after receipt of any such notice, thenon-Breaching Shareholder shall have the unconditional right to (i) require the Breaching Shareholder to sell all of its shares to thenon-Breaching Shareholder at a price per share equal to 80% of the market price as of the date of the notice exercising a call option and (ii) if thenon-Breaching Shareholder is CorpGroup Parent, to sell to Itaú Unibanco all of its shares at a price per share equal to 120% of the market price as of the date of the notice exercising a put option. Notwithstanding the foregoing, if thenon-Breaching Shareholder is Itaú Unibanco, Itaú Unibanco may elect to purchase the maximum number of shares which would allow Itaú Unibanco to avoid making a public offer for all of the outstanding shares of Itaú Corpbanca. Non-Competition;Non-Solicit Non-Competition Neither Itaú Unibanco nor CorpGroup Parent shall, directly or indirectly, own, invest, control, acquire, operate, manage, participate or engage in any Banking Business in Chile, Colombia and the Republic of Panama other than (i) through its investment in the Itaú Corpbanca and its subsidiaries and (ii) through anysociedad de apoyo al giro in which Itaú Corpbanca has an ownership interest. For purposes of the Itaú CorpGroup Shareholders’ Agreement, Banking Business shall mean providing (i) consumer financial products and/or services, including secured and/or unsecured consumer lending, consumer mortgage products, consumer card products, retail banking products and/or services, and consumer leasing; and/or (ii) deposit-taking services including both consumer and commercial deposits, and payroll services; and/or (iii) credit and/or debit card transaction processing services (which transaction processing services, for the avoidance of doubt, include merchant acquiring); and/or (iv) commercial financial products and/or services, including bilateral and syndicated loans, trustee and depositary services; and/or (v) investment banking services; and/or (vi) financial advisory services related to the services described in clauses (i) through (v) above; and/or (vii) all businesses related or reasonably incidental thereto. Notwithstanding the foregoing, the Itaú CorpGroup Shareholders’ Agreement permits the following activities: (i) providing consumer financing and other financial products or services offered from time to time by supermarkets and other nonbank retailers in the applicable jurisdiction; (ii) financing or providing asset management products and services; (iii) receiving from or providing to any third party a personal guaranty or a loan or engaging in other financial arrangements in connection with a transaction or transactions that does not otherwise constitute a Banking Business in Chile, Colombia or the Republic of Panama; (iv) making investments by or in employee retirement, pension or similar plans or funds or in companies that manage such plans or funds; (v) acquiring, owning, controlling or managing, in any third party that has any Banking Business in Chile, Colombia and the Republic of Panama pursuant to purchase, merger, consolidation or otherwise so long as (A) the Banking Business in Chile, Colombia or the Republic of Panama conducted by such third party or business constitutes not more than 10% of the revenues of such acquired third party or business and not more than 5% of the revenues of Itaú Corpbanca, in each case for the immediately preceding 12 months, and (B) after consummation of such acquisition, Itaú Corpbanca is offered the right to acquire such Banking Business for cash at the fair value thereof; (vi) acquiring, owning, controlling, managing, investing in any third party or business which would otherwise be prohibited under thenon-compete obligation, provided that action is undertaken to sell the competing portion of such business; (vii) acquiring, owning, controlling, managing, investing in any third party that has any Banking Business in Chile, Colombia and the Republic of Panama or engaging in a new business opportunity in the Banking Business in Chile, Colombia, Peru and Central America, if such transaction or opportunity was presented by Itaú Corpbanca to Itaú Unibanco, if CorpGroup Parent is the investing party, or by Itaú Corpbanca to CorpGroup Parent, if Itaú Unibanco is the investing party, and CorpGroup Parent or Itaú Unibanco, as the case maybe, withheld their consent to Itaú Corpbanca consummating such transaction; (viii) providing products or services pursuant to any unsolicited request from any client that operates in Chile, Colombia and the Republic of Panama which cannot be reasonably provided by Itaú Corpbanca or its subsidiaries or (ix) acquiring, owning, managing or investing in the MCC Entities (as defined in the Itaú CorpGroup Shareholders’ Agreement) or prohibit any activities currently conducted by the MCC Entities. Non-Solicit Neither Itaú Unibanco nor CorpGroup Parent shall, directly or indirectly, solicit for hire, hire or otherwise induce or attempt to induce any officer of Itaú Corpbanca or any of its subsidiaries to leave the employment of Itaú Corpbanca or any of its subsidiaries, or in any way interfere with the relationship between Itaú Corpbanca or any of its subsidiaries, on the one hand, and any officer thereof on the other hand. Dividend Policy; Dividend Put and Call Options. For a period of eight fiscal years starting from the closing of the Transaction, or the Dividend Period, Itaú Unibanco and CorpGroup Parent agreed to cause Itaú Corpbanca to adopt an annual business plan and budget expressly providing for the management of Itaú Corpbanca and its subsidiaries in a manner that has as its primary target, in the following order of priority: (i) first, complying with the Optimal Regulatory Capital for such fiscal year, (ii) second, the payment by Itaú Corpbanca of cash dividends aggregating at least US$370 million for each year during the Dividend Period and (iii) third, achieving a growth rate of the total assets of Itaú Corpbanca and Itaú Corpbanca Colombia above the Minimum Growth Rate and other reasonable objectives as determined by the board of Itaú Corpbanca. Itaú Unibanco and CorpGroup Parent have agreed to cause the board of Itaú Corpbanca to cause management of Itaú Corpbanca and its subsidiaries to conduct their respective businesses in accordance with such annual business plan and budget. If the amount of the dividends paid in cash by Itaú Corpbanca is less than US$370 million for any fiscal year during the Dividend Period, Itaú Unibanco and CorpGroup agreed to cause Itaú Corpbanca and its subsidiaries to maximize the use of Tier 2 capital, to the fullest extent permitted by applicable Law to increase its regulatory capital to the extent required to maintain Optimal Regulatory Capital requirements for such fiscal year. Optimal Regulatory Capital means at any date, with respect to either Itaú Corpbanca or Itaú Corpbanca Colombia, as the case may be, (a) the higher of (i) 120% of the minimum regulatory Capital Ratio required by applicable law of the applicable country and (ii) the average regulatory Capital Ratio of the three largest privately-owned banks (excluding the Itaú Corpbanca and/or Itaú Corpbanca Colombia) (measured in terms of assets) in Chile or Colombia, as the case may be, in each case as of the last day of the most recent fiscal year multiplied by (b) the risk-weighted assets (including any risk-weighted assets of subsidiaries that are consolidated for purposes of calculating minimum regulatory Capital Ratio in such country) of the Itaú Corpbanca or Itaú Corpbanca Colombia, as the case may be, as of the date one year from the last day of the most recent fiscal year assuming that such risk-weighted assets grow during such year at a rate equal to the Minimum Growth Rate. Minimum Growth Rate for any year shall mean the minimum growth rate of the total assets of Itaú Corpbanca and Itaú Corpbanca Colombia (determined in accordance with IFRS) for the applicable country (e.g., Chile or Colombia) determined in good faith by the board of directors of Itaú Corpbanca (but in no event exceeding Forecasted System Growth in such country for such year) reasonably necessary to maintain the market share of Itaú Corpbanca and Itaú Corpbanca Colombia (each measured in terms of assets in their respective countries) as of the last day of the immediately preceding year. Itaú Corpbanca shall pay an annual dividend equal to 100% of the annual cash distributable earnings, net of any reserves required to maintain Optimal Regulatory Capital, before March 31 of each Fiscal Year. If the portion of such dividend to be received by CorpGroup Parent is less than US$120 million in any fiscal year of the Dividend Period, CorpGroup Parent shall have the right, from and after the date that such dividend is declared to (i) sell to Itaú Unibanco, at a price per share equal to the market price as of the date of the notification to exercise this put right, a number of shares of Company Two equal to (A) US$120 million minus the portion of the annual dividend declared by Itaú Corpbanca to be received by CorpGroup Parent, divided by (B) the market price of the shares of Itaú Corpbanca as of the date of the notification to exercise this put right; or (ii) cause Company Two to sell to Itaú Unibanco, a number of shares of Itaú Corpbanca equal to (A) US$120 million minus the annual dividend declared by Itaú Corpbanca and to be received by CorpGroup Parent, divided by (B) the market price of such shares as of the date of the notification to exercise this put right. If, as a result of the competitive bidding procedures of the Santiago Stock Exchange, the shares of Itaú Corpbanca sold by Company Two are unexpectedly sold over the Santiago Stock Exchange to a third party at a higher price, then CorpGroup Parent shall no longer have the right to repurchase such shares of Itaú Corpbanca from Itaú Unibanco or one of its wholly-owned subsidiaries. If the put right described above has been exercised, during the five-year period thereafter, CorpGroup Parent shall have the right either to (i) acquire from Itaú Unibanco, a number of shares of Company Two up to the number of shares sold pursuant to such put right at the same price per share as was paid by Itaú Unibanco plus an annual interest rate at the ChileanÍndice de Cámara Promedio plus a spread that is not to exceed the lowest spread then being offered by Itaú Corpbanca tonon-governmental borrowers in Chile; or (ii) cause Itaú Unibanco to place an order on the Santiago Stock Exchange to sell to CorpGroup Parent and/or Company Two a number of shares of Itaú Corpbanca up to the number of shares sold to Itaú Unibanco pursuant to such put right at the same price per share as was paid by Itaú Unibanco plus an annual interest rate at the ChileanÍndice de Cámara Promedio plus a spread that is not to exceed the lowest spread then being offered by Itaú Corpbanca tonon-governmental borrowers in Chile. If, as a result of the competitive bidding procedures of the Santiago Stock Exchange, the shares of Itaú Corpbanca sold by Itaú Unibanco or one of its wholly-owned subsidiaries are sold over the Santiago Stock Exchange to a third party at a higher price, then CorpGroup Parent and/or Company Two shall not have the right to repurchase such shares of Itaú Corpbanca. Use of Brands Itaú Unibanco and CorpGroup Parent have agreed that for so long as Itaú Unibanco owns shares of Itaú Corpbanca, Itaú Corpbanca and its subsidiaries shall have a royalty-free, perpetual license to use the Itaú Brand, whether alone or in conjunction with other trademarks. Preapproved Matters CorpGroup Parent agreed to consent to and affirmatively vote its shares of Itaú Corpbanca at any shareholders’ meeting in favor of the approval of a transaction between the Itaú Corpbanca’s securities broker ( Strategic Transactions Pursuant to the terms of the Itaú CorpGroup Shareholders’ Agreement, CorpGroup Parent and Itaú Unibanco intend to use Itaú Corpbanca and its subsidiaries as their exclusive vehicle to pursue business opportunities in the Banking Business in Chile, Colombia, Peru and Central America. As a result, if either CorpGroup Parent or Itaú Unibanco, intends to pursue or develop any new business opportunities in the Banking Business in the abovementioned territories, either individually or with third parties, such party shall notify the other party and provide Itaú Corpbanca with the exclusive right to pursue such business opportunity prior to presenting it to or pursuing it individually or with third parties. If CorpGroup Parent or Itaú-Unibanco, as the case may be, does not agree to Itaú Corpbanca pursuing or continue to pursue or consummate such particular business opportunity within 30 days following receipt of such notice, the other party shall have the right to pursue and implement it unilaterally and not through Itaú Corpbanca. If CorpGroup Parent agrees to Itaú Corpbanca pursuing a business opportunity that would require a capital increase and/or a change in the dividend policy of Itaú Corpbanca, Itaú Unibanco agreed to provide CorpGroup Parent with long-term financing in an amount reasonably necessary as to finance its subscription of its pro rata share in such capital increase. If, on the other hand, CorpGroup Parent agrees to allow Itaú Corpbanca to pursue and implement such business opportunity but decides not to participate in the capital increase in connection therewith, Itaú Unibanco will grant CorpGroup Parent a call option with respect to the number of shares that if purchased by CorpGroup Parent at such time would restore its direct and indirect ownership percentage of outstanding shares of Itaú Corpbanca to its ownership percentage of outstanding shares of Itaú Corpbanca immediately prior to such capital increase. Itaú Unibanco’s Paraguay and Uruguay Operations In respect of Itaú Unibanco’s Paraguay and Uruguay Operations, CorpGroup Parent and Itaú Unibanco agreed to (i) negotiate in good faith the inclusion of their respective businesses in Paraguay and Uruguay as part of the business owned and operated by Itaú Corpbanca, (ii) use their reasonable best efforts to agree on the valuation of such businesses in Paraguay and Uruguay and (iii) if CorpGroup Parent and Itaú Unibanco agree on the valuation of such businesses, to transfer to and operate such businesses by Itaú Corpbanca. Systems Operations Services Agreement We have entered into a Systems Operations Services Agreement with IBM, initially dated March 30, 2001, and covering a term from April 1, 2001 through April 15, 2006 which can be renegotiated periodically. The current extension became effective on April 16, 2008 until April 30, Service Contracts On July 6, 2001, we entered into a Services Agreement with our affiliate Inversiones CorpGroup Interhold Limitada pursuant to which CorpGroup provides us with professional and technical consulting services including preparation of financial statements, implementing financial and administrative procedures; preparing, analyzing, and providing legal advisory services; and analyzing economic, financial sectors and feasibility of investment plans; we pay fees of approximately UF6,250 per month. On January 27, 2014, we entered into an amendment to the agreement which took effect as of January 1, 2015. Pursuant to this amendment, the agreement was extended for a further10-year term beginning on January 1, 2015, subject to certain early termination provisions. Either party may extend the term of the agreement for five additional years. Provisions for the payment of expenses were also included in this amendment. On April 10, 2008, we entered into a Services Agreement with our affiliate Inversiones CorpGroup Interhold Limitada, pursuant to which CorpGroup provides us with professional and technical consulting services in the finance, capital markets, real estate and operations areas; we pay fees of approximately UF 1,350 per month. On January 27, 2014, we entered into an amendment to the agreement which took effect as of January 1, 2015. Pursuant to the amendment, the agreement was extended for a further10-year term beginning on January 1, 2015, subject to certain early termination provisions. Either party may extend the term of the agreement for five additional years, subject to certain conditions. Provisions for the payment of expenses were also included in this amendment. On March 27, 2012, we entered into a Services Agreement with Mr. Álvaro Saieh Bendeck and our affiliate CorpGroup Holding Inversiones Limitada, pursuant to which CorpGroup Holding Inversiones Limitada provides us with professional and technical consulting services in all matters related to strategic planning and definitions, new businesses, including acquisitions in Chile or abroad, and management controls; we pay fees of approximately UF 1,250 per month. On January 27, 2014, we entered into an amendment to the agreement which took effect as of January 1, 2015. Pursuant to the amendment, the agreement was extended for a further10-year term beginning on January 1, 2015, subject to certain early termination provisions. Either party may extend the term of the Service Contract for five additional years, provided that on such date the services continue to be rendered with the participation of Mr. Álvaro Saieh Bendeck. Provisions for the payment of expenses were also included in this amendment. Software Consulting and Development Agreement We have entered into a Software Consulting and Development Agreement, for the Integrated Banking System (IBS), dated as of October 4, 2001, with Datapro, Inc. The contract covers a five-year term for system maintenance and adjustments, which is automatically renewable at the end of the term. The contract includes an initial charge for development and user license of US$380,000.00 and a schedule of additional fees for services provided as well as a monthly maintenance fee. Redbanc Agreement We entered into an agreement dated as of April 1, 2001 to participate in the automated teller machine network operated by Redbanc S.A. Due to the Merger, on October 11, 2016, this agreement was amended and restated in order to (i) terminate the equivalent agreement entered into by former Banco Itaú Chile with Redbanc S.A. prior to the Merger and (ii) recognize and confirm the agreement entered into by former Corpbanca, which remains in full force and effect. The agreement covers a three-year term which is automatically and successively renewed for equal three-year periods. The purpose of this agreement is to provide services to facilitate the performance of banking objectives. This includes the installation, operation, maintenance, and development of equipment, devices, systems, and services used for the management and operation of automated andnon-automated cash andpoint-of-sale machines and the related services. Redbanc shall invoice and charge us a different monthly fee for each of the services connected to the automated teller machine network. D. EXCHANGE CONTROLS The Central Bank of Chile is responsible for, among other things, monetary policies and exchange controls in Chile. Foreign investments must be registered with the Central Bank of Chile under theLey Orgánica Constitucional del Banco Central de Chile, or the Chilean Central Bank Act and theCompendio de Normas de Cambios Internacionales, or the Central Bank Foreign Exchange Regulations or the Compendium. The Chilean Central Bank Act is a constitutional law requiring a “special majority” vote of the Chilean Congress to be modified. Until January 1, 2016, foreign investments could be registered with theComité de Inversiones Extranjeras Pursuant to the Central Bank Foreign Exchange Regulations, investors are allowed to freely enter into any kind of foreign exchange transaction, the only restriction being that investors must inform the Central Bank of Chile about certain operations which they have conducted and must conduct certain operations through the Formal Exchange Market. The type of information related to equity investment that must be reported to the Central Bank of Chile bynon-Chilean residents include the occurrence of, among other things, any assignment, substitution, changes in organizational status, change in the form of the investment, or material changes to the terms of the agreement governing the foreign currency transaction. Transactions that are required to be conducted through the Formal Exchange Market include transactions involving foreign commercial bank loans or Chilean company issued bonds, deposits made in Chilean financial institutions by foreign depositors, and equity investments and contributions of capital by foreign investors. The Formal Exchange Market entities through which transactions are conducted will report such transactions to the Central Bank of Chile. Pursuant to the provisions of Chapter XIV of the Compendium, it is not necessary to seek the Central Bank of Chile’s prior approval in order to establish an ADS facility. The Central Bank of Chile only requires that (i) any foreign investor acquiring shares to be converted into ADSs who has actually brought funds into Chile for that purpose shall bring those funds through the Formal Exchange Market, (ii) any foreign investor acquiring shares to be converted into ADSs informs the Central Bank of Chile of the investment in the terms and conditions described below, (iii) all remittances of funds from Chile to the foreign investor upon the sale of the shares underlying the ADSs or from dividends or other distributions made in connection therewith, shall be made through the Formal Exchange Market, and (iv) all remittances of funds to the foreign investor, whether or not from Chile, shall be informed to the Central Bank of Chile in the terms and conditions described below. When the shares to be converted into ADSs have been acquired by the foreign investor with funds brought into Chile through the Formal Exchange Market, a registration form shall be filed with the Department of International Financial Operations of the Central Bank of Chile by the foreign investor acting through an entity of the Formal Exchange Market on or before the date on which the foreign currency is brought into Chile. However, if the funds were brought into Chile with a different purpose and subsequently were used to acquire shares to be converted into ADSs, the Department of International Financial Operations of the Central Bank of Chile then shall be informed of such investment by the Custodian within ten days following the end of each15-day period on which the Custodian has to deliver periodic reports to the Central Bank of Chile. If the funds were not brought into Chile, a registration form shall be filed with the Department of International Financial Operations of the Central Bank of Chile by the foreign investor itself or through an entity of the Formal Exchange Market within first 10 days of the month following the date on which the proceeds were used. All payments in U.S. dollars in connection with the ADS facility made from Chile shall be made through the Formal Exchange Market. Pursuant to Chapter XIV of the Compendium no previous authorization from the Central Bank of Chile is required for the remittance of U.S. dollars obtained in the sale of the shares underlying ADSs or from dividends or other distributions made in connection therewith. The entity of the Formal Exchange Market participating in the transfer shall provide certain information to the Central Bank of Chile on the next banking business day. In the event there are payments made outside Chile, the foreign investor shall provide the relevant information to the Central Bank of Chile directly or through an entity of the Formal Exchange Market within the first 10 days of the month following the date on which the payment was made. Under Chapter XIV of the Compendium payments and remittances of funds from Chile are governed by the rules in effect at the time the payment or remittance is made. Therefore, any change made to Chilean laws and regulations after the date hereof will affect foreign investors who have acquired ADSs or shares to be converted into ADSs. There can be no assurance that further Central Bank of Chile regulations or legislative changes to the current foreign exchange control regime in Chile will not restrict or prevent foreign investors to purchase and remit abroad U.S. dollars, nor can there be any assessment to the duration or impact of such restrictions, if imposed. This situation is different from the one governing ADSs issued by Chilean companies prior to April 19, 2001. Prior to such date, ADSs representing shares of stock of Chilean corporations were subject to Chapter XXVI of the Compendium, which addressed the issuance of ADSs by Chilean companies and foreign investment contracts entered into among the issuer of the shares, the Central Bank of Chile and the depository pursuant to Article 47 of the Central Bank Act. Chapter XXVI of the Compendium and the corresponding foreign investment contracts granted foreign investors the vested right to acquire dollars with the proceeds obtained in the sale of the underlying shares of stock, or from dividends or other distributions made in connection therewith and remit them abroad. On April 19, 2001, the Central Bank of Chile eliminated Chapter XXVI of the Compendium and made the establishment of new ADS facilities subject to the provisions of Chapter XIV of the Compendium. All foreign investment contracts executed under the provisions of Chapter XXVI of the Compendium remain in full force and effect and are governed by the provisions in effect at the time of their execution. The foregoing is a summary of the Central Bank of Chile’s regulations with respect to the issuance of ADSs representing common shares as in force and effect as of the date hereof. This summary does not purport to be complete and is qualified in its entirety by reference to the provisions of Chapter XIV of the Compendium, a copy of which is available from Corpbanca upon request. There can be no assurance that further Central Bank of Chile regulations or legislative changes to the current foreign exchange control regime in Chile will not restrict or prevent foreign investors from purchasing or remitting U.S. dollars, or that further restrictions applicable to foreign investors which affect their ability to remit the capital, dividends or other benefits in connection with the shares of stock will not be imposed by the Central Bank of Chile in the future, nor can there be any assessment to the duration or impact of such restrictions, if imposed. E. TAXATION CHILEAN TAX CONSIDERATIONS The following discussion is based on material Chilean income tax laws presently in force, including Ruling No. 324 of January 29, 1990 of the Chilean Internal Revenue Service and other applicable regulations and rulings. The discussion summarizes the material Chilean income tax consequences of an investment in the ADSs or common shares received in exchange for ADSs by an individual who is not domiciled in or a resident of Chile, or a legal entity that is not organized under the laws of Chile and does not have a permanent establishment located in Chile, which we refer to as a foreign holder. For purposes of Chilean law, an individual holder is a resident of Chile if he or she has resided in Chile for more than six months in one calendar year or for a total of more than six months, whether consecutive or not, in two consecutive tax years. An individual holder is domiciled in Chile if he or she resides in Chile with the purpose of staying in Chile (such purpose to be evidenced by circumstances such as the acceptance of employment within Chile or the relocation of his or her family to Chile). On August 21, 2018, a bill was submitted to the Chilean National Congress aimed at reforming the tax legislation. The bill proposes to modify the definition of “resident,” considering a person a “resident” of Chile if a person remains in the country for a period or periods of time exceeding 183 days in any twelve-month period. This discussion is not intended as tax advice to any particular investor, which can be rendered only in light of that investor’s particular tax situation.
Under Chilean law, provisions contained in statutes such as tax rates applicable to foreign holders, the computation of taxable income for Chilean purposes and the manner in which Chilean taxes are imposed and collected may be amended only by another statute. In addition, the Chilean tax authorities issue rulings and regulations of either general or specific application interpreting the provisions of Chilean tax law. Absent a retroactive law, Chilean taxes may not be assessed retroactively against taxpayers who act in good faith relying on such rulings and regulations, but Chilean tax authorities may change said rulings and regulations prospectively. There is no general income tax treaty in force between Chile and the United States (although a treaty has been signed, it has not yet been ratified by United States’ Congress and therefore is not yet effective). CASH DIVIDENDS AND OTHER DISTRIBUTIONS Cash dividends paid by us with respect to the ADSs or common shares held by a foreign holder will be subject to a 35% Chilean withholding tax, which is withheld and paid over to the Chilean tax authorities by us. We refer to this as the Chilean withholding tax. A credit against the Chilean withholding tax is available based on the level of corporate income tax, or first category tax, actually paid by us on the taxable income to which the dividend is imputed; however, this credit does not reduce the Chilean withholding tax on aone-for-one basis because it also increases the base on which the Chilean withholding tax is imposed. From January 1, 2017, the first category tax may be credited partially (65%). Nevertheless, the foreign holder shall be entitled to a full first category tax credit, regardless of the tax regime chosen by the company, if such holder is established or domiciled in, or is a resident of, a country with which Chile force, and the holder duly credits his tax residency according to Resolución No. 11, issued by the Chilean Internal Revenue Service on January 30, 2019. However, if the new tax reform bill which was presented to the Congress by the Government on August, 2018 passes, the first category tax would be fully credited to any foreign investor, regardless of his establishment or domicile. In addition, distribution of book income in excess of retained taxable income is subject to the Chilean withholding tax, but such distribution is not eligible for the credit. In case such withholding is determined to be excessive at the end of the year, foreign holders will have rights to file for the reimbursement of the excess withholding. Under Chilean income tax law, for purposes of determining the level of the first category tax that has been paid by us, dividends generally are assumed to have been paid out of our oldest retained taxable profits. The first category tax rate As indicated above, a bill was submitted to the Chilean National Congress on August 21, 2018 aimed at reforming the tax legislation. Among other matters, this bill provides for a general regime under which the corporate tax would apply as a general rule with a 27% rate, which would be fully creditable against the withholding tax or Global Complimentary Tax. To date, such bill is still under discussion by the Chilean National Congress. CAPITAL GAINS Gains realized on the sale, exchange or other disposition by a foreign holder of ADSs (or ADRs evidencing ADSs) will not be subject to Chilean taxation, provided that such disposition occurs outside Chile (confirmed by the Chilean IRS in ruling No. 1,307 of 2013). The deposit and withdrawal of common shares in exchange for ADSs will not be subject to any Chilean taxes. Gains recognized on a sale or exchange of common shares received in exchange for ADSs (as distinguished from sales or exchanges of ADSs representing such common shares) by a foreign holder until December 31, 2016 will be subject to both the first category tax and the Chilean withholding tax (the former being creditable against the latter) if (1) the foreign holder has held such common shares for less than one year since exchanging ADSs for the common shares, (2) the foreign holder acquired and disposed of the common shares 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 (10% or more of the shares in the case of Public Companies). A 35% withholding tax is imposed on the amount of the gains obtained on the sale or exchange of common shares received in exchange for ADSs, less a Chilean credit tax. In all other cases, gain on the disposition of common shares will be subject only to the first category tax levied as a sole tax. However, in these latter cases, if it is impossible to determine the taxable capital gain, a 5% withholding will be imposed on the total amount to be remitted abroad without any deductions as a provisional payment of the total tax due. From January 1, 2017 onwards, any gain obtained on the sale or exchange of common shares received in exchange for ADSs by a foreign holder will be subject to the Chilean withholding tax with a rate of 35%, which must be withheld by the purchaser. However, if it is impossible to determine the taxable capital gain, a 10% withholding will be imposed on the total amount to be remitted abroad without any deductions as a provisional payment of the total tax due. The tax basis of common shares received in exchange for ADSs will be the acquisition value of such shares duly adjusted for local inflation. The valuation procedure set forth in the deposit agreement, which values common shares that are being exchanged at the highest price at which they trade 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 common shares and sale of such common shares for the value established under the deposit agreement will not generate a capital gain subject to taxation in Chile, to the extent that the sale price is equal to the acquisition value at the time of redemption as discussed above. In the event the sale price exceeds the acquisition value of such shares determined, as explained above, such capital gain will be subject to first category tax (in the event the sale took place on or before December 31, 2016), and to the Chilean withholding, tax as discussed above. Under the bill submitted to the Chilean National Congress on August 21, 2018 referred to above, capital gains obtained by individuals could be subject to a 20% single tax, or to Complementary Global Tax in case of taxpayers resident or domiciled in Chile. The distribution and exercise of preemptive rights relating to the common shares will not be subject to Chilean taxation. Amounts received in exchange for the assignment of preemptive rights relating to the shares will be subject to both the first category tax and the Chilean withholding tax (the former being creditable against the latter to the extent described above). Exempt capital gains - Article 107 of the Chilean Income Tax Law According to Article 107 of the Chilean Income Tax Law, the sale and disposition of shares of Chilean public corporations which are significantly traded on a Chilean stock exchange is not levied by any Chilean tax on capital gains, if the sale or disposition was made:
For purpose of the bullets above, shares are considered to be significantly traded on a Chilean stock exchange when they (1) are registered in the securities registry, (2) are registered in a Chilean Stock OTHER CHILEAN TAXES No Chilean inheritance, gift, 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 a gift of common shares by a foreign holder. No Chilean stamp, issue, registration or similar taxes or duties apply to foreign holders of ADSs or common shares. WITHHOLDING TAX CERTIFICATES Upon request, we will provide to foreign holders appropriate documentation evidencing the payment of the Chilean withholding tax. U.S. FEDERAL INCOME TAX CONSIDERATIONS This section is a summary of certain U.S. federal income tax consequences applicable to the acquisition, ownership and disposition by a U.S. holder (as defined below) of ADSs or common shares. This summary applies to you only if you are a U.S. holder and you hold your ADSs or common shares as capital assets (generally, property held for investment) for U.S. federal income tax purposes. This summary is not a comprehensive description of all of the tax consequences that may be relevant to a decision to purchase, hold or dispose of our ADSs or common shares. This section does not apply to you if you are a U.S. holder subject to special rules, including for example:
a
This section is based on the Internal Revenue Code of 1986, as amended, or the Code, its legislative history, existing and proposed U.S. Treasury Regulations, published rulings, and court decisions, all as of the date of this Annual Report. These laws are subject to change, possibly on a retroactive basis, and subject to differing interpretations. This summary does not address any U.S. state or local ornon-U.S. tax considerations or any U.S. federal estate, gift or alternative minimum tax considerations. On February 4, 2010, a comprehensive income tax treaty between the United States and Chile was signed, however such treaty has not yet been ratified by each country and therefore is not yet effective. It is unclear at this time when such treaty will be ratified by both countries. You should consult your tax advisor regarding the ongoing status of this treaty and, if ratified, the impact such treaty would have on the consequences described in this Annual Report. As used herein, the term “U.S. holder” means a beneficial owner of ADSs or common shares who is, for U.S. federal income tax purposes, any of the following:
If a partnership (or other entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds the ADSs or common shares, the U.S. federal income tax treatment of a partner, member or owner of such entity or arrangement will generally depend on the status of the partner, member or owner and the tax treatment of such entity. A partner, member or owner in an entity holding the ADSs or common shares should consult its tax advisor with regard to the U.S. federal income tax treatment of its investment in the ADSs or common shares. Prospective investors should consult their tax advisors as to the particular tax considerations applicable to them relating to the acquisition, ownership and disposition of our ADSs or common shares, including the applicability of U.S. federal, state and local tax laws andnon-U.S. tax OWNERSHIP OF ADSs In general The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the relevant deposit agreement and any related agreement will be performed in accordance with the terms set forth therein. For U.S. federal income tax purposes, if you are a holder of ADSs, you generally will be treated as the owner of our common shares represented by such ADSs. Accordingly, deposits or withdrawals of common shares for ADSs will not be subject to U.S. federal income tax. The U.S. Treasury Department has expressed concern that depositaries for depositary receipts, or other intermediaries between the holders of shares of an issuer and the issuer, may be taking actions that are inconsistent with the claiming of U.S. foreign tax credits by U.S. holders of such receipts or shares. These actions would also be inconsistent with claiming the reduced rate for “qualified dividend income” described below. Accordingly, the analysis regarding the availability of a U.S. foreign tax credit for Chilean withholding taxes and sourcing rules described below and availability of the reduced rate for qualified dividend income could be affected by future actions that may be taken by the U.S. Treasury Department. Taxation of distributions Subject to the PFIC rules discussed below, if you are a U.S. holder, the gross amount of any distribution of cash or property (including the net amount of Chilean taxes withheld, if any, on the distribution, after taking into account the credit for first category tax, as discussed above under “—Chilean Tax Considerations—Cash Dividends and Other Distributions”), paid by the bank out of its current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) will be includable in gross income as ordinary dividend income. You must include the net amount of Chilean tax withheld, if any, from such distribution in gross income even though you do not in fact receive it. The dividend is taxable to you when you, in the case of common shares, or the depositary, in the case of ADSs, receive the dividend, actually or constructively. Distributions in excess of current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be treated as anon-taxable return of capital to the extent of your basis in the ADSs or common shares and thereafter as either long-term or short-term capital gain, depending on whether you have held our ADSs or common shares for more than one year at the time of the distribution. The bank does not currently maintain, and does not intend to maintain, calculations of our earnings and profits in accordance with U.S. federal income tax principles. Consequently, a U.S. holder should treat the entire amount of any distribution received as a dividend. As used below, the term “dividend” means a distribution that constitutes a dividend for U.S. federal income tax purposes. If you are anon-corporate U.S. holder, dividends paid to you may constitute qualified dividend income and be taxable to you at a reduced rate provided that (1) certain holding period requirements are met, (2) the ADSs or common shares are considered to be readily tradable on an “established securities market” in the United States, and (3) the bank is not a PFIC. Under U.S. Internal Revenue Service, or IRS, authority, ADSs are considered for purposes of clause (2) above to be readily tradable on an established securities market in the United States because they are listed on the NYSE. Based on existing guidance, it is not entirely clear whether dividends received with respect to the common shares will be treated as qualified dividend income because the common shares are not themselves listed on a U.S. exchange. Moreover, as discussed below, under “—Passive Foreign Investment Company rules,” we believe that we will not be treated as a PFIC for U.S. federal income tax purposes with respect to our The amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the Chilean peso payments made, determined at the spot Chilean peso/U.S. dollar rate on the date the dividend distribution is actually or constructively received by you or the depositary, regardless of whether the payment is in fact converted into U.S. dollars at that time. If the dividend is converted to U.S. dollars on the date of receipt, a U.S. holder generally will not recognize a foreign currency gain or loss. However, if the U.S. holder converts the Chilean pesos into U.S. dollars on a later date, the U.S. holder must include in income any gain or loss resulting from any exchange rate fluctuations. The gain or loss will be equal to the difference between (1) the U.S. dollar value of the amount included in income when the dividend was received, and (2) the amount received on the conversion of the Chilean pesos into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the reduced tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. U.S. holders should consult their own tax advisors regarding the tax consequences to them if the bank pays dividends in Chilean pesos or any othernon-U.S. currency. The amount of any distribution of property other than cash will be the fair market value of such property on the date of distribution. Subject to certain limitations (including minimum holding period requirements), the net amount of Chilean income tax withheld and paid over to the Chilean taxing authorities (after taking into account the credit for first category tax, when available) will generally be creditable or deductible against your U.S. federal income tax liability. However, if the amount of Chilean withholding tax initially withheld from a dividend is determined under applicable Chilean law to be excessive (as described above under “—Chilean Tax Considerations—Cash Dividends and Other Distributions”), the excess tax may not be creditable. Special rules apply in determining the foreign tax credit limitation with respect to dividends received by individuals that are subject to the reduced tax rate for qualified dividends. Dividends will be treated as income from sources outside the United States and will generally be categorized as “passive category income” for most U.S. holders for U.S. foreign tax credit purposes. A U.S. holder that does not elect to claim a credit for any foreign income taxes paid during the taxable year may instead claim a deduction in respect of such foreign income taxes, provided that the U.S. holder elects to deduct (rather than credit) all foreign income taxes paid or accrued during the taxable year. This discussion does not address special rules that apply to U.S. holders who, for purposes of determining the amount of the foreign tax credit, take foreign income taxes into account when accrued. The rules governing foreign tax credits are complex and a U.S. holder should consult its own tax advisor regarding the availability of foreign tax credits under its particular circumstances. Taxation of dispositions Subject to the PFIC rules discussed below, if you are a U.S. holder and you sell, exchange or otherwise dispose of your ADSs or common shares in a taxable disposition, you will recognize capital gain or loss for U.S. federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars, in your ADSs or common shares. Any such gain or loss will be long-term capital gain or loss if your ADSs or common shares have been held for more than one year. Certainnon-corporate U.S. holders (including individuals) may be eligible for preferential rates of U.S. federal income tax in respect of long-term capital gains. The deductibility of capital losses is subject to limitations. If you are a U.S. holder of our ADSs or common shares, the initial tax basis of your ADSs or common shares will be the U.S. dollar purchase price or, if purchased in Chilean pesos, the U.S. dollar value of the Chilean peso-denominated purchase price determined on the date of purchase. If the common shares are treated as being traded on an “established securities market,” a cash basis U.S. holder, or, if it elects, an accrual basis U.S. holder, will determine the U.S. dollar value of the cost of such common shares by translating the amount paid at the spot rate of exchange on the settlement date of the purchase. If you convert U.S. dollars to Chilean pesos and immediately use the currency to purchase common shares, such conversion generally will not result in taxable gain or loss to you. The amount realized generally will be equal to the amount of cash or the fair market value of any other property received. With respect to the sale, exchange or other taxable disposition of our common shares, if the payment received is in Chilean pesos, the amount realized generally will be the U.S. dollar value of the payment received determined on (1) the date of receipt of payment in the case of a cash basis U.S. holder, and (2) the date of disposition in the case of an accrual basis U.S. holder. If our common shares are treated as being traded on an “established securities market,” a cash basis U.S. holder, or, if it elects, an accrual basis U.S. holder, will determine the U.S. dollar value of the amount realized by translating the amount received at the spot rate of exchange on the settlement date of the sale. If Passive Foreign Investment Company rules Based upon our present regulatory status under Chilean law, current estimates, expectations and projections of the value and classification of our assets and the sources and nature of our income, we believe that the bank’s ADSs and common shares should not be treated as stock of a PFIC for U.S. federal income tax purposes for In general, if you are a U.S. holder, the bank will be a PFIC with respect to you if for any taxable year in which you held the bank’s ADSs or common shares:
Passive income for this purpose generally includes dividends, interest, royalties, rents, annuities and gains from assets that produce passive income. We will be treated as owning our proportionate share of the assets and earnings and our proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% by value of the stock of another corporation. If we are a PFIC for any year during which you hold our ADSs or common shares, you will generally be required to treat our ADSs or common shares as stock in a PFIC for all succeeding years during which you hold our ADSs or common shares, even if the We are unable to determine with certainty that we are not a PFIC because the application of the PFIC rules to banks is unclear under present U.S. federal income tax law. Banks generally derive a substantial part of their income from assets that are interest bearing or that otherwise could be considered passive under the PFIC rules. The IRS has issued a notice and has proposed regulations, which together describe what is referred to as the “active bank exception.” For purposes of the PFIC test, the active bank exception excludes from passive income any income derived in the active conduct of a banking business by a qualifying foreign bank. The IRS notice and proposed regulations each have different requirements for qualifying as a foreign bank and for determining the banking income that may be excluded from passive income under the active bank exception. Moreover, the proposed regulations have been outstanding since 1994 and will not be effective unless finalized.
In addition, because a PFIC determination is a factual determination that must be made following the close of each taxable year and is based on, among other things, the market value of our assets and shares, and because the proposed regulations (although proposed to be retroactive in application) are not currently in force, our PFIC status may change and there can be no assurance that we will not be considered a PFIC for the current taxable year or any subsequent taxable year. If the bank is treated as a PFIC for any year in which you hold ADSs or common shares, and you are a U.S. holder that did not make amark-to-market election, as described below, you will be subject to special rules with respect to:
Under these rules:
The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the ADSs or common shares cannot be treated as capital, even if you hold the ADSs or ordinary shares as capital assets. If we were a PFIC, certain subsidiaries and other entities in which we have a direct or indirect interest may also be PFICs, or Lower-tier PFICs. Under attribution rules, U.S. holders would be deemed to own their proportionate shares of Lower-tier PFICs and would be subject to U.S. federal income tax according to the rules described above on (1) certain distributions by a Lower-tier PFIC and (2) certain dispositions of shares of a Lower-tier PFIC, in each case as if the U.S. holder held such shares directly, even though such U.S. holder had not received the proceeds of those distributions or dispositions. Alternatively, a U.S. holder of “marketable stock” (as defined below) may make amark-to-market election. If you make this election, you will not be subject to the PFIC rules described above. Instead, in general, you will include as ordinary income each year the excess, if any, of the fair market value of your ADSs or common shares at the end of the taxable year over your adjusted basis in your ADSs or common shares. These amounts of ordinary income will not be eligible for the reduced tax rates applicable to qualified dividend income or long-term capital gains. You will also be allowed to take an ordinary loss in respect of both (1) the excess, if any, of the adjusted basis of your ADSs or common shares over their fair market value at the end of the taxable year and (2) any loss realized on the actual sale or disposition of the ADSs or common shares, but in each case only to the extent of the net amount of previously included income as a result of themark-to-market election. Any loss on an actual sale of your ADSs or common shares would be a capital loss to the extent it exceeds any previously includedmark-to-market income not offset by previous ordinary deductions. Your basis in the ADSs or common shares will be adjusted to reflect any such income or loss amounts. The Notwithstanding any election you make with regard to the ADSs or common shares, dividends that you receive from us will not constitute qualified dividend income to you, and therefore are not eligible for the reduced tax rate described above, if the bank is a PFIC either in the taxable year of the distribution or any preceding taxable year during which you held our ADSs or common shares. Instead, you must include the gross amount of any such dividend paid by us out of the bank’s accumulated earnings and profits (as determined for U.S. federal income tax purposes) in your gross income, and these amounts will be subject to tax at rates applicable to ordinary income. If you directly (and, in some cases, indirectly) own ADSs or common shares that are treated as PFIC shares with respect to you during a taxable year, you will be required to file an annual report for such taxable year. In addition, if we are a PFIC, we do not intend to prepare or provide you with the information necessary to make a “qualified electing fund” election, which, like themark-to-market election, is a means by which U.S. taxpayers may elect out of the tax treatment that generally applies to PFICs. YOU ARE URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE APPLICATION OF THE PFIC RULES TO YOUR INVESTMENT IN ADSS OR COMMON SHARES, INCLUDING THE AVAILABILITY AND ADVISABILITY OF MAKING AN ELECTION TO AVOID THE ADVERSE TAX CONSEQUENCES OF THE PFIC RULES SHOULD WE BE CONSIDERED A PFIC FOR ANY TAXABLE YEAR. Possible Foreign Account Tax Compliance Act Withholding Pursuant to Sections 1471 through 1474 of the Code and U.S. Treasury Regulations promulgated thereunder, commonly referred to as FATCA, a 30% withholding tax may, in the future, be imposed on all or some of the payments on the ADSs or our common stock to holders andnon-U.S. financial institutions receiving payments on behalf of holders that, in each case, fail to comply with information reporting, certification and related requirements. Under current guidance, the amount to be withheld is not defined, and it is not yet clear whether or to what extent payments on the ADSs or shares of our common stock may be subject to this withholding tax. This withholding tax, if it applies, could apply to any payment made with respect to the ADSs or our common stock. Moreover, withholding may be imposed at any point in a chain of payments if anon-U.S. payee fails to comply with U.S. information reporting, certification and related requirements. Accordingly, ADSs or shares of our common stock held through anon-compliant institution may be subject to withholding even if the holder otherwise would not be subject to withholding. You should consult your tax advisor regarding potential U.S. federal withholding taxes imposed under FATCA. If FATCA withholding is required, the bank will not be required to pay any additional amounts with respect to any amounts withheld. Certain beneficial owners of ADSs or our common stock that are not foreign financial institutions generally will be entitled to refunds of any amounts withheld under FATCA, but this may entail significant administrative burden. U.S. holders are urged to consult their tax advisers regarding the application of FATCA to their ownership of the ADSs or our common stock. Medicare tax A 3.8% tax is imposed on the lesser of (1) modified adjusted gross income in excess of US$200,000 (US$250,000 for joint-filers), and (2) net investment income of certain individuals, trusts and estates. For these purposes, net investment income will generally include any dividends paid to you with respect to the ADSs or common shares and any gain realized on the sale, exchange or other taxable disposition of an ADS or common share. Backup withholding tax and information reporting requirements U.S. backup withholding tax and information reporting requirements generally apply to certain payments to certainnon-exempt holders of ADSs or common shares. Information reporting generally will apply to payments of dividends on, and to proceeds from the sale or redemption of, ADSs or common shares made within the United States, or by a U.S. payor or U.S. middleman, to a holder of ADSs or common shares, other than an exempt recipient. A payor will be required to withhold U.S. backup withholding tax from any payments of dividends on, or the proceeds from the sale or redemption of, ADSs or common shares within the United States, or by a U.S. payor or U.S. middleman, to a holder, other than an exempt recipient, if such holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an exemption from, such U.S. backup withholding tax requirements. Backup withholding is not an additional tax. Any U.S. backup withholding tax generally will be allowed as a credit against the holder’s U.S. federal income tax liability or, to the extent the withheld amount exceeds such liability, refunded upon the timely filing of a U.S. federal income tax return. Information with respect to foreign financial assets Certain U.S. investors are subject to reporting requirements in connection with the holding of certain foreign financial assets, including our ADSs or common shares that they own, either directly or through certain foreign financial institutions, but only if the aggregate value of all of such assets exceeds US$50,000. Such investors are subject to penalties if they are required to submit such information to the IRS and fail to do so. You should consult your tax advisor regarding the application of these new reporting requirements to your particular situation. The above description is not intended to constitute a complete analysis of all tax consequences relating to the purchase, ownership or disposition of the ADSs or common shares. Investors deciding on whether or not to invest in ADSs or common shares should consult their own tax advisors concerning the tax consequences of their particular F. DIVIDENDS AND PAYING AGENTS Not applicable. G. STATEMENT BY EXPERTS Not applicable. H. DOCUMENTS ON DISPLAY We are subject to the information requirements of the Exchange Act, except that as a foreign issuer, we are not subject to the proxy rules or the short-swing profit 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 Additional documents concerning Corpbanca which are referred to in this annual report may be inspected at our offices at Rosario Norte 660, Las Condes, Santiago, Chile. I. SUBSIDIARY INFORMATION Not applicable. ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT FINANCIAL RISK A. DEFINITION AND PRINCIPLES OF FINANCIAL RISK MANAGEMENT Following the consummation of the Merger, as part of the integration process of the merged banks, we amended our risk management policies and procedures in order to adopt Itaú Unibanco’s risk policies and procedures according to Basel III framework. While there is no single definition of financial risk, the 1.Market Risk Market risk is the exposure to economic gains or losses caused by movements in prices and market variables. This risk stems from the activities of the Trading and Banking Books. The Trading Book includesnon-derivative financial instruments that have been classified as trading instruments and all derivative positions that have not been classified as hedging instruments, according to accounting standards. The Banking Book includes all positions in derivative andnon-derivative instruments that do not form part of the Trading Book. In the first case, it comes from activities intended to obtain short-term gains and from the intensive use of instruments recorded at fair value. In the second case, with a more long-term vision, it stems from commercial activities with products valued at amortized cost. The following section describes the main market risk factors to which the a) Foreign Exchange Risk Foreign exchange risk is the exposure to adverse movements in the exchange rates of currencies other than the base currency for all balance sheet andoff-balance sheet positions.
The main sources of foreign exchange risk are:
b) Indexation Rate Risk Indexation risk is the exposure to changes in indexed units (e.g. UF, UVR or others) linked to domestic or foreign currency in which any instruments, contracts or other transactions recorded in the statement of financial position may be denominated. c) Interest Rate Risk Interest rate risk is the exposure to movements in market interest rates. Changes in market interest rates can affect both the price of instruments recorded at fair value and the financial margin and other gains from the Banking Book such as fees. Fluctuations in interest rates also affect the Interest rate risk can be represented by sensitivities to parallel and/ornon-parallel yield shifts with the effects reflected in the prices of instruments, the financial margin, equity and economic value. d) Volatility Risk In addition to the exposure related to the underlying asset, issuing options has other risks. These risks arise from thenon-linear relationship between the gain generated by the option and the price and level of the underlying factors, as well as exposure to changes in the price volatility of the underlying asset. 2.Funding Liquidity Risk Funding liquidity risk is the exposure of the Financial institutions are exposed to funding liquidity risk that is intrinsic to the role of intermediary that they play in the economy. In general, in financial markets demand for medium or long-term financing is usually much greater than the supply of funds for those terms while short-term financing is in considerable supply. In this sense, the role of intermediary played by financial institutions, which assume the risk of satisfying the demand for medium and long-term financing by brokering short-term available funds, is essential for the economy to function properly. Appropriately managing funding liquidity risk not only allows contractual obligations to be met in a timely manner, but also enables:
3. Counterparty risk is the risk of loss arising fromnon-compliance by a given counterparty, for whatever reason, in paying all or part of its obligations with the The B. FINANCIAL RISK MANAGEMENT The process of managing financial risks is an ongoing, interlinked process that begins by identifying the risks to which the institution is exposed. After that, the 1)Identification of Financial Risks The Financial Risk Division has a highly technical team that is constantly monitoring the activities of the 2)Quantification and Control of Financial Risk Exposure Once a risk has been identified, the Financial Risk Division is responsible for mapping the risk using the appropriate quantification metrics. Our board of directors and senior management are aware of the methods used to measure exposure and are responsible for setting the institution’s desired risk appetite levels (by business unit, associate, risk factor, area, etc.), always taking care to adhere to current regulations. The limit setting process is the instrument used to establish the equity available to each activity. Limit determination is, by design, a dynamic process that responds to the risk level considered acceptable by senior management. The Financial Risk Division requests and proposes a system of quantitative and qualitative limits and warning levels that affect liquidity and market risk. This request must be authorized by the Assets and Liabilities Committee, or ALCO, and our board of directors. It also regularly measures risk incurred, develops valuation tools and models, performs periodic stress testing, measures the degree of concentration with interbank counterparties, drafts policy and procedure handbooks and monitors authorized limits and warning levels, which are reviewed at least once per year. The limit structure requires the division to carry out a process that includes the following steps:
Enable business generators to take on a cautious yet sufficient level of risk in order to achieve budgeted results.
The metrics, by type of risk, used to quantify exposure or demonstrate that a risk has been materialized are detailed below: a) Market Risk Metrics and Limits Given the complexity and relevance of the portfolios managed by Itaú Corpbanca, diverse instruments have been chosen to control market risk based on the characteristics of the financial products in the Trading and Banking Books. The following regulatory and internal metrics are used to monitor and control market risk: Regulatory Risk Measurements for the Trading and Banking Books The The regulatory measurement of market risk in the Trading Book allows the The The following table details regulatory limit consumption for market risk, specifically for the Trading Book as of December 31, 2018. Trading Book
The regulatory risk measurement for the Banking Book (Regulatory Report SBIF C40—Cashflows related to interest rate and indexation risk in the Banking Book) is used to estimate the bank’s potential losses from standardized adverse movements in interest and exchange rates. For regulatory reporting purposes, the Trading Book includes the interest rate risk of derivatives managed in the Banking Book. The standardized regulatory report for the Banking Book (Regulatory Report SBIF C40) is used to estimate the bank’s potential economic losses from standardized adverse movements in interest rates defined by the SBIF. Currently, limits for short-term exposure (STE) to interest rate and indexation risk in the Banking Book must not exceed 35% of annual operating income (LTM moving period) and long-term limit consumption (LTE) must be less than 20% of the The following table details regulatory limit consumption for market risk, specifically for the Banking Book as of December 31, 2018: Banking Book
Value at Risk (VaR) Calculation Calculation of Historical Value at Risk(non-parametric): This measurement provides the maximum potential economic loss at a certain confidence level and a given time horizon. Historical VaR, as opposed to Statistical or Parametric VaR, is based on the observed distribution of past returns, does not need to make assumptions of probability distributions (frequently normal distribution) and, therefore, does not need a mean (assumed 0), standard deviation and correlations across returns (parameters). The Calculation of volatility-adjusted Historical Value at Risk(non-parametric): This measurement is based on the above and the profit and loss (P&L) vector is adjusted according to whether it is facing a period of greater or less volatility. Our board of directors defines limits on the Value at Risk (as of the end of the first half of 2016 it uses the volatility-adjusted Historical VaR method) that can be maintained, which is monitored on a daily basis. The measurement is also subjected to back testing to verify that the daily losses that effectively occurred do not exceed VaR more than once every 100 days. The result is monitored daily to confirm the validity of the assumptions, hypothesis and the adequacy of the parameters and risk factors used in the VaR calculation. The (i) Limitations of VaR Model Although the VaR model is one of the models most frequently used by the local financial industry, like any model it has limitations that must be considered:
(ii) Sensitivity Measurements Sensitivity measurements are based on estimated scenarios for positions in the Trading and Banking Books. Trading Book Positions by Risk Factor: The table below sets forth the Trading Book positions by risk factor as of December 31,
Trading Book positions by risk factor correspond to the fair and equivalent nominal value (exchange rate or “FX,” inflation and optionality) of the portfolios within the Trading Book. The Trading Book is made up of the financial assets presented in Notes 6 and 8, and financial liabilities presented in Note 8, all of them included in our consolidated financial statements. The currency position incorporates the amortized cost positions from the statement of financial position, excluding the positions related to the foreign investment with their respective hedges. The currency positions in the Trading Book have limits for each currency. Banking Book by Risk Factor: FX and Inflation Positions in Banking Book: The following table sets forth the foreign currency and inflation positions in the Banking Book as of December 31,
Positions in currencies other than Chilean pesos and exposure to indexation are classified by book and by their effect on the Structural Interest Rate Position in Banking Book (Interest Rate Gap): Structural interest rate risk is measured using representation by risk factor of cash flows expressed at fair value, assigned at the repricing date and by currency. This methodology facilitates the detection of concentrations of interest rate risk over different time frames. All positions in and outside the statement of financial position must be ungrouped into cash flows and placed at the repricing / maturity point. For those accounts that do not have contractual maturities, an internal model is used to analyze and estimate their durations and sensitivities. The following table shows the Banking Book positions for the most important currencies in which the The exposures presented are the present values resulting from:
Debt issued Checking accounts and demand deposits Savings accounts and time deposits DERIVATIVES Financial derivative instruments Assets Cash Repurchase agreements Loans to customers, net Financial assets available for sale Financial assets held to maturity PP&E and investments Other assets Liabilities Checking accounts and demand deposits Savings accounts and time deposits Debt issued Other liabilities Capital and reserves Derivatives Financial derivative instruments ASSETS Cash Repurchase agreements Loans to customers, net Financial assets available for sale Financial assets held to maturity PP&E and investments Other assets LIABILITIES Checking accounts and demand deposits Savings accounts and time deposits Debt issued Other liabilities Capital and reserves DERIVATIVES Financial derivative instruments
The following table summarizes the aforementioned exposures:
(iii) Sensitivity Analysis for Financial Risks The Bank uses stress testing as a sensitivity analysis tool in order to control financial risk. This measurement is performed separately for each class of financial instruments. Sensitivity is estimated using the DV01 indicator, which is a measure of sensitivity of the portfolio results considering an increase of one basis point (0.01%) of the zero coupon interest rate of the financial risk factor for different maturities in annualized terms. The following table presents an estimate of the likely, but reasonable impact of the fluctuations in interest rates, exchange rates and implicit volatilities (market factors) that would have an impact the based on a scenario of each class of financial instrument. The estimated economic impact derived from the scenarios of changes in market factors presents effects in profit and loss for trading instruments and instruments measured at amortized cost, as well as impacts in other comprehensive income relating the available for sale, cash flow hedges and foreign investments portfolios. The scenarios presented below correspond to the probable worst-case scenarios chosen from a set of scenarios agreed upon based on the opinions of specialists in economics, financial risk and traders. In order to estimate the economic impact, sensitivities (DV01) and scenario related changes must be multiplied for each market factor. Scenarios are presented separately for Chile and Colombia. Interest Rate Scenarios — Chile (basis points — 0.01%):
Exchange Rate Scenarios — Chile:
Interest Rate Scenarios — Colombia (basis points — 0.01%):
Exchange Rate Scenarios —
The consolidated effects in profit or loss of the scenarios are presented below:
The impact on the Banking Book does not necessarily mean a gain/loss but it does mean smaller/larger net income from the generation of funds (net funding income, which is the net interest from the financial instruments measured at amortized cost portfolio) for the next 12 months.
As of December 31, 2016:
As of December 31, 2017:
Exchange Rate Total Impact on Exchange Rate Total Impact As of December 31, 2018:
The For further details on accounting hedge strategies, see Note 8 of our consolidated financial statements. b) Liquidity Risk Metrics and Limits Liquidity risk measurements are focused mainly on quantifying whether the institution has sufficient resources to meet its assets and liabilities committee (ALCO) for review. The following regulatory and internal metrics are used to monitor and control liquidity risk. (i) Regulatory Measurement of Liquidity Risk Adjusted liquidity gap: SBIF Chapter12-20 (“Management and Measurement of Liquidity Position”) establishes that, with prior authorization from the regulator, cash outflows to retail counterparties may be assigned a different maturity than their contractual maturity based on their statistical behavior. Adjusted mismatches (local consolidated) are restricted to a maximum of:
The The following table sets forth the use of the liquidity regulatory limit as of December 31,
Note: Negative percentage (ii) Regulatory Measurement of Contractual Liquidity Gap In accordance with SBIF Chapter12-20, all cash flows in and outside the statement of financial position are analyzed provided that they contribute cash flows at their contractual maturity point. Balances of the
Lines of credit secured from Chilean Central Bank Obligations with other domestic banks without lines of credit Lines of credit secured from other domestic banks Savings accounts and time deposits Foreign loans without lines of credit Lines of credit from foreign banks Letter of credit obligations Bonds payable Other obligations or payment commitments without lines of credit Other lines of credit secured Net band Assets Cash Financial instruments recorded at market value Loans to other domestic banks without lines of credit Lines of credit granted to other domestic banks Commercial loans without lines of credit Commercial lines of credit and overdrafts Consumer loans without lines of credit Consumer lines of credit and overdrafts Residential mortgage loans Financial instruments recorded based on issuer’s flow Other transactions or commitments without lines of credit Other lines of credit granted Derivative instruments Liabilities Checking accounts and other demand deposits Term savings accounts - unconditional withdrawal Term savings accounts - deferred withdrawal Obligations with Chilean Central Bank without lines of credit Lines of credit secured from Chilean Central Bank Obligations with other domestic banks without lines of credit Lines of credit secured from other domestic banks Savings accounts and time deposits Foreign loans without lines of credit Lines of credit from foreign banks Letter of credit obligations Bonds payable Other obligations or payment commitments without lines of credit Other lines of credit secured Net band Assets Cash Financial instruments at fair value through profit or loss Interbank loans at amortized cost without lines of credit Lines of credit granted to other domestic banks Loans and accounts receivable from customers at amortized cost: Commercial loans without lines of credit Commercial lines of credit and overdrafts Consumer loans without lines of credit Consumer lines of credit and overdrafts Residential mortgage loans Financial instruments at fair value through other comprehensive income Other transactions or commitments without lines of credit Other lines of credit granted Derivative instruments Liabilities Checking accounts and other demand deposits Term savings accounts—unconditional withdrawal Term savings accounts—deferred withdrawal Obligations with Chilean Central Bank without lines of credit Lines of credit secured from Chilean Central Bank Obligations with other domestic banks without lines of credit Lines of credit secured from other domestic banks Savings accounts and time deposits Foreign loans without lines of credit Lines of credit from foreign banks Letter of credit obligations Bonds payable Other obligations or payment commitments without lines of credit Other lines of credit secured Net band The preceding tables present undiscounted cash flows from the The grouping corresponds to regulatory categories that bring together financial items with similar characteristics from the perspective of liquidity risk. These categories are modeled separately and reported in cash flows. (iii) Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) In line with international risk management practices, the The LCR aims to measure the sufficiency of high-quality assets to face a30-day funding stress scenario. At a minimum, the Starting in April 2019, Chilean banks will begin reporting their local LCR figures with a minimum level set by SBIF at 60%. This minimum will gradually rise to 100% by 2023. As of December 31, 2018, the Bank’s LCR was 118%. The BACEN limit for NSFR is set at 85% and as of December 31, 2018, the Bank’s NSFR was higher than 85%. (iv) Deposits / Loans Structurally, the
(v) Liquidity Warning Levels Warning levels seek to provide evidence or signs of potential adverse liquidity events. The most relevant warning levels include: counterparty and maturity concentration, currency concentration, product concentration, reserve management, evolution of funding rates and diversification of Liquid Assets. (vi) Analysis of Pledged and Unpledged Assets The following presents an analysis of the
The following table sets forth our available assets and investments adjusted for the delivery or receipt of guarantees as of December 31,
(vii) Counterparty Risk Exposure to derivative counterparty risk is measured by recognizing the different contracts maintained with the The following table details the netting of these transactions:
Market values of derivatives that are reported in accounting do not reflect counterparty risk management using guarantees as they do not reveal the true exposures with the counterparties. The guarantees delivered (received) must be added (subtracted) from the market value in order to correctly reflect these exposures. It is important to highlight that counterparty risk management is framed within the 3) Monitoring and Governance of Financial Risks Our board of directors is the body in charge of the Risk management policies are established with the objective of identifying and analyzing the risks faced by the regularly so that they reflect changes in the The Audit Committee supervises the way in which the In accordance with the The Corporate Treasury Division is charged with managing financial risk in the The Financial Risk Department is independent from the business areas and is responsible for controlling and measuring the The a) Financial Risk Management Principles
b) Financial Risk Management Committees In order to guarantee the flexibility of management efforts and communication of risk levels to senior management, the following network of committees has been established:
AMERICAN DEPOSITARY SHARES Fees and Expenses Effective as of
Any other charges and expenses of the depositary under the deposit agreement will be paid by Itaú Corpbanca upon agreement between the depositary and Itaú Corpbanca. All fees and charges may, at any time and from time to time, be changed by agreement between the depositary and the Company but, in the case of fees and charges payable by ADS holders and beneficial owners, only in the manner contemplated by The depositary reimburses Itaú Corpbanca for certain expenses incurred by Itaú Corpbanca that are related to the ADS facility upon such terms and conditions as Itaú Corpbanca and the depositary have agreed and may hereinafter agree from time to time. The depositary may make available to Itaú Corpbanca a set amount or a portion of the depositary fees charged in respect of the ADS facility or otherwise upon such terms and conditions as Itaú Corpbanca and the depositary may agree from time to time.
There have been no defaults, dividend arrearages or delinquencies in any payments for the year ended December 31,
There have been no material modifications to the rights of security holders for the year ended December 31,
DISCLOSURE CONTROLS AND PROCEDURES As of December 31, A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Therefore, our management does not expect that the controls will prevent all errors and all fraud. Based upon the evaluation performed, our CEO and CFO have concluded that as of December 31, MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules13a-15(f) and15d-15(f) under the Exchange Act. Our internal control was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes, in accordance with IFRS, and includes those policies and procedures that:
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective 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 a decline in the level of compliance with policies or procedures may occur. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. The effectiveness of our Company’s internal control over financial reporting as of December 31, CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING In connection with the evaluation required by Rule13a-15(d) under the Exchange Act, our management, including our CEO and CFO, concluded that the changes that occurred during the year ended December 31, REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The report of PricewaterhouseCoopers Consultores Auditores SpA, our independent registered public accounting firm, dated April
We have adopted a code of ethics, as defined in Item 16B ofForm 20-F under the Exchange Act. Our code of ethics applies to our CEO, CFO, principal accounting officer and persons performing similar functions, as well as to our directors and other employees without exception. A copy of our code of ethics, as amended, along with our Code of Conduct in the Securities Market, is attached as an exhibit to this Our code of ethics is available on our website, at www.itau.cl under the heading “Sobre Itaú Corpbanca—Políticas, Manuales y Códigos.” No waivers have been granted to the code of ethics since its adoption that applies to the persons indicated above.
The following table sets forth the fees billed to us by our independent auditors during the fiscal years ended December 31,
Audit fees in the above table are the aggregate fees billed by PwC for Audit-related fees in the above table are the aggregate fees billed by PwC for PRE-APPROVAL POLICIES AND PROCEDURES Our audit committee approves all audit, audit-related services, tax services and other services provided by PwC. Any services provided by PwC that are not specifically included within the scope of the audit must bepre-approved by the audit committee prior to any engagement.
Itaú Corpbanca’s audit committee meets the requirements of Exchange ActRule 10A-3. However, Itaú Corpbanca is subject to the general exemption contained in Exchange ActRule 10A-3, which provides an exemption from NYSE’s listing standards relating to audit committees for foreign companies like Itaú Corpbanca.
The following table sets out certain information concerning purchases of our shares registered under Section 12 of the Exchange Act by us or any affiliated purchaser during fiscal year
Not applicable.
Pursuant to Section 303A.11 of the Listed Company Manual of the New York Stock Exchange, “foreign private issuers” are required to provide a summary of the significant ways in which their corporate governance practices differ from those corporate governance standards required of U.S. companies by the New York Stock Exchange. As a Chilean bank, our corporate governance standards are governed by ourby-laws, the Chilean General Banking Act, the Chilean Securities Market Act, the Chilean Corporations Act and the Regulations of the SBIF. The following chart notes these differences:
Not applicable.
Not applicable.
See the following items starting atpage F-3: (a) Report of independent registered public accounting firm; (b) Consolidated statements of financial position as of 2017; (c) Consolidated statements of income for the years ended December 31, 2017; (d) Consolidated statements of other comprehensive income for the years ended December 31, 2017; (e) Consolidated statements of changes in Equity for the years ended December 31, 2017; (f) Consolidated statements of cash flows for the years ended December 31, (g) Notes to the consolidated financial statements.
The following exhibits are filed as part of this Annual Report: Exhibit Exhibit 2.(a) Exhibit 2.(a) Exhibit 2.(b)
SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
Date: April
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Santiago, April 24, 2019 To the Board of Directors and Shareholders of Itaú Corpbanca Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated statements of financial position of Itaú In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, Change in Accounting Principle As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for financial instruments in 2018. Basis for Opinions The Company’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 We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits 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 audits 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 regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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 audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. 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. 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 SpA Santiago, April 24, 2019 We have served as the Company’s auditor since 2006.
Itaú Corpbanca and Consolidated Statements of Financial Position
(In millions of Chilean pesos - MCh$)
The
Itaú Corpbanca and Consolidated Statements of Income
(In millions of Chilean pesos - MCh$
The
Itaú Corpbanca and Consolidated Statements of Other Comprehensive Income
(In millions of Chilean pesos - MCh$)
The
Itaú Corpbanca and Consolidated Statements of Changes in Equity
(In millions of Chilean
The
Itaú Corpbanca and Consolidated Statements of Cash Flows
(In millions of Chilean pesos - MCh$)
The
Notes to the Consolidated Financial Statements As of (In millions of Chilean pesos, except for the number of shares)
General Information – Background of Itaú Corpbanca and Itaú Corpbanca (the “Bank”) is a corporation incorporated under the laws of the Republic of Chile and regulated by the Superintendency of Banks and Financial Institutions (SBIF) The current ownership structure is Itaú Corpbanca is headquartered in Chile and MCh$3,219,478 (MMUS$4,634). The legal www.itau.cl The Consolidated Financial Statements as of Significant Accounting Policies and Others
The
These Consolidated Financial Statements have been prepared in The Bank had a significant accounting change due to IFRS 9 adoption. Please see new accounting policies in letters k) and u) in this section and Note 2 “Accounting changes”.
Note 1 – General Information and Summary of Significant Accounting Policies, continued
These Consolidated Financial Statements comprise the
Intercompany balances and any unrealized income or loss arising from intercompany transactions are eliminated upon consolidation during the preparation of the
The Bank controls an investee
Bank’s returns; When the Bank has less than The Bank considers all relevant factors and circumstances
The Bank
Note 1 – General Information and The
The
Note 1 – General Information and
The Bank and its subsidiaries manage assets held in The Bank provides trust commissions and other fiduciary services that result in the participation or investment of assets by clients. Assets held in a fiduciary activity are not reported in the Consolidated Financial Statements, since they are not Bank assets and there is no control over them. Contingencies and commitments arising from this activity are disclosed in Note N°22 “Contingencies, Commitments, and Responsibilities”, letter c), related to Responsibilities recorded inoff-balance-sheet accounts. In accordance
Rights held by other
The remuneration to which it is entitled to in accordance with the remuneration
Decision-maker’s exposure to variability of returns from other interests that it holds in the investee. The Bank does not control or consolidate any The Bank manages the funds on behalf
Business combinations are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Bank, liabilities incurred by the Bank to the former owners of the acquiree and the equity interests issued by the Bank in exchange for control of the acquiree. Acquisition costs incurred are expensed and included in administrative expenses. When Itaú Corpbanca and its subsidiaries
Note 1 – General Information and Summary of Significant Accounting Policies, continued
Goodwill, After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill
When goodwill is allocated to a CGU and
The Bank has The Bank translates accounting records of its subsidiaries in
Monetary assets and liabilities
All differences arising from the settlement or conversion of monetary items are recorded in income, except for those that correspond to monetary items that are part of the hedge of a net investment in a foreign operation, for which the cumulative difference is recorded in equity and subsequently reclassified to profit and loss (on disposal). Tax effects attributable to the exchange differences on such monetary items are also recorded in Other Comprehensive Income.
The Bank grants loans and receives deposits in amounts denominated in foreign currency, mainly in US dollars and Colombian pesos.
Note 1 – General Information and Summary of Significant Accounting Policies, continued
The Assets and liabilities, by using exchange rates as of the date of the Consolidated Financial Statements. Income and expenses and cash flows, by using the exchange rates as of the date of each transaction. Exchange differences arising from translating balances in functional currencies of the consolidated entities other than
by the Bank. Assets and liabilities in foreign
The Estimates and relevant assumptions are regularly reviewed by Management in order to properly measure some assets, liabilities, income, and expenses. Accounting estimates changes due to reviews are recognized in the year in which the estimate is reviewed and in any future period affected. In certain cases, International Financial Reporting Standards requires that assets and liabilities be recorded or disclosed at their fair values. Fair value is 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 market prices in active markets are available, they have been used as a basis for valuation. When market prices in active markets are not available, the Bank has estimated those values as values based on the best available information, including the use of modeling and other valuation techniques. In particular, information on most significant areas of estimate due to uncertainties and critical judgments in the application of accounting policies that have the most important effect on the amounts recorded in the Consolidated Financial Statements are the following: Useful lives of property, plant and equipment and intangible assets (Notes 12, 13, and 30). Goodwill - Impairment test (Notes 12 and 30). Allowances for loan losses (Notes 9, 10 and 27). Fair value of financial assets and liabilities (Note 33). Provisions (Note 19). Contingencies and commitments (Note 21).
Note Impairment losses of certain assets (Notes 12, 13, and 30). Current taxes and deferred taxes (Note 14). Perimeter of consolidation and control assessment for consolidation purposes (Note 1, letter c). During the
Better evaluate
Form better opinions regarding the Bank as a whole. To comply with IFRS 8, Itaú Corpbanca identifies operating segments
The Executive Committee manages these segments Colombia. More information on each segment is presented in Note 4
Note 1 – General Information and Summary of Significant Accounting Policies, continued
Financial
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 For classification process the Bank perform the SPPI test, which assesses the contractual term to identify whether they meet SPPI criterion, the contract is a basic lending arrangement. The Bank applies judgment 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 Bank’s business model represents how financial assets are managed to generate cash flows and does not depend on the Management’s intention regarding an individual instrument, but at a higher level of aggregated portfolio and is based on observable factors such as: risks that affect the performance of business model; how business managers are compensated; how the performance of business model is assessed and reported to Management. In addition, the Banks’s business model is not assessed on aninstrument-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, among others. 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 realize 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 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 realizing cash flows through the sale of the assets. The Bank makes decisions based on the assets’ fair values and manages the assets to realize those fair values.
Note 1 – General Information and Summary of Significant Accounting Policies, continued
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.
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 of financial assets and financial liabilities carried at fair value are expensed in profit or loss.
After initial recognition,
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
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 recognized in other comprehensive income, until the assets are sold. Upon disposal, the cumulative gain and losses in OCI are recognized in the income statements.
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. 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.
After initial recognition, the Bank shall measure a financial liability at amortized cost, except for derivatives that are measured at fair value through profit or loss.
Note 1 – General Information and Summary of Significant Accounting Policies, continued
Financial assets are derecognized 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 derecognizes the financial asset and recognize separately any rights and obligations created or retained in the transfer. 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 recognize 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 recognized as a financial asset and a financial liability is recognized for the obligation to pay the repurchase price. Financial liabilities are derecognized when, and only when, they are extinguished, cancelled or expired.
The Bank issues contingent loans (including letters of credit, foreign letters of credit and performance guarantee) and loan commitments. Contingent loans and undrawn loan commitments are commitments under which, over the duration of the commitment, the Bank is required to provide a loan withpre-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 expected credit losses allowances are disclosed in Note 19.
Financial assets and financial liabilities are offset in the balance sheet only when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. As of December 31, 2018, the Bank does not have balance offsetting of financial instruments.
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.
Note 1 – General Information and Summary of Significant Accounting Policies, continued “Hybrid financial instruments” are contracts that simultaneously include anon-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.
Financial assets were classified into the following specified categories: trading investments at fair value through profit or loss (FVTPL), ‘held to maturity investments’, ‘available for sale investments (AFS)’ and ‘loans and accounts receivable from customers’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular purchases or sales of financial asset were recognized and derecognized on a trade basis. Regular way purchases or sales of financial assets required delivery of the 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 was recognized on an effective interest basis for loans and accounts receivables other than those financial assets classified as at fair value through profit or loss. Trading investment Financial assets were classified as FVTPL when the financial asset is either held for trading or they are designated as at fair value through profit or loss. A financial asset was 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 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 it forms part of Financial assets at FVTPL were 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 was included in the ‘net income (expense) from financial operations’ line item.
Note 1 – General Information and Summary of Significant Accounting Policies, continued Held to maturity investments Held-to-maturity investments werenon-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Bank had the positive intent and ability to hold to maturity. Subsequent to initial recognition,held-to-maturity investments were measured at amortized cost using the effective interest method less any impairment. Available for sale investments (AFS investments) AFS investments werenon-derivatives that were either designated as AFS or were 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 were traded in an active market were classified as AFS and were stated at fair value at the end of each reporting period. The Bank also had investments in financial instruments that were not traded in an active market but that were also classified as AFS investments and stated at fair value at the end of each reporting period (because the Bank considered 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 were recognized in profit or loss. Other changes in the carrying amount of available for sale investments were recognized in other comprehensive income and accumulated under the heading of “Valuation Adjustment”. When the investment was disposed of or it was determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation reserve was reclassified to profit or loss. Dividends on AFS equity instruments were recognized in profit or loss when the Bank’s right to receive the dividends was established. The fair value of AFS monetary financial assets denominated in a foreign currency was determined in that foreign currency and translated as the described in f) above. The foreign exchange gains and losses that were recognized in profit or loss were determined based on the amortized cost of the monetary asset. Loans and accounts receivable from customers Loans and accounts receivable from customers werenon-derivative financial assets with fixed or determinable payments that were not quoted in an active market. Loans and accounts receivables from customers (including loans and accounts receivable from customers and interbank loans) were measured at amortized cost using the effective interest method, less any impairment. Interest income was recognized by applying the effective interest rate, except for short-term receivables when the effect of discounting is immaterial.
For presentation purposes, the financial assets were classified by their nature into the following line items in the Consolidated Financial Statements: Cash and deposits in banks: this line included cash balances, checking accounts andon-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 represented 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.
Note 1 – General Information and Summary of Significant Accounting Policies, continued Trading investments: this item included financial instruments held 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: included balances of financial instruments purchased under resale agreement. Interbank loans: this item included 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. Loans and accounts receivables from customers: these loans werenon-derivative financial assets for which fixed or determined amounts are charged, that were not listed on an active market and which the Bank does not intend to sell immediately or in the short term. When the Bank was the lessor in a lease, and it substantially transferred the risks and rewards incidental to the leased asset, the transaction was presented in loans and accounts receivable from customers while the leased asset is derecognized in the Bank’s statements of financial position. Investment instruments: were classified into two categories:held-to-maturity investments, andavailable-for-sale investments. Theheld-to-maturity investment classification included only those instruments for which the Bank had the ability and intent to hold to maturity. The remaining investments were treated as available for sale.
The Bank classified all financial liabilities as subsequently measured at amortized cost, except for: Financial liabilities at FVTPL As of December 31, 2017 the Bank did not maintain financial liabilities at FVTPL. Other financial liabilities Other financial liabilities (including interbank borrowings, issued debt instruments and other payables) were initially recorded at fair value and subsequently measured at amortized cost using the effective interest method.
The financial liabilities were classified by their nature into the following line items in the consolidated statements of financial position: Deposits and otheron- demand liabilities: this included allon-demand obligations except for term savings accounts, which were not consideredon-demand instruments in view of their special characteristics. Obligations whose payment may be required during the period were deemed to beon-demand obligations. Operations which became callable the day after the closing date were not treated ason-demand obligations. Cash items in process of being cleared: this represented 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 included the balances of sales of financial instruments under securities repurchase and loan agreements. The Bank did not record in its own portfolio instruments acquired under repurchase agreements. Time deposits and other time liabilities: this showed the balances of deposit transactions in which a term at the end of which they became callable has been stipulated. Interbank borrowings: this included 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 included 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.
Note 1 – General Information and Summary of Significant Accounting Policies, continued
Financial asset and liability balances were offset, i.e., reported in the Consolidated Statements of Financial Position at their net amount, only if there was a legally enforceable right to offset the recorded amounts and the Bank intended either to settle them on a net basis or to realize the asset and settle the liability simultaneously. As of December 31, 2017 the Bank did not have balance offsetting of financial instruments.
The accounting treatment of transfers of financial assets was 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 transferred 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 did not retain subordinated debt nor grants any credit enhancement to the new holders, and other similar cases, the transferred financial asset was derecognized from the Consolidated Statements of Financial Position and any rights or obligations retained or created in the transfer were simultaneously recorded. ii. If the Bank retained 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 undertake to return the same or similar assets, and other similar cases, the transferred financial asset was not derecognized from the Consolidated Statements of Financial Position and continued to be measured by the same criteria as those used before the transfer. However, the following items were recorded: An associated financial liability for an amount equal to the consideration received; this liability was 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. iii. If the Bank neither transferred nor substantially retained 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 was not deeply in or out of the money, securitization of assets in which the transferor retained a subordinated debt or other type of credit enhancement for a portion of the transferred asset, and other similar cases—the following distinction was made: a. If the transferor did not retain control of the transferred financial asset: the asset was derecognized from the Consolidated Statements of Financial Position and any rights or obligations retained or created in the transfer were recognized. b. If the transferor retained control of the transferred financial asset: it continued to be recognized 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 was the amortized cost of the rights and obligations retained, if the transferred asset was measured at amortized cost, or the fair value of the rights and obligations retained, if the transferred asset was measured at fair value. Accordingly, financial assets were only derecognized from the Consolidated Statements of Financial Position when the rights over the cash flows they generated have terminated or when all the inherent risks and rewards of ownership had been substantially transferred to third parties. Similarly, financial liabilities were only derecognized from the Consolidated Statements of Financial Position when the obligations specified in the contract were discharged or cancelled or the contract matured.
Note 1 – General Information and Summary of Significant Accounting Policies, continued
The Bank has elected to continue applying 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. 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”). 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
Note 1 – General Information and Summary of Significant Accounting Policies, continued
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 conditions 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. Sources of hedge ineffectiveness may arise from basis risk, including but not limited to the discount rates used for calculating the fair value of derivatives, hedges using instruments with anon-zero fair value, and notional and timing differences between the hedged items and hedging instruments. 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 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.
In general, financial assets and 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 loans and accounts receivable from customers. “Fair
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,
Note 1 – General Information and Summary of Significant Accounting Policies, continued When
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets All derivatives are
transaction price. The changes in the fair value of
portfolios of financial assets or liabilities held for trading is deemed to be their daily quoted price. If, for exceptional reasons, the
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 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.
Note 1 – General Information and
The main
The fair value of the financial instruments
i. Interest revenue, interest expense, and similar items 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 the ECL provision). ii. Commissions, fees, and similar items Fee and commission income and expenses are recognized in the Consolidated Statements 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 recognizes revenue when (or as) satisfied a performance obligations by transferring a service (i.e. an asset) to a customer; under this definition an asset is transferred when (or as) the customer obtains control of that asset. 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 recognizes revenue over time, and/or the Bank satisfies the performance obligation at a point in time.
Note 1 – General Information and Summary of Significant Accounting Policies, continued
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 securities’ custody services. 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 online 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 securities’ brokerage. Other fees and commissions: includes mainly expenses generated from online services. The Bank has incorporated disaggregated revenue and expense disclosures and reportable segment relationship in Note 28. Additionally, 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 disclosures for the year 2017 and 2016, was under IAS 18 “Revenue recognition”, fees and commission income and expense were recognized in according to their nature. The main criteria was: Fee and commission income and expenses on financial assets and liabilities were recognized when they are Those arising from transactions or services that were performed over a period of time, were recognized over the life of these transactions or services. Those relating to services provided in a single transaction were recognized when the single transaction was performed. iii. Loan arrangement fees Fees that arise as a result of the origination of a loan, mainly application and
Assets are acquired or purchased based on the future economic benefits they produce. Accordingly, impairment is recorded when the carrying amount of those assets is lower than the recoverable amount, Assets are subject to impairment tests in order to properly reflect the future economic benefits that assets are capable to produce when used by the Bank.
Note 1 – General Information and Summary of Significant Accounting Policies, continued The Bank
The time value of money; and Reasonable and supportable information that is available without undue cost or effort at the repotting date about past events, current conditions and forecasts of future economic conditions. The Bank follows the criteria described below in order to assess impairment, when applicable:
A financial asset, other than those A financial asset or group of financial assets will be impaired An impairment loss relating to
Individually significant financial Impairment loss for available for sale investments is If impairment evidence exists, any amount previously recorded in equity is transferred from equity to the Consolidated Statement of Income, presented as available for sale investments net gains or losses. This amount is calculated as the difference between acquisition cost (net of any amortization and reimbursement) and the current fair value of the asset, less any impairment loss on the investment previously recorded in the
Consolidated Statement of Income. In respect
Note 1 – General Information and Summary of Significant Accounting Policies, continued
The Bank’s
If the recoverable amount of an asset is estimated to be less than its carrying amount, the Recoverable amount is the higher of fair value less costs to sell
The Bank shall assess at the end of each reporting period whether there is any indication that an impairment loss recognized in prior periods for an asset other than goodwill may no longer exist or may have decreased. If any such indication exists, the entity shall estimate the recoverable amount of that asset. In assessing whether there is any indication that an impairment loss recognized in prior periods for an asset other than goodwill may no longer exist or may have decreased, an entity shall consider, as a minimum, external sources of information, such as there are observable indications that the asset’s value has increased significantly during the period; significant changes with a favorable effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which the asset is dedicated; market interest rates or other market rates of return on investments have decreased during the period, and those decreases are likely to affect the discount rate used in calculating the asset’s value in use and increase the asset’s recoverable amount materially and internal sources of information such as significant changes with a favorable effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, the asset is used or is expected to be used. These changes include costs incurred during the period to improve or enhance the asset’s performance or restructure the operation to which the asset belongs. In the case of goodwill and indefinite useful life intangible assets or not yet available for use the recoverable amount is estimated at least annually. When impairment exists the carrying amount of the asset shall be reduced to its recoverable amount if, and only if, the recoverable amount of an asset is less than its carrying amount. This reduction is an impairment loss. An impairment loss shall be recognized immediately in profit or loss, unless the asset is carried at revalued amount in accordance with another standard. Any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance with that other standard.
Note 1 – General Information and Summary of Significant Accounting Policies, continued
If an impairment loss is recognized, any related deferred tax assets or liabilities are determined in accordance with IAS 12 “Income Taxes” by comparing the revised carrying amount of the asset with its tax base. Impairment losses recognized in previous years are assessed at the end of each reporting period in order to identify any indication for impairment reduction or disappearance. 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 recognized for the asset in prior years.
Goodwill is tested annually in order to determine For the purpose of impairment
In addition to the price paid to acquire each item, the cost also includes, where applicable, the capitalized cost. The capitalized cost includes expenses attributed directly to the asset acquisition and any other costs directly attributable to the process of placing the asset in conditions to be used.
This item includes the amounts of property, land, furniture, vehicles,
Property, plant and equipment for own use includes but is
Note 1 – General Information and Summary of Significant Accounting Policies, continued
Depreciation is calculated using the straight line method over the acquisition cost of assets
lease. Maintenance expenses relating to tangible assets held for own use are recorded as an expense in the period in which they are incurred.
Intangible assets are recorded initially at acquisition or production cost and An entity shall assess whether the useful life of an intangible asset is finite or indefinite and, if finite, the length of, or number of production or similar units constituting, that useful life. An intangible asset shall be regarded by the entity as having an indefinite useful life when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity. The accounting for an intangible asset is based on its useful life. An intangible asset with a finite useful life is amortized over its useful life, and it is reviewed in order to determine if the asset is impaired, the amortization period and the amortization method shall be reviewed at least at each financialyear-end. An intangible asset with an indefinite useful life are not amortized and the entity tests for impairment by comparing its recoverable amount with its carrying amount annually and whenever there is an indication that the intangible asset may be impaired. 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. Expenditure on research activities is recorded as an expense in the year in which it is incurred and cannot be subsequently capitalized.
The software acquired by the Bank is recognized at cost less the accumulated amortization and The expenses in software developed internally are
Note 1 – General Information and Summary of Significant Accounting Policies, continued The subsequent expenditures associated with the asset are capitalized only when future economic benefits from them will flow to the entity. The rest of the expenditures are recognized in income. Intangible assets are amortized on a straight-line basis over their estimated useful life; starting on the date it is ready for use.
According to IFRS 3 “Business combinations”, when an intangible asset is acquired or generated in a business combination it cost will be the fair value at the acquisition date. The fair value of an intangible asset represents expectations of market participants at the acquisition date over the probability that future economic benefits from the asset will flow to the entity. In other words, the entity expects that economic benefits flows to it, even though there is uncertainty about the date or the amount of them. As set forth by IAS 38 “Intangibles Assets” and IFRS 3 “Business combinations”, the acquirer will recognize an intangible asset from the acquiree at the acquisition date separately from Goodwill independently if the asset was previously recognized by the acquiree before the business combination. In connection with the aforementioned, the business combination between Itaú Chile y Corpbanca gave rise to intangible assets and Goodwill as indicated in Note 13 “Intangible Assets”.
Correspond to those intangible assets that can be identified, the Bank controls them, can be reliably measured and it is probable that future benefits will flow to the Bank.
The Bank performs operations with their clients, in which they receive invoices and other credit representative trading instruments with or without recourse to the transferor, anticipating a percentage of the total amount receivable of the borrower upon collection. These transactions are valued at the disbursed amounts by the Bank in exchange for invoices or other credit representative trading instruments. The price differences between the disbursed amounts and the nominal amount of the documents are recorded in the
Accounts receivable for lease contracts, included as “Loans and accounts receivable form customers” correspond to installments for contracts that qualify as financial leases and are presented at nominal amounts net of unearned interest at year end. When the Bank is the lessor in a lease
The Bank recognized as lending to third parties under “Loans and accounts receivable from customers” in the Consolidated Statement of Financial Position the sum of the present value of the lease payments receivable from the lessee, including the exercise price of the
Note 1 – General Information and Summary of Significant Accounting Policies, continued When consolidated entities act as lessees, the leased assets are classified based on their nature in the Consolidated Statement of Financial Position, and recognizing an asset and liability at the same amount (the lower between the
In both cases, income and expenses arising from these contracts are recorded under “Interest income” and “Interest expense”, respectively, in Consolidated Statement of
When the consolidated 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 Statement of Income.
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 impairment model applies to all financial The Bank accounted ECL related to financial assets measured at amortized 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 for as a provision in the statements of financial position. The Bank recognizes in profit or loss, as an impairment gain or loss, the amount of ECL (or reversal) that was required to adjust the loss allowance at the reporting date to the amount that is required to be recognized in accordance IFRS 9, for financial assets measured at amortized cost and contingent loans. The new model uses a dual measurement approach, under which the loss allowance is measured as either: 12-month expected credit losses Lifetime expected credit losses
Note 1 – General Information and Summary of Significant Accounting Policies, continued
The Bank has defined default on an individual or collective basis as follows:
For collective assessment purposes, financial assets are grouped based on characteristics of shared credit risk, considering the type of instrument, credit risk classifications, initial recognition date, remaining term, industry, geographical location of the counterparty, among other significant factors. An instrument is considered to be no longer in default when it no longer meets the default criteria for a consecutive period between4-11 months, depending on the type of loan. The ECL 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:
The Bank, at the end of each reporting period, evaluates whether a financial instrument’s credit risk has significantly increased since initial recognition or whether an asset is considered to be credit-impaired, and consequently classify financial instrument in the respective stage: Stage 1: When loans are first recognized, the Bank recognizes an allowance based on 12 months ECL. Stage 1 loans also include facilities where the credit risk has improved and the loan Stage 2: When a loan has shown a significant increase in credit risk since origination, the Bank records an allowance based on 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 based on lifetime ECL, setting the Probability of Default (“PD”) at 100%. The Banks assessment of a SICR and the calculation of ECL both incorporate forward-looking information. The Bank performs historical analysis and identify the key economic variables that impacts credit risk and ECL for each portfolio. These can include GDP, inflation, interest rates, and unemployment, among others. Where applicable, we incorporate these economic variables and their associated impacts into our models. 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.
Note 1 – General Information and Summary of Significant Accounting Policies, continued
The Bank has considered that if contractual payments are
The ECL are 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 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 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. EAD: The Exposure at default is an estimate of the exposure at a future default date, taking into account expected changes in the For measuring12-month and lifetime ECL, 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. The Bank considered a multi-factor analysis to perform credit risk analysis. The type of portfolio or transactions, and whether individually or collectivelly assessed. The Bank divides its portfolio in commercial loans, mortgage loans, consumer loans and contingent loans. The Bank assesses individually whether objective evidence of impairment exists for
ii. Contingent loans The Bank enters into various irrevocable loan
When the Bank estimates the ECL for contingent loans, it
Note 1 – General Information and Summary of Significant Accounting Policies, continued
Unemployment rates Central Banks interest rates Real estate prices iv. Modifications of financial assets When a loan measured at For ECL estimation purposes of financial assets that have been modified, the Bank 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 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. 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 estate 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 estate, which are valued based on data provided by specialized third parties. The estimation of ECL reflects the cash flows According to the Bank’s policy when an asset (real estate) is repossessed, it is transferred to assets held for sale at its fair value less cost to sell and classified asnon-financial assets at the repossession date. i) Guarantees Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it occurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instruments. Such financial guarantees are given to banks, financial institutions and others on behalf of customers to secure loans, overdrafts and other banking facilities. Financial guarantee contracts are initially measured at fair value and subsequently measured at the higher of: The amount of the loss allowance (calculated as described in note 28); and The premium received on initial recognition less income recognized in accordance with the principles of IFRS 15. Loan commitments provided by the Bank are measured as the amount of the loss allowance (calculated as described in note 28). The Bank has not provided any commitment to provide loans at a below-market interest rate, or that can be settled net in cash or by delivering or issuing another financial instrument.
Note 1 – General Information and Summary of Significant Accounting Policies, continued For loan commitments and financial guarantee contracts, the loss allowance is recognized as a provision. However, for contracts that include both a loan and an undrawn commitment and the Bank cannot vi. Charge-offs
Subsequent recoveries of amounts previouslycharge-off are credited to the income statements, as recovery of Loan and accounts receivable charge-offs are recorded for overdue and current installments based on the
The Bank performed an assessment of the risk associated with loans and
Group assessment - a group assessment was relevant for analyzing a large number of transactions with small individual balances from The Bank models determined allowances and provisions for loan losses according to the type of portfolio or transactions. Loans and accounts receivables from customers were divided into three categories: i. Commercial loans, ii. Mortgage loans, and iii. Consumer loans.
Note 1 – General Information and
The models used to determine credit risk allowances are described as follows: I. Allowances for individual assessment An individual assessment of commercial debtors was 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 For individually analyzed commercial loans, we used a risk classification process that combined parametrical variables with expert judgment, to assign risk categories to each individually analyzed customer. This process considered financial risk factors such as profitability, payment ability and financial indebtedness, and qualitative risk factors such as the economic sector in which the customer develops its activities, the management and experience of the owners, and its historical payment behavior. As a result of this classification process, we differentiated the normal loans from the impaired ones, identifying three mayor categories: 1. Customers classified in risk categories A1, A2, A3, A4, A5 or A6. These customers were current or have less than 30 days overdue on their payment obligations and showed no significant signs of deterioration in their credit quality. 2. Customers classified in risk categories B1, B2, B3 or B4. These customers were overdue between 30 and 89 days on their payment obligations, thus showing a certain level of deterioration in their credit quality. 3. Customers classified as C1, C2, C3, C4, C5 or C6. This portfolio included customers whose loans with us have been in default (over 90) or were managed by a specialized collection area. For loans classified as A1, A2, A3, A4, A5, A6, B1, B2, B3 and B4, we assigned a specific allowance percentage on an individual basis to each rating. The amount of the allowance for loan losses was determined based on debt servicing capacity, the company��s financial history, solvency and capacity of shareholders and management and projections for the industry sector in which the customer operates. There was a determined allowance percentage by group of customers with similar characteristics (i.e., A1, A2, A3, A4, A5, A6, B1, B2, B3 and B4). Estimated Incurred Loan Loss = Allowance for Loan Losses The Estimated Incurred Loan Loss (EIL) was determined by multiplying the risk factors as defined in the following
Estimated Incurred Loss (EIL) meant the amount of impairment losses that were incurred, only if there was objective evidence that the estimated future cash flows of the financial asset or group of financial assets was impaired as a result of a loss event. Exposure at Default (EAD) was the loan amount outstanding at the balance sheet date that was considered in the calculation and not any future movements and drawdowns. Probability of Default (PD) meant the probability, expressed as a percentage that a customer will default within the next 12 months. This percentage was associated with the rating that given to
Note 1 – General Information and Summary of Significant Accounting Policies, continued Loss Identification Period (LIP) meant the period between the time at which the event occurred and the date when the entity identified it. Loss Given Default (LGD) meant the effective loss rate given for default to customers in the same risk category, which was determined statistically based on the historical effective losses. Allowances for loan losses for each C risk category were based mainly on the value of the collateral, adjusted for the estimated expenses associated with the recovery and asset sale discounted by the effective interest rate. The allowance percentage for each category was then based mostly on the level of collateral. II. Allowances for group assessments The Bank used 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’s definition, the Bank used a group evaluation to approach transactions that have similar credit risk features, which indicated the debtor’s payment capacity over the entire debt, principal and interests, pursuant to the contract’s terms. In addition, this allowed 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 were grouped together and each group has a risk level assigned to These models were meant to be used mainly to analyze loans granted to individuals (including consumer loans, credit lines, mortgage loans and Allowances were established using these models, taking into account the historical Impairment and other Allowances for group-evaluated loans were established based on the credit risk of the profile to which the loan belongs. The method for assigning a profile was 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 determined a client’s risk level, which in this case was 90 days ofnon-performance (the chosen features are relevant when calculating future cash flows per group of assets). Afterwards, common profiles were established and with differentiated default rates, applying the real historical loss the Bank had with that portfolio. The different risk categories were constructed and updated periodically based on the payment behavior of the client’s profile to which they belong, as well as his or her sociodemographic characteristics. Therefore, when a customer had past due balance or has missed some payments, the outcome was 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 were classified, was the product of three factors: exposure (EXP), Probability ofNon- Performance (PNP) and Severity (SEV), the same equation used for individual assessment mentioned above. The estimated incurred loss rates for group-evaluated loans corresponded to charge-offs net of recoveries. The methodology established the period in which the estimated incurred loss for each risk profile emerges. Once the was considered as incurred, the estimated incurred loss rates were applied to the corresponding risk profile to obtain the netcharge-off level associated with this period. The loss rates applied to each risk profile were based only on the historical netcharge-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 was used to determine the loss rates.
Note 1 – General Information and Summary of Significant Accounting Policies, continued
In connection with mortgage loans, historical net charge-offs were considered in the model to calculate loss rates for loans collectively evaluated for impairment. The risk categories were such that when a customer has apast-due balance or has missed some payments, the outcome was 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 andsmall-and-mid- sized commercial loans) were 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 were more than a year old as we only updated the historical net charge-offs when our assessment of predictability and stability indicators determine it was necessary. For allowances calculation purposes, guarantees were treated according to the following, as applicable:
Leased assets Estimated losses when establishing allowances based on the assessment method corresponding to each debtor, considered the amount that would have been obtained if the leased asset was sold, taking into account any potential impairment for the assets in case of debtor’s default and the related recovery and relocation expenses. Factoring operations Establishing allowances for factoring operations considered as counterparty the entity ceding rights over the endorsed in favor of the Bank when the cession was recourse for the latter, and to the debtor when the cession has been made without recourse. III. Charge-offs As a general rule, charge-offs should be done when all collection efforts have been exhausted. These charge-offs consisted of derecognition from the Consolidated Statements of Financial Position of the corresponding loans transactions in its entirety, and, therefore, included portions not past due of a loan in the case of installments loans or leasing transactions (no partial charge-offs exist). Subsequent payments obtained fromcharged-off loans were recognized in the Consolidated Statements of Income as a recovery of loans previouslycharged-off.
Note 1 – General Information and Summary of Significant Accounting Policies, continued
IV. Recovery of loans previously charged off and accounts receivable from customers Any payment agreement of an alreadycharged-off loan did not give rise to income—as long as the operation was in an impaired status—and the effective payments received were accounted for as a recovery from loans previouslycharged-off. Recovery of previouslycharged-off loans and accounts receivable from customers, were recorded in the Consolidated Statements of In accordance with ourcharge-off policy described in iii) above, we may subsequently recovered a portion of the amountcharged-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 wecharged-off the carrying amount of any loans which have been collectively evaluated for impairment, the allowance for loan losses on collectively evaluated loans was 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 were recorded in the financial statements as provision established.
The Bank has recognized an expense (income) arising from gains or losses for each year, according to the applicable taxation rules for each country or jurisdiction it operates. 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
Provisions: credit balances covering present obligations at the
Contingent liabilities: possible obligations that arise from past events and whose existence will be confirmed only
Note 1 – General Information and Summary of Significant Accounting Policies, continued Contingent assets: possible assets that arise from past events and whose existence is conditional on, and will be confirmed only by, the occurrence ornon-occurrence of one or more uncertain future events Group. Contingent assets are not recognized in the consolidated balance sheet or in the consolidated income statement, but rather are disclosed in the notes, provided that it is probable that these assets will give rise to an increase in resources embodying economic benefits. The Provisions, Provisions are classified
Provisions for contingent liabilities and commitments: include the
Correspond to
Personnel vacations The annual cost of personnel
Note 1 – General Information and Summary of Significant Accounting Policies, continued
Post-employment benefits Correspond to employee benefits (other than termination benefits and short-term employee benefits) that are Other long-term benefits
Termination benefits Termination benefits are employee benefits
the decision of an An entity
The Bank recorded a provision for mandatory dividends calculated as a portion of income for the year in order to comply with dispositions of the Chilean Corporations Act (Ley de Sociedades Anónimas) which requires to distribute at least 30% of income of the year, consistent with the Bank’s internal policy. As of December 31, 2018 and 2017 the Bank provisioned 30% of its income for the year. This provision is recorded, as a deducting item, under the “Retained earnings – provision for mandatory dividends” line of the Consolidated Statement of Changes in Equity. In the Bank’s bylaws, title VII, it is established that the Bank should distribute annually as a dividend to its shareholders, as a proposal of the Board of Directors and based on the number of shares, at least thirty percent (30%) of the net income of the year. Furthermore, no dividends distribution will take place if there are equity losses (negative reserves) until these losses are recovered or if a dividend distribution will cause anon-compliance of the capital requirements established by the Ley General de Bancos (General Bank Law). For all matters related to dividends distributions, the Bank is subject to the terms incorporated in the Transaction Agreement (dated January 29, 2014 and its subsequent modifications), which was approved by the Ordinary Shareholders Meeting (dated March 11, 2016).
Assets received or awarded in lieu of payment of loans and accounts receivable from clients are recognized 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 both cases, an independent appraisal is performed.
Note 1 – General Information and Summary of Significant Accounting Policies, continued
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, and the difference between the carrying value of the asset and the estimated fair value less costs to sell is charged to income, under “Other operating expenses”.
The The Bank has an
disposable group) are
Impairment losses in initial classification of
Diluted earnings per share are determined in the same way as basic earnings, but the weighted average number of As of December 31, 2018, 2017 and 2016 the Bank did not have any instruments that
The Bank presents For the preparation of the cash flow statement, the indirect method was used,
Note 1 – General Information and Summary of Significant Accounting Policies, continued
For the preparation of the cash flow statement, the
Equivalents”. The provision for loan losses
Net comprehensive income for the
Other changes in equity: Includes retained earnings distributions, equity increases, provision for mandatory dividends, dividends paid, among other increases or This information is presented in two statements: The Consolidated Statement of Other Comprehensive Income and
Note 1 – General Information and Summary of Significant Accounting Policies, continued
In the Consolidated Statement of Other Comprehensive Income are presented income and expenses generated by the Bank as a Due to this, in this statement the Income for the Net amount of Deferred income taxes originated by transactions described above, except for
Total amount of consolidated income and
On 1 January 2018, Itaú Corpbanca and subsidiaries adopted IFRS 9 ‘Financial Instruments’ (IFRS 9). The new or revised accounting policies are set out below. The impact of applying IFRS 9 is disclosed in Note 2. The accounting policy changes for IFRS 9, set out below, have been applied from 1 January 2018. Comparatives have not been restated. As a result of the change from IAS 39 to IFRS 9, some disclosures presented in respect of certain financial assets are not comparable because their classification may have changed between as a result of the adoption of the new standard. This means that some IFRS 9 disclosures are not directly comparable and some disclosures that relate to information presented on an IAS 39 basis are no longer relevant in the current period. As explained in Note 2, the classification and measurement changes to financial assets that arose on adoption of IFRS 9 are aligned to the presentation in the Consolidated Statement of Financial Position. The Bank decided to continue adopting IAS 39 hedge accounting requirements and consequently there have been no changes to the hedge accounting policies and practices following the adoption of IFRS 9. However, additional hedge accounting disclosure requirements of IFRS 7 ‘Financial Instruments: Disclosures’ (IFRS 7) were included in these Consolidated Financial Statements. In addition, new categories of financial instruments in accordance with IFRS 9 are presented in the Consolidated Statement of Financial Position as of December 31, 2018, as explained in detail in Note 2 to the Consolidated Financial Statements. 1.2 IFRS 15 “Revenues from contracts with customers” On May 28, 2014, the IASB issued IFRS 15, which provides a single model to account for revenues from contracts with customers based on principles, through five steps that will be applied to all contracts with customers, i) contract identification, ii) performance obligations identification, iii) transaction price determination, iv) allocating the transaction price to performance obligations, v) recognize income when (or as) the entity satisfies a performance obligation. Initially, IFRS 15 was to be applied in the first annual financial statements under IFRS for the year beginning on or after January 1, 2017, however, its entry into force has been deferred for annual periods beginning on or after January 1, 2018. The application of the standard is mandatory and its early adoption is permitted. The adoption of this standard had no significant impact on the Consolidated Financial Statements. See Note 2.
Note 1 – General Information and Summary of Significant Accounting Policies, continued
Issued on April 12, 2016, clarifies and This modifications shall be applied to annual periods beginning on January 1, 2018. Early adoption is allowed. The adoption of this standard had no significant impact in the Consolidated Financial Statements. 1.3 Amendment to IFRS 2, “Share-based Payment” – Classification and measurement of transactions Issued on June 20, 2018, it presents the following subjects: Accounting of payments transactions based on shares settled in cash that includes a performance condition. Classification of payment transactions based on shares with balance compensation features. Accounting for changes in payment transactions based on shares that have been settled in cash and settled in equity instruments. This amendment applies prospectively since January 1, 2018. The early adoption is allowed. The adoption of this standard had no significant impact in the Consolidated Financial Statements. 1.4 IFRIC 22 “Foreign Currency Transactions and Advance Consideration” Issued on December 8, 2016, it is applies to a transaction in foreign currency (or a part of it) when an entity recognizes anon-financial asset ornon-financial liability arising from the payment or receipt of an advance consideration before the entity recognizes the related asset, expense or income (or the part of these that corresponds). The interpretation provides a guide for a payment/ receipt, as well as for situations in which multiple payment/ receipt are made. It has as objective to reduce diversity in practice. Its adoption is mandatory for periods beginning on or after January 1, 2018. The adoption of this standard had no significant impact in the Consolidated Financial Statements. 1.5 Amendment to IAS 40 “Investment Property”, in relation to investments property transfers. Issued in December 2016, it clarifies when there is a transfer to, or from, investment property. This amendment is effective for periods beginning in or after January 1, 2018. The adoption of this standard had no significant impact in the Consolidated Financial Statements.
Note 1 – General Information and Summary of Significant Accounting Policies, continued
The document covers the following standards, which begin after January 1, 2018:
It is related to the suspension of short-term exceptions for adopters for the first time with respect to IFRS 7, IAS 19 and IFRS 10. The Bank’s Administration analyzed in detail this amendments and concludes that it does not apply, since the IFRS will not be transitioned for the first time in the mandatory year of the amendment.
In relation to the measurement of the associate or joint venture at fair value. The Bank’s Management concluded that this amendment does not apply, since neither the Bank nor its subsidiaries have joint ventures. The adoption of this standard had no significant impact in the Consolidated Financial Statements. 2) Standards and interpretations that have not been adopted in these Consolidated Financial Statements 2.1 IFRS 16 “Leases” On January 13, 2016, the IASB published a new standard, IFRS 16 “Leases”. The new standard shall imply that most leases are presented in the lessee’s balance under a single model, eliminating the distinction between operating and financial leases. However, the accounting for the lessors remains largely unchanged and the distinction between operating and financial leases is retained. IFRS 16 replaces IAS 17 “Leases” and related interpretations and is effective for periods beginning on or after January 1, 2019. Its early application is allowed, provided that IFRS 15 “Income from Contracts with Customers” is also applied. The Bank’s management evaluated the impact of the adoption of this new standard
January 1, 2019.
Issued on
An entity shall apply this Interpretation for the annual reporting periods Management do not expect that the adoption of this standard will have significant impact in the Consolidated Financial Statements.
Note 1 – General Information and Summary of
2.3 Amendment to IFRS Issued on October 17, 2017, this amendment allows more assets to be measured at amortized cost than in the previous version of IFRS 9, in particular some prepaid financial assets with
2019.
Issued on October 17, 2017, this amendment clarifies that companies that account for long-term investments in venture -where the equity method is not applied- using IFRS 9. The
The amendments are effective for annual periods beginning on January 1, 2019. These modifications do not apply because neither the Bank nor its subsidiaries have joint ventures.
Amendment issued on December 2017 introduces the following improvements:
This amendment is effective for annual periods beginning on or after January 1, 2019. These amendments / new pronouncements have no impact in the Consolidated Financial Statements.
In March, 2018, the International Accounting Standards Board (IASB) issued a complete set of concepts for the presentation of financial reports, the revised Conceptual Framework for financial information, replacing the previous version of the Conceptual Framework issued in 2010. The revised Conceptual Framework has an effective date from January 1, 2020. The Bank’s
Note 1 – General Information and Summary of Significant Accounting Policies, continued
In February 2018, the International Accounting Standards Board (IASB) issued the Amendment, Reduction or Settlement of the Plan (Amendments to IAS 19). Modifications to accounting when a modification, reduction or liquidation of the plan occurs. The amendments are effective for annual periods beginning on January 1, 2019. These amendments/new pronouncements had no impact in the Consolidated Financial Statements.
In October 2018, the International Accounting Standards Board (IASB) issued the Definition of a business to enable companies to decide whether the activities and assets they acquire are a business or simply a group of assets. Reducing the definitions of a company by focusing the definition of products on goods and services provided to customers and other income from ordinary activities, instead of providing dividends or other economic benefits directly to investors or reducing costs. Amendment to IFRS 3 or has a validity date from January 1, 2020. The Bank’s Management is evaluating the potential impact of these amendments / new pronouncements in
In October, 2018, the IASB issued amendments to the The amendments are effective for annual periods beginning on January 1, 2020. The Bank’s Management is evaluating the potential impact of the adoption of these amendments / new pronouncements in its Consolidated Financial Statements.
IFRS 9 “Financial instruments” adoption The Bank has adopted IFRS 9 as issued by the IASB in July 2014 with a date of transition of January 1, 2018, which resulted in changes in accounting policies. The adoption of IFRS 9 has resulted in changes in our accounting policies for recognition, classification and measurement of financial assets and financial liabilities and impairment of financial assets. IFRS 9 also significantly amends other standards dealing with financial instruments such as IFRS 7“Financial Instruments: Disclosures”. As per the permitted transitional provisions of IFRS 9, the Bank elected not to revise comparative figures and thus some IFRS 9 disclosures presented in respect to certain financial assets are not comparable because their classification may have changed between both standards. Any adjustments to the Consequently, for disclosures purposes, the amendments to IFRS 7 have also been applied to the current period only. The comparative period disclosures shows those disclosures made in the prior year. Set out below are disclosures regarding the impact of the adoption of IFRS 9 on the Bank and further details of the specific IFRS 9 accounting policies applied in the current period (as well as the previous IAS 39 accounting policies applied in the comparative period). a) Classification and measurement of financial instrument
Note 2 – Accounting Changes, continued
Note 2 – Accounting Changes, continued (i) Includes reclassifications and remeasurements of instruments previously classified as trading investments and investments in (ii) Includes reclassifications and (iii) Includes reclassifications of financial instruments previously classified as interbank loans according to IAS 39 and remeasurement of the allowances for expected credit losses under the new model according to IFRS 9. (iv) Includes reclassifications of financial instruments previously classified as loans and accounts receivable from customers according to IAS 39 and remeasurement of the allowances for expected credit losses under the new model according to IFRS 9. (v) Includes reclassifications of financial instruments previously classified as held to maturity investments according to IAS 39 and remeasurement due to allowances for expected credit losses under the new model according to IFRS 9. (vi) Recognition of deferred taxes according to IAS 12 due to IFRS 9 adoption. (vii) Recognition of deferred taxes according to IAS 12 due to IFRS 9 adoption. (viii) Includes the recognition of provision for expected credit losses related to contingent loans under the new model according to IFRS 9. (ix) Includes remeasurement due to recognition of credit risk related to financial assets classified as FVTOCI. (x) Includes all the effects due to IFRS 9 first application. (xi) Includes thenon-controlling portion of the effects arising from IFRS 9 first application. There were no changes to the classification and measurement of financial liabilities. The composition of the loan portfolio classified as loans and accounts receivable at amortized cost as of January 1, 2018 is as follows:
Note 2 – Accounting Changes, continued
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 commissions 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 recognized 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 24. Changes in CVA and DVA accounting estimate In June, 2018, improvements were made to the methodology for the determination of the CVA (Credit Value Adjustment) and DVA (Debit Value Adjustment), mainly in the determination of the Exposure and LGD (loss given default), which is part of the valuation of the Bank’s financial derivative contracts. These improvements generated a positive effect producing a lower loss of MCh$5,809 related to CVA and a negative effect producing a lower income of MCh$1,089 related to DVA, which has been recognized as a change in an estimate in accordance with IAS 8 “Accounting policies, changes in accounting estimates and errors”.
As of December 31, ITAÚ CORPBANCA
Dividend Distributions On March At the Annual Ordinary Shareholders Meeting
Chief Executive Officer Appointment On Change of Directors In the ordinary session held on November 27, 2018, the Board of As of January 1, 2019, Caio Ibrahim David and Milton Maluhy Filho, respectively, assume as Directors, who will remain in office until the next Participation increase of the shareholder Itaú Unibanco Holding S.A. On October 12, 2018 the shareholder Itaú Unibanco Holding S.A. (“Itaú Unibanco”) announced that through its subsidiary ITB Holding Brasil Participações Ltda., indirectly acquired the amount of 10,651,555,020 shares (“Shares”) of Itaú Corpbanca, at the price of MCh$65,686. This type of operation is part of the Itaú Corpbanca shareholders’ agreement signed by Itaú Unibanco and Corp Group and its related entities, on April 1, 2016. As a result of this acquisition, Itaú Unibanco’s share has increased from approximately 36.06% to 38.14%, without any changes in the corporate governance of Itaú Corpbanca (see Note 23, letter a). This operation was implemented through the acquisition of 100% of the shares of the companies named Saga II SpA and Saga III SpA, which are the actual owners of the Shares. All regulatory approvals to carry out this operation were duly obtained.
Note 3 – Significant Events, continued
By resolution dated June 30, 2017, notified to Itaú Corpbanca on July 17, 2017, the SBIF resolved, among other matters, to order the continuation of a sanctioning administrative procedure against the Bank, for supposed transgressions of the individual credit limits in granting certain loans to Norte Grande S.A., Potasios de Chile S.A. and Sociedad de Inversiones Pampa Calichera S.A., same operations that had motivated fines annulled by the First Court of Appeals of Santiago by legal sentence dated August 31, 2016. On July 19, 2017, the Bank appealed for a reversal against the resolution, considering it contrary to Law, among other reasons, considering that there is no administrative procedure instructed by the SBIF against the Bank that can be continued, as declared by the aforementioned procedure and by the ruling of the Supreme Court, which dismissed the appeal required by the SBIF against it. By resolution dated July 24, 2017, the SBIF rejected the aforementioned appeal for reconsideration, arguing that the proceeding was in the investigative stage, without the Bank being formally a forming part of a sanctioning administrative proceeding. On October 23, 2017, the Bank received a letter from the SBIF, charging Itaú Corpbanca with a procedure for the same operations. The Bank has the conviction that this procedure does not comply with the Law, giving it the right to take action, as a consequence, that the legal order grants. On November 22, 2017, the Bank proceeded to formulate its corresponding releases. Subsequently, through a letter dated December 27, 2018, the SBIF informed the conclusion of the investigation phase of the aforementioned sanctioning administrative procedure. The results of this procedure and the Bank’s decision in this regard are detailed in Note 37 “Subsequent Events” INSURANCE BROKERAGE SUBSIDIARIES Merge of subsidiaries On March 29, 2018, the partners of Itaú Chile Corredora de Seguros Limitada considered the conditions of the merger with Corpbanca Corredores de Seguros S.A. were successfully executed according to what was agreed by the partners on September 30, 2017. On April 1, 2018, the merger of Itaú Chile Corredora de Seguros Limitada into Corpbanca Corredores de Seguros S.A. was completed. For all legal purposes the legal continuation name is Itaú Corredores de Seguros S.A. COMPANIES TRANSFORMATION Itaú Corredores de Bolsa Limitada Through an Extraordinary Shareholders Meeting held on July 11, 2018, reduced to a public document dated August 1, 2018 at the Santiago Notary Office of Mr. Juan Ricardo San Martin Urrejola, the shareholders approved the transformation of the company into a limited liability company under the Itaú Corredores de Bolsa Limitada corporate name, which will be governed by its bylaws and by the provisions of Law No. 3,918 and its subsequent amendments and the relevant regulations of the Civil Code and the Commercial Code. Itaú Asesorías Financieras S.A. On July 5, 2018, authorization was requested from the SBIF to transform Itaú Asesorías Financieras S.A. into a limited liability company. As of the date of these Consolidated Financial Statements, there is still no pronouncement from the regulator on this matter.
The information reported by segments is determined by the Bank on the basis of its operating segments (Chile, that includes the New York Branch, and Colombia), which are mainly differentiated by the risks and rewards that affect them. The reporting segments and the criteria used to inform the highest authority of the Bank on the decision making of the operation are in accordance with what is set forth in IFRS 8 “Operating Segments
According to the above, the descriptions of each operating segment are as follows: i) Chile The Bank’s business activities in Chile take place mainly in the local market. It has strategically aligned its operations into the following five business areas that are directly related to its customers’ needs and the Bank’s strategy:1)Wholesale Banking (a) Corporate Banking, (b) Large Companies, and (c) Real Estate and Construction; 2) Retail Banking (a) Itaú Private Bank, (b) Itaú Companies, (c) Itaú Personal Bank (d) Itaú and (e) Banco Condell; 3) Treasury; 4) Corporate; and 5) Other Financial Services. The Bank manages these business areas using a reporting system for internal profitability. The operating results are reviewed regularly by the entity’s highest decision-making authority for operating decisions as one single cash generating unit, to decide about resource allocation for the segment and evaluate its performance. The Bank did not enter into transactions with a particular customer or third party that exceed 10% of its total revenue in 2018, 2017 and 2016. ii) Colombia Colombia has been identified as a separate operating segment based on the business activities. Its operating results are regularly reviewed by the entity’s highest decision-making authority for operating decisions as one single CGU, to decide on the resource allocation for the segment and evaluate its performance. Separate financial information is available for this segment. The commercial activities of this segment are carried out by Itaú Corpbanca Colombia S.A. and subsidiaries
The segments reported by Itaú Corpbanca, discloses revenue from ordinary activities from external clients:
When revenue from external customers attributed to a particular foreign country is significant, it is disclosed separately. Pursuant to the foregoing, the Bank operates in two main geographic areas: Chile and Colombia. Chile segment includes operations carried out by Itaú Corpbanca New York Branch and the Colombia segment includes the operations carried out by Itaú S.A. (Panama) and Itaú Casa de Valores S.A.
Note 4 – Reporting Segments, continued The information on interest income and interest expenses for the years ended December 31, 2018, 2017 and 2016 of the aforementioned geographic areas is presented below:
Segment information on assets and liabilities is presented as of December 31, 2018 and 2017. c.1 Assets and Liabilities
Note 4 – Reporting Segments, continued
c.2 Income for the years ended December 31, 2018, 2017, and 2016
Note 5 – Cash and Cash Equivalents
The detail of the balances included under cash and cash equivalents is as follows:
Note 5 – Cash and Cash Equivalents, continued
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 that may be delayed in settlement due to timing differences. The detail of these balances is as follows:
Based on the nature of its activities, the Bank considers that its funding has a direct relationship with its loan and investing portfolio; for such purpose all those activities are taken into consideration to determine, approve and monitor the financial strategies that guide the Bank with respect to the composition of its assets and liabilities, cash inflows and outflows and transactions with financial instruments. Finally, the Bank, based on its overall business strategy, considers that gains and losses derived from these transactions are part of the main revenue generating activities and core business, and that the presentation of the cash flows from those items under operating activities consequently shows consistency between our Consolidated Statement of Income and our Consolidated Statement of Cash Flows. Examples of cash flows from operating activities are: i.Investments under resale agreements and obligations under repurchase agreements. These items represent the cash flows (collections and payments) corresponding to the purchase and sale of obligations and securities lending associated with financial intermediation activities (see Note 7). ii.Investments portfolio.This item represents the cash flows (collections and payments) of our trading and investment portfolios (see Notes 6 and 11). iii.Foreign borrowings and repayment of foreign borrowings. These items represent the cash flows (funds received and payments made) from interbank borrowings (see note 17) which are mainly used in the financing of customers through foreign trade loans, which are included as part of the following items: “Interbank loans” (see Note 9) and “Loans and accounts receivable from customers” (see Note 10). iv.Increase and repayment of other borrowings.These items represent the cash flows (collections and payments) arising from the obligations corresponding to financing or operations specific to the business (see Note 18).
Note 6 – Financial Instruments at Fair Value through Profit or Loss and Trading Investments a. The detail of the financial instruments at fair value through profit or loss according to IFRS 9 is as follows:
As of December 31, 2018, the financial instruments at fair value through profit or loss include MCh$15,741 in instruments with maturities which do not exceed three months from the acquisition date and are considered as cash equivalents (see Note 5). b. The detail of the trading investments according to IAS 39 is as follows:
As of December 31, 2017 trading investments include MCh$19,239 in instruments with maturities which do not exceed three months from the acquisition date and are considered as cash equivalents (see Note 5).
Note 7 – Investments under Resale Agreements and Obligations under Repurchase Agreements
Note 8 – Financial Derivative Contracts and Hedge Accounting The Bank and subsidiaries use the following derivative financial instruments for hedge accounting and trading purposes, which, in order to capture the credit risk in the valuation, are adjusted to reflect the CVA (Credit Value Adjustment). The detail of these instruments is presented below:
a.1 Financial derivative assets
Note 8 – Financial Derivative Contracts and Hedge Accounting, continued a.2 Financial derivative liabilities
Note 8 – Financial Derivative Contracts and Hedge Accounting, continued a.3 Portfolio detail As of December 31, 2018 and 2017, the portfolio of financial derivative instruments held for hedge accounting and trading purposes is as follows:
Note 8 – Financial Derivative Contracts and Hedge Accounting, continued
Note 8 – Financial Derivative Contracts and Hedge Accounting, continued
b.1) Fair value hedges: The Bank uses interest rate derivatives to manage its structural risk by minimizing accounting asymmetries in the Statement of Financial Position. Through different hedging strategies, it redenominates an element originally at a fixed rate to a floating rate, thus decreasing the financial duration and consequently risk, aligning the balance sheet structure with expected movements in the yield curve. The following table presents the hedged items and the hedging instrument at fair value as of December 31, 2018 and 2017, detailed by maturity:
Note 8 – Financial Derivative Contracts and Hedge Accounting, continued Below is an estimate of the periods in which flows are expected to be produced: Forecasted cash flows by interest rate risk:
Note 8 – Financial Derivative Contracts and Hedge Accounting, continued b.2) Cash flow hedges: Cash flow hedge is used by the Bank mainly to: Reduce the volatility of cash flows in items in the Statement of Financial position that are indexed to inflation through the use of inflation forwards and combinations of swaps in pesos and indexed units. It also sets the rate of funding sources at a floating rate, decreasing the risk that its funding costs increase. The following table presents the nominal values of the hedged item as of December 31, 2018 and 2017:
Note 8 – Financial Derivative Contracts and Hedge Accounting, continued Below is an estimate of the periods in which flows are expected to occur. Forecasted cash flows by interest rate risk:
Note 8 – Financial Derivative Contracts and Hedge Accounting, continued
The effective portion generated by cash flow derivatives recorded in the Consolidated Statement of Changes in Equity as of December 31, 2018 and 2017. The income generated by cash flow hedge derivatives whose effect was transferred from Other Comprehensive Income to Income for the year, is as follow:
Note 8 – Financial Derivative Contracts and Hedge Accounting, continued b.3) Hedge of net investment in foreign operations: Itaú Corpbanca, the parent company whose functional currency is the Chilean peso, has foreign business investments consisting of a branch in New York and subsidiaries in Colombia. As a result of the proper accounting treatment for these investments, fluctuations in the value of the investments as a result of changes in the Chilean peso-Colombian peso exchange rate alter the parent company’s equity. The objective of these hedges is to safeguard the value of equity by managing exchange rate risk affecting the investments. Hedges of a net investment in a foreign operation, including hedges of monetary items that are accounted for as part of a net investment, are recorded to cash flow hedges, where: The portion of the gain or loss from the hedge instrument that is determined to be an effective hedge is recognized in equity. As of December 31, 2018, this was a debit of MCh$19,791 (credit of MCh$45,759 net of deferred taxes as of December 31, 2017). The ineffective portion is recognized in profit or loss. No such amounts were recorded in 2018 and 2017.
Note 8 – Financial Derivative Contracts and Hedge Accounting, continued Each hedge is detailed in the table below: b.3.1) Hedge of net investment in New York Branch
b.3.2) Hedge of net investment in Itaú Corpbanca Colombia
As of December 31, 2018, the balances presented under the item “Interbank loans, net”, according to IFRS 9 are as follows:
Movements in allowances and impairment for interbanks loans during the year ended December 31, 2018 are detailed as follows:
Note 9 - Interbank Loans, continued As of December 31, 2017, the balances presented under the item “Interbank loans, net”, according to IAS 39 are as follows:
Movements in allowances and impairment for loans with domestic and foreign Banks during as of December 31, 2017 are detailed as follows:
Note 10 – Loans and Accounts Receivable from Customers
As of December 31, 2018, the composition of the loan portfolio under IFRS 9 is as follows:
Movements in the loan portfolio for the year ended December 31, 2018 is as follows:
Note 10 – Loans and Accounts Receivable from Customers, continued As of December 31, 2017, the composition of the loan portfolio under IAS 39 is as follows:
Normal portfolio This includes individual debtors in the Normal portfolio (A1 to A6) and in the Substandard portfolio (categories B1 and B2, only). For collectively assessed loans, it includes the Normal portfolio. Impaired Portfolio This includes individual debtors in theNon-compliant portfolio (C1 to C6) and in the Substandard portfolio (categories B3 and B4, only). For collectively assessed loans, it includes theNon-compliant portfolio.
Note 10 – Loans and Accounts Receivable from Customers, continued Guarantees taken by the Bank to secure collections of rights reflected in its loan portfolios are real mortgage-type guarantees (urban and rural property, farm land, ships and aircraft, mining claims and other assets) and pledges (inventory, farm assets, industrial assets, plantings and other pledged assets). As of December 31, 2018 and 2017, the fair value of guarantees taken corresponds to 136.48% and 126.76% of the assets covered, respectively. In the case of mortgage guarantees, as of December 31, 2018 and 2017, the fair value of the guarantees taken corresponds to 90.10% and 85.38% of the balance receivable on loans, respectively. The Bank finances its customers’ purchases of assets, including real estate and other personal property, through finance lease agreements that are presented within this item. As of December 31, 2018, the Bank recorded MCh$436,654 in finance leases for property (MCh$306,931 as of December 31, 2017) and MCh$809,826 in finance leases for real estate property (MCh$927,168 as of December 31, 2017).
As of December 31, 2018 and 2017, the loan portfolio before allowances for loan losses by customer economic activity was as follows:
Note 10 – Loans and Accounts Receivable from Customers, continued
Movements in allowances for loan losses during the year ended December 31, 2018, under IFRS 9, detailed as follows:
The detail by type of portfolio (commercial, mortgage and consumer) is as follow:
Note 10—Loans and Accounts Receivable from Customers, continued
Movements in credit risk provisions during the years ended December 31, 2017, under IAS 39, detailed as follows:
As of December 31, 2018 and 2017, the Bank and its subsidiaries engaged in portfolio purchases and sales. The effect on result of these transactions amounts to MCh$1,602 as of December 31, 2018 (MCh$15,121 as of December 31, 2017), the effect on income of these transactions as a whole does not exceed 5% of before tax profit for the year, and is recorded within net gains from trading and investment income activities in the consolidated statement of income for the year, disclosed in Note 25 “Net income (expense) from financial operations” within “Sale of loans and accounts receivable from customers”.
Note 10 – Loans and Accounts Receivable from Customers, continued
As of December 31, 2018 and 2017, the Bank and its subsidiaries derecognized 100% of its sold portfolio, thus complying with the requirements of the accounting policy for derecognizing financial assets and liabilities in Note 1, letter l), point iv) of the annual Consolidated Financial Statements. The main sales during 2018 and 2017 were of loans related to Law 20,027, which are detailed in point d.2).
For the year ended December 31, 2018, a gain was recognized amounting to MCh$13,272 (MCh$15,852 for the year ended December 31, 2017) corresponding to the income generated in the sale included directly in the Consolidated Statement of Income under “Net income from financial operations”. An adjustment to the effective interest rate for MCh$11,768 as of December 31, 2018 (MCh$14,058 as of December 31, 2017) is allocated to the portion of the CAE portfolio that was classified as loans at amortized cost, recognizing an effective interest rate equivalent for all these operations, according to IFRS 9 (IAS 39 in 2017).
As of December 31, 2018 and 2017, the Bank’s scheduled cash flows to be received from finance lease contracts have the following maturities:
Note 11 – Investment instruments a) Financial instruments at fair value through other comprehensive income and at amortized cost—under IFRS 9 As of December 31, 2018, the detail of financial instruments measured at FVOCI and at amortized cost is as follows:
As of December 31, 2018 this total includes MCh$178,671, included in Note 5 “Cash and cash equivalents,” which corresponds to those financial instruments with maturities that do not exceed three months from their dates of acquisition. As of December 31, 2018, the portfolio at FVTOCI includes an unrealized gain of MCh$25,450, presented in Equity as valuation accounts, distributed among a gain of MCh$17,793 attributable to equity holders and a gain of MCh$7,657 attributable tonon-controlling interest. Impairment As of December 31, 2018 the portfolio of debt securities classified as investment instruments at fair value through other comprehensive income includes impairment movements as summarized below:
Note 11 – Investment instruments, continued As of December 31, 2018 the portfolio of investment instruments at amortized cost includes impairment movements as summarized below:
Unrealized gains and losses of the portfolio at FVTOCI Unrealized gains and losses of the FVTOCI portfolio as of December 31, 2018 are detailed as follows:
Note 11 – Investment instruments, continued b) Investment instruments - under IAS 39 As of December 31, 2017, the detail of available for sale and held to maturity financial instruments is as follows:
As of December 31, 2017 this total includes MCh$15,775, included in Note 5 “Cash and cash equivalents,” which corresponds to those financial instruments with maturities that do not exceed three months from their dates of acquisition. As of December 31, 2017, the portfolio of available for sale includes an unrealized gain of MCh$24,552, presented as equity reserve accounts, distributed among a profit of MCh$16,592 attributable to equity holders and a gain of MCh$7,960 attributable tonon-controlling interest. Impairment of investment instruments The Bank’s portfolio of fair value through other comprehensive income does not present impairment as of December 31, 2017. The detail of investments quoted innon-active markets classified as available for sale has been recorded at fair value. Itaú Corpbanca reviewed the instruments with unrealized losses as of December 31, 2017, concluding that they were not impairments other than temporary. Therefore, they do not imply adjustments to results of the fiscal year.
Note 11 – Investment instruments, continued Unrealized gains and losses of the available for sale portfolio Unrealized gains and losses of the available for sale portfolio as of December 31, 2017 are detailed as follows:
Note 12 – Intangible assets, continued
c.
Itaú Corpbanca evaluates, at the end of each reporting period, whether there is any indication of impairment of any asset (including Goodwill). If this indication exists, or when an impairment test is required, the Bank estimates the recoverable amount of the asset. As of December 31, 2018 and 2017 there is no indication nor concrete evidence of impairment (see details in note 30). As of the date of these Consolidated Financial Statements, there have been no events that require the recognition of impairment.
Itaú Corpbanca and its subsidiaries have no restrictions on intangible assets as of December 31, 2018 and 2017. In addition, no intangible assets have been pledged as collateral to
Note 13 – Property, plant and equipment
The useful life presented in the preceding tables, corresponds to the total useful life and residual useful life for the property, plant and equipment. Total useful lives have been determined based on our expected use of the
(*) See detail in Note 15 “Other assets andnon-current assets held for sale”.
Note 13 – Property, plant and equipment, continued
(*) See detail in Note 15 “Other assets andnon-current assets held for sale”.
Note 14 – Current Taxes and Deferred Taxes
At the end of each reporting period, the Bank and subsidiaries recognize a First Category Income Tax Provision, which is determined based on currently enacted tax legislation. The net provision for current taxes recognized as of December
The tax expense for the years ended December 31, 2018, 2017 and 2016 is comprised of the following items:
Note 14 – Current Taxes and Deferred Taxes, continued
The following table reconciles the income tax rate to the effective rate applied to determine the Bank’s income tax expense as of December 31, 2018, 2017 and 2016. The nominal tax rates of the countries where consolidated subsidiaries are located are:
The table below sets for a summary of the deferred tax effect on other comprehensive income for the years ended December 31, 2018, 2017 and 2016, which consists of the following items: d.1 Tax effect of “OCI” that may be reclassified subsequently to profit or loss:
d.2 “OCI” that may not be reclassified subsequently to profit or loss:
Note 14 – Current Taxes and Deferred Taxes, continued
e.1)Totals deferred taxes Detail of effects for deferred taxes presented in assets and liabilities is as follows:
e.2 Deferred taxes by geographic area:
Effects of deferred taxes on assets and liabilities arising from temporary differences (by geographic area) are as follows:
Note 15 – Other assets and assetsnon-current assets held for sale
Note 16 – Deposits and Other Demand Liabilities and Time Deposits
Note 17 – Interbank Borrowings
Note 18 - Debt Instruments Issued and Other Financial Liabilities As of December 31, 2018 and 2017, composition of debt instruments issued and other financial liabilities is as follows:
Debt classified as short term includes demand obligations or obligations that will mature in less than one year. All other debt is classified as long term, and is detailed as follows:
Note 18 - Debt Instruments Issued and Other Financial Liabilities, continued The following tables provide with additional information, including maturities, for each type of debt issued as of December 31, 2018 and 2017.
Detail of maturities for mortgage finance bonds is as follows:
Details for senior bonds, by currency, are as follows:
Detail of maturities for senior bonds is as follows:
Note 18 - Debt Instruments Issued and Other Financial Liabilities, continued The following table presents details for senior bonds issued: Senior bonds issued during the year ended December 31, 2018
Senior bonds issued during the year ended December 31, 2017
Note 18 - Debt Instruments Issued and Other Financial Liabilities, continued
Details of subordinated bonds, by currency, are as follows
Detail of maturities for subordinated bonds is as follows
For the years ended December 31, 2018 and 2017no issuance of subordinated bonds took place.
As of December 31, 2018 and 2017, the Bank has no financial debt covenants to comply with.
As of December 31, 2018 and 2017, the Bank has registered the following movements in its provisions:
Provisions disclosed in liabilities as of December 31, 2018 and 2017 present the following detail:
Note 19 – Provisions, continued
e. The main aspects of the Bank’s long term employee benefits are detailed below e.1) Other long-term employee benefits Description: Annual payment during the month in which the employee completes a given number of years of service (in five-year intervals from 5 to 50). Measurement:The projected unit credit method was used to determine the present value of the defined-benefit obligation and the corresponding service cost. For all active plan participants, the “projected accrued benefit” is based on the plan formula and years of service as of the date of calculation, but using assumptions such an average salary and social security benefits, projected to the age at which it is assumed that the employee will stop providingservices. The total benefit is used for inactive members. The plan does not have any related policies (and therefore no reimbursements) or assets, but rather uses structured funding based on the entity’s financial conditions.
Note 19 – Provisions, continued The economic assumptions are summarized as follows:
The movements of the present value of the obligation for this type of benefit and the amounts recognized in the Consolidated Statements of Income are determined using the projected credit unit method and it consist of the following:
(*) Detail of net cost of benefit is as follows:
e.2) Pension plan Description:Old-age pension or Survivors in accordance with the Measurement:The projected unit credit method is using for the determination of The summary of the economic assumptions is as follows:
Note 19 – Provisions, continued The detail of Pension plan balances movements is as follows:
e.3) Retroactive unemployment plan Description: Retroactive unemployment plan prior to Law 50 from 1990 in Colombia. Measurement:The The economic assumptions are summarized as
The details of movements for this benefits during years ended December 31, 2018 and 2017 are as
e.4) Retirement Bonus Plan Description:Fixed payment upon retirement Measurement:The projected unit credit method is used to determine the
Note 19 – Provisions, continued The economic assumptions are summarized as follows:
The amounts recognized for this benefit are as follows:
The effect on Other Comprehensive Income is summarized as follows:
Note 19 – Provisions, continued Future payments Future actuarial calculations may differ with respect to the calculations presented, due to the following factors: The experience of the plans differs from those anticipated by the
Expected increases or decreases as a natural part of the Changes in the characteristics of the applicable The following is a detail of future payments for the year 2018 and 2017:
Note 20 – Other liabilities and
Note 21 – Contingencies, Commitments, and Responsibilities
As
On December 20, 2016, Helm LLC filed a lawsuit in the New York State Supreme Court (“the State Court Lawsuit”) and a Request for Arbitration before the ICC International Arbitration Court (the “Arbitration”), against Itaú Corpbanca, CorpBank Holding Inversiones Lade e Itaú Corpbanca Colombia, the latter as nominal defendant, alleging certain breaches of
. In its lawsuit, Helm LLC On April 19, Other lawsuits Other legal actions have been filed against the Bank and its subsidiaries involving its transactions carried out in the ordinary course of business. The Bank’s maximum exposure for these lawsuits amounts to approximately MCh$26,995 as of December 31, 2018 and MCh$36,309 as of December 31, 2017. However, in Management’s opinion based on reports from the Legal Division as of December 31, 2018, it is more likely than not that these lawsuits will not result in significant losses not contemplated by the Bank in these Consolidated Financial. Itaú Corpbanca Colombia S.A. The Bank and its subsidiaries are involved in civil, administrative and labor proceedings. The outstanding civil and administrative proceedings, them are related to Banking transactions, and the remaining ones derive from the ownership of leased assets. Such claims amount, in the aggregate, to MCh$32,375 as of December 31, 2018 (MCh$13,748 as of December, 2018). According to the evaluation of the expected results in each lawsuits the Bank has recorded a provision of MCh$152 as of December 31, 2018 (MCh$977 as of December 31, 2017). There are labor processes of which amounted to MCh$2,527, for which the Bank has recorded a provision of MCh$1,057 as of December 31, 2018. (MCh$865 as of December 31, 2017)
Note 21 – Contingencies, Commitments, and Responsibilities, continued
Via Ruling No. 16,191 dated December 30, 2015, the SBIF fined Corpbanca MCh$21,765 On May 9, 2017, the Supreme Court dismissed As previously reported, the aforementioned fines were recognized as an expense in the result of the 2015 fiscal year. Pursuant to this decision of the Supreme Court, the reverse of such expense and the other corresponding financial effects.
Through a resolution dated June 30, 2017, served to Itaú Corpbanca (the “Bank”) on July 17, 2017, the Chilean Superintendence of Banks and Financial Institutions (“SBIF”) resolved, among other matters, the continuation of the administrative proceeding against the Bank for alleged violations of individual credit limits in granting certain loans to Norte Grande S.A., Potasios de Chile S.A. and Sociedad de Inversiones Pampa Calichera S.A., the same transactions which were the basis for the fines rendered null and void by the Santiago Court of Appeals on August 31, 2016. On July 19, 2017, the Bank filed a motion against that resolution for considering it against the law, among other reasons, because there is no administrative proceeding in existence to be continued by the SBIF against the Bank, as resolved by the Santiago Court of Appeals and by Chilean Supreme Court, which dismissed the complaint filed by the SBIF against that resolution. In accordance with a resolution dated July 24, 2017, the SBIF dismissed the aforementioned motion, claiming that the proceeding is in the investigation stage and that the Bank is not formally a party to any administrative proceedings. On October 23, 2017, the Bank received a communication from the SBIF, filing charges against Itaú Corpbanca for the same operations
Note 21 – Contingencies, Commitments, and Responsibilities, continued Transaction Agreement On January 29, 2014, Inversiones Corp Bank Limitada, Inversiones Saga Limitada (CorpBank), Itaú-Unibanco Holding S.A., Corpbanca and Bank Itaú, subscribed a contract called “Transaction Agreement”, in accordance to the contract, they agreed a strategic association of its operations in Chile and Colombia. This strategic association gave rise at April 1, 2016 the merger of Corpbanca and Itaú, which was be renamed “Itaú Corpbanca”. Additionally, the Transaction Agreement also included the postponement of the date for Itaú Corpbanca to purchase the shares that CorpBank holds in Corpbanca Colombia. The purchase of those shares of Corpbanca Colombia held by CorpBank (currently representing 12.36% of shares outstanding), which was previously agreed to be carried out no later than January 29, 2017, was postponed until January 28, 2022, subject to receipt of the applicable regulatory approvals. The purchase price for the shares has not changed and will be US$3.5367 per share plus interest from August 4, 2015 until the payment date at an annual interest rate equal to Libor plus 2.7% minus the sum of the aggregate amount of dividends paid by Corpbanca Colombia to CorpBank since the date of the Transaction Agreement. According to article 76 of the General Banking Law, investments in shares of Banks established abroad are subject to the prior approval of the Superintendency of Banks and Financial Institutions in Chile (SBIF), as well as the Central Bank of Chile (BCCH), which in turn is subject to compliance with Consequently, the aforementioned transaction must be confirmed only by the
The following table contains the amounts for which the Bank and its
Note 21 – Contingencies, Commitments, and Responsibilities, continued
The Bank and its subsidiaries have the following responsibilities arising from
and
Itaú Limitada In order to comply with articles 30 and 31 of Chilean Law 18,045, this subsidiary kept a
Note 21 – Contingencies, Commitments, and Responsibilities, continued
In addition, the company has Amounts recorded with respect to the comprehensive insurance policy
The company pledged its shares 12,630 as of December 31, 2018. As of December 31, MCh$5,042 (MCh$4,101 as of December 31, 2017). The
Itaú On August 14, 2017, Corpbanca Administradora General de Fondos S.A. replaced the documented guarantee in Banco Santander Chile, at sight for MCh$14, equivalent to UF500, originally issued on June 6, 2017, in favor of the Production Development Corporation to ensure CORFO’s faithful and timely compliance with the obligations of the Portfolio Management contract, its Committees and Funds, and the payment of labor and social obligations with the contracting party’s employees, its expiration date is August 30, 2021. On June 2, 2017, Corpbanca Administradora General de Fondos S.A. took a documented guarantee at Banco Santander Chile, at sight, for UF15,000 equivalent to MCh$400 in favor of the Production Development Corporation to ensure CORFO the faithful fulfillment of CORFO’s portfolio management contract, its Committees and Funds, and the payment of labor and social obligations with the workers of the contracting party. Its expiration date is August 31, 2021. On April 30, 2018, Itaú Administradora General de Fondos S.A. contract the policy called Bankers Blanket Bond with Orión Seguros Generales. On April 30, 2018, Itaú Administradora General de Fondos SA contracted the Global Banking Policy (Bankers Blanket Bond) with Orión Seguros Generales Company, in order to foresee possible situations of official infidelity, its maturity date being May 31, 2019. The insured amount of the policy amounts to US$5,000,000 for each individual loss event and US$10,000,000 in the combined aggregate. During the year
Movements in
: As of December 31, 2018, 2017 and 2016, the
As of December 31, 2018, 2017 and 2016, the Bank has a capital in the amount of MCh$1,862,826, consisting of 512,406,760,091 common shares subscribed and paid, with no par value. Purchase and sale of own shares During the years ended December 31, 2018 and 2017, there were no transactions to buy and sell shares of own issuance. List of major shareholders The shareholders list as of December 31, 2018, 2017 and 2016, is as follows:
Note 22 – Equity, continued
At the Ordinary Meeting of the Shareholders of Itaú Corpbanca held on March 27, 2018, the shareholders agreed to distribute net income for MCh$22,979 representing 40% of the profits for 2017 (as filed with the SBIF) and at an Ordinary Meeting of the Shareholders of Itaú Corpbanca held on March 27, 2017, the shareholders agreed to distribute profits for MCh$618, representing 30% of the 2016 net income (as filed with the SBIF). See Note 37 “Subsequent events” for 2018 dividends distribution decision.
As of December 31, 2018 and 2017 and for the year ended December 31, 2018, 2017 and 2016, the basic earnings and diluted earnings are as follows:
During the years ended December 31, 2018, 2017 and 2016, there were no
Hedge of net investment in foreign operations:Corresponds to adjustments for hedges of net investments in foreign operations.
Exchange differences on investments in Colombia and New York branch:
Defined
The following
This item corresponds to “Other
Corresponds to accumulated losses for the year ended
This corresponds to the net amount of equity in the consolidated subsidiaries attributable to capital that does not belong, directly or indirectly, to the Bank, including the part of profit for the period that is attributed to them. Non-controlling interest in the subsidiary’s equity and profit for the
Note 22 – Equity, continued
The main subsidiary withnon-controlling interest of Itaú Corpbanca, is the following:
Note 22 – Equity, continued
This item comprises interest
This item comprises the amount of all commissions accrued and paid in the
This item
This item includes expenses for commissions accrued during the year
Commissions earned on loans with
This item includes the amount of
(*) See details Note 10, letter d.
This item includes the income earned from foreign currency trading,
Note 27 – Provisions for Impairment of
Personnel
The Bank has defined two CGUs: CGU Chile
Note 30 – Depreciation, Amortization, and
The Goodwill generated in the reverse acquisition mentioned in Note 1, section “General
Consistent with the In testing goodwill for impairment, management considered different sources of information, including:
Assumptions approved by management.
Information from external sources such as analyst reports,
Observable market information such as rate curves, inflation and growth projections.
The competitive strategy defined for both
The key assumptions used in
and long-term objectives, consistent with the vision of becoming the third largest Bank in Chile. This transformation
Loans were projected considering an increase of around
Interest income and commissions were estimated based on the sensitivities of GDP growth and the effects of inflation with respect to the Banking industry (both in Chile and Colombia), which resulted in the projected growth rate based on the mix of products (consumer, housing and commercial placements) and in
The cost projections are mainly determined based on demand deposits and term deposits
The perpetuity growth rates are aligned with the growth of the economy in both jurisdictions. Consequently, these were built considering local inflation and GDP growth
impairment testing As a
Consequently, management has not identified an impairment impact that has to be recognized in the financial statements. 5.
The
This, together with other measures, will result in
Management has considered and analyzed Additionally, the ranges of the discount and growth rates in perpetuity of the CGU Colombia have been sensitized, separately, in both cases of 60 basis points
Note 30 – Depreciation, Amortization, and Impairment, continued
6. Reconciliation of before and after taxes The Bank has used the
The detail of other operating income is as follows:
Note 31 – Other operating income and expenses, continued
During the years ended December 31, 2018, 2017 and 2016, the Bank presents other operating expenses
In the case of sociedades anónimas abiertas (publicly traded companies) and their subsidiaries, transactions with related parties involve any negotiation, act, contract or
As of December 31, 2018 and 2017,
For the years ended December 31, 2018, 2017
Note 32 – Related Party Transactions, continued
These transactions were carried out at normal market prices prevailing
Compensation received by key personnel of
As of December 31,
Compensation received by directors and
This disclosure was prepared based on the guidelines “Fair Value of Financial Instruments” from the IFRS 13 “Fair Value Measurements.” The following section details the main guidelines and definitions used by the Bank: Fair value: 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 Market participants: Buyers and sellers in the principal (or most advantageous) market for the asset or liability that have all of the following characteristics:
Fair value measurement: When measuring fair value, the Aspects of the transaction: A fair value measurement assumes that the asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date under current market conditions. The measurement assumes that the transaction to sell the asset or transfer the liability takes place: (a) on the principal market for the asset or liability; or (b) in the absence of a principal market, on the most advantageous market for the asset or liability. Market participants: The fair value measurement measures the fair value of the asset or liability using the assumptions that the market participants would use in pricing the asset or liability, assuming that the participants act in their best economic interest. Prices: Fair value is the price that will be received for the sale of an asset or paid for the transfer of a liability in an orderly transaction on the main (or most advantageous) market as of the measurement date under current market conditions Highest and best use ofnon-financial assets: The fair value measurement of these assets takes into account the market participant’s ability to generate economic benefits through the highest and best use of the asset or through the sale of the asset to another market participant that would maximize the value of the asset.
Note 33 – Fair Value of Financial Assets and Liabilities, continued
a. A liability would remain outstanding and the market participant transferee would be required to fulfill the obligation. The liability would not be settled with the counterparty or otherwise extinguished on the measurement date. b. An entity’s own equity instrument would remain outstanding and the market participant transferee would take on the rights and responsibilities associated with the instrument. The instrument would not be cancelled or otherwise extinguished on the measurement date. Default risk: The fair value of a liability reflects the effect of the default risk. This risk includes, but is not limited to, the entity’s own credit risk. This risk is assumed to be the same before and after the liability is transferred. Initial recognition: When an asset is acquired or a liability assumed in an exchange transaction involving that asset or liability, the transaction price is the price paid to acquire the asset or received to assume the liability (the entry price). In contrast, the fair value of the asset or liability is the price received to sell the asset or paid to transfer the liability (the exit price). Entities do not necessarily sell assets at the prices paid to acquire them. Likewise, they do not necessarily transfer liabilities at the price received to assume them. Valuation techniques: The Bank will use techniques that are appropriate for the circumstances and for which sufficient data is available to measure the fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. The following approaches deserve mention: a.Market approach. Uses prices and other relevant information generated by market transactions involving identical or comparable (similar) assets, liabilities, or a b.Income approach. Converts future amounts (cash flows or income and expenses) to a single current (discounted) amount, reflecting current market expectations about those future amounts. The fair value measurement is determined based on the value indicated by the current market expectations about those future amounts. c.Cost approach. Reflects the amount that would be required currently to replace the service capacity of an asset (current replacement cost). Present value techniques: Technique to adjust the discount rate and expected cash flows (expected present value). The present value technique used to measure the fair value will depend on the specific facts and circumstances of the asset or liability being measured and the availability of sufficient data. Components of the present value measurement: Present value is the tool used to link future amounts a. An estimate of future cash flows for the asset or liability being measured. b. Expectations about possible variations in the amount and timing of the cash flows representing the uncertainty inherent in the cash flows. c. The time value of money, represented by the rate on risk-free monetary assets that have maturity dates or durations that coincide with the period covered by the cash flows and pose neither uncertainty in timing nor risk of default to the holder (i.e. a risk-free interest rate). d. The price for bearing the uncertainty inherent in the cash flows e. Other factors that market participants would take into account in the circumstances. f. For a liability, thenon-performance risk relating to that liability, including the entity’s Fair value hierarchy: Gives the highest priority to quoted prices (unadjusted) in active markets for identical assets and liabilities (Level 1 inputs) and lowest priority to unobservable inputs (Level 3 inputs). Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Note 33 – Fair Value of Financial Assets and Liabilities, continued The following table summarizes the fair values of the Bank’s main financial assets and liabilities as of December 31, 2018, including those that are not recorded at fair value in the Consolidated Statement of Financial Position. Determination of the fair value as of
Note 33 – Fair Value of Financial Assets and Liabilities, continued
The following table summarizes the fair values of the Bank’s main financial assets and liabilities as of December 31, 2017, Determination of the fair value as of December 31, 2017 - under IAS 39
In addition, the fair value estimates presented above do not attempt to estimate the value of the
The following section describes the methods used to estimate fair value:
Fair Value Measurements of assets and liabilities only for disclosure purposes(non-recurring) - under IAS 39:
Note 33 – Fair Value of Financial Assets and Liabilities, continued
Cash, short-term assets and short-term liabilities The fair value of these items approximates their book value given their short-term nature. These items include:
Cash in the process of collection
Trading investments Current accounts and demand deposits
Other financial obligations Loans The fair value of loans is determined using a discounted cash flow analysis, using a risk-free interest rate adjusted for expected losses from debtors based on their credit quality. The credit risk adjustment is based on the
Loans and receivables from customers Financial instruments held to maturity The estimated fair value of these financial instruments is determined using quotes and transactions observed in the main market for identical instruments, or in their absence, for similar instruments. Fair value estimates of debt instruments or securities representative of debt take into account additional variables and inputs to the extent that they apply, including estimates of prepayment rates and the credit risk of issuers. Financial instruments held to maturity
Medium and long-term liabilities The fair value of medium and long-term liabilities is determined using a discounted cash flow analysis, using an interest rate curve that reflects current market conditions at which the entity’s debt instruments are traded. Medium and long-term liabilities include:
Borrowings from financial institutions
Debt issued
Note 33 – Fair Value of Financial Assets and Liabilities, continued
Fair Value measurement of financial assets and liabilities (recurring) – under IAS 39:
Note 33 – Fair Value of Financial Assets and Liabilities, continued
Financial Instruments The estimated fair value of these financial instruments is determined using quotes and transactions observed in the main market for identical instruments, or in their absence, for similar instruments. Fair value estimates of debt instruments or securities representative of debt take into account additional variables and inputs to the extent that they apply, including estimates of prepayment rates and the credit risk of issuers. These financial instruments are classified as follows:
Financial investments available for sale Financial Derivative Instruments The estimated fair value of derivative instruments is calculated using prices quoted The adjustments are known internationally as the counterparty value adjustment (“CVA”), which consists of an adjustment for debtor risk (credit value adjustment or CVA) and for creditor risk (debit value adjustment or “DVA”). The sum of these adjustments gives the effective counterparty risk that the derivative contract must have. These adjustments are recorded periodically in the financial statements. As of December 2018, 2017
Note 33 – Fair Value of Financial Assets and Liabilities, continued
1.2 Fair value hierarchy IFRS 13 establishes a fair value hierarchy that classifies assets and liabilities based on the characteristics of the data that the technique requires for its valuation: Level 1:
In the case of currency, shares and mutual funds, prices are observed directly inover-the-counter For instruments issued by the Chilean Central Bank and the Chilean Treasury, a price provider is used, which corresponds to a public quotation. The comparative prices are defined under the criterion of similarity in duration, type of currency and they are traded equivalently on a daily basis. The valuation of these instruments is identical to the Stock Exchange Comercio de Santiago, which is a standard and international methodology. This methodology uses the rate of internal return to discount the flows of the instrument.
In this category, instruments are valued by discounting contractual cash flows based on azero-coupon curve determined through the price of instruments with similar characteristics and a similar issuer risk. The income approach is used, which converts future amounts to present amounts. For derivative instruments within this category, quotes fromover-the-counter The Black and Scholes model is used for options based on prices of brokers in the For money market instruments, prices of transactions on the Santiago Stock Exchange are observed and used to model market curves. For corporate or
Note 33 – Fair Value of Financial Assets and Liabilities, continued Level Inputs are unobservable inputs for the asset or liability. This is used when prices, data or necessary inputs are not directly or indirectly observable for similar instruments for the asset or liability as of the valuation date. These fair value valuation models are subjective in nature. Therefore, they base their estimate of prices on a series of assumptions that are widely accepted by the market. The Due to the lack of liquidity of the active In addition, the Bank develops American forwards to meet its customers’ needs. They do not have a secondary market and, therefore, their value is estimated using an extension of the Hull-White model, used widely by the financial services industry. None of these products generate significant impacts on the Bank’s results as a result of recalibration. The TAB swap does not have significant impacts on the valuation as the parameters are stable and the reversal to a historic average is empirically quick, which this model reflects correctly. On the other hand, the American forward behaves like a traditional forward when there is an important curve differential, which is the case between the Chileanpeso-US dollar curve. Also, the model’s parameters are very stable. The table below summarizes the impacts on the portfolio of a recalibration of the models based on a stress scenario, recalibrating parameters with the shock incorporated.
Note 33 – Fair Value of
The following table summarizes the fair value hierarchy for the
The following table classifies assets and liabilities measured at fair value on a recurring basis, in accordance with the fair value hierarchy established in IFRS 13 as of December 31, 2018 – under IFRS 9:
Note 33 – Fair Value of Financial Assets and Liabilities, continued
The following table classifies assets and liabilities measured at fair value on a recurring basis, in accordance with the fair value hierarchy established in IFRS 13
Note 33 – Fair Value of Financial Assets and
As of December 31, 2018 no transfers were observed between Level 1 and Level 2, as shown below – under IFRS 9:
As of December 31, 2018 no transfers were observed between Level 1 and Level 2, as shown below – under IAS 39:
e. Disclosures regarding level 3 assets and liabilities During
Level 3 assets and liabilities are valued using techniques that require inputs that are not observable on the market, for which the income approach is used to convert future amounts to present amounts. This category includes:
As none of these products has a market, the Bank uses financial engineering valuation techniques variables. These techniques use the following inputs: transaction prices from the main financial instrument markets and assumptions that are widely accepted by the financial services industry. Using this information, unobservable variables are constructed such as: adjustment curves, spreads, volatilities and other variables necessary for the valuation. Lastly, all of the models are subject to internal contrasts by independent areas and have been reviewed by internal auditors and regulators.
Note 33 – Fair Value of Financial Assets and Liabilities, continued
None of these products generate significant impacts on the Bank’s results as a result of recalibration. The American forward is only offered for the US dollar-Chilean peso market and until now, given the important differential between these interest rates, the product behaves like a traditional forward. The TAB swap does not have significant impacts on the valuation as the modeled liquidity premiums have a quick mean reversion for the short part and low volatility for the long part, concentrating on the book’s sensitivity in the longest part of the curve. The following table reconciles assets and liabilities measured at fair value on a recurring basis as of
The following table classifies assets and liabilities measured at fair value on anon-recurring basis, in accordance with the fair value hierarchy as of December 31,
Risk management policies are established The following Risk Management Structure: Board of Directors
Audit Committee The Audit Committee’s objective is to monitor the Bank’s internal control systems and its compliance with regulations and other internal standards. It is also responsible for the oversight of the different aspects of maintenance, application and functioning of the Bank’s internal controls, monitoring compliance with standards and procedures regulating its practices, and having The committee is linked to the Board of Directors through the participation of at least two board members named by the Board itself. These members must report to the Board situations and events analyzed by the Committee, thus holding the Bank’s board members responsible for complying with both self-control policies established and practiced by the entity as well as laws and regulations to which it is subject. The Audit Committee must reinforce and support Directors’ Committee The Directors’ Committee’s objective is to strengthen the self-regulation of the Bank and other entities under its control, making the Board’s work more efficient through increased oversight of management’s activities. Likewise, responsible for making the agreements necessary to protect shareholders, especially minority shareholders, examining executive compensation systems and analyzing and issuing a report on the transactions referenced in title XVI of Law 18,046. A copy of this report is sent to the Board, which must read the report and approve or reject each respective transaction. In its role as overseer of corporate activity, the committee must inform the market of any violations or major corporate events as well as transactions that the company carries out with related parties of the controlling shareholder or takeovers of any form.
Note 34 – Risk management, continued
Corporate Governance Committee For the purposes of this committee, which is aware of how difficult it is to bring together all aspects of good corporate governance under one definition, corporate governance shall be defined as the set of bodies and institutional practices that impact a company’s decision making process, contributing to sustainable value creation in a framework of transparency, proper management, risk control and corporate responsibility towards the market. Therefore, appropriate corporate governance in a The Corporate Governance Committee is a consultation body of the Board of Directors whose mission is to ensure the existence and development within the Bank of the best corporate governance practices for financial entities. To this end, it will evaluate the current practices and policies, propose and make recommendations to the Board of Directors on improvements, reforms and adjustments that it deems appropriate and work to ensure proper implementation and application of these corporate governance practices and policies defined by the Board of Directors.
Asset-Liability Committee (ALCO) After the Board and its specialized committees, the Asset-Liability Committee (hereinafter also “ALCO”) is the next highest body involved in managing the institution’s financial policies. The committee’s main purpose is to comply with the financial guidelines set by the Board of Directors. In this spirit, it must approve and monitor the financial strategies that guide the Bank with respect to the composition of its assets and liabilities, cash inflows and outflows and transactions with financial instruments. It will consider the diverse alternatives available to make decisions that ensure the highest and most sustainable returns with financial risk levels that are compatible with the business, current regulations and internal standards.| Anti-Money Laundering and Anti-Terrorism Finance Prevention Committee This committee’s main purpose is to plan and coordinate activities to comply with policies and procedures to prevent asset laundering, terrorism financing and bribery, to maintain itself informed of the work carried out by the Operational Risk Committee This committee’s objective is to evaluate the status of critical processes that are directly related to the Bank’s Operational Risk and Internal Controls, in accordance with current Superintendency of Banks and Financial Institutions standards in order to improve any weaknesses that the Bank may present and ensure proper implementation of regulatory changes. It is also responsible for attaining critical processes under an internal control environment that enables the Bank to operate stably and consistently, thus procuring desired levels of reliability, integrity and availability for information resources. Compliance Committee The Compliance Committee’s main purpose is to define, promote and ensure that the conduct of all Itaú Corpbanca employees meets the highest possible standards of personal and professional excellence. Employee conduct should, at all times, be guided by the principles and values that embody our organization’s spirit, philosophy and good business practices. It is also responsible for ensuring that the
Note 34 – Risk management, continued
Committee on Risk Methodologies The objective of the Risk Methodologies Committee is to ensure the quality of all methodologies for estimating the Bank’s provisions for all business areas. This Committee - which exercises its functions with respect to the Bank, its Its main members are: Corporate Risk Manager, Risk Control Manager, Retail Credit Manager, Financial Risk Manager, Responsible for Monitoring and Control of Retail and Responsible for Risk Models. Portfolio Committee The objective of the Portfolio Committee is to monitor the evolution of the Bank’s wholesale and retail portfolios in terms of their risk-return ratio, their adjustment to the defined risk appetite and the progress made in materializing short-term Also, long term that this committee has defined. As a result, it considers in its analysis the competition, the movements of its most relevant actors and the main risks that affect the management of the portfolios, as well as the projects that have an impact on the matter. Its main members are: General Manager, Corporate Risk Manager, Risk Control Manager, Wholesale Credit Manager, Wholesale Banking Manager, Retail Credit Manager, Retail Banking Manager, Financial Planning and Control Manager and Product Manager and Internal Audit The main function of Internal Audit is to support the Board of Directors and senior management to independently Code of Conduct and Market Information Manual The objective In response to our clients’ trust and recognition, which are vital to our success, all associates and directors should strive to retain this trust, strictly complying with the General Code of Conduct.
Credit risk is the risk
Credit risk management The Bank’s credit committee is responsible for managing the Bank’s credit risk by: Ensuring that the Bank has appropriate credit risk practices, including an effective system of internal control, to consistently determine adequate allowances in accordance with the Bank’s stated policies and procedures, IFRS and relevant supervisory guidance. Identifying, assessing and measuring credit risk across the Bank, from an individual instrument to a portfolio level. Creating credit policies to protect the Bank against the identified risks including the requirements to obtain collateral from borrowers, to perform robust ongoing credit assessment of borrowers and to continually monitor exposures against internal risk limits. Limiting concentrations of exposure by type of asset, counterparties, industry, credit rating, geographic location etc. Establishing a robust control framework regarding the authorization structure for the approval and renewal of credit facilities. Developing and maintaining the Bank’s risk grading to categorize exposures according to the degree of risk of default. Risk grades are subject to regular reviews. Developing and maintaining the Bank’s processes for measuring ECL including monitoring of credit risk, incorporation of forward looking information and the method used to measure ECL. Ensuring that the Bank has policies and procedures in place to appropriately maintain and validate models used to assess and measure ECL. Establishing a sound credit risk accounting assessment and measurement process that provides it with a strong basis for common systems, tools and data to assess credit risk and to account for ECL. Providing advice, guidance and specialist skills to business units to promote best practice throughout the Bank in the management of credit risk. The internal audit function performs regular audits making sure that the established controls and procedures are adequately designed and implemented. Significant increase in credit risk The Bank analyzes all data collected using statistical models and estimates the remaining lifetime PD of exposures and how these are expected to change over time. The factors taken into account in this process include macro-economic data such as GDP growth, unemployment, benchmark interest rates and house prices. The Bank generates a ‘base case’ scenario of the future direction of relevant economic variables as well as a representative range of other possible forecast scenarios. The Bank then uses these forecasts, which are probability-weighted, to adjust its estimates of PDs. Under the Bank’s monitoring procedures a significant increase in credit risk is identified before the exposure has defaulted, and at the latest when the exposure becomes 30 days past due, unless the Bank has reasonable and supportable information that demonstrates otherwise. The Bank uses different criteria to determine whether credit risk has increased significantly per portfolio of assets. The criteria used are both quantitative changes in PDs as well as qualitative. The table below summarizes per type of asset the range above which an increase in lifetime PD is determined to be significant, as well as some indicative qualitative indicators assessed.
Note 34 – Risk management, continued Criteria used for Chile
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 and relative terms. The following formulas are used to determine such thresholds: Relative comparison formula Threshold =Lifetime PD (at reporting date) - 1 Lifetime PD (at origination) Absolute comparison formula Threshold = Lifetime PD (at reporting date) – Lifetime PD (at origination)
Note 34 – Risk management, continued Criteria used for Colombia
Loan commitments are assessed along with the category of loan the Bank is committed to provide, i.e. commitments to provide mortgages are assessed using similar criteria to mortgage loans, while commitments to provide a corporate loan are assessed using similar criteria to corporate loans. The Bank has monitoring procedures in place to make sure that the criteria used to identify significant increases in credit are effective, meaning that significant increase in credit risk is identified before the exposure is defaulted or when the asset becomes 30 days past due. The Bank performs periodic back-testing of its ratings to consider whether the drivers of credit risk that led to default were accurately reflected in the rating in a timely manner. Incorporation of forward-looking information The Bank uses forward-looking information that is available without undue cost or effort in its assessment of significant increase of credit risk as well as in its measurement of ECL. The Bank employs experts who use external and internal information to generate a ‘base case’ scenario of future forecast of relevant economic variables along with a representative range of other possible forecast scenarios. The external information used includes economic data and forecasts published by governmental bodies and monetary authorities. The Bank applies probabilities to the forecast scenarios identified. The base case scenario is the single most-likely outcome and consists of information used by the Bank for strategic planning and budgeting. The Bank has identified and documented key drivers of credit risk and credit losses for each portfolio of financial instruments and, using a statistical analysis of historical data, has estimated relationships between macro-economic variables and credit risk and credit losses. The Bank has not made changes in the estimation techniques or significant assumptions made during the reporting period. The table below summarizes the principal macroeconomic indicators included in the economic scenarios used as of December 31, 2018 until December 31, 2023 in the countries where the Bank and its subsidiaries operate and therefore are the countries that have a material impact on ECLs.
Note 34 – Risk management, continued Criteria for Chile
Criteria for Colombia
Predicted relationships between the key indicators and default and loss rates on various portfolios of financial assets have been developed based on analyzing historical data over the past 3 years. Sensitivity analysis The most significant assumptions affecting the ECL allowance, as indicated in the tables above by country, are as follows: Chile: Unemployment rate, given its impact on secured and unsecure borrowers’ ability to meet their contractual repayments. Consumer’s Price Index (IPC), given its impact on housing prices, mortgage collateral valuations, and consumers acquisition power Interbank interest rate, given its impact on companies’ likelihood of default Cooper, given its impact on the Chilean economy as a whole
Note 34 – Risk management, continued Colombia:
Set out below are the changes to ECL as of December 31, 2018 that would result from reasonably possible changes in these parameters from the actual assumptions used in the Bank’s economic variable assumptions as set forth in the tables above for Base scenarios, upside scenarios, and downside scenarios.
ECL coverage rates reflect the underlying observed credit defaults, the sensitivity to economic environment, extent of collateral and the effective maturity of the book. Measurement of ECL The key inputs used for measuring ECL are:
As explained above these figures are generally derived from internally developed statistical models and other historical data and they are adjusted to reflect probability-weighted forward-looking information. PD is an estimate of the likelihood of default over a given time horizon. It is estimated as at a point in time. The calculation is based on statistical rating models, and assessed using rating tools tailored to the various categories of counterparties and exposures. These statistical models are based on market data (where available), as well as internal data comprising both quantitative and qualitative factors. PDs are estimated considering the contractual maturities of exposures and estimated prepayment rates. The estimation is based on current conditions, adjusted to take into account estimates of future conditions that will impact PD.
Note 34 – Risk management, continued LGD is an estimate of the loss arising on default. It is based on the
portfolios. The Bank
contractual notice period. For The measurement of ECL is based on probability weighted average credit loss. As a result, the measurement of
Credit quality A detail by credit quality, which includes loans and accounts receivable from customers and interbank loans, under IFRS 9 as of December 31, 2018 and under IAS 39 as of December 31, 2017, is summarized as follows:
Note 34 – Risk management, continued
The table below provides an analysis of the gross carrying amount of loans and advances to customers by past due status under IFRS 9:
The table below provides an analysis of the gross carrying amount of loans and advances to customers by overdue status under IAS 39:
An analysis for the movement of the allowance for losses during the year by individual and group portfolio is included in Note 10, letter c.
Note 34 – Risk management, continued Maximum Exposure to Credit Risk The following table shows the Bank’s maximum credit risk exposure by financial asset as of December 31, 2018, 2017, 2016
A summary for the allowances for loan losses according to IFRS 9 is as follows:
For more detail on maximum credit risk exposure and concentration by type of financial instrument, see the specific Notes.
Note 34 – Risk management, continued The following table displays the concentration of credit risk by industry for financial assets:
Guarantees In order to mitigate credit risk, guarantees have been established in the Bank’s favor. The main guarantees provided by customers are detailed as follows:
Guarantees taken by the Bank to secure collections of rights reflected in its loan portfolios are
b.2 Financial Risk
Market The following section describes the main market risk factors to which the Bank and its subsidiaries are exposed: b.2.1.1) Currency Risk
Currency mismatches between the assets and liabilities
Currency flow
Structural positions, The foregoing means that movements in exchange rates can generate volatility b.2.1.2) Inflation and other indexes adjustments Risk
Note 34 – Risk management, continued
Interest Interest rate risk can be represented by sensitivities to parallel and/ornon-parallel yield shifts with the effects reflected in the prices of instruments, the financial margin, equity and economic value.
The following are the Banking Book items (products valued at amortized cost and FVTOCI / instruments available for sale and derivatives valued at fair value) for the most relevant currencies in which the Bank trades at the end of the
The expositions presented above correspond to the present values resulting from: Model contract flows according to their behaviors that affect market risk exposure. Example: prepayment, renewal, etc. Discount the flows of the items recorded to accrual at a rate that represents the opportunity cost of the liability/ asset. Discount the flows of items accounted to the market at the market rate.
In addition to the exposure related to the underlying asset, issuing options has other risks. These risks arise from thenon-linear relationship between the gain generated by the option and the price and level of the underlying factors, as well as exposure to changes in the price volatility of the underlying asset.
Financial institutions are exposed to funding liquidity risk that is intrinsic to the role of intermediary that they play in the economy. In general, in financial markets demand for medium or long-term financing is usually much greater than the supply of funds for those terms while short-term financing is in considerable supply. In this sense, the role of intermediary played by financial institutions, which assume the risk of satisfying the demand for medium and long-term financing by brokering short-term available funds, is essential for the economy to function properly. Appropriately managing funding liquidity risk not only allows contractual obligations to be met in a timely manner, but also enables:
The commercial and treasury activities of the Bank and its subsidiaries to be financed at competitive rates.
The Bank to avoid fines or regulatory penalties for not complying with regulations.
Note 34 – Risk management, continued
Continuous and interconnected process that originates in the
The
Once The In addition, it carries out periodic measurements of the risk incurred, develops annually. The
Quantify and communicate to the business areas the
Give flexibility to the business areas
Allowing business generators to take
Delimit the range of products and underlying assets The metrics, by type of risk, used to quantify
Note 34 – Risk management, continued The following
Book The Bank measures regulatory exposure (ChapterIII-B-2.2 “Standards on of Financial the Banking Book. The effective Equity of the Bank. The Bank,
The
The regulatory risk measurement for the Banking Book. The standardized regulatory report for the The following table details regulatory limit consumption for market risk, specifically for the
As of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016 the Bank has complied with all regulatory requirements and
Note 34 – Risk management, continued
Calculation of Historical Value at Risk
The Board The Bank in turn calculates VaR for sub/portfolios and risk factors, which allows it to quickly detect pockets of risk. Since VaR does not consider stress scenarios, it is complemented by stress testing. Specifically, the Bank uses metrics that take into account prospective, historical and standardized scenarios. Although the Value at Risk model is one of the models most frequently used by the local financial industry, like any model it has limitations that must be considered:
It does not consider intraday results, but only reflects the potential loss given current positions.
It does not take into account potential changes in the dynamics of movements in market variables Sensitivity Measurements
The Bank uses stress testing as a sensitivity analysis tool in order to control financial risk. This measurement is performed separately for the Trading and Banking Books. Sensitivity is estimated using the DV01 indicator, which is a measure of sensitivity of
Trading and Banking Book. The
Note 34 – Risk management, continued
Interest The table below presents a sensitivity analysis for changes of 0.01% in interest rates by term and type of interest rate, and its corresponding impact on profit and loss (net interest margin) and equity (valuation accounts for financial instruments at FVTOCI).
Interest The table below presents a sensitivity analysis for changes of 0.01% in interest rates by term and type of interest rate, and its corresponding impact on profit and loss (net interest margin) and equity (valuation accounts for financial instruments at FVTOCI).
Exchange The table below presents a sensitivity analysis for changes in the relevant exchanges rates, and its corresponding impact on profit and loss (net income from financial operations and net foreign exchange gain/loss) and equity (valuation accounts for financial instruments at FVTOCI).
Exchange rate scenarios Colombia
The following table presents the impact
Note 34 – Risk management, continued The following table presents the impact on the net interest margin of movements or reasonably likely scenarios on positions in the Accrual Book for the years ended December 31, 2018, 2017
The impact on the Impact on Equity derived from sensitivity analysis
Hedging The Bank uses accounting hedges to manage efficiently The use of accounting hedges is The
Note 34 – Risk management, continued
The Bank
guidelines. The
The risk management program contemplates that all relevant risk issues must be reported to the higher levels and to the Operational Risk Committee.
Identification, evaluation, information, management, and monitoring Build a strong culture of operational risk management and internal controls, with clearly defined and adequately segregated responsibilities between business and support functions, whether these are internally developed or outsourced to third parties; Generate effective internal reports in connection with issues related to operational risk management, with a clearly defined escalation protocol; Control Regarding training and awareness, the risk culture continues to be reinforced throughface-to-face training in the field of operational risk, internal control, prevention of external and internal fraud, and the implementation of the annual “more security” program for all collaborators and induction programs for new employees. Finally, it is worth mentioning that Sarbanes-Oxley methodologies (SOX) continue to be applied for their main
Note 34 – Risk management, continued
requirements The primary objectives of capital management are to ensure compliance with regulatory requirements and to maintain a solid risk rating and healthy capital ratios. During
In accordance with the General Banking Law, the Bank must maintain a minimum ratio of
RAN. Assets are weighted using risk categories, which are assigned a risk percentage based on the capital needed to back up each asset. There are In the case of Itaú, it uses 10%. All derivative instruments tradedoff-market are taken into account to determine risk assets using conversion factors over notional values, thus calculating the value of the credit risk exposure (or “credit equivalent”). For weighting purposes, “credit equivalent” also considers contingent loans not recorded in the Consolidated Statement of Financial Position. According to local regulations, as of December 31, 2018 and 2017, the relation between assets and risk weighted assets is as follow:
The main
Interbank loans are presented gross. The amount of allowances corresponds to MCh$463. Loans and accounts receivable from customers at amortized cost are presented gross. Allowances by loan type are detailed as follows: Commercial MCh$484,707, Mortgage MCh$66,117 and Consumer MCh$217,296. Assets Trading investments Investments under agreements to resell Derivative financial instruments Interbank loans (*) Loans and accounts receivable (**) Commercial loans Mortgages loans Consumer loans Available for sale instruments Held to maturity investments Liabilities Investments under repurchase agreements Deposits and other demand liabilities Financial derivative contracts Interbank borrowings Debt instruments issued Interbank loans are presented gross. The amount of allowances corresponds to MCh$208 Loans and accounts receivable are presented gross. Allowances by loan type are detailed as follows: Commercial MCh$446,914, Mortgage MCh$35,019 and Consumer MCh$136,594. Itaú Corpbanca and subsidiaries – Consolidated Financial Statements – December 31, 2018 F-183 Note 36 – Foreign currency position In the Consolidated Statements of
SBIF resolution On January 7, 2019, the Bank was informed by Resolution No 101 of January 4, 2019, that the SBIF imposed a penalty fee of MCh$5,985 on the Bank, on the grounds that it had exceeded the limit of credits to the same debtors to which the Bank was obligated to comply with according to articles 84 No. 1, 85 letter a) of the General Law of Banks and Chapter12-3 of the Updated Compilation of Standards of the SBIF. The same resolution accepted the defenses used by the Bank with respect to the other two charges that were formulated in the same sanctioning administrative proceeding. On January 14, 2019, the Bank’s Board of Directors, together with its legal advisors, analyzed the aforementioned Resolution, its rationale and implications, as well as the possible courses of action against it, and considered all the aspects involved, both legal and not legal. The Board of Directors agreed, unanimously, to reiterate its full conviction that the Bank acted in accordance with the Law in all the loans operations that were subject to charges, including the one for which the penalty fee was issued; and decided not file a claim against the Resolution. This decision was adopted in the best interest of the Bank and its shareholders, since it was considered that initiating an appeal process would involve various costs to the Bank, even though there are solid grounds to challenge the fine. Instead, the Board of Directors agreed to favor the ordinary course of operations of the Bank, concentrating the attention and resources of Management in the development of its business, and to avoid continuing with this process and its negative implications regarding the distraction of the managerial staff, communicational impact, and loss of focus in the relationship between the Bank and the authority. In accordance with the provisions of the aforementioned Resolution, the fine has been paid in full as of the date of issuance of these Consolidated Financial Statements. The foregoing constitutes a subsequent event that results in adjustment to the Consolidated Financial Statements as of December 31, 2018 in accordance with IAS 10 “Events after the reporting period”, for which the effects have been duly incorporated into the present Consolidated Financial Statements. Dissolution by absorption of CorpLegal S.A. On January 8, 2019, the Bank requested authorization from the SBIF to proceed with the dissolution of its subsidiary CorpLegal S.A., which will occur as a consequence of the acquisition that Itaú Corpbanca will make of the stock that Itaú Corredores de Bolsa Limitada holds in CorpLegal S.A., both of which are subsidiaries of the Bank, and so all of its shares are held by a single shareholder. By letter dated February 25, 2019, the SBIF authorized the dissolution of the company. After that, in March 2019, the Board approved the dissolution of CorpLegal. As of the date of these Consolidated Financial Statements, the purchase has not yet taken place, therefore the entity has not yet been dissolved. Modification of the General Banking Law On January 12, 2019, Law 21,130, Modernizing Banking Legislation, was issued in the Official Gazette. This law introduces modifications, among other regulatory bodies, to the General Banking Law, N°21,000 that created the Commission for the Financial Market, the Organic Law of the State Bank of Chile and the Tax Code. One of the main changes introduced by this law, is the integration of the SBIF with the Commission for the Financial Market (CMF), new capital requirements in accordance with the international standards established by Basel III, as well as new limits for credit operations. The new Law adopts the highest international standards in terms of banking regulation and supervision, strengthening international competitiveness and contributing to financial stability of Chile.
In December 2016 Helm LLC (“Helm”) initiated an arbitration before the ICC International Court of Arbitration (the “ICC”) against Corp Group Holding Inversiones Ltda. (“Corp Group”) and Itaú Corpbanca (collectively, “Respondents”). Helm alleged that Respondents had breached (i) the Amended and Restated Shareholders Agreement of HB Acquisition S.A.S., dated as of July 31, 2013, which governs Itaú Corpbanca’s subsidiary Itaú Corpbanca Colombia, and (ii) the Transaction Agreement, dated January 29, 2014, as amended and restated, which governs the merger between Itaú Chile S.A. and Corpbanca, by which Itaú Corpbanca was formed, and the potential acquisition by Itaú Corpbanca of certain shares of Itaú Corpbanca Colombia from Corp Group. During the course of the proceedings, Helm demanded that Itaú Corpbanca and Corp Group effect the acquisition of its shares of Itaú Corpbanca Colombia at the price agreed with Corp Group in the Transaction Agreement, which (with interest at 9% per year running from January 29, 2014) would have totaled approximately $850 million.
In this context, on March 11, 2019 we have filed with regulators a request to be authorized to purchase those shares from Helm LLC corresponding to the 19.44% as indicated above and also from Kresge Stock Holding Company Inc (KSHC) for a 1.38% of the equity of Itaú Corpbanca Colombia, respectively, as part of the shareholders agreement in Colombia. The Bank is currently in the process of seeking regulatory authorization to purchase those shares in Chile, Colombia and Brazil. The regulators’ approval in these three different jurisdictions is not perfunctory and accordingly, the acquisition of thenon-controlling interest and corresponding obligation is to be reflected in the Consolidated Financial Statements once the approval process is completed. Consequently, as a result of these recent events, there are
Shareholders’ meeting In the Annual Ordinary Shareholders’ Meeting held on March 1. To renew in its entirety the
Note 37 – Subsequent Events, continued
It is noted herein that the office-holders, Messrs. Gustavo Arriagada Morales, Pedro Samhan Escándar, Bernard Pasquier and Fernando Concha Ureta were appointed as independent directors, as set forth in article 50 Bis. of Law No. 18,046. 2. To distribute a dividend Other subsequent events Between January 1
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